Statement of Actuarial Opinion
and the Annual Statement
Changes and Statistics
Casualty Loss Reserve Seminar
September 18-19, 2008
Moderator: Mary D. Miller, Ohio Dept of Insurance
Panelists: Sarah McNair-Grove, Alaska Division of Insurance
Melissa Greiner, Pennsylvania Insurance Dept
Topics of Presentation
Changes for 2007


Successes
Challenges
2007 Opinion and AOS Statistics
Review of Last Year’s Advice
Changes for 2008
Review of 2007 Changes
Expansion of Exhibit B disclosures:





Name of Appointed Actuary
Relationship of Actuary to Company
Qualifications of Actuary
Type of Opinion
Definitive Statement on RMAD (Y or N)
Electronic submission of data in Opinion
Exhibits A & B.
Why the 2007 Changes?
Make it easier for regulators to view key
elements of Opinion at a glance
Gather Opinion statistics on national level

Previously, statistics compiled only from
states with active regulatory actuary staff
Analyze statistics year to year
Successes
Electronic reporting allowed cross check of
“electronically” filed information to
language from Actuary’s Opinion.
RMAD conclusion – eliminated the ambiguity of
“could be risk of MAD” responses
 Look to Exhibit B for the Y or N response
 If vague in narrative, rely on Exh B response
to follow up or clarify.
Successes
Can compare individual states to national
results
Will be able to more easily track trends
from year to year
Enhances ability to check for:


Consistency across affiliated entities
Consistency across individual actuaries
Challenges
With any new requirement or change to
financial reporting instructions, regulators
expect reporting hiccups in first few years.
Burden is on the company to accurately
report Exhibit B data
Letters being sent to companies with
obvious errors
Exhibit B Reporting Hiccups
Missing information
Improperly filed information
Inconsistently reported information
Small company exemptions not easily
identified
Total error ratio: nearly 25%
Challenges to Exhibit B Reporting
One state intern spent 40+ hours to clean
up electronically reported information.
Some states, through analysis and/or
actuarial support functions requested
companies to correctly refile.
We’re not sure how many states took the
initiative to request corrections to
electronic reporting of Exhibit B in 2008.
Challenges – Small Company
Exemptions
NAIC Instructions allow exemptions from
an Opinion based on specific criteria.

Total exemptions across all states is
unknown.
Some of these companies completed
Exhibit B, when not needed to.
We may discuss with NAIC to avoid
unnecessary reporting.
What did we find?
Name of Actuary
Collected in three fields by Last Name, First name,
Middle
Actual results looked like:
Greiner
GREINER
Greiner
Melissa
Greiner
Melissa
MELISSA
M
Lynn
Melissa
L
Lynn
Greiner
Lynn
Difficult to run a quick query or pivot table on single
actuary’s results.
Relationship to Company
Valid responses are C, E
Invalid responses: blanks, ~, D, N, S

Invalid response ratio ~ 5.2%
Of valid responses:


68.7% Consultants
31.3% Employees
Actuary’s Qualification
Valid responses are F, A, M or O


M = Academy member, but approved by Casualty
Practice Council of AAA
O = Other
Invalid responses: ~, 0, C, Y, N

Error ratio = 5.2%
Of valid responses:



76% Fellows
23% Associates
1% AAA Member or Other
Type of Opinion
Valid responses are R, E, I, N, Q
Invalid responses: blanks, ~, 0, O, F

Error ratio = 6.3%
Of valid responses:



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99.0% Reasonable
0.3% Excessive
<0.1% Inadequate
0.2% No opinion
0.4% Qualified opinion
Non Reasonable Opinions
8 Excessive opinions
1 Inadequate opinion
6 No Opinion
10 Qualified opinions
Risk of MAD
Valid responses are Yes or No

Answers of Y, N, none easily interpreted
Invalid responses: blanks or exemptions
Of valid responses:


31.6% Yes to RMAD
68.4% No to RMAD
What RMAD standard did you use?
62% use surplus
11% use LLAE
20% use a combination of surplus, LLAE,
and/or RBC
Net vs. gross standards (reinsurance
considerations)
Always consider specific company risks &
operations
Source: multi-state sample
What did you use?
Data from 887
companies
domiciled in
CT, IL, NY,
OH, PA, TX
and AK
4%
4%
20%
Surplus
Reserves
Combo
Reinsurance
11%
Other
61%
Is there RMAD?
Consider specific company risks
RMAD amount vs. the Range
Carried reserves vs. actuarial indications
RMAD on a Gross basis, but not Net?
Explicitly state if risk exists; 32% said Yes
“Attorney approved” language
What is your answer?
Data from
companies domiciled
in CT, IL, NY, OH,
PA, TX and AK
887 total companies
Risk of Material
Adverse Deviation


Yes 31%
No 69%
Is there Risk of MAD?
Yes
No
What is your answer?
Data from NAIC
database of Exhibit B
responses
Adjusted for missing
and invalid responses
2560 total companies
Risk of Material
Adverse Deviation
 Yes 32%
 No 68%
Is there Risk of MAD?
Yes
No
What can we learn?
State sample consistent with NAIC electronic
reporting
Is there Risk of MAD?
70.0%
60.0%
50.0%
40.0%
Yes
No
30.0%
20.0%
10.0%
0.0%
Multi State
Sample
Database
Does RMAD vary by employer?
Is there Risk of MAD?
80.0%
70.0%
60.0%
50.0%
Yes
No
40.0%
30.0%
20.0%
10.0%
0.0%
Employees
Consultants
Does RMAD vary by credentials?
Is there Risk of MAD?
80.0%
70.0%
60.0%
50.0%
Yes
No
40.0%
30.0%
20.0%
10.0%
0.0%
Fellows
Assoc
Mem/Other
Is there Risk of MAD?
Yes to RMAD
50%
40%
30%
2005
2006
2007
20%
10%
0%
Multi-State Sample
Database
Fewer actuaries concluded “yes” to RMAD over time.
AOS Statistics
Combined Net
Data from 825
Companies
domiciled in
seven states
Reflects 2007
AOS data
Includes some
companies
that carry net
zero
30%
Point
Range
Both
52%
18%
AOS Statistics –
Carried to Actuary Estimate
Combined Net
data from 732
companies in 7
states
Excludes
companies that
carry zero-net
reserves
50%
40%
30%
20%
10%
M
or
to
5%
e
th
an
10
%
ab
ov
Le
10
e
ss
%
th
ab
an
ov
5%
e
ab
ov
Le
e
ss
th
Eq
an
5% ual
5%
be
to
M
lo
or
10
w
e
%
th
be
an
lo
10
w
%
be
lo
w
0%
Our Advice Last Year
Use your resources
Focus on RMAD
Prepare a good Actuarial Report
Meet with the Board annually
Provide better comments on adverse
development
Use Your Resources
Annual Statement Instructions
ASOP 36
COPLFR Practice Note

Practice Note’s Regulatory Guidance
Regulatory actuaries
Papers re: MAD, ranges, etc.
AAA Opinion Seminar
Focus on RMAD
Statutory A/S Instructions vs. ASOP 36
Use the COPLFR Practice Note
Regulatory Guidance
Consider your audience – focus on
solvency, capitalization, RBC level, and
IRIS ratios, but don’t forget income
Don’t confuse RMAD with a range of
reasonable reserve estimates
Actuarial Report
Define report: ASOP 36, A/S Instructions,
Regulatory Guidance
Does it support the Actuarial Opinion, the
Actuarial Opinion Summary and carried
reserves?

AOS range should match range in Report
Actuarial Report Documentation
Document assumptions and methods and
any changes
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Loss ratios used in B-F methods
Loss development factors
Interpolated factors and roll forwards
Ultimate selections
Segmentation of data
Schedule P reconciliation
Meet with the Board
Best to present your Report in person, as
soon as possible
Regulators expect the Board to
understand the significance of your
findings
When in Doubt…
Disclose, disclose, disclose
Talk with management
Seek help from a regulatory actuary
2008 Changes
Intercompany Pooling

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Only applies when there is one lead company with
100% of pool; the rest of the companies have 0%
Each company files a single Opinion that covers
entire Pool
File Exhibits A&B with company specific values
even though most are 0 for 0% companies
File Exhibits A&B of lead company as appendix for
0% companies
2008 Changes
Not Applicable added as acceptable
RMAD response for intercompany pooling


Only for use by 0% companies
All others must check either yes or no
Cross checks added to Exhibits A and B


Clarifies how exhibits tie back to Annual
Statement
Letters generated by NAIC when exhibits do
not tie to the Annual Statement
2008 Changes
Actuarial Guidance to Financial Analysis
Handbook provides additional “tests” to
review on materiality and context within
the range
Analysis Guidance Example
What if actuary said “no” to RMAD, yet
company carried reserves in lower end of
actuarial range?
Consideration given to surplus and RBC
levels. If low, appointed actuaries should
expect a call from the domestic regulator.


Why is there no RMAD?
Is the Materiality threshold possibly set too high?
Our Advice for This Year
Use your resources
Focus on RMAD
Prepare a good Actuarial Report
Meet with the Board annually
Provide better comments on adverse
development
Questions?
Comments?