The Actuary’s Role in the
Audit Process
The Actuary’s Responsibility to Auditors
and Examiners
CLRS – September 9th, 2003
Matt Carrier, ACAS, MAAA
Senior Manager
Deloitte & Touche
Agenda
 The Basics
 Comparisons
 Specific Situations / Issues
 Education / Value Adds
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The Basics
Comparisons
Specific Situations / Issues
Education / Value Adds
Entities where Actuaries
Support the Audit
 Insurance Companies
 Self-Insureds
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Pure Self-Insured
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Large Deductible / Retro Rated
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Captive Insurance Co.
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The Basics
Comparisons
Specific Situations / Issues
Education / Value Adds
Entities where Actuaries
Support the Audit
 Additional situations
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Asbestos / pollution
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Product warranties
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Member reward programs
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Bad debt reserves on loans
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The Basics
Comparisons
Specific Situations / Issues
Education / Value Adds
Items Reviewed by Actuaries
During an Insurance Co. Audit
 Loss and loss expense reserves
 Unearned premium reserves
 Anticipated Sub & Sal
 Premium deficiency reserves
 Reinsurance / risk transfer
 Discounting
 Retrospective premium reserves
 Other – 10K, Insurance Dept. questions
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The Basics
Comparisons
Specific Situations / Issues
Education / Value Adds
Items Reviewed by Actuaries
During a Self-Insured Audit
 Loss and loss expense reserves
 Discounting
 Risk margins / confidence intervals
 Retention levels / risk transfer
 Insurance policies
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The Basics
Comparisons
Specific Situations / Issues
Education / Value Adds
Objective for Actuary in
Supporting Audit
 Determine the reasonableness of entity’s position for
items reviewed by actuary
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For example: loss and loss expense reserves, unearned
premium reserve, etc.
 The approach to determine reasonableness may vary
by client
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Review of client’s methodology
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Sensitivity testing based on client methodology
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Independent development of a corroborative range
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The Basics
Comparisons
Specific Situations / Issues
Education / Value Adds
Insurance Co. Vs.
Self-Insured Environment
Insurance Co.
 Actuarial Statement of
Opinion performed
 Data available / reliable
 Understands nature of
risks
 Understands / accepts
actuarial methods
 Credibility of the data
Self-Insured
 Statement of Opinion
typically not performed
 Often data issues
 Diversity of insurance
knowledge
 Sometimes resistance
to accept actuarial
methods
 Incorporate external
data
Purpose of actuary in audit is to evaluate management’s best estimates
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The Basics
Comparisons
Specific Situations / Issues
Education / Value Adds
Independent Testing Vs.
Review
Independent Testing
 Supplement entity’s
methods / estimates
 Entity requests 2nd look
 Auditor request 2nd look
 Support State exams
 Focus on problem
areas
Review
 Strong analysis by
entity
 Limited materiality of
reserve balance
 Stability of results
 Predictable exposures
 Complexity of
calculations
 Lack of data
Often some combination approach is taken on an Audit
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The Basics
Comparisons
Specific Situations / Issues
Education / Value Adds
Audit Support Vs.
State Exams
Audit Support
 Current View (12/31/03)
 Mix of review and
indep. testing
 Often several statutory
entities combined
 Statutory and GAAP
 Net focus
 Going concern aspect
State Exams
 Historic view (12/31/02)
but can use subsequent
data
 Greater use of indep.
testing
 Single statutory entity
 Statutory accounting
 Gross and net focus
 Solvency based
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The Basics
Comparisons
Specific Situations / Issues
Education / Value Adds
Reliance on Company’s Actuary:
Employee Vs. Consultant
Employee Actuary
 Review analysis
 Support data collection
 Discuss company
changes
 Discuss company
insurance programs
Consulting Actuary
 Review analysis
 Given nature of
relationships (i.e. client,
consulting actuary,
auditor) typically
provide limited support
in other areas
 Provide broad context
and perspective
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The Basics
Comparisons
Specific Situations / Issues
Education / Value Adds
Discounting and discount
rates for self-insureds
 30% to 50% of self-insureds discount some or
all of their loss reserves
 Issue of appropriate discount rate given
economic conditions
 Support risk free rates (i.e. T-bills) that match
liability duration
 Education of client and auditor
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The Basics
Comparisons
Specific Situations / Issues
Education / Value Adds
Appropriate Risk Margins
 Often issue with self-insureds
 Example:
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Actuary provides self-insured hospital with
estimate at 80% confidence level
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Hospital booked millions > conf level number
 Education of client and auditor
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The Basics
Comparisons
Specific Situations / Issues
Education / Value Adds
Communication/Interaction
with Company
 Request data
 Discuss operations and changes
 Collect and review data
 Communicate conclusions
 Education on process
 Value added observations/trends
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The Basics
Comparisons
Specific Situations / Issues
Education / Value Adds
Education/Value Adds
 Audit actuaries and consulting actuaries can add
value through benchmarking against the industry
 Audit process allows numerous opportunities to
educate client (CFOs, Controllers, etc.) on actuarial
concepts and the value it can generate
 Same opportunities arise for company employed
actuaries
 We all need to use these opportunities…
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