As you are the official UNIG Canadian Actuary, you probably know all about
the following. It is in response to the question on premium deficiency
reserves.
Diane
>
You should note that GAAP premium defiency reserves have long been a
part of statuatory reporting in Canada. Forecasting of the loss
experience associated with the unearned premium (we call it the premium
liabilities) is in any case an essential part of testing the amount of
commission and acquisition expense that can be deferred. Considerations
relevant to forecasting the premium liability have been part of the
CIA's standards for property and casualty financial reporting since 1990
(standard is avialble on the CIA website, www.actuaires.ca). Generally,
PDR and DAC are calculated on an alllines basis - i.e. full offset of
future profits and losses. Part of the arguement for that would be that
the expense allocation part of the costs is somewhat arbitrary. The
next argument is that any subdivision is also essentially arbitrary.
Finally, there is in fact no requirement for the profitable lines to
carry a pro-rata unearned premium (though it is certainly simpler to do
so). The only requirement is that the unearned premium be enough to pay
for future losses.
As to discounting, the regulatory approach is to permit the recognition
of investment income that would be earned on the premium before the loss
occurs - that is, usually 3 to 4 months worth. This is consistent with
the general regualtory prohibitionon discounting loss reserves (claim
liabilities). Of course, the CIA has consistently been in favour of
discounting all liabilities, with an appropriate margin for risk.
A number of U.S. based actuaries are involved in the preparation of
financial statements for Canadian branchs of U.S. compnaies, and would
be able to give you more details on the matter.
Chris Townsend
Visit the CAS Web Site at http://www.casact.org
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