CIA - Subsequent Events

Question 1

Definition of materiality.

Answer 1

An omission, or under/overstatement is material if the actuary expects it to materially affect the user’s decision-making or reasonable expectations. (something that would most likely change the user’s decision)

Question 2

Define calculation date.

Answer 2

The effective date of the calculation (eg: for financial statements, the calculation date would normally be the balance sheet date).

Question 3

Define report date.

Answer 3

The date on which the actuary completes the report on his/her work.

Question 4

Define report.

Answer 4

The actuary’s oral or written communication to users about his/her work.

Question 5

Define subsequent event.

Answer 5

It is an event (of which an actuary first becomes aware) AFTER the calculation date but BEFORE the corresponding report date.

Question 6

Define adjusting event, and give an example.

Answer 6

• an event after the calculation date that provides evidence of conditions existing at the calculation date: this results in an adjustment
  Eg: reinsurer insolvency after the calculation date that was due to gradual deterioration occurring before the calculation date.

Question 7

Define non-adjusting event, and give an example.

Answer 7

• an event after the calculation date indicative of conditions arising after the calculation date: this results in NO adjustment
  Eg: reinsurer insolvency due to catastrophe

Question 8

What is the prime consideration when applying the subsequent event decision tree?

Answer 8

IS THE EVENT MATERIAL? (if not, no action is required)

Question 9

Facts for ICE STORM:
Occurrence: Jan 5, 1998
Calculation date: Dec 31, 1997
Actuary became aware: Jan 5, 1998
Report Date: assume later in Jan

1) Is this a subsequent event?
2) What branch does it fall into on the decision tree?
3) What is the resulting action? (provide answers regarding path)

Answer 9

1) YES, the actuary became aware after the calculation date of Dec 31, 1997 and before the report date, which was to be several weeks after the date of the event.
2) Middle Branch

3) EWDP - Inform:
- Error? No, next;
- (When) Occur after calc date? Yes, next;
- Entity Different than what it was? Yes, AFTER Calc Date, next;
- Purpose of the report? Report on the entity as it WAS.
- FINAL ACTION: Inform only

Additional Comments:
- premium liabs would have been understated

Question 10

Facts for LATE REPORTED CLAIMS:
Occurrence: Nov 20
Calculation date: Dec 31
Actuary became aware: Jan 12
Report Date: assume later in Jan

1) Is this a subsequent event?
2) What branch does it fall into on the decision tree?
3) What is the resulting action? (provide answers regarding path)

Answer 10

1) YES, the actuary became aware after the calculation date of Dec 31 and before the report date which was several weeks after Jan 12
2) Middle Branch

3) EW - Reflect:
- Error? No, next;
- (When) Occur after calc date? No, Reflect;
- FINAL ACTION: Reflect

Additional Comments:
- common situation for reinsurers, note that this is not the same as data error or missing claims

Question 11

Facts for ALBERTA MINOR INJURY cap:
Occurrence: Feb 8, 2008
Calculation date: Dec 31, 2007
Actuary became aware: Feb 8, 2008
Report Date: assume BEFORE Feb 8

1) Is this a subsequent event?
2) What branch does it fall into on the decision tree?
3) What is the resulting action? (provide answers regarding path)

Answer 11

1) NO, the actuary became aware after the calculation date of Dec 31 but also after the corresponding report date
2) Right Branch

3) Consider Materiality:
- if YES, then Withdraw and Amend
- if NO, then No Action

Question 12

Facts for ALBERTA MINOR INJURY cap:
Occurrence: Feb 8, 2008
Calculation date: Dec 31, 2007
Actuary became aware: Feb 8, 2008
Report Date: assume AFTER Feb 8

1) Is this a subsequent event?
2) What branch does it fall into on the decision tree?
3) What is the resulting action? (provide answers regarding path)

Answer 12

1) YES, the actuary became aware after the calculation date of Dec 31 and before the report date which was several weeks after Feb 8
2) Middle Branch

3) EWD - Reflect:
- Error? No, next;
- (When) Occur after calc date? Yes, next;
- Entity Different than what it was? Yes, ON or BEFORE Calc Date, Reflect;
- FINAL ACTION: Reflect

Question 13

Facts for REINSURER FAILURE (evidence of prior deterioration):
Occurrence: Jan 15
Calculation date: Dec 31
Actuary became aware: Jan 15
Report Date: assume later in Jan

1) Is this a subsequent event?
2) What branch does it fall into on the decision tree?
3) What is the resulting action? (provide answers regarding path)

Answer 13

1) YES, actuary became aware after the calculation date of Dec 31 and before the report date which would be a few weeks after Jan 15
2) Middle Branch

3) EWD - Reflect:
- Error? No, next;
- (When) Occur after calc date? Yes, next;
- Entity Different than what it was? Yes, ON or BEFORE Calc Date (there was evidence of prior deterioration), Reflect;
- FINAL ACTION: Reflect

Additional Comments:
- action depends on cause of failure: had failure been due to a catastrophe, then the resulting action would have been EDWP - Inform

Question 14

Facts for STOCK MARKET DROP (sudden drop after New Year):
Occurrence: 1st week of Jan
Calculation date: Dec 31
Actuary became aware: 1st week of Jan
Report Date: assume later in Jan

1) Is this a subsequent event?
2) What branch does it fall into on the decision tree?
3) What is the resulting action? (provide answers regarding path)

Answer 14

1) YES, the actuary became aware after the calculation date of Dec 31, and before the report date which would have been several weeks later
2) Middle Branch

3) EWDP - Inform:
- Error? No, next;
- (When) Occur after calc date? Yes, next;
- Entity Different than what it was? Yes, AFTER Calc Date, next;
- Purpose of the report? Report on the entity as it WAS.
- FINAL ACTION: Inform

Additional Comments:
- in this case, it was decided that the event did not exist prior to the calculation date, but had there been evidence of such, then action would be EWD - Reflect

Question 15

Facts for MISSING CLAIMS:
Occurrence: Before June 30
Calculation date: June 30
Actuary became aware: Aug 5
Report Date: assume later in Aug

1) Is this a subsequent event?
2) What branch does it fall into on the decision tree?
3) What is the resulting action? (provide answers regarding path)

Answer 15

1) YES, as the actuary became aware after the calculation date of June 30 and before the report date which was after Aug 5
2) Middle Branch

3) E - Reflect:
- Error? Yes, Reflect.
- FINAL ACTION: Reflect

Additional Comments:
- this would be in the right branch had the actuary became aware after the report was complete (not a subsequent event). The action instead would then be to Withdraw and Amend (would be reflected if Sub Event, and error does Invalidate the report)

Question 16

Facts for CHANGE IN INDUSTRY BENCHMARKS:
Occurrence: July 15
Calculation date: June 30
Actuary became aware: July 15
Report Date: assume later in Aug

1) Is this a subsequent event?
2) What branch does it fall into on the decision tree?
3) What is the resulting action? (provide answers regarding path)

Answer 16

1) YES, actuary became aware after quarterly calculation date (Jun 30) and before the report date which would have been several weeks after Jul 15.
2) Middle Branch

3) EWD - No Action:
- Error? No, next;
- (When) Occur after calc date? Yes, next;
- Entity Different than what it was? No, since LDFs don’t change much from quarter to quarter, Stop.
- FINAL ACTION: No Action

Additional Comments:
- if a newer company without own set of robust data is relying on benchmarks, then this can be more impactful and may require action.