CIA Materiality

Question 1

Define Materiality

Answer 1

An omission/understatements/overstatement is considered to be MATERIAL if the actuary expects it to be MATERIALLY AFFECT the user’s decision-making or reasonable expectations.

Question 2

What materiality IS NOT. (2)

Answer 2

• materiality is NOT a range of reasonable values around actuarial estimate
• materiality is NOT inherent uncertainty in an actuarial estimate

Question 3

Identify the main consideration in setting a materiality level. (2)

Answer 3

To SPECIFY:

• use of work, intended users
• there is no obligation to communicate with other than the intended audience

Question 4

Identify when the materiality level should change.

Answer 4

• when an external BENCHMARK is approached (eg: regulatory action level)
• otherwise, it should be consistent over time AND between valuations

Question 5

Identify characteristics of an insurance company that may affect materiality. (6)

Answer 5

• financial strength
• size of entity
• type of business
• access to capital
• net retention
• stage of organization’s life cycle

Question 6

Identify a metric to test materiality for regulatory (or solvency) purposes. (2)

Answer 6

• statutory surplus

- solvency benchmark ratio

Question 7

Identify a metric to test materiality for appraisals. (3)

Answer 7

• net worth
• net income
• EPS (earnings per share)

Question 8

Identify a metric to test materiality for general purpose financial statements. (2)

Answer 8

• statutory surplus

- net income

Question 9

Identify which application has less rigorous materiality level, DCAT or valuation.

Answer 9

DCAT is less rigorous (so materiality standard is higher)
DCAT: used for surplus in scenario-testing
Valuation: this impacts net income which is more important, and need to detect smaller deviations here

Question 10

Considerations for extent of disclosure of materiality. (3)

Answer 10

• sophistication of users
• important of concept to users
• complexity of concept

Question 11

Possible actions of report-writer based on materiality. (3)

Answer 11

INCLUDE ITEM? whether item should be CONSIDERED
REFINE ITEM? whether item is sufficiently ACCURATE
DISCLOSE ITEM? whether item should be REPORTED