ACTUARIAL SERVICES
Other Balance Sheet Reserves:
SAO & Reinsurer Concerns
Las Vegas
September 2004
ADVISORY
SAO: Other Considerations
Retroactive reinsurance assumed & Financial
Reinsurance
Write in on pg 3, not reflected in Schedule P or net
reserves listed in SAO
For reinsurance that does not pass risk transfer test
Claims made extended loss & expense reserves
Also appears in Schedule P Interrogatories
Included in scope of opinion
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SAO: Other Considerations
Anticipated salvage/subrogation
Consider how derivation of IBNR implicitly includes
anticipated salvage & subrogation
Discounting
Disclose separately for tabular and non-tabular,
appears elsewhere in Annual Statement
ASOP 20 & 36 for guidance
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SAO: Other Considerations
Pools & Associations
Net reserves for company’s share of voluntary and
involuntary participation in UW pools included in reserves
Asbestos & Environmental Reserves
Net reserves for A&E included in Schedule P reserves
Also reported in Note 33
Reinsurance Collectibility
Must comment on collectibility of reinsurance in SAO
Suggested sources for this information include company
management, Schedule F, and public information
Could have material effects
Can discuss amounts set up to cover this risk
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SAO: Other Considerations
IRIS Ratios
Comment on failure of reserve development ratios
Any additional topics which have material effect
NAIC has left this open-ended in the instructions, and
requests comments on major risk factors that could have a
material impact on the variability of reserves.
Left to actuary’s judgment and discretion
Should include items such as Mold, CD, 9/11, Large Ded
WC, coverage disputes, etc.
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Reinsurer Concerns:
Other Reserve Balances
Retro Premium
Contingent Commission
Premium Deficiency Reserve
EBNR
Reinsurance Risk Transfer
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Reinsurer Concerns:
Retro Premium
Calculation must be consistent with other
assumptions underlying IBNR, EBNR estimates –
must be consistent with booked IBNR by contract to
the extent possible
Reinsurer perspective – most calculations don’t start
for 3+ years, so can be ‘forgotten’, may be some
data coding issues in identifying contracts and
features
For reinsurance contracts, can be material by
contract or in total – one contract can be as high as
$20M asset due reinsurer for all AY combined
SOX audit implications
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Reinsurer Concerns:
Contingent Commission
Similar issues as retro premium
Varying terms in reinsurance contracts including
sliding scale features
Need consistency with other assumptions and
booked IBNR
Reinsurer perspective – many calculations don’t
start immediately, either side can ‘forget’
Generally smaller in amount than retro premiums,
but can be material in total
SOX audit implications
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Reinsurer Concerns:
Premium Deficiency Reserve
Don’t necessarily need actuary to calculate
Actuary should verify appropriate LR used for each
group, and expenses
Liability must be recognized for each grouping
where premium deficiency is indicated – grouping
based on how contracts are marketed, serviced, and
measured. No offset allowed.
Optional to include PDR in SAO scope, instructions
state that actuary must then also opine on reserves
excluding it
Accounting requirement: FAS 60, SSAP 53
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Reinsurer Concerns:
EBNR
Different terms – EBNR, EBUB – IBNR estimates must be
based on the appropriate earned premium
EBNR asset not mentioned in SAO, but appropriateness of
IBNR may depend on it
Reinsurers generally estimate late reporting premium based
on EP triangles, although can be done on a contract-bycontract basis for larger contracts
Larger reporting delay for reinsurers – typically 3-4 months,
so size of this asset will be material
Companies may prefer to be conservative with this asset –
auditors will look for any changes in conservatism or
methodology
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Reinsurer Concerns:
Reinsurance Risk Transfer
FAS 113 Accounting definition: Reasonable
possibility for reinsurer to realize significant loss
Generally accepted interpretation is 10% chance of
PVLR > 110%
Should get auditor sign off on questionable contracts
before year end
Can assess based on historical experience, or
modeling
Could have material effects on reserves of both
ceding company and reinsurer if contracts do not
pass risk transfer test – Schedule P must be gross of
reserves that do not pass
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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate
and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on
such information without appropriate professional advice after a thorough examination of the particular situation.
Presenter’s contact details
Sharon C. Carroll, FCAS, MAAA
Senior Associate, KPMG LLP
(314) 244 4160
scarroll@kpmg.com
www.kpmg.com
© 2004 KPMG LLP, a member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A.
03617G/SL
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