Loss Reserve Opinions
Mary D. Miller FCAS, MAAA
Ohio Department of Insurance
CASE 2006 Fall Meeting
September 13, 2006
Actuarial Hat Trick
• Regulator and Vice-Chair of Casualty
Actuarial Task Force of NAIC
• AAA Casualty Vice-President
• Newly Elected CAS Board Member
I am happy to answer questions from any
perspective
Regulatory Actuaries and the NCAA
• States with Regulatory
Actuaries
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Texas
Ohio
Pennsylvania
Florida
California
North Carolina
Illinois
West Virginia
• States with Teams in
BCS or Final 4
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Texas
Ohio
Pennsylvania
Florida
California
North Carolina
Illinois
West Virginia
How Do Regulators Use Opinions?
• Potentially, 55 variations on the “ensure solvency”
theme!
• Consequently domiciliary nuances usually apply!
Reserving Risk
• Generally largest risk for every company
• It’s where all the other risks eventually
reside
• Regulator’s view of reserves depends on
many variables
– Solvency Position
– Spread of Risk
– Management competence
What Should a Regulator Want to See?
• Consistency with the Instructions
• Consistency with other information about the
company
• Clarity on risks, materiality and RMAD
conclusions
• A report that clearly supports the opinion
• Unanswered questions raise eyebrows
Actuarial Opinion Summary (AOS)
• Compromise position to public disclosure of
information
• Regulators wanted information sooner
• Required to be sent only to domiciliary state
– Other states may request if they can demonstrate they
can protect confidentiality
– Due March 15
– Will now be a supplemental filing with separate
Instructions
Actuarial Opinions
• Carried Reserves are Management’s Best Estimate
– Summary (new in 2006) shows Actuary’s Point
Estimate and/or Range
– Question Significant Differences
• Type of Opinion:
– Reasonable, Deficient/Inadequate,
Redundant/Excessive, Qualified, No Opinion.
• Relevant Comments
– Risk of Material Adverse Deviation
– Reinsurance: retroactive, financial, collectibility
– IRIS Ratios 10-12 exceptional values
8
Actuarial Opinion –
What Can It Tell Me?
“The Company’s carried reserves fall within
the reasonable range of estimates developed
by the Appointed Actuary, although near the
low end of that range…”
9
Actuarial Opinion –
What Can It Tell Me?
“As noted in Schedule F, the Company’s
ceded loss and LAE reserves totaled $xxx,
or 223% of surplus. Of this amount, 27.7%
reflects cessions to affiliates…”
10
Actuarial Opinion –
What Can It Tell Me?
“In my opinion there is a risk of material
adverse deviation…including uncertainties
associated with the company’s changing mix
of business and operations,…liabilities
relating to the Company’s discontinued
operations, potential reinsurance collectibility
issues and estimates of liability for the
Company’s A&E exposure.”
11
Actuarial Opinion –
What Can It Tell Me?
“The Group has experienced significant
changes in its operations…The nature of the
business has also changed…The Company
has experienced significant changes in its
claim operations…”
12
Actuarial Opinion –
What Can It Tell Me?
“There are points within my reasonable range
of reserve estimates that … would
materially reduce the Company’s
surplus…Certain points nearer the high end
of my range would…change the Company’s
RBC status to Company Action Level.”
13
Actuarial Opinion –
Regulatory Guidance
“Bright Line Indicator” to Discuss the
Potential for Material Adverse Deviation
If 10% of the insurer’s net reserves are greater than
the difference between the Total Adjusted Capital
and Company Action Level Capital
14
2005 AOS Results –4 State Totals
OH, TX, PA, IL(Net Only)
Carried reserves are:
More than 10% below
Net
Gross
6
1.0%
1.3%
10
2.1%
2.3%
More than 5% but less than 10% below
13
2.1%
2.7%
18
3.8%
4.1%
Less than 5% below
79
13.0% 16.5%
72
15.2% 16.2%
Equal to but other than $0 reserve
80
13.2% 16.7%
90
18.9% 20.3%
183 30.2% 38.3%
167
35.2% 37.6%
More than 5% but less than 10% above
67
11.1% 14.0%
41
8.6%
9.2%
More than 10% above
50
8.3%
46
9.7%
10.4%
31
6.5%
Less than 5% above
Carried reserves are zero
128 21.1%
Total # of Companies
606
10.5%
478
475
444
What’s the Development Trend?
Development as a % of Reserves
< -10%
Missing
-10% to –
5%
CY
-5% to 0%
0% to 5%
5% to
10%
> 10%
# of Companies
1998
143
761
335
427
297
128
311
1999
107
696
293
430
393
121
301
2000
130
647
252
442
350
151
319
2001
119
602
200
330
377
199
445
2002
138
520
192
258
409
212
493
2003
157
492
178
335
401
213
430
NAIC, 2004
Other Hot Topics
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Risk Transfer/Bifurcation
International
Risk-focused Examinations
Qualifications Standard
Governance Initiatives
What’s Next
• October 11-12 2nd Opinion Writers Seminar
• AAA - Presentation for Boards – what to
expect from your actuary
• Best Estimate White Paper
• Results of Survey by Task Force for
Enhancing the Reputation of Casualty
Actuaries
• CRUSAP Report