2 - COPLFR.SAO Flashcards
Describe the organization of the SAO (Statement of Actuarial Opinion) [Hint: ISOR + (A,B)]
The SAO consists of 4 sections, and 2 exhibits: ISOR + (A,B)
Identification
Scope
Opinion
Relevant comments
Exhibit A: recorded amounts for items in scope (loss reserves, reinsurance…)
Exhibit B: disclosure items regarding NET reserves in scope
What does COPLFR stand for?
Committee on Property and Liability Financial Reporting
Are actuaries required to comply with this practice note or follow the illustrations provided herein?
No. The practice note provides information to actuaries on current and emerging practices in which their peers are engaged. Actuaries are not bound in any way to comply with practice notes or to conform their work to the practices described in practice notes.
AOWG
NAIC’s Actuarial Opinion Working Group
Propose revisions to the following, as needed, especially to improve actuarial opinions, actuarial opinion summaries and actuarial reports, as well as the regulatory analysis of these actuarial documents and loss and premium reserves….
1. Financial Analysis Handbook.
2. Financial Condition Examiners Handbook
3. Annual Statement Instructions-Property/Casualty.
4. Regulatory guidance to appointed actuaries and companies.
5. Other financial blanks and instructions, as needed.”
ASOPs
Actuarial Standards of Practice
ASOPs “identify what the actuary should consider, document, and disclose when performing an actuarial assignment” and “set standards for appropriate practice for the U.S.”
SSAPs
“Statements of Statutory Accounting Principles (SSAPs) are published by the NAIC in its Accounting Practices and Procedures Manual. The manual includes more than 100 SSAPs, which serve as the basis for preparing and issuing statutory financial statements for insurance companies in the U.S. in accordance with, or in the absence of, specific statutes or regulations promulgated by individual states.”
SAO begins with an Identification paragraph. According to the NAIC SAO instructions, this paragraph should:
indicate the Appointed Actuary’s relationship to the Company, qualifications for acting as Appointed Actuary, date of appointment and specify that the appointment was made by the Board of Directors
Do actuaries need to be reappointed each year?
NAIC Instructions do not necessarily require the Appointed Actuary to be reappointed every year.
However, when the appointment is specific to the year-end in question, then reappointment would normally be necessary.
The most recent date of appointment (if there is more than one) may be quoted in the identification paragraph.
Appointment of the Qualified Actuary
Upon initial engagement, the Appointed Actuary must be appointed by the Board of Directors by December 31 of the calendar year for which the
opinion is rendered. The Company shall notify the domiciliary
commissioner within five business days of the initial
appointment with the following information:
a. Name and title (and, in the case of a consulting actuary, the name of the firm).
b. Manner of appointment of the Appointed Actuary (e.g., who made the appointment and when).
c. A statement that the person meets the requirements of a Qualified Actuary (or was approved by the domiciliary commissioner) and that documentation was provided to the Board of Directors.
Once this notification is furnished, no further notice is required with respect to this person unless the Board of Directors takes action to no longer appoint or retain the actuary or the actuary no longer meets the requirements of a Qualified Actuary.
Board of Directors definition
Board of Directors can include the designated Board of Directors, its equivalent or an appropriate committee directly reporting to the Board of Directors.” For example, an actuary may be appointed by the Audit Committee of the Board of Directors.
Should the Appointed actuary obtain documentation of his/her appointment?
The Appointed Actuary might consider obtaining and retaining documentation of his or her appointment, including the date of the appointment, as support for this statement. For this purpose, the Appointed Actuary may wish to retain materials such as minutes of the Board of Directors’ meeting indicating the appointment or written confirmation by a company officer.
Definition of a Qualified Actuary
(i) meets the basic education, experience and continuing education requirements of the Specific Qualifications 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 (U.S. Qualification Standards), promulgated by the American Academy of Actuaries (Academy), and
(ii) has obtained and maintains an Accepted Actuarial Designation; and
(iii) Is a member of a professional actuarial association that requires adherence to the same Code of Professional Conduct promulgated by the Academy, requires adherence to the U.S. Qualification Standards, and participates in the Actuarial Board for Counseling and Discipline when its members are practicing in the U.S.
An exception to parts (i) and (ii) of this definition would be an actuary evaluated by the Academy’s Casualty Practice Council and determined to be a Qualified Actuary for particular lines of business and business activities.
Does the definition of Qualified Actuary and other related requirements (e.g., Qualification Documentation) in the NAIC Property/Casualty Opinion Instructions apply to NAIC title insurers? What about captive insurers?
The definition of Qualified Actuary in the NAIC Title Opinion Instructions is different than what is presented in this section; the Title Instructions definition of Qualified Actuary has not recently changed. Additionally, the NAIC Title Opinion Instructions do not include reference to other requirements that were introduced in the 2019 NAIC Property/Casualty Opinion Instructions such as the qualification documentation discussed in section 2.2.1 herein. For informational purposes, the NAIC Title Opinion Instructions are included as Appendix I.3
For captive insurance company requirements, refer to captive laws and regulations of the specific captive domicile.
Special Situations for “Qualified Actuary”
NAIC SAO Instructions state that in the case of:
1. an Appointed Actuary meeting the definition of Qualified Actuary per the exception to parts (i) and (ii) via evaluation and determination by the Academy’s Casualty Practice Council; or
2. an Appointed Actuary not meeting the definition of Qualified Actuary but being approved by the domiciliary commissioner,
“…the company must attach, each year, the approval letter and reference such in the Identification paragraph.”
NAIC SAO U.S. Qualification Standards - General
- MAAA, FCAS, ACAS, FSA, or fully qualified member of another IAA-member organization
- Three years of responsible actuarial experience, defined as work that requires knowledge and skill in solving actuarial problems
- Knowledge of the applicable law through examination or documented professional development
- And either:
1. Have attained highest possible level of membership in an IAA full- member organization and have one year responsible actuarial experience in the relevant area under the review of an actuary qualified to issue the SAO at the time the review took place under standards in effect at that time
2. Have a minimum of three years of responsible actuarial experience in the relevant area under the review of an actuary qualified to issue the SAO at the time the review took place under standards in effect at that time - 30 hours of “relevant” continuing education (CE)
>= 6 “organized activities” >=3 professionalism
<=3 general business
NAIC SAO U.S. Qualification Standards – Specific
In addition to the requirements of the General Qualification Standard:
* Successfully complete relevant examinations administered by the Academy or the CAS on (a) policy forms and coverages, underwriting, and marketing; (b) principles of ratemaking; (c) statutory insurance accounting and expense analysis; (d) premium, loss, and expense reserves; and (e) reinsurance; OR obtain a signed statement from another actuary who is qualified to issue the SAO, NAIC P&C Annual Statement, indicating that the writer is familiar with the actuary’s professional history and that the actuary has obtained sufficient alternative education to satisfy the basic education requirement for the specific qualification standard. This statement should be obtained before issuing a SAO.
4. Three years of responsible experience relevant to the subject of the SAO under the review of an actuary qualified to issue the SAO at the time the review took place under standards in effect at that time
5. Obtain 15 continuing education (CE) hours per year related directly to the particular topic
6. Minimum of 6 CE hours of “organized” activities related directly to the particular topic
NAIC SAO - NAIC Qualifications
- Meet U.S. Qualification Standards’ Specific Qualification Standard for NAIC SAOs (or be evaluated by the Academy’s CPC and determined to be a Qualified Actuary for particular lines of business and business activities)
- Obtained an “Accepted Actuarial Designation”, as defined in the NAIC SAO Instructions (or be evaluated by the Academy’s CPC and determined to be a Qualified Actuary for particular lines of business and business activities)
- Member of one of the following actuarial organizations – the American Academy of Actuaries, the ASPPA College of Pension Actuaries, the Casualty Actuarial Society, the Conference of Consulting Actuaries, and/or the Society of Actuaries. Each of these organizations:
– Require adherence to the Code of Professional Conduct;
– Require adherence to the U.S. Qualification Standards; and
– Are within the Actuarial Board for Counseling and Discipline’s jurisdiction to investigate alleged violations of the Code of Professional Conduct - State requirements may vary
NAIC SAO - CAS Requirements
- The CAS Continuing Education Policy requires actuaries providing SAOs in the U.S. to comply with the U.S. Qualification Standards
NAIC SAO Qualification Documentation
The Appointed Actuary shall provide to the Board of Directors qualification documentation on occasion of their appointment, and on an annual basis thereafter, directly or through Company management. The documentation should include brief biographical information and a description of how the definition of “Qualified Actuary” is met or expected to be met (in the case of continuing education) for that year. The documentation should describe the Appointed Actuary’s responsible experience relevant to the subject of the Actuarial Opinion. The Board of Directors shall document the Company’s review of those materials and any other information they may deem relevant, including information that may be requested directly from the Appointed Actuary. The qualification documentation shall be considered workpapers and be available for inspection upon regulator request or during a financial examination.
What are the requirements of the Appointed Actuary with respect to ensuring the Board of Directors reviews the actuary’s qualification documentation?
The NAIC SAO Instructions require the actuary to provide his or her qualification documentation to the Board of Directors, directly or through company management. Presumably, the minutes of the Board of Directors meeting would document management’s discussion of their review of the actuary’s qualification documentation. The actuary is not obligated to take additional steps to ensure the company’s review of this documentation.
How do you satisfy the experience requirement if the subject of the Opinion is an emerging risk or LOB?
COPLFR notes that there will be situations where the subject of the Opinion is an emerging risk or line of business where the actuary has minimal experience (e.g., the recent emergence of cyber liability). Experience with other risks as they emerged in the past and broad familiarity with the topic and the insurance coverages may satisfy the responsible experience requirement per the NAIC SAO Instructions. Consultation with the U.S. Qualification Standards may also be appropriate in this situation.
When a single actuarial report supports the Opinion for multiple individual companies, how many qualification documents are needed?
One
In some cases, a single actuarial report might support the Opinion for multiple individual companies (e.g., a group of companies participating in an intercompany pool; or a group of companies that write and/or retain different books of business). In these situations, a single qualification documentation may be appropriate which discusses the Appointed Actuary’s responsible experience across the individual companies that comprise the actuarial report.
The definition of a “Qualified Actuary” in the NAIC SAO Instructions include the requirement to obtain and maintain an “Accepted Actuarial Designation”. What is an “Accepted Actuarial Designation”?
“Accepted Actuarial Designation” in item (ii) of the definition of a Qualified Actuary, is an actuarial designation accepted as meeting or exceeding the NAIC’s Minimum Property/Casualty (P/C) Actuarial Educational Standards for a P/C Appointed Actuary (published on the NAIC website). The following actuarial designations, with any noted conditions, are accepted as meeting or exceeding basic education minimum standards:
(i)Fellow of the CAS (FCAS) – Condition: basic education must include Exam 6 – Regulation and Financial Reporting (United States);
(ii) Associate of the CAS (ACAS) – Conditions: basic education must include Exam 6 – Regulation and Financial Reporting (United States) and Exam 7 – Estimation of Policy Liabilities, Insurance Company Valuation, and Enterprise Risk Management;
(iii) Fellow of the SOA (FSA) – Conditions: basic education must include completion of the general insurance track, including the following optional exams: the United States’ version of the Financial and Regulatory Environment Exam and the Advanced Topics in General Insurance Exam.
I am an ACAS or FCAS and do not have credit for Exam 6-US. How do I document my knowledge of U.S. P/C statutory accounting and regulation?
The NAIC SAO Instructions note that the actuary “may substitute experience and/or continuing education for CAS Exam 6 (US) provided the Appointed Actuary explains in his/her qualification documentation how knowledge of U.S. financial reporting and regulation was obtained.” The ability to substitute experience and/or continuing education in this manner applies only to individuals who earned their credential prior to 2021.
The Appointed Actuary may wish to use language in their qualification documentation such as the following: “Knowledge relating to U.S. financial reporting and regulation was obtained through experience working as a credentialed actuary in the U.S. property/casualty insurance industry for over 30 years as well as obtaining relevant continuing education.” Within the documentation, the AA may wish to expand on his/her experiences with U.S. financial reporting and regulation and relevant CE obtained in order to comply with the requirement.
NAIC Appointed Actuary CE Log Categories
- Law/Regulation
- Policy form/coverage/underwriting/marketing
* Form/Coverage
* Premium rates/Ratemaking
* Underwriting and/or marketing - Reinsurance
* Statutory accounting
* Reinsurance collectability
* Reinsurance collateral
* Reinsurance reserving - Reserves
* Reserving data
* Reserving adjustments
* Reserving calculations
* Reserving analysis
* Statutory accounting - Requirements & Practice Notes
* Annual Statement Instructions
* Practice notes, ASOPs, etc.
* Statutory accounting
* Solvency calculations
* Company-specific - Business Skills
- Other
* Accounting other than statutory
* Analytics
* Emerging issues
* Modeling
* Professionalism (other than practice notes, ASOPs, etc.)
* Risk management
* “Describe in own words”
Does the Appointed Actuary have to meet a minimum number of hours for each of the NAIC Appointed Actuary CE Log Categories?
No
There are no requirements in terms of number of hours of CE in each category. The categories were part of a survey of knowledge that was conducted by the NAIC a few years ago. An expectation by category was not determined. Recording hours in these categories is at the request of the NAIC.
NAIC SAO Instructions require a formal process for changing Appointed Actuaries. The steps are set out in paragraph 1 of the NAIC SAO Instructions. The process involves actions by the insurer and prior Appointed Actuary and is set into motion by the formal Board of Directors action replacing the Appointed Actuary. NAIC SAO Instructions state that:
- Within five days of the action, the company must advise the relevant domiciliary insurance department in writing of the change.
- Within 10 days of the notification, the company must write to the domiciliary Commissioner stating whether in the 24 months preceding the change “there were any disagreements with the former Appointed Actuary regarding the content of the opinion on
matters of the risk of material adverse deviation, required
disclosures, scopes, procedure, type of opinion issued, substantive wording of the opinion or data quality. The disagreements required to be reported… include both those resolved to the former Appointed Actuary’s satisfaction and those not resolved to the former Appointed Actuary’s satisfaction.”
The letter should list and describe such disagreements, as well as the nature of the resolution, or that the items were not resolved, as applicable.
The letter must be accompanied by a response from the former Appointed Actuary addressed to the company “stating whether the Appointed Actuary agrees with the statements contained in the Insurer’s letter and, if not, stating the reasons for which he or she does not agree.”
The 2021 AOWG Regulatory Guidance states “While regulators are interested in material disagreements regarding differences between the former Appointed Actuary’s final estimates and the insurer’s carried reserves, they do not expect notification on routine discussions that occur during the course of the Appointed Actuary’s work.”
Could an actuary be appointed after year-end?
Under extraordinary circumstances (e.g., illness of prior Appointed Actuary), the appointment of a new actuary may occur after year-end. Companies would typically communicate with the regulator about the reasons for the late change.
The NAIC SAO Instructions also indicate that the SCOPE should include a paragraph regarding what?
The data relied upon in forming the opinion, including who provided the data and that the Appointed Actuary reconciled the data to Schedule P, Part 1 of the Company’s Annual Statement.
If the company participates in intercompany pooling, the Appointed Actuary discloses this in which section of the SAO?
SCOPE
his disclosure should include a description of the pool, an identification of the lead company, a listing of all companies with their state of domicile and pooling percentages. It must also discuss how the data used in the Appointed Actuary’s analysis was reconciled to Schedule P (either on a pooled basis or for each company on its own).
The SCOPE section identifies the reserve items upon which the Appointed Actuary is providing an opinion. The reserve items may include:
- Loss and LAE reserves;
- Retroactive reinsurance assumed reserves;
- Unearned premium reserves for P&C Long Duration Contracts;
- Unearned premium reserves for extended reporting endorsements, including, but not necessarily limited to those items included in Schedule P Interrogatory No. 1 of the company’s Annual Statement; and,
- Other reserve items for which the Appointed Actuary is providing an opinion.
These items, and their corresponding amounts, are listed in Exhibit A: Scope. Exhibit A: Scope and Exhibit B: Disclosures are two exhibits that are required to be attached to the Statement of Actuarial Opinion.
What is an accounting basis?
An accounting basis refers to the reporting principles underlying the presentation of the financial report. Two common examples are SAP (Statutory Accounting Principles) and GAAP (Generally Accepted Accounting Principles).
What is Intercompany Reinsurance?
Intercompany Reinsurance refers to a transaction whereby one company (the reinsurer), for a consideration, agrees to indemnify the other (ceding company) against all or part of the loss that the latter may sustain under the policy or policies that it has issued.
What is Intercompany Pooling?
Intercompany Pooling in this context refers to business that is pooled among affiliated insurance companies who are party to a pooling agreement in which the participants receive a fixed and predetermined share of all business written by the pool. Intercompany pooling arrangements involve establishment of a conventional quota share reinsurance agreement under which all the pooled business is ceded to the lead entity and then retroceded back to the pool participants in accordance with their stipulated shares.
Sections of Scope
- Scope of SAO
- Stated basis of presentation
- Intercompany pooling
- Review date
- Provider of data relied upon by Appointed Actuary
- Evaluation of data for reasonableness and consistency
- Reconciliation to Schedule P
- Data testing requirement
- Methodology
How is review date defined in ASOP 36?
The date (subsequent to the valuation date) through which material information known to the actuary is included in forming the reserve opinion.
What if the data is provided by a third party administrator rather than by an officer of the Company?
According to AOWG Regulatory Guidance, while it is informative to identify the third– party in the SCOPE, the regulated entity will be ultimately responsible for the data. Regulators expect that a Company official will be identified in the SCOPE paragraph.
Is the “review date” the same date that the Appointed Actuary issues the Opinion?
The “review date” is the date through which the Appointed Actuary considers material information in forming the reserve opinion. While it can be the date the Appointed Actuary signs the Opinion, it may in fact precede the signature date.
Is the actuary required to attest that no errors exist in the data examined?
No
If the Appointed Actuary identified the data as being unreasonable or inconsistent to a significant degree (relative to the Appointed Actuary’s opinion on the reserves), and the apparent data problem was not resolved satisfactorily, some possible alternatives are as follows:
– Do not rely on the data in question: If, in the Appointed Actuary’s judgment, this causes a significant increase in the uncertainty inherent in the Appointed Actuary’s opinion on the reserves, then the situation is typically described in the Statement of Actuarial Opinion and elaborated upon in the Actuarial Report, or
– Conclude that an actuarial opinion cannot be formed based on the available data.
What data are in scope vs. out of scope of the data testing requirement?
Upon request from the auditor, the Appointed Actuary identifies the data they have deemed significant to the analysis in support of the SAO. However, it is the auditor’s responsibility to determine which data elements are to be included in the testing procedures within the scope of the financial statement audit.
According to NAIC SAO Instructions, the OPINION paragraph should include a sentence that at least covers the points listed in the following illustration:
“In my opinion, the amounts carried in Exhibit A on account of the items identified:
A. Meet the requirements of the insurance laws of (state of domicile).
B. Are computed in accordance with accepted actuarial standards.
C. Make a reasonable provision for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements.”
If the Scope includes material Unearned Premium Reserves for P&C Long Duration Contracts or Other Loss Reserve items on which the Appointed Actuary is expressing an opinion, the Actuarial Opinion should contain language such as the following:
D. “Make a reasonable provision for the unearned premium reserves for P&C Long Duration Contracts and/or <insert> of the Company under the terms of its contracts and agreements.
If there is any aggregation or combination of items in Exhibit A, the opinion language should clearly identify the combined items.</insert>
How can I find the relevant state laws?
There are several resources that may be used to find relevant state laws. The American Academy of Actuaries’ 2021 P/C Loss Reserve Law Manual is one resource (see note below). In addition, state insurance laws are often available on the website of the particular state regulatory authority. One can also contact the applicable state regulator directly to obtain that state’s insurance laws. The responsibility to identify all relevant state laws rests with the individual actuary and legal counsel should be consulted where the actuary is unable to identify all relevant state laws.
If a state were to interpret the NAIC SAO Instructions literally it might expect the Appointed Actuary to…
have examined the company’s methodology for determining its reserves. The Appointed Actuary would need to perform additional work if required to comply with the relevant state’s interpretation.
What takes precedence between insurance laws and regulations and the actuarial standards?
Insurance laws and regulations take precedence over the actuarial standards. The Code of Professional Conduct states, for example: “Laws impose obligations upon an Actuary. Where requirements of Law conflict with the Code, the requirements of Law shall take precedence.”
The NAIC SAO Instructions explain the determination of a reasonable SAO as follows:
“When the carried reserve amount is within the Appointed Actuary’s range of reasonable reserve estimates, the Appointed Actuary should issue a Statement of Actuarial Opinion that the carried reserve amount makes a reasonable provision for the liabilities associated with the specified reserves.”
What if the Appointed Actuary concludes that the net loss reserves and the direct-plus-assumed loss reserves make reasonable provisions for the unpaid loss and LAE obligations of the company, but amounts booked for certain subsets of the carried reserves do not, in isolation, make reasonable provisions for the associated portions of the company’s obligation?
The determination of whether to issue a deficient/inadequate opinion is based upon the overall evaluation of the loss reserves as disclosed in the SCOPE paragraph of the SAO as discussed in Chapter 3. For this purpose, it may not be relevant whether the actuary believes that each subset of the reserves makes a reasonable provision for the associated obligations, as long as the carried reserve amount is reasonable in the aggregate. However, the Actuary would still need to assess whether the reserves are stated in accordance with the laws of the state of domicile and accepted actuarial standards.
The NAIC SAO Instructions explain the determination of an inadequate/deficient SAO as follows:
“When the carried reserve amount is less than the minimum amount that the Appointed Actuary believes is reasonable, the Appointed Actuary should issue a Statement of Actuarial Opinion that the carried reserve amount does not make a reasonable provision for the liabilities associated with the specified reserves. In addition, the Appointed Actuary should disclose the minimum amount that the Appointed Actuary believes is reasonable.”
The determination of an excessive/redundant SAO is explained in the NAIC SAO Instructions as follows:
“When the carried reserve amount is greater than the maximum amount that the Appointed Actuary believes is reasonable, the Appointed Actuary should issue a Statement of Actuarial Opinion that the carried reserve amount does not make a reasonable provision for the liabilities associated with the specified reserves. In addition, the Appointed Actuary should disclose the maximum amount that the Appointed Actuary believes is reasonable.”
Qualified Opinion - The NAIC SAO Instructions explain the determination of a qualified SAO as follows:
“When, in the Appointed Actuary’s opinion, the reserves for a certain item or items are in question because they cannot be reasonably estimated or the Appointed Actuary is unable to render an opinion on those items, the Appointed Actuary should issue a qualified Statement of Actuarial Opinion. The Appointed Actuary should disclose the item (or items) to which the qualification relates, the reason(s) for the qualification and the amounts for such item(s), if disclosed by the Company. Such a qualified opinion should state whether the carried reserve amount makes a reasonable provision for the liabilities associated with the specified reserves, except for the item (or items) to which the qualification relates. The Appointed Actuary is not required to issue a qualified opinion if the Appointed Actuary reasonably believes that the item or items in question are not likely to be material.”
