Please enable JavaScript.
Coggle requires JavaScript to display documents.
QBS 13(PART3): CODE OF CONDUCT, ASSET VALUATION, INTEREST - Coggle Diagram
QBS 13(PART3): CODE OF CONDUCT, ASSET VALUATION, INTEREST
K + L: CIA CODE OF CONDUCT AND RULE 13
CIA Code of Conduct
1) Professional Integrity (act honestly with integrity and competence)
2) Qualification Standards
3) Standards of Practice (follow standards of practice)
4) Disclosure
Communicate fully and timely manner
Disclose relationships that are not apparent
Disclose compensation received from another party for project
Identify principals for whom communication is issued and capacity that actuary serves
5) Conflict of interest
not knowingly get involved in potential conflict of interest unless can act fairly, conflict is disclosed and all parties agree
6) Control of work product
Must take reasonable steps to ensure services do not mislead others
Identify client/ER who the material is being prepared for
Identify source of material and actuary involvement
7) Confidentiality
8) Courtesy and Cooperation
Previous actuary must provide requested info to new actuary
9) Advertising
must not advertise activities that are false/msileading
10) Titles and Designations
Can use titles if conforms with practices authorized by authorities
11-13) Collateral obligations
Discuss /resolve material violation with other actuary
Should report incident if discussion unsuccesful to disciplinary body
CIA GUIDANCE APPLICATION RULE 13
RESPONSIBILITIES OF MEMBER
1) Attempt to discuss issue with other member to resolve
2) Resolution can be to determine if really noncompliance or to admittance of noncompliance by rectifying issue
3) if Noncompliance not rectified then obliged to report to CPC
DEFINITION
1) Describes actions to take when observing noncompliance material with The CSOP or Professional Rules of Conduct
2) Outlines member's responsibility regarding resolving noncompliance and reporting to Committee on Professional COnduct (CPC)
EXCEPTIONS FROM REPORTING
1) Instances where may not be appropriate :
Employed by regulatory body
Employed by entity protecting policyholder benefits during insurer insolvency
CIA committee member reviewing practices with educational purpose
2) When Rule13 prohibits reporting vs reporting being optional
3) When not possible to anticipate all potential applications
CONFIDENTIAL DISCUSSIONS WITH CHAIR OF CPC
1) Chair obliged to report non-compliance
2) Confidentiality applies to non-compliance with CSOP
3) Reporting of non-compliance applies regardless of materiality of infraction
4) Chair serves as resource, rather than police officer
5) Must disclose conflict of interest
M: ASSET VALUATION METHODS
CIA VALUATION OF ASSETS
1) MV
2) MV adjusted to moderate volatilty
3) PV of Cashflows after valuation date
4) Assume constant rate of return for illiquid assets with fixed redemption values
DESIRABLE CHARACTERISTICS OF ASSET VALUATION METHOD
1) Achieves Objectives
2) Tracks to Market Value
3) Does not unduly deviate from MV (logical rltsp to MV)
4) Free of bias
5) No undue influence on Investment transaction decisions
6) Consistent with length of typical economic cycles
EXAMPLE OF BIAS
1) Asset value equals fixed percentage of MV
2) Asset value = MAX( MV, Smoothed asset value)
3) Asset value does not converge to market even if assumpitons are realized every year in future
4) Unbalanced corridor
OTHER CONSIDERATIONS
1) Conservatism
2) Corridors
3) Method application
4) Changing asset valuation method
BEST PRACTICE DISCLOSURES
1) Detailed calculation of assets
2) Objective of any asset valuation method which deviates from MV
3) Rationale supporting asset valuation method
4) Application of any corridor
5) Type and degree of any bias that may exist in asset valuation method
6) Rationale for any changes in asset valuation method
WIND-UP VS SOLVENCY
Asset value would be MV at calculation date (adjusted for wind-up expenses/payables/receivables)
Solvency method = wind-up method unless required or permitted by law
N: BEST ESTIMATE DISCOUNT RATES FOR GC FUNDING VALUATIONS
SELECTING DISCOUNT RATE
1) Expected return on assets at calculation date
2) Expected investment policy after calculation date
3) Yields on fixed income investments
4) Expected future benefits pmts
5) Circumstancesof work
6) No active
REPORT SHOULD DESCRIBE
1) Rationale for additional returns vs passive strategy
2) Statement if no PfAD
3) Describe each material assumption including extent of margin for adverse deviation
4) Rationale for each material assumption
TWO APPROACHES OF SELECTION OF BEST ESTIMATE DISCOUNT RATE
1) Future expected returns on assets of plan
2) Yields on investment grade debt securities that match projected benefit cash flows with appropriate low level risk, regardless of plan investments
Determined using unbiased measurements and without margins for adverse deviations
Best estimate typically based on 20-30 time horizon, but shorter time may be applicable for mature plans
BUILDING BLOCK APPROACH
1) Determine long term expected return for each asset class (typical risk premium in range of 3-5% over long-term govmnt bonds)
2) Combine best estimate return to different asset classes in plan's inv policy
3) Consider effects of rebalancing and diversification (typical diversification 0.3%-0.5%)
4) Consider inclusion of additional return due to passive vs active management
5) Apply appropriate provision for expense (may assume provision for active management covers management fees)
ACTIVE MANAGEMENT RETURN CONSIDERATIONS
1) Reasonable to include only to extent of covering additional inv management fees
2) Value added returns require supporting data
3) Returns should be consistently and reliably achieved over long term
4) Historic returns and future expectations
5) Including effects of stages of economic cycles
6) Management style, organization, people, inv processes, expertise...
7) Include positive and negative incremental returns when assessing historical performance
8) Alternative asset classes (private equity,
STOCHASTIC METHODOLOGY
Asset model based on
1) Inputs of investment policy
2) Assumptions about investment returns
3) Standard deviations of each asset class (correlations between returns of each asset class)
4) Implicit incorporation of rebalancing and diversification effects
O: EXPENSES IN FUNDING VALUATIONS FOR PP
TWO TYPES OF TYPICAL EXPENSES
1) Investment expenses
2) Administration-related expenses
REDUCTION IN DISCOUNT RATE METHOD
1) Reduction in discount rate affects both liability and NC
2) Method applies to all future years
3) Increase or decrease over time with liability growth or decline
4) Lends itself well to asset-related expenses if plan is expected to be fully funded over time (inv management fees, brokerage fees, custodial, trustee and consultant fees dependant to asset size)
5) Can be considered for less robust fees (independant of asset fees)
EXPLICIT ALLOWANCE IN NC METHOD
1) Represents short term assumption until next valuation
2) Commonly used for admin expenses
3) Requires ongoing funding for expenses even if no further
4) No impact to plan's liability or funded ration
OTHER CONSIDERATIONS
1) Common approach is combination of both methods
2) Preferable to identify allowance for admin expenses for small plans
3) Diff in approaches can arise:
Segregated inv accounts vs pooled funds: expenses should reflect expense levels for particular pooled fund in use
Actively vs passively managed fund; diff levels of expenses