Revised ASOP No. 36 &
ASOP No. 43
Southwest Actuarial Forum
June 10, 2011
Lisa Slotznick, FCAS, MAAA
Member, COPLFR
Copyright © 2011 by the American Academy of Actuaries
Southwest Actuarial Forum
June 2011
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The advice presented here:

Is discretionary, not mandatory

Is not intended to set or enforce binding standards

Is not a standard or statement of opinion of the Actuarial
Standards Board, the Joint Committee on the Code of
Professional Conduct, or the Committee on Qualifications

Does not purport to describe accepted practice

Should not be used as a substitute for your own
professional judgment and discretion
The views expressed in this presentation are those of the
presenter and do not purport to represent the position of
the American Academy of Actuaries.
Copyright © 2011 by the American Academy of Actuaries
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June 2011
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Agenda

Practical applications of ASOP No. 36 and ASOP No. 43

ASOP No. 36, Statements of Actuarial Opinion

History and Background
 Structure
 Purpose and Scope
 New or Reframed Sections


Mostly Unchanged Sections
ASOP No. 43, Unpaid Claim Estimates

History
 Purpose and Scope
 Definitions, Issues, and Recommended Practice

Actuarial Communications and Disclosures
Copyright © 2011 by the American Academy of Actuaries
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Practical applications
ASOP No. 36 and ASOP No. 43

Direct application

Reserving assignments
 Statement of actuarial opinion assignments

Indirect application

Pricing assignments the results of which may be
used in a reserving assignment
 Areas in which there are no on-point standards and
nonbinding guidance is sought

Litigation
Copyright © 2011 by the American Academy of Actuaries
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ASOP No. 36
History and background



Statements of Actuarial Opinion regarding
property/casualty loss and loss adjustment expense
reserves
Originally adopted in 2000
Reasons to revise ASOP No. 36:




Consistency with ASOP No. 43
Consistency with current ASOPs
Revision process included two exposure drafts
Effective date: Opinions issued on and after May 1,
2011
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ASOP No. 36
Structure of the standard

Section 1: Purpose and scope

Section 2: Definitions

Section 3: Analysis of issues and
recommended practice

Section 4: Communications and disclosures
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ASOP No. 36
Purpose and scope of the standard


Written statement of actuarial opinion (SAO) under
particular circumstances

In compliance with NAIC Property and Casualty Annual
Statement Instructions

Otherwise prescribed by law or regulation

Represented by actuary as being in compliance with this standard
Items other than loss and loss-adjustment expense reserves
are not covered by this ASOP, even if the particular SAO
includes those items
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ASOP No. 36
New or reframed sections


Dates—explicit definitions the same for ASOP No. 36 and ASOP No. 43

Accounting date, used to separate paid versus unpaid claim amounts

Valuation date, through which transactions are included in the data

Review date, the cutoff for including information known to the actuary in
the analysis
Disclosure requirements differ between ASOP No. 36 and ASOP No. 43

ASOP No. 36 requires accounting and review dates;

ASOP No. 43 requires all three dates.
Sample Language: The unpaid claim estimate as of Dec. 31, 2010, was based
on data evaluated as of Nov. 30, 2010, and additional information provided to
me through Jan. 17, 2011.
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ASOP No. 36
New or reframed sections


Reserve opined upon—explicit disclosure
requirement

Reserve amounts

In the aggregate or not aggregated
Accounting standards—Statutory, GAAP, IFRS,
etc.
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ASOP No. 36
New or reframed sections

Role of ASOP No. 43

Previously, ASOP No. 36 provided guidance on performing the
underlying review of the unpaid claim estimates and included
reference to Statement of Principles Regarding Property and
Casualty Loss and Loss Adjustment Expense Reserves

ASOP No. 43 reference replaces that guidance

ASOP No. 43 governs the work underlying the report that is
prepared to support an NAIC opinion
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ASOP No. 36
New or reframed sections

Use of another’s unpaid claim estimate



Making use of the work of another

Previously, reliance on the opinion of another

Making use is not the same as reliance

Inclusion of the analysis, as well as the opinion of another

Use only when reasonable to do so
Review Opinion no longer is recognized
Explicit guidance for determining when it is reasonable to use
another’s work
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ASOP No. 36
New or reframed sections

Use of another’s unpaid claim estimate

Additional explicit review procedures and disclosures

Amount of reserves relied upon

Nature of exposure and coverage of this portion of the reserve

Inherent variability of the exposure and impact on aggregate reserves
of this variability

Credential of the individual preparing the analysis

Additional review procedures over work relied upon and the results
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ASOP No. 36
New or reframed sections—summary

Dates—explicit disclosure requirements

Reserve opined upon—explicit disclosure
requirement

Accounting standards

Acknowledgement of role of ASOP No. 43

Use of another’s unpaid claim estimate
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ASOP No. 36
Mostly unchanged sections—summary

Basis of presentation

Scope of analysis

Materiality

Reserve evaluation

Types of opinions

Explanatory paragraph and significant risks of material
adverse deviation
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ASOP No. 36
Mostly unchanged sections

Basis of Presentation

Understand nature of the reserves

Nominal versus discounted

Monetary value of the discount

Interest rate used

Explicit risk margin—explicit disclosure

Gross or net of specified recoverables

Potential for uncollectable recoverables, particularly reinsurance
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ASOP No. 36
Mostly unchanged sections

Scope of analysis


Explicit statement of scope
Reserve evaluation

Responsible for work of staff

Types of opinions

Significant risks of material adverse deviation (RMAD)

Explanatory paragraph accompanies assertion of RMAD
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ASOP No. 36
Mostly unchanged sections of ASOP

Materiality


Actuary to evaluate materiality based on professional
judgment
Not only materiality for an RMAD


Applies to determination of applicability of various sections of
the ASOP
Materiality defined in both ASOP No. 36 and ASOP
No. 43
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ASOP No. 36
Guidance for preparing opinions

COPLFR’s Practice Note for the SAO on Property and
Casualty Loss Reserves

P/C Effective Loss Reserve Opinion Seminar: Tools for
the Appointed Actuary

COPLFR’s Property/Casualty Law Manual
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ASOP No. 43
History

Until 2007, there was no ASOP on unpaid
claim estimates (or loss reserves)

The Casualty Actuarial Society’s Statement of
Principles Regarding Property and Casualty
Loss and Loss Adjustment Expense Reserves
had served as guidance
ASOP No. 43 therefore was conceived and
issued to be the authoritative guidance


Effective June 2007
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ASOP No. 43
Section 1: Purpose and scope of the standard

Applies to unpaid claim (loss and expense) estimates for events that
have occurred as of a given balance sheet date

Does not apply to estimates solely for ratemaking or health/disability
claims that may be covered by other ASOPs (but applies to health
benefits in connection with workers’ compensation liabilities)

Applies to “unpaid claim estimates communicated as an actuarial
finding in written or electronic form”

Internal work products supporting a position on reserves

Analysis and report supporting a prescribed Statement of Actuarial
Opinion (PSAO) on loss reserves (under the revised U.S. Qualification
Standards, all PSAOs are considered SAOs)
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ASOP No. 43
Section 2: Definitions

Consider using the definitions within the
standard in the written report supporting the
work performed pursuant to the ASOP
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ASOP No. 43
Section 3: Issues and recommended practices

Purpose of the unpaid claim estimate

Constraints

Scope of the estimate

Materiality

Nature of unpaid claims

Methods and models, assumptions, etc.

Reasonability, consistency, and presentation

Documentation
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ASOP No. 43
Section 3.1: Purpose or use of unpaid claim estimate

For the prescribed SAO on property and casualty loss
reserves, the intended purpose is self-evident, and the
users likely would be:

Regulators
 Boards of Directors
 Management
Any other users are ancillary

The purpose of the actuarial report related to an SAO is
to support the conclusions of the opinion.
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ASOP No. 43
Section 3.3: Scope of the unpaid claim estimate
intended measure

Identification of the intended measure of the unpaid claim
estimate—examples:







Mean
Mean plus risk margin
Median
Low estimate
High estimate
75th percentile
“Best estimate” and “actuarial estimate” are not sufficient
identifications of the intended measure
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ASOP No. 43
Section 3.3: Scope of the unpaid claim estimate
intended measure

Intended measure in the context of an NAIC
actuarial opinion



Management’s best estimate
Opining actuary’s measure of reasonability of
management’s best estimate
Places to put a reference to the actuary’s intended
measure for NAIC opinions


Actuarial opinion summary (AOS)
Report supporting the NAIC opinion
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ASOP No. 43
Section 3.3: Scope of the unpaid claim estimate
intended measure

Definition of “actuarial central estimate”
 An
estimate that represents an expected value
over the range of reasonably possible outcomes
 Does not include all conceivable outcomes
 Is not necessarily result of a probability
distribution
 Is not a precise statistical measure, not a
statistical mean
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ASOP No. 43
Section 3.3: Scope of the estimate

Gross and net indication

Collectability risk

Types of claims adjustment expense

Types of claims

Other scope items (exclusions)
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ASOP No. 43
Section 3.5: Nature of unpaid claims
The actuary should understand the nature of the unpaid
claims being estimated:
 Coverage
 Conditions
or circumstances that make a claim more or
less likely or the cost more or less severe—frequency
and severity characteristics
 The underlying claim adjustment process
 Potential recoverables
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ASOP No. 43
Section 3.5: Nature of unpaid claims

Other considerations in understanding the nature of
claims:

Methods used to sell or provide coverages

Distribution channels from which the entity’s business is
obtained

General underwriting and pricing practices of the entity

Marketing objectives and strategies of the entity

Relevant reinsurance program changes
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Case study—Changes to operation and
markets
Details
 Claim department operations
 New management
 Change to case reserving and
settlement practices
 Significant growth and expansion
into new markets in the past five
years
Add’l Financial Data/Information

Net reserves (held and
indicated): $400 million

Reserves in new lines: $200
million

Surplus: $200 million
Key Issues/Considerations



Operational changes and rapid growth make prior experience less
relevant to the estimate of unpaid liabilities
External data and benchmark development patterns used to
supplement company data
 May not match the company’s future experience
Increased uncertainty
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Case study—Sample opinion language

Significant changes in claim operations over the past five years create
additional uncertainty in estimating the company’s loss and LAE
development patterns due to lack of complete historical data.

The company experienced rapid growth in net premium over the past five
years. Primary drivers of this growth include the introduction of MGA
business and the entrance into new workers’ compensation markets in 2009.
This rapid growth into new areas, for which there is not complete historical
data, necessitates considerable reliance on benchmark development
patterns. In my opinion, these benchmarks are relevant to the operations of
the company. Their use, however, increases the uncertainty of the
company’s reserves.
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ASOP No. 43
Section 3.6: Unpaid claim estimate analysis

Methods and models

Assumptions

Data

Recoverable interaction

Gross versus net

External conditions

Changing conditions

Uncertainty
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ASOP No. 43
Section 3.6.1: Methods and models

Nature of the claims and underlying exposures

Claim development characteristics

Characteristics of available data

Applicability of methods or models to the data

Reasonableness of the assumptions underlying each
method or model

Use of more than one method

Consistency with prior valuations
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ASOP No. 43
Section 3.6.1: Methods and models

Multiple methods

Disclosure if only one method
 Apply to one or many components of the reserve

Consistency

Across time
 Across coverages
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ASOP No. 43
Section 3.6.2: Assumptions

Reasonability of explicit and implicit
assumptions

Sensitivity of the results to reasonable
alternative assumptions

Particular requests for assumptions and
disclosure
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ASOP No. 43
Sections 3.6.6 and 3.6.7
External and changing conditions

External conditions


Cognizant of environment that might affect
estimates—economic, regulatory, legal, and judicial
Changing conditions

Consideration of changes not fully reflected in data
related to claims handling, exposures, and reinsurance
 Support for such changes
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ASOP No. 43
Section 3.6.8: Uncertainty

Types and sources of uncertainty:
Correlation
Model risk
Parameter risk
Process risk
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ASOP No. 43
Section 3.7: Unpaid claim estimate

Reasonableness of estimates

Benchmarks
 Peer review

Consistency of estimate across components

Comparison among components
 Consider materiality

Presentation in relation to intended purpose
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ASOP No. 43
Section 4.1: Actuarial Communication
Disclosures:



Some of the items we have discussed today are
explicitly listed as required disclosures
Other areas are just “good practice”
Deviation from standard—disclosure

Both ASOP No. 43 and ASOP No. 36

Include a description of why

Protection against discipline and litigation
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Southwest Actuarial Forum
For more information, contact:
Lauren Pachman, Casualty Policy Analyst
Pachman@actuary.org
(202) 223-8196
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