2007 Annual Meeting ● Assemblée annuelle 2007

Vancouver

2007 Annual Meeting ● Assemblée annuelle 2007

Vancouver

Canadian Institute

of Actuaries

Canadian Institute

of Actuaries

L’Institut canadien desactuaires

L’Institut canadien desactuaires

2 2

PD - 43

•Standards of Practice for Public Personal Injury Compensation Plans (PPICP)

–Willard A Ramsey

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Topics

• The relationship of assets and liabilities for PPICP financial statements

• Best estimates for assumptions

• Dynamic capital adequacy

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Assets and Liabilities

• Current practice, is not Canadian Asset Liability method (CALM)– is CALM an alternative?

• International Accounting Standards Board (IASB).

• Committee on Workers’ Compensation (CWC) plans.

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Current Practice

• Current method used for valuation of liabilities is the present value of future expected cash flows.

• The discount or valuation interest rate is typically a level rate and does not change from year to year.

• Hence, this method is not directly dependent on investment performance or funded status.

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CALM

• Should we consider adopting a method such as CALM (Canadian Asset Liability Method)?

• CALM would address the issue that assets and liabilities are not on a consistent basis.200

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CALM

• However, CALM presents several hurdles.

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CALM

• Shortage of, or at least not an abundance of, CALM expertise in those practicing in the PPICP field.

• Implementation would be costly and time consuming – would likely require extensive help from consulting firms.

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CALM

• Significant portion of invested assets are in equities.

• A few WC Boards are not fully funded – still building assets to support liabilities.

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IASB

• It appears at this point in time that the evolving International Standards are moving towards a liability value that does not depend on the value of the assets.

• If we did adopt CALM were adopted it could be for a relatively short period of time.

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CALM

• Conclusion of the CWC (Committee on Workers’ Compensation) is that CALM is not a viable option at this time.

• Perhaps an approach similar to CALM?200

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CWC Plans

• The CWC would like to clarify in the standards:

• A definition of the market value of liabilities.

• If the current approach is still appropriate.

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CWC Plans

• Outline ways to manage the current approach, e.g. allowing flexibility in the choice of discount rate derived from the fair value of assets.

• Issuance of a guidance note regarding the adjustment of the valuation discount rate.

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CWC Plans

• A plan to implement moving from current practice to tomorrow’s IASB (International Accounting Standards Board) methodology.

• Whether other methodologies need to be considered.

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Best Estimates For Assumptions

• Current standards consider:• Plan’s policy:

– pricing stability– smoothing of short term deviations– and equity among generations

• In addition:– ad hoc indexing– intermittence pattern of benefits due to

remission or relapse– Changes in claim practices or economic

conditions

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Best Estimates For Assumptions

• The CWC is considering providing guidance on:– Areas where assumptions are

required.– Where it may be appropriate to

combine assumptions.– How to select best estimates.– Margins for adverse deviation – if or

when they may be appropriate.

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Dynamic Capital Adequacy

• Current environment– PPICP’s are not subject to solvency

standards.• Not regulated by OSFI.• No solvency requirements from

provincial governments.

– Entities can operate with unfunded liabilities.• All have plans to address excess

surpluses or deficits.

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Dynamic Capital Adequacy

• Actuaries are sometimes asked to provide advice on what is an appropriate level of capital for a PPICP.– Or, to provide sensitivity tests for

various risks and the impact on funding ratios (assets / liabilities) and premium rates.

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Dynamic Capital Adequacy

• CWC interest is in examining or defining what is adequate / appropriate capital for a PPICP. – Could be quite challenging as

different views are developing.

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Dynamic Capital Adequacy

• What type of guidance should be provided?– Change to standards or

educational note?

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Dynamic Capital Adequacy

• Dependent on the funding policy of the PPICP.– The actuary must work within the

funding policy.

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Next Steps

• We have several interesting and challenging topics.

• Probably a lot of work ahead.• Look forward to your feedback

and input.

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