1 - Odomirok1617SAO Flashcards
Who prepares the Statement of Actuarial Opinion?
A qualified actuary (as defined by the NAIC) who is appointed by the company’s board then referred to as the appointed actuary.
How does the NAIC define a qualified actuary?
A person who meets the basic education, experience and continuing education requirements of the Specific Qualification Standard for Statements of Actuarial Opinion, NAIC Property and Casualty Annual Statement, as set forth in the Qualification Standards for Actuaries Issuing Statements of Actuarial Opinion in the United States, promulgated by the American Academy of Actuaries, and is either:
(i) A member in good standing of the Casualty Actuarial Society, or
(ii) A member in good standing of the American Academy of Actuaries who has been approved as qualified for signing casualty loss reserve opinions by the Casualty Practice Council of the American Academy of Actuaries
Can someone that doesn’t meet the NAIC requirements prepare the SAO?
The 2011 NAIC Annual Statement Instructions Property/Casualty go on further by saying that the requirements of the company’s domiciliary state may permit individuals to issue the SAO despite not meeting the definition of qualified actuary per the NAIC. In these instances, a letter from the state must be attached to the SAO indicating that the individual meets the state’s requirement to issue SAOs.
Possible exemptions from SAO requirement
- Size of the insurer (less than $1 million of total gross written premiums during a calendar year and less than $1 million of total gross loss and LAE reserves at year- end)
- Insurers under supervision or conservatorship
- Nature of business written
- Insurers under financial hardship (if the cost of the SAO is greater than either 1% of surplus or 3% of gross written premiums during the calendar year within which the exemption is requested)
Simply meeting one of the above criteria does not provide automatic exemption. To qualify, the insurer has to file for exemption with its domiciliary commissioner. It is at the discretion of the domiciliary commissioner to decide whether to exempt a company from the SAO requirement.
Main purposes of the SAO
- Provide the appointed actuary’s opinion on the reserves specified within the scope of the SAO.
- Inform the reader, in particular regulators, of significant risk factors and/or uncertainties with respect to those reserves.
- Advise whether those risks and uncertainties are reasonably expected to lead to material adverse deviation in the reserves.
Every appointed actuary should read and be familiar with the most current versions of the following when issuing a SAO:
- Qualification Standards, as set forth by the American Academy of Actuaries (AAA)
- NAIC Instructions for the SAO
- AAA Committee on Property and Liability Financial Reporting (COPLFR) Practice Note
on Statements of Actuarial Opinion on Property and Casualty Loss Reserves (COPLFR P/C Practice Note) - NAIC Regulatory Guidance On Property and Casualty Statutory Statements of Actuarial
Opinion Prepared by the NAIC’s Casualty Actuarial and Statistical (C) Task Force101
Actuarial Standards of Practice (ASOP), including but not limited to:
* ASOP No. 20. Discounting of Property/Casualty Unpaid Claim Estimates (September 2011)
* ASOP No. 23. Data Quality
* ASOP No. 36. Statement of Actuarial Opinion Regarding Property/Casualty
Loss and LAE Reserves
* ASOP No. 41. Actuarial Communications
* ASOP No. 43. Property/Casualty Unpaid Claim Estimates
* Applicable state laws, in particular with respect to reserve requirements, SAO requirements, discounting, etc. (the Property/Casualty Loss Reserve Law Manual published annually by the AAA provides a compilation of this material) 102
* SSAP No. 55, Unpaid Claims, Losses and Loss Adjustment Expenses
* SSAP No. 62R, Property and Casualty Reinsurance
* SSAP No. 65, Property and Casualty Contracts
Required sections of the SAO
- Identification
- Scope
- Opinion
- Relevant comments
Exhibit A
Exhibit B
Exhibit A of the SAO
Exhibit A provides the recorded amounts associated with the items identified in the scope section, generally on a direct plus assumed and net basis.
Exhibit B of the SAO
Exhibit B provides relevant disclosure items with respect to the net reserves identified in the scope section, as identified in the relevant comments section. For example, loss and LAE reserves for asbestos are disclosed in Exhibit B on a net of reinsurance basis. There is no separate exhibit within the SAO showing asbestos reserves on a gross of reinsurance basis. Differences between the net and gross (direct plus assumed) amounts reported in Exhibit B may be discussed in the relevant comments section.
Identification section of the SAO
Actuary’s name and credentials
Actuary’s qualifications for issuing the SAO
Actuary’s relationship to the company
Date the actuary was appointed by the company’s board of directors (or its equivalent) to issue the opinion.
This section typically includes a statement identifying the intended purposes and users of the opinion, consistent with ASOP 36 requirements.
Scope section of the SAO
The scope section identifies the reserve items upon which the actuary is giving an opinion as well as the accounting basis for those reserves. The reserve items include:
* Loss and LAE reserves
* Retroactive reinsurance assumed reserves
* Unearned premium reserves for Property and Casualty (“P&C”) Long-Duration
Contracts103
* Unearned premium reserves for extended reporting endorsements, such as those
included in Schedule P Interrogatory No. 1 of the company’s Annual Statement
* Other reserve items for which the actuary is providing an opinion
Also identifies “review date” which is defined in ASOP 36 as “the date (subsequent to the valuation date) through which material information known to the actuary is included in forming the reserve opinion. If review date is not disclosed, assume it’s the date the opinion was signed.
It also contains a statement regarding who provided the data relied upon by the actuary in forming the opinion and that either the actuary performed a reconciliation of that data, or reviewed a reconciliation prepared by the company, to Schedule P of the company’s Annual Statement.
If the company participates in intercompany pooling, the actuary may wish to disclose this and the basis for reconciling data used in the actuary’s analysis to Schedule P. Must provide pooling percentage and info on the pooling arrangement
What are P&C Long Duration Contracts?
P&C Long Duration Contracts are defined on page 10 of the NAIC SAO Instructions as “contracts (excluding financial guaranty contracts, mortgage guaranty contracts and surety contracts) that fulfill both of the following conditions: (1) the contract term is greater than or equal to 13 months; and (2) the insurer can neither cancel the contract not increase the premium during the contract term. These contracts are subject to the three tests of SSAP No. 65-Property and Casualty Contracts of the NAIC Accounting Practices and Procedures Manual.”
Opinion section of the SAO
The opinion section provides the actuary’s opinion with respect to the reserves identified in the scope section. The actuary has five options in terms of the type of opinion, as outlined in ASOP 36. These are:
1. Reasonable: if the recorded reserve lies within the actuary’s range of reasonable unpaid claim estimates
2. Inadequate or deficient: if the recorded reserves are below what the actuary deems to be reasonable
3. Excessive or redundant: if the recorded reserves are above what the actuary deems to be reasonable105
4. Qualified: if the actuary is unable to issue an opinion on certain items and those items are believed to be material
5. No opinion: if the actuary is unable to conclude on the reasonableness of the recorded reserves
Note that in accordance with ASOP 36, the actuary should disclose the minimum amount that he or she deems reasonable when issuing an inadequate or deficient opinion.106 Similarly, the actuary should disclose the maximum amount deemed to be reasonable when issuing an excessive or redundant opinion.The actuary is also required to state whether the recorded reserves identified in the scope section meet the requirements of the insurance laws of the state the company is domiciled in and are computed in accordance with actuarial standards.
Additionally, if use was made of the work of another actuary, such as for pools and associations, for a subsidiary, or for special lines of business, in forming the SAO, the other actuary must be identified by name and affiliation within the opinion section.
Relevant Comments section of the SAO
The relevant comments section provides commentary and disclosures relative to the reserves opined on to assist the reader in understanding the context and composition of those reserves. Commentary is required on the following items:
* The actuary’s materiality standard for purposes of addressing the risk of material adverse deviation
* Significant risks and uncertainties that could result in material adverse deviation
* The significance of items listed in Exhibit B, including:
* Anticipated net salvage and subrogation
* Nontabular discounting
* Tabular discounting
* Net reserves for the company’s share of voluntary and involuntary pools and
associations
* Net reserves for asbestos and environmental liabilities
* Claims-made extended loss and LAE reserve reported as unearned premium
and as loss reserves
* Retroactive or financial reinsurance
* Uncollectible reinsurance
* The results of IRIS ratios 11, 12 and 13 and explanation for exceptional values
* Changes in methods and assumptions from those employed in the most recent prior
opinion that are deemed to have a material effect on the recorded reserve or actuary’s
unpaid claim estimate
* Unearned premium reserves for P&C Long Duration Contracts
* Net reserves for Accident and Health (“A&H”) Long Duration Contracts that the
company carries on the Liabilities, Surplus and Other Funds page as Losses, Loss Adjustment Expenses, Unearned Premium or other Write-In items (e.g., Premium Deficiency Reserves, Contract Reserves, or AG 51 Reserves)
Materiality Standard
Common methods are based on a percentage of reserves, surplus and movements in Risk-Based Capital (RBC) levels, among others. Materiality standards such as 10% of loss and LAE reserves or anywhere from 10% to 20% of surplus are commonly used.
