C - CIA Materiality

Question 1

CIA MATERIALITY

Define
Materiality

Answer 1

-an omission, misstatement is material if actuary expects it to materially affect the USER’S DECISION MAKING or USER’S REASONABLE EXPECTATIONS

• aka IMPORTANCE
• “Whether or not it matters to the USER of the info”

whether or not

• -an item needs to be considered
• -a number is accurate enough to convey its intended message
• -a fact needs to be reported
• Defined both in QUALITATIVE and QUANTITATIVE word, but judgment plays a significant role
• When talking about materiality : USER IS KEY!!!
• Actuary is not responsible for unintended users with whom they did not intend to communicate

Question 2

CIA MATERIALITY

Discuss what materiality is NOT.

Answer 2

Materiality is not:
range of reasonable values in an estimate
uncertainty around estimate

Learn to know your USER
Would my user come to a different conclusion if I used some other materiality level?

Question 3

CIA MATERIALITY

Contrast
intended audience VS to other users.

Answer 3

INTENDED USER : person to whom the actuarial communication is directed and with whom the actuary intends to communicate, after discussion with the principal

(principal = employer of actuary, is always part of the audience)

OTHER USER : any user not being the principal or the intended user

Question 4

CIA MATERIALITY

a way to avoid unintended use of the work

Answer 4

by describing the purpose of the work and its users so that the unintended user can assess the appropriateness for his need

Question 5

CIA MATERIALITY

4 elements on which the degree of materiality depends

Contrast applying judgment about materiality in the context of policy valuation vs setting rates.

Answer 5

1) needs, 2) skills, 3) sophistication, 4) experience
of intended audience

Because of regulatory scrutiny and sophistication of user on policy valuation, actuaries have more experience in applying judgment about materiality in the context of policy valuation work than when setting rates.

Question 6

CIA MATERIALITY

characteristics of a company that can influence its selected materiality level.

Answer 6

1) size
2) access to capital
3) stage of organizational cycle
4) type of business (multi-line, single line)
5) net retention.

Question 7

CIA MATERIALITY + CIA VALUATION

Materiality level should be related to PURPOSE and INTENDED USES of the work.

Which financial values are important for the intended uses :

• For regulatory and solvency issues?
• For Appraisal Work?
• For DCAT work?
• For Financial Statement Work?

Answer 7

–For regulatory and solvency issues–
surplus or solvency benchmark ratios

–For appraisal work–
net income, earnings

–For DCAT work–
surplus used in scenario testing
expected to be less rigorous (greater) than for valuation work

–For financial statement work (valuation)–
net income and net capital (net surplus)
AA threshold would not be greater than external auditor’s threshold

Exclusive reliance on quantitative benchmarks is inappropriate. Need to take into account the purpose of the work.

Question 8

CIA MATERIALITY

Discuss the level of appropriate description and disclosure of materiality in a report

Answer 8

Need to balance between too little and too much.
Too much: exaggerate importance of minor matters
Too little: deprives users of needed information
What qualitative and quantitative information best serves the user’s understanding and decision making?

Question 9

CIA MATERIALITY

when it is appropriate to change materiality level

when it is not appropriate

Answer 9

If an organization approaches a threshold or an external benchmark (such as “SCR”)

should not change the materiality level significantly from year to year