CANE Fall 2004 Meeting
Statements of Actuarial Opinion – Changes for 2004 and
2005 Reporting Years
Thomas L. Ghezzi, FCAS, MAAA
September 22, 2004
This document was designed for discussion purposes only.
It is incomplete, and not intended to be used, without the
accompanying oral presentation and discussion.
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Agenda
 Changes to statutory Statements of Actuarial Opinion
(SAO)
 Year-end 2004
 Anticipated 2005
 Focus on SAO required to be attached to financial
statements of US property/casualty insurers
 Based on NAIC Annual Statement Instructions –
Property/Casualty, for the year 2004
 Based on my interpretation
 Individual opinions must be based on appointed
actuary’s interpretation of the principles applicable
to the particular situation
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Background
 The SAO is an important manifestation of
actuarial work
 Presents actuarial conclusions
 Important tool for solvency monitoring
 SAO needs to
 Opine on held reserves
 Disclose relevant issues
 Flag material issues/risks
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Recent Criticism of Actuaries
 Reserve performance has been generally poor in
recent years
 Not only due to asbestos and other mass torts
 Often for companies with “clean” opinions
 Credibility of the SAO is brought into question
 Regulators
 External users
—
—
—
—
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Rating Agencies
SEC
Standard & Poors
Public
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Intent of the Changes for 2004 and 2005
 Bring more order to the Opinion Instructions
 Seventeen sections consolidated into nine sections
and two exhibits
 Provide better disclosures
 Within the SAO
 Within the Actuarial Report
 Formal acknowledgement of regulatory reliance on the
Actuarial Standards of Practice of the Academy and
the Statement of Principles of the CAS
 Provide additional disclosures in a confidential
document – the Actuarial Opinion Summary – for 2005
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Major Categories of Change for 2004
 Compare
Substantive
Actuary’s
Conclusions to
Carried
Amounts
 Risk of
Material
Adverse
Deviation
 Materiality
Standard
 Data Reliance
SAO
• Substantive
Changes
Actuarial
Report
• Format
 Opinion
Process
 SCOPE Items
 Scope of the Auditor’s
Examination
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of Materiality
Standard
 Extended
Comment on
Exceptional IRIS
Test Results
Moved to
Exhibits
 Miscellaneous
Comment on
Risk of Material
Adverse
Deviation
 Describe Basis
Section
Wording
Format
 Extended
 Reconciliation
to Schedule P
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Risk of Material Adverse Deviation (RMAD)
 The SAO Must state whether or not there are
“Significant risks and uncertainties that could result in
material adverse deviation.”
 The actuary needs to judge
 Whether the risk is “significant”
— Based on actuary’s reasonable belief
— Not intended to include every conceivable risk
 What is material
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Materiality Standard
 Must be disclosed in all opinions (Exhibit B)
 General approach is to consider how user will be
influenced
 An item is material if it would change the user’s
interpretation of the situation
 Depends on the context
 Solvency monitoring - might imply a standard based
on surplus
 Actuarial appraisal – might imply a standard based
on net income or net worth
 Other standards are possible
 Involves qualitative and quantitative considerations
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RMAD Disclosure
 Explanatory paragraph must describe
 Major risk factors
 Combination of factors
 Particular conditions
underlying the risks and uncertainties
 Include basis of the materiality standard
 Should not include broad general statements
 E.g., Risk of future adverse legislative or judicial
changes is too broad a statement
 The list need not be exhaustive
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NAIC “Bright Line Test”
 Regulators plan to use a bright line test for 2004 in
evaluating if there is a risk of material adverse
deviation
 Based on the relationship of
 10% of held reserves
 Difference between surplus and company action
level RBC
 Not conclusive, but disclosure and discussion will be
looked for in the SAO and Actuarial Report
 A more restrictive standard is expected to apply in
most cases
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Data Reliance
 Identification of data source to include
 Name, affiliation, relation to company
 Previously, referred to:
“Responsible officers and employees…”
 Prior reference provided no useful data to regulators
 Response to past situations where adverse
development attributed to “bad data”
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Opinion Section
 Must state category of opinion, based on ASOP #36
definitions
 Reasonable
 Deficient or Inadequate
 Redundant or Excessive
 Qualified
— Really a “limited scope” opinion
 No Opinion
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Items Included in the Opinion
 Moved from the SCOPE paragraph to Exhibit A
 Loss reserve items listed separately from premium
reserve items
 Claims-made extended reserve not explicitly listed
 “Other” categories, e.g.,
 Extended reserve
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Exhibit A: SCOPE
Loss Reserves:
A. Reserve for Unpaid Losses (Liabilities, Surplus and Other Funds
page, Line 1)
B. Reserve for Unpaid Loss Adjustment Expenses (Liabilities,
Surplus and Other Funds page, Line 3)
C. Reserve of Unpaid Losses – Direct and Assumed (Schedule P,
Part 1, Totals from Cols. 13 and 15)
D. Reserve for Unpaid Loss Adjustment Expenses – Direct and
Assumed (Schedule P, Part 1, Totals from Cols. 17, 19 and 21)
E. The Page 3 write-in item reserve, “Retroactive Reinsurance
Reserve Assumed”
F. Other Loss Reserve items on which the Appointed Actuary is
expressing an Opinion (list separately)
Amount
$ ________
Premium Reserves:
G. Reserve for Direct and Assumed Unearned Premiums for Long
Duration Contracts
H. Reserve for Net Unearned Premiums for Long Duration
Contracts
I. Other Premium Reserve items on which the Appointed Actuary
is expressing an Opinion (list separately)
Amount
$ ________
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$
________
$
________
$
$
________
________
$
________
$
________
$
________
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Additional Disclosures
 Moved from the SCOPE paragraph to Exhibit B
 Disclosure of materiality standard added
 Standard used to judge the risk of material adverse
deviation
 Stated in $US
 Includes disclosure of statutory surplus
 Includes listing of items covered in RELEVANT
COMMENTS
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Exhibit B: DISCLOSURES
1. Materiality Standard expressed in $US
2. Statutory Surplus
3. Anticipated net salvage and subrogation included as a reduction to loss
reserves as reported in Schedule P
4. Discount included as a reduction to loss reserves and loss expense reserves
as reported in Schedule P
4 (a) Nontabular Discount
4 (b) Tabular Discount
5. The net reserves for losses and expenses for the company’s share of
voluntary and involuntary underwriting pools’ and associations’ unpaid
losses and expenses that are included in reserves shown on the Liabilities,
Surplus and Other Funds page, Losses and Loss Adjustment Expenses
lines.
6. The net reserves for losses and loss adjustment expenses that the company
carries for the following liabilities included on the Liabilities, Surplus and
Other Funds page, Losses and Loss Adjustment Expenses lines. *
6 (a) Asbestos, as disclosed in the Notes to Financial Statements
6 (b) Environmental, as disclosed in the Notes to Financial Statements
7. The total claims made extended loss and expense reserve (Schedule P
Interrogatories).
7 (a) amount reported as loss reserves
7 (b) amount reported as unearned premium reserves
8. Other items on which the Appointed Actuary is providing Relevant
Comment (list separately)
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$ ________
$ ________
$ ________
$ ________
$ ________
$ ________
$ ________
$ ________
$ ________
$ ________
$ ________
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Major Categories of Change for 2004
 Compare
Actuary’s
Conclusions to
Carried
Amounts
SAO
• Substantive
Changes
• Format
Actuarial
Report
 Extended
Comment on
Risk of Material
Adverse
Deviation
 Describe Basis
Process
of Materiality
Standard
 Extended
Comment on
Exceptional IRIS
Test Results
 Reconciliation
to Schedule P
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Actuarial Report - General Considerations
 Regulators want to be able to rely on the Actuarial
Report
 Timely
 Consistent with ASOP #9, Other ASOPs, Statement
of Principles
 Needs to convey completely the significance of the
actuary’s opinion and findings
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Comparison of Actuary’s Conclusions to the
Carried Reserves
 Must show either
 Point estimate
 Range of reasonable estimates
 Both
 The held amount must tie to the Annual Statement
 Although new to the instructions, this has always been
considered by many to be a best practice
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Extended Comments on RMAD
 Substantive support for the actuary’s conclusions
regarding RMAD
 Cite trends that indicate the presence or absence of
RMAD
 Will likely need to be extensive in many situations
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Description of the Basis of the Materiality
Standard
 Supportive of disclosures in the SAO
 Will likely include
 Actual data and conclusions underlying any
calculations used in derivation of the standard
 Bright line test documentation
 Will likely include both quantitative and qualitative
considerations and discussion
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Extended Comment on Exceptional IRIS Test
Results
 Substantive comment regarding the failed tests is
required
 Mostly a requirement for the Actuarial Report, but best
practice for the SAO as well
 Key considerations
 Prior year carried reserves vs current evaluation
 Implicit assumption is that test result is predictive of
future changes in current reserve
 If current reserves are reasonable, irrelevance of
failed test must be explained
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Reconciliation of Analysis Data to Schedule P
 Historical standard includes
 Paid amounts
 Case reserves
 Earned premium
 May include additional items
 Salvage/Subrogation
 Claim counts
 Other
 More of an interpretation change than a change in the
instructions
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Major Categories of Change for 2004
SAO
• Substantive
Changes
Actuarial
Report
• Format
Process
 Scope of the Auditor’s
Examination
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Process Change –
Scope of the Auditors’ Examination
 Auditor must obtain an understanding of data identified
by the appointed actuary as significant to reserve
projections
 Separate testing may be required
 “Unless otherwise agreed” among the appointed
actuary, management and the auditor
 This requirement may cause difficulties
 May shift role of the actuary to include data testing
issues
 May cause conflict with auditor and management
 Early discussions are advisable
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Role of the Actuary and the Auditor
 This instruction places responsibility on the auditor and
the company
 However, it anticipates significant interaction between
the auditor, company and the appointed actuary
 Actuary must decide what data is significant
 Losses
 LAE
 Premium
 Claim counts
 Data for a particular state
 Sub-component/line of business
 Other
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Anticipated Changes for 2005 –
Actuarial Opinion Summary (AOS)
 Due March 15 following statement year
 Confidential document
 To include at least
 Actuary’s point estimate, gross and net
 Actuary’s range, gross and net
 Company’s recorded reserves, gross and net
 Discussion of differences between estimated
reserves and recorded reserves, gross and net
 Discussion of recent adverse development
— Greater than 5% of surplus in three of last five
calendar years
— Discussion of major contributors
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AOS Continued
 Model law to protect confidentiality of the AOS
 Passage to take several years
 Voluntary compliance may be requested as early as
year-end 2004
 Only if confidentiality of AOS can be protected
 AOS content requirements may change
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Other 2005 Change
 Process of changing appointed actuary
 To track process for changing independent auditor
 Will require disclosures of disagreements
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Resources
 NAIC Annual Statement Instructions
 Property and Casualty Practice Note
 Will contain additional appendices related to
— Changes to the opinion, including NAIC guidance
memorandum
— Data audit, including discussion of
communication with auditors
 NAIC Accounting Practices and Procedures Manual
 Other
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Discussion
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