Insurance and Actuarial
Advisory Services
Statements of Actuarial Opinion
Midwest Actuarial Forum
March 23, 2004
Robert H. Wainscott, FCAS, MAAA, FCIA
Principal, Ernst & Young
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Topics for Discussion
• Historical Perspective
• Reference Documents
• Codification of Statutory Accounting
• Classes of Opinion
• Opinion Requirement Changes: 2004 and 2005
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Statement of Actuarial Opinion
Historical Perspective
• Statement of Actuarial Opinion arose from insolvencies
of the 1970’s
• Primary statutory concern is solvency
• “Good and Sufficient Provision”
• By 1990 the SAO was required in every state
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Today’s Statement of Actuarial Opinion
• “Good and Sufficient” has become “Reasonable”
• The actuary is appointed by the Board
• Commentary is required on such items as:
– Anticipated salvage & subrogation
– Discount for time value of money
– Reinsurance collectibility
– Retroactive reinsurance
– … and more
• Long-duration unearned premiums are included
• Documentation report is required
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Statements of Actuarial Opinion
• Reference Documents
– ASB #36
– SSAP #55; SSAP #65; SSAP #62; others
– AAA Practice Note on SAO
– AAA Loss Reserve Law Manual
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Actuarial Standard of Practice #36
• Six-year effort
• Three exposure drafts, with many comments
• Public Hearing
• Effective:
For all Statements of Actuarial Opinion
provided for reserves with a valuation date on
or after October 15, 2000
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Scope
• Written statements of actuarial opinion for which:
– Opinion is provided to comply with requirements of
law or regulation
– Opinion is represented by the actuary as a
statement of actuarial opinion
• Applies to loss and loss adjustment expense reserves
of insurance companies, reinsurance companies and
of other property/casualty risk financing systems,
such as self-insurance
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Codification and The Actuary
• Management Records (and Supports)
Best Estimate of Reserves
• Actuary Continues to Opine Upon
Reasonableness of Reserves
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SSAP #55
Unpaid Claims, Losses, and Loss Adjustment Expenses
• For each line of business and for all lines of business in the
aggregate, management shall record its best estimate of
its liabilities for unpaid claims, unpaid losses, and
loss/claim adjustment expenses.
• If, for a particular line of business, management develops
its estimate considering a range … management’s best
estimate of the liability within that range shall be recorded.
• Management’s range shall be realistic and, therefore, shall
not include the set of all possible outcomes but only those
that are considered reasonable.
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SSAP #55 - Continued
Unpaid Claims, Losses, and Loss Adjustment Expenses
• In the rare instances when … it is determined that no point
within management’s estimate of the range is a better
estimate than any other point, the midpoint … shall be
accrued.
• If management determines that the high end of the range
cannot be quantified, then a range does not exist, and
management’s best estimate shall be accrued.
• If a reporting entity chooses to anticipate salvage and
subrogation recoverables, the recoverables shall be
estimated and shall be deducted from the liability for
unpaid claims or losses.
10
SSAP #65 – Property and Casualty Contracts
• P/C contracts can be written on the following bases:
 Occurrence
 Cover insured events that occur within the effective dates of the
policy regardless of when they are reported. Liabilities for losses
shall be recorded when the insured event occurs.
 Claims made
 Cover insured events that are reported within the effective dates of
the policy, subject to retroactive dates when applicable. Liabilities
for losses shall be recorded when the event is reported to the
reporting entity.
 Extended reporting
 Endorsements to claims made policies covering insured events
reported after the termination of a claims made contract but subject
to the same retroactive dates where applicable.
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SSAP #65 - Continued
• Defines the accounting practices to follow for
reporting the following items:
–
–
–
–
–
–
–
–
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Extending reporting guidelines
Discounting
Structured settlements
Policies with coverage periods >= to 13 months
High deductible policies
Asbestos and environmental exposures
Excess statutory reserve
Policyholder dividends
Unresolved Issues and Interpretations
• What constitutes management’s “Best Estimate”?
• Who is “management”?
• Who owns the estimate?
• Role of the Actuary
– Set reserves or review
management’s reserves?
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Whose Best Estimate?
• Management’s vs. the Actuary’s
• Why is there a difference?
• What is a reasonable tolerance? What’s a
material difference between management’s and
the actuary’s evaluation?
• What kind of documentation does management
have for their estimate?
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What Kind of Opinion?
Differences in Language
• ASOP 36 Classes
–
–
–
–
–
Reasonable
Excessive
Inadequate
Qualified
No Opinion
Reserve Certifications?
“Clean” Opinions?
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What is a Reasonable Opinion?
• Reasonable in the context of what is
known/available to the actuary today?
• Can/Should it include the “there’s an outside
shot if everything goes right” scenario?
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What is a Reasonable Range?
• Ranges often picked judgmentally. May be based
on rules of thumb or actuary uses several
estimation techniques and uses highest and
lowest result as range.
• Should ranges rely more on stochastic analysis?
• Should ranges explicitly consider both process
and parameter risk?
• What sort of ranges would such analysis yield?
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Qualified Opinions
• ASOP 36 definition: “the reserves for certain
items are in question because they can not be
reasonably estimated”
• When does risk of material adverse deviation
produce a qualified opinion?
• If the difference between the high end of a
reasonable range and carried reserves is more
than surplus, are those reserves reasonably
estimable?
• Is a qualified opinion necessarily bad?
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2004 Changes
• Requires identification of person responsible for
providing data used in actuarial analysis
• Moves numbers to Exhibit A – Scope and Exhibit
B – Disclosures
• Whether or not there is significant risk of material
adverse duration
• Greater definition of Actuarial Report
• Requires auditor to test key data for opinion
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2004 Changes
Exhibit A: SCOPE
Loss Reserves
• A. – D. Same as current Scope
• E. “Retroactive Reinsurance Reserve Assumed” moves to E from F as “claims
made extended loss and LAE reserve is removed from Scope section.
• F. Other Loss Reserve items on which the Appointed Actuary is expressing an
Opinion (list separately)
Premium Reserves
• G. Reserve for Direct and Assumed Unearned Premiums for Long Duration
Contracts
• H. Reserve for Net Unearned Premiums for Long Duration Contracts (Ceded
no longer listed separately)
• I. Other Premium Reserve items on which the Appointed Actuary is expressing
an Opinion (list separately)
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2004 Changes
Exhibit B – Disclosures
• New items 1 & 2 –
– 1. Materiality Standard expressed in $US
– 2. Statutory Surplus $
• Items 3-7 are the same as current A-E Disclosures except
claims made extended loss and loss expense reserve is
separately broken out by amounts reported as loss
reserves and as unearned premium reserves
• Item 8 - Other items on which the Appointed Actuary is
providing Relevant Comment (list separately)
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2004 Changes – Risk of MAD
• Requires explicit statement of whether or not actuary
reasonably believes there are significant risks and
uncertainties that could result in material adverse deviation
and why.
• The explanatory paragraph should not include general,
broad statements about risks and uncertainties… nor
is the actuary required to include an exhaustive list of
all potential sources of risks and uncertainties.
• Materiality standard disclosed in $US.
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What’s Material?
• SEC
• NAIC
• Threshold
• Common Sense
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Materiality
• Consider the purposes and intended uses for which the
actuary prepared the statement of actuarial opinion
• Use professional judgment as well as guidelines or
standards
• For NAIC Opinions, the actuary may wish to consider:
• Quantitative “rule of thumb” measures, (I.e., % of
statutory surplus)
• Risk Based Capital implications
• Minimum capital and surplus requirements
• IRIS ratio exceptional value triggers
• Accounting Guidance – Staff Accounting Bulletin 99
• Discussion with regulators/auditors may be useful
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Actuarial Report Defined
• Narrative and technical components.
• Requires exhibit which ties to AS and
compares Actuary’s conclusions to carried
amounts.
• Summary exhibit(s) of either the actuary’s best
estimate, range of reasonable estimates, or
both, that led to the conclusion in the
OPINION paragraph regarding the
reasonableness of the reserves.
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Actuarial Report: New names, same intent
• Narrative and technical components.
– The narrative component - sufficient detail to clearly
explain to company management, the regulator, or other
authority the findings, recommendations and
conclusions, as well as their significance.
– The technical component - sufficient documentation and
disclosure for another actuary practicing in the same
field to evaluate the work. This technical component
must show the analysis from the basic data, e.g., loss
triangles, to the conclusions.
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Actuarial Report: New Specifications
Requires Extended Comments on:
• Trends that indicate the presence or absence of risks
and uncertainties that could result in material adverse
deviation
• Factors that led to unusual IRIS ratios for Reserve
tests (10,11,12), and how these factors were
addressed in prior and current analyses.
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Data Testing: Auditor/Actuary Consultation
The independent auditor consults with the
actuary to “…obtain an understanding of the
data identified by the appointed actuary as
significant …” to the decision regarding the
reasonableness of the reserves so that the
data may be tested by the auditor.
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2005 Changes
• Notification of change in Actuary procedure will be similar
to that required when Auditor is changed including letters
stating there were no material disagreements on items
within the Scope of the Opinion.
• Actuarial Opinion Summary(AOS) to be due March 15
• Explicit discussion regarding continued pattern of adverse
development (if 3 of last 5 years)
• Model Law to protect confidentiality of AOS
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Model Law: What it Does
• Creates an Actuarial Opinion Summary document
submitted March 15. Summary contains very basic
data on the appointed actuary’s range or point
estimate
• Protects the confidentiality of material in both the
Report and the Summary
• Provides legal protection to the appointed actuary
except in cases of fraud or willful misconduct by the
actuary
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Model Law: The Enactment Process
• Passed Casualty Actuarial Task Force at the NAIC in
June 2003
• Ratified by parent committee at the NAIC in
September, then Executive Committee and Plenary in
December.
• Referred to states for legislative or regulatory action
• Expected to be requirement for accreditation
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Model Law: Actuarial Opinion Summary
• Required to be sent only to domiciliary state
– Other states may request if they can demonstrate they
can protect confidentiality
• Contains
– Net and Gross point estimate and/or range
– Company’s Net and Gross Carried Reserve
– Difference between the Company’s Net and Gross
Carried reserves and the Appointed Actuary’s point
estimate and/or range
– Discussion of any persistent adverse development
(Schedule P 1 year test adverse by 5% of surplus or
more in 3 of the last 5 years)
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