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.”
According to ASOP No. 36, the Appointed Actuary is to issue a qualified SAO 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
How would an opining actuary treat a situation in which there is a portion of reserves for which he or she did not perform an independent analysis? Does this necessarily mean that the opinion is qualified?
Often, the phrase “independent analysis” is construed as a quantitative analysis. In addressing this question, it is important to distinguish between “quantitative analysis” and “review.” In the course of a review of reserves, actuaries generally use quantitative methods to analyze most reserve segments. However, for certain segments the actuary may, relying on professional judgment, conclude that the reserves for the segment are likely to be too small to be material to the total, – and a quantitative analysis is not needed. This professional judgment would typically reflect information such as the number of open claims, dollars of total case loss reserves, and types of policies written. The use of such professional judgment does not necessarily require a qualified opinion. We note that the actuary’s review process should be well-documented in the Actuarial Report.
If the SAO is qualified, what is the Appointed Actuary required to do?
The Appointed Actuary is required to explicitly state in the OPINION paragraph that it is a qualified opinion and properly disclose it as such in Exhibit B, item 4. Additionally, the OPINION paragraph should provide the item or items to which the qualification relates, the reasons for the qualification, and the amounts for such items, if disclosed by the entity, that are included in the stated reserve amount. A qualified SAO normally will state whether the stated 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 NAIC SAO Instructions explain the determination of “no opinion” as follows:
“The Appointed Actuary’s ability to give an opinion is dependent upon data, analyses, assumptions, and related information that are sufficient to support a conclusion. If the Appointed Actuary cannot reach a conclusion due to deficiencies or limitations in the data, analyses, assumptions, or related information, then the Appointed Actuary may issue a statement of no opinion. A statement of no opinion should include a description of the reasons why no opinion could be given.”
Examples of “Other Loss Reserves”
- The accrual for Death, Disability, or Retirement provisions in claims-made insurance policies if recorded as a loss reserve rather than Unearned Premium Reserve (UPR);
- The amount of discount for workers’ compensation loss reserves;
- Retroactive reinsurance ceded loss reserves; and
- Contingent liabilities
P&C Long Duration Contracts for the purposes of the SAO are defined in 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 thirteen months; and (2) the insurer can neither cancel the contract nor 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”
The following specific contract types are excluded from unearned premium reserves related to direct and assumed P&C Long Duration contracts:
Financial guaranty, mortgage guaranty, and surety
What is the primary focus of Scope items 7 and 8 (P&C Long Duration Contracts)?
Extended warranty contracts
Are all policies of duration not less than 13 months considered P&C Long Duration for the purposes of this requirement?
No. SSAP 65 specifies certain criteria for the policies that are subject to this requirement. Surety policies are explicitly excluded from this requirement. Policies that are cancellable under certain conditions may also be exempted, such as a D&O policy that can be cancelled upon a major change in the insured (such as a major acquisition).
The following entries for P&C Long Duration Contracts are required to be included on Exhibit A: SCOPE:
Premium Reserves:
(7) Reserve for Direct and Assumed Unearned Premium for P&C Long Duration Contracts
(8) Reserve for Net Unearned Premium for P&C Long Duration Contracts
If there is any aggregation or combination of items in Exhibit A, NAIC SAO Instructions require the OPINION paragraph to clearly identify the combined items.
According to the NAIC SAO Instructions, if the Appointed Actuary has made use of the analysis of another actuary not within the Appointed Actuary’s control (such as for pools and associations, for a subsidiary or for special lines of business) for a material portion of the reserves, the other actuary must be identified by what and in which paragraph?
Name, credential and affiliation within the OPINION paragraph. If the Appointed Actuary has made use of the work of a non-actuary (such as for modeling) for a material portion of the reserves, that individual must be identified by name and affiliation and a description of the type of analysis performed must be provided.
In determining whether it is reasonable to use the work of another, the Appointed Actuary should consider the following:
a. The amount of the reserves covered by another’s analyses or opinions in comparison to the total reserves subject to the actuary’s opinion;
b. The nature of the exposures and coverage;
c. The way in which reasonably likely variations in estimates covered by another’s analyses or opinions may affect the actuary’s opinion on the total reserves subject to the actuary’s opinion; and
d. The credentials of the individual(s) that prepared the analyses or opinions.
In situations where the work was done by someone not under the actuary’s control, and after considering these items, the actuary determines that it is reasonable to use the work of another without performing any independent analysis, and the actuary uses another’s work for a material portion of the reserves, the actuary should disclose:
(a) whether he/she reviewed the other’s analysis and
(b) if a review was performed, the extent of the review (see paragraph 4.2.f). Where, in the opinion of the actuary, the analyses or opinions of another need to be modified or expanded, the actuary should perform such analyses as necessary to issue the opinion on the total reserves. If the actuary is unable to determine that it is reasonable to use the work of another, it may be necessary to issue a qualified opinion.
According to the NAIC SAO Instructions,
the Appointed Actuary must provide RELEVANT COMMENT paragraphs to address the following topics of regulatory importance:
a. Company-Specific Risk Factors
b. Risk of Material Adverse Deviation
c. Other Disclosures in Exhibit B
d. Reinsurance
e. IRIS Ratios
f. Methods and Assumptions
RELEVANT COMMENT paragraphs should describe the significance of each of the remaining Disclosure items (8 through 14) in:
Exhibit B
In addition to the disclosures on Exhibit B, the Appointed Actuary must follow the disclosure requirements of sections 4.1 and 4.2 of ASOP No. 36, which include the following, among others:
- The intended user(s) of the SAO
- The intended purpose of the SAO
- The stated basis of reserve presentation
- Whether any material assumption or method was prescribed by applicable law
- Whether the Appointed Actuary disclaims responsibility for any material assumption or method selected by another party
Examples of company specific risk factors to comment on in the Relevant Comments section of the SAO:
- COVID-19
- A&E losses
- Other emerging mass torts
- Construction defects
- Catastrophic weather events
- Conflagration events
- Exposure related to mortgage defaults
- Exposure to cyber liability
- High excess layers
- Impact of soft market conditions
- Large deductible workers’ compensation claims
- Medical professional liability legislative issues
- New products or new markets
- Opioid epidemic
- Rapid growth in one or more lines of business or segments
- Lack of data or unexpected and unexplained changes in data
- Operational changes that are not objectively quantified
- Sudden unexplained changes in frequency or severity of reported data for a line of business or segment
- Changes in adequacy of known case reserves
- Changes in distribution of policy limits and/or policy attachments/deductibles
- Terms and conditions of reinsurance contracts
The NAIC SAO Instructions require the Appointed Actuary to include RELEVANT COMMENT paragraphs that specifically address material adverse deviation. These paragraphs would contain the following:
- A description of the major factors or particular conditions underlying the significant risks or uncertainties that the Appointed Actuary considers relevant to the statutory entity;
- The amount of adverse deviation in U.S. dollars that the Appointed Actuary judges to be material with respect to the SAO (i.e., materiality standard disclosed as item 5 in Exhibit B) and an explanation of how that amount was determined; and
- An explicit statement of whether the Appointed Actuary reasonably believes that there are significant risks or uncertainties that could result in material adverse deviation. This determination is also disclosed in item 6 of Exhibit B.
Examples of possible considerations in the choice of a materiality standard are:
- Percentage of surplus
- Percentage of reserves
- The amount of adverse deviation that would cause surplus to fall below minimum capital requirements
- The amount of adverse deviation that would cause Risk- Based Capital (RBC) to fall to the next action level
- Multiples of net retained risk
- Reinsurance considerations, such as levels of ceded reserves compared to surplus or concerns about solvency or collectability of reinsurance
- The upper limit of a company’s reinsurance protection on reserve development, if any
If a company is a 0% pool participant, what is the company’s materiality standard?
According to the NAIC Instructions, a 0% pool participant should enter a materiality standard of zero dollars for Question 5 on Exhibit B of the SAO. Furthermore, the response to Question 6 of Exhibit B regarding whether there are significant risks that could result in material adverse deviation should be “not applicable”.
What percentage of SAOs concludes an RMAD exists?
Approximately one-third of SAOs reach this conclusion.
RMAD
Risk of Material Adverse Deviation
When deciding whether RMAD exists, the Appointed Actuary should consider what?
The materiality standard in relation to the range of reasonable estimates and the carried reserves.
For example, RMAD should likely exist when the sum of the materiality standard plus the carried reserves is within the range of reasonable estimates.
What is a potential consideration of an RMAD decision on a direct and assumed basis vs a net basis?
The carried reserve in relation to the actuary’s range or varying magnitude of reinsurance protection across the company’s portfolio (e.g., the company maintains additional reinsurance protection on lines of business that have greater uncertainty in results).
SSAP No. 55—Unpaid Claims, Losses and Loss
Adjustment Expenses to clarify that salvage and subrogation estimates and recoveries can
include amounts related to both:
Claims losses and loss adjusting expenses
In item 9 of Exhibit B, the Appointed Actuary is required to disclose the amount of:
Non-tabular (item 9.1) and tabular (item 9.2) discount included as a reduction to loss reserves as reported in Schedule P.
Is Schedule P, Part 2 gross or net of discounting?
Schedule P, Part 2 is gross of all discounting, including tabular discounts.
What if I didn’t review another’s work supporting the reserve balance for a voluntary or involuntary underwriting pool? Does this mean that my opinion should be qualified?
No, not if the pool reserves are immaterial.
Some key considerations for the SAO for a company that participates in voluntary and/or involuntary underwriting pools and associations are:
- Are pool reserves material?
- Does the Company book what the pool reports with no independent analysis, perform independent actuarial analysis and in some instances adjust the pool’s reported reserves, make use of the pool Appointed Actuary’s SAO, or some combination of the above?
- If there is a lag in the booking of pool losses, does the company accrue for this or not? Are premiums treated similarly? Are these items material?
- How does the company’s ceded reinsurance program treat business that comes in from these pools?
In item 11 of Exhibit B, the Appointed Actuary is required to disclose the amount of net reserves for losses and LAE that the company carries for:
A&E (asbestos and environmental)
Definition of Asbestos exposures
any loss or potential loss (including both first party and third party claims) related directly or indirectly to the manufacture, distribution, installation, use, and abatement of asbestos-containing material, excluding policies specifically written to cover these exposures
Definition of Environmental exposures
any loss or potential loss, including third party claims, related directly or indirectly to the remediation of a site arising from past operations or waste disposal. Examples of environmental exposures include but are not limited to chemical waste, hazardous waste treatment, storage and disposal facilities, industrial waste disposal facilities, landfills, superfund sites, toxic waste pits, and underground storage tanks.
Do all asbestos & environmental (A&E) claim liabilities of an insurer get reported in the A&E Note in the statutory Annual Statement?
Not necessarily. The statutory Note does not include liabilities from policies clearly designed to cover A&E, such as asbestos abatement policies and many claims-made pollution policies.
Why aren’t traditional actuarial methods applied to the estimation of asbestos and environmental liabilities?
Because such claims often attach multiple accident/policy years, and because new claim filings continue to arise for several decades after the policies were issued.
The Company whose reserves I’m opining on has bought a retroactive cover that assumes all asbestos losses. Do I still have to discuss A&E in my opinion?
Retroactive reinsurance accounting does not impact booked loss reserves on either a gross or net basis. But the benefit from such cover does show up in surplus. Hence you may still have to discuss the impact on a gross basis, and the impact on net reserves.
In item 12 of Exhibit B, the Appointed Actuary is required to disclose:
The total claims-made extended loss and expense reserve (greater than or equal to Schedule P interrogatories) that the company carries as a loss reserve (item 12.1) and/or unearned premium reserve (item 12.2).
Extended Reporting Endorsements definition
Endorsements to claims-made policies covering insured events reported after the termination of a claims-made contract but subject to the same retroactive dates where applicable.
Two types of extended reporting endorsements
- Those that extend reporting of claims-made policies for a defined period, such as one or two years
- Those that extend reporting for an indefinite period.
DDR
Death, Disablement, Retirement
DDR provisions generally extend reporting under a claims-made policy for an indefinite period, at no additional cost, in the event that the insured dies, becomes disabled or retires during the policy period. Because coverage is extended at no additional charge, a portion of the claims-made premium should be recorded as a policy reserve for liability stemming from this coverage provision.
In item 13 of Exhibit B, the Appointed Actuary is required to disclose the net reserves for:
Accident and Health (A&H) Long Duration Contracts
A&H Long Duration contracts are defined in the NAIC SAO instructions to be:
A&H contracts in which the contract term is greater than or equal to 13 months and contract reserves are required. Two specific examples of contracts that typically require contract reserves are long-term care and disability income insurance.
Item 14 of Exhibit B provides a place for disclosure of:
“Other items on which the Appointed Actuary is providing relevant comment…” This means that if item 14 of Exhibit B of the SAO includes a non-zero value (or values), then the SAO should include RELEVANT COMMENT paragraph(s) with discussion of the significance of each item(s) individually and within context of the other disclosure items in Exhibit B.
URR
Uncollectible Reinsurance Reserves
For a Company also filing financial statements for US GAAP, uncollectible reinsurance reserves (URR) related to credit risk are set based on expected ultimate uncollectible amount. The URR is meant to address uncollectible amounts due to both credit risk and dispute risk.
When an insurer bills its reinsurer under a ceded reinsurance contract for a paid loss, this is recorded under statutory and US GAAP accounting as a ceded paid amount when billed, even if it hasn’t been collected yet. Statutory accounting also requires the ceded paid entry to be reversed if the bill is ultimately written off as uncollectible, which results in an increase in paid and incurred losses unless offset by a reserve change at the time of the write-off.
Don’t I only have to look at the collectability of ceded loss reserves and not ceded paid?
Not necessarily. Reinsurance collectability issues include the collectability of amounts billed to reinsurers but not yet collected. These billed but uncollected balances are included in Schedule F-Part 3, Column 16, and can also be found on Page 2, Line 16. If those billed amounts are not collected then the original ceded paid entry is reversed, which could impact reported loss development.
Reinsurance collectability can be impacted by:
Inability to pay (sometimes called credit default risk) and unwillingness to pay (dispute risk).
It can also be caused by overly aggressive estimates of ceded loss potential or by overly aggressive billing of the reinsurer by the cedant.
Is all reinsurance entered into after policy expiration accounted for as retroactive reinsurance?
No. SSAP 62R makes exceptions for certain retroactive reinsurance contracts between affiliates, such as those undertaken to reconfigure a quota share reinsurance pool within a group.
The NAIC SAO Instructions require that any write-in retroactive reinsurance assumed reserves that are reported on the Annual Statement balance sheet also be listed in:
The SAO’s Exhibit A: SCOPE
Retroactive reinsurance assumed reserves (and retroactive reinsurance ceded reserves) are reported as a write-in line of the balance sheet and are not included in any loss reserve schedules of the Annual Statement such as Schedule P or the Underwriting & Investment Exhibit.
Can I find disclosure of retroactive reinsurance in GAAP statements?
Not necessarily. GAAP treats retroactive reinsurance differently from statutory accounting, as GAAP does allow a deduction for net loss reserves for retroactive reinsurance that contains sufficient risk transfer.
The Appointed Actuary is required to provide commentary on the factors underlying exceptional values calculated under the NAIC IRIS Tests for One-Year Reserve Development to Surplus, Two-Year Reserve Development to Surplus, and Estimated Current Reserve Deficiency to Surplus. If one or more of these tests’ calculations result in exceptional value(s), the Appointed Actuary must:
Include a RELEVANT COMMENT paragraph to explain in detail the primary reasons for the exceptional value(s). The Appointed Actuary may want to consider potential responses in the AOS section E for consistency with commentary in the SAO on IRIS test exceptional values.
Is an explanatory paragraph required if the calculations of the IRIS tests don’t create exceptional values?
No. However, even when there are no exceptional values, the Appointed Actuary may want to include wording indicating that he/she reviewed the calculations of the IRIS tests and noted no exceptional values.
I changed the methods and assumptions from the prior year; do I need to disclose the changes?
Per the Instructions and ASOP No. 36, if the effect of the change is material, then you should disclose the change; if the effect of the change is not material, disclosure can be made at your discretion.
COVID-19 specific areas to consider during the analysis of a Company’s reserves include:
- Workers’ Compensation (WC) presumptive benefit regulations, which vary by state. Certain state
regulations have been passed where any employee working outside of their home who tests
positive for COVID-19 is presumed to have acquired the disease related to their employment and
is eligible for workers’ compensation benefits. - Loss data. For example, there were delays in the court system during 2020, which may be
continuing through 2021, that could impact personal and commercial lines paid losses, reported
losses, and claim counts. Other lines of business may have had increases in loss activity, or
possibly changes in the types of claims and/or likelihood of loss payment. - The COVID-19 impact on the overall economy could bring about changes in exposure
assumptions that were established before COVID-19.
Keep Covid-19 in mind in the following:
- Review date (Section 3.4)
- Use of the work of another (Section 4.10)
- Company-Specific Risk Factors (Section 5.1)
- Risk of Material Adverse Deviation and the Materiality Standard (Section 5.2)
- Other Items on Which Appointed Actuary is Providing Relevant Comment (Section 5.3.7)
- Reinsurance (Section 5.4)
- Changes in Methods and Assumptions (Section 5.6)
- Extended comments on risks and uncertainties (Section 8.7)
Is an original signature required for the SAO?
This depends on the requirements of each state. Suggested resources for these requirements include the 2021 P/C Loss Reserve Law Manual and state statutes, regulations and bulletins. Knowledge of and compliance with legal and regulatory requirements rests with the individual actuary. Legal counsel should be consulted where the actuary is unable to identify all relevant legal requirements.
What types of reserves may be included in Exhibit A, items 6 and 9?
If an actuary opines on a particular reserve segment that is not included in items 1-4 or 7-8, e.g., DDR, this may be handled in item 6 and/or 9.
The signature and date should appear in the following format:
______________________
*Signature of Appointed Actuary *Printed name of Appointed Actuary *Employer’s name
*Address of Appointed Actuary *Telephone number of Appointed Actuary *Email address of Appointed Actuary *Date opinion was rendered
Is Exhibit B completed for Net or Gross dollar amounts?
Exhibit B should be completed for Net dollar amounts included in the SCOPE. If an answer would be different for Direct and Assumed amounts, identify and discuss the difference within RELEVANT COMMENTS.
For companies participating in an intercompany pool with a zero percent (0%) share, Exhibits A and B of the lead company:
Must be attached as an addendum to the company’s SAO.
What if the actuary cannot determine what, if any, changes are needed to the SAO within the required timeline?
The actuary and insurer should perform the necessary procedures to determine the impact of the SAO as soon as reasonably practical. If the insurer does not provide the necessary data and/or support within ten (10) business days, the actuary should notify the domiciliary Commissioners that the original SAO should no longer be relied upon.
NAIC SAO Instructions specify a formal process when an SAO is considered to be in error. The process involves notifications to the Board, as well as the domiciliary commissioner, as described below:
- According to NAIC SAO Instructions, the insurer “shall require its Appointed Actuary to notify its Board of Directors or its audit committee in writing within five (5) business days after any determination by the Appointed Actuary that the Actuarial Opinion submitted to the domiciliary commissioner was in error as a result of reliance on data or other information (other than assumptions) that, as of the balance sheet date, was factually incorrect”84 and meets the definition above.
The Appointed Actuary should include a summary of the finding of the error and an amended SAO. - Within five (5) business days of receipt from the Appointed Actuary, the company is required to forward a copy of the amended SAO to the domiciliary commissioner, with notification to the Appointed Actuary of doing so.
If the Appointed Actuary does not receive such notification, the Appointed Actuary is required to notify the domiciliary Commissioner within the next five (5) business days that an amended actuarial opinion has been finalized. - According to the NAIC SAO Instructions, “if the
Appointed Actuary learns that the data or other
information relied upon was factually incorrect, but cannot immediately determine what, if any, changes are needed in the Actuarial Opinion, the Appointed Actuary and the company should quickly undertake procedures necessary for the Appointed Actuary to make such determination. If the insurer does not provide the necessary data corrections and other support (including financial support) within ten (10) business days, the Appointed Actuary should proceed with the notification to the Board of Directors and the domiciliary commissioner.”
“Qualified Actuary” is a person who…
(i)
meets
…education, experience, continuing education requirements…
of the
…SQS for SAO (Specific Qualification Standards for Statement of Actuarial Opinion)…
as set forth in
…the QS (Qualification Standards) for actuaries issuing opinions in the U.S…
promulgated by
…the AAA (American Academy of Actuaries)
and both (aside from Exceptions to Definition of Qualified Actuary)
(ii) maintains an AAD (Accepted Actuarial Designation)
(iii) is a member of a professional actuarial association that
requires adherence to the AAA code of conduct
requires adherence to the U.S. qualification standards
participates in ABCD (Actuarial Board for Counselling & Discipline) for members practicing in the U.S.
Identify items the Appointed Actuary should disclose in the SCOPE section of the SAO
Date of Review
Source of data (name, affiliation)
Evaluation date
Reconciliation to Schedule P
Are you opining on UEPR or long duration contracts?
Reviewed methods/assumptions used in determining reserves listed in Exhibit A
Reviewed data for reasonableness/consistency
If there are any reserve amounts the actuary is not opining on
Reflect Disclosure Items Exhibit B
Identify items that the actuary should disclose related to discounting reserves in an actuarial communication.
- Whether a Risk Margin is used, and basis for risk margin
- Amount of reserve discount
- Amount of tabular discount
- Amount of non-tabular discount
- Discount table used/description of tabular discount/basis & assumptions for tabular
discount - Determination/basis/selection method/methodology of discount rate (also source)
- Description of tabular discount
- Material changes in discounting methods
- Specific risks/uncertainties with regard to timing of future payments
- Accounting date
- Valuation date
- Review date
- If any assumption/method was prescribed by applicable law (permission granted)
- If a range is specified, basis for the range
- Significant limitations that constrained actuaries analysis
- Materially differs from ASOP 20
- Selection of Tabular discount rate
- Selection of Non Tabular discount rate
Items disclosed in the SCOPE section
DREARIRR:
*Data sources
*Reserve items in opinion
*Evaluation of data for reasonableness and consistency
*Accounting basis for reserves
*Review date
*Intercompany pooling (if applicable)
*Reviewed reserve setting methods and assumptions
*Reconciliation to Schedule P
The opinion must start with:
In my opinion, the amounts carried in Exhibit A on account of the items identified…
Required parts of a reasonable opinion:
SAUL UP
S = State X - meets requirements of
A = Actuarial principles and standards - computed with
UL = Unpaid Losses - Make a reasonable provision for all unpaid loss and LAE obligations of the Company under the terms of its contracts and agreements
UP = Unearned Premium - makes a reasonable provision for long duration contracts
Items the Appointed Actuary should consider when making use of the work of another:
EN-PC (pronounced NPC like non-playable character)
E: Effect of variations in other person’s estimates on appointed actuary’s opinion
N: Nature of Coverage
P: Proportion of reserves covered by other person’s work (relative to total reserves)
C: Credentials of other person
Disclosures if using the work of another person that is an actuary vs. non-actuary:
an actuary: disclose → name, credential, affiliation (within OPINION paragraph)
a non-actuary: disclose → name, affiliation, type of analysis performed
Company-Specific Risk Factors in Relevant Comments section of the SAO
DONGAS:
*Data (thin data or unexplained changes)
*Operations (qualitative changes in operations)
*New (new products or new markets)
*Growth (rapid growth in 1 or more business segments)
*Adequacy (changes in adequacy of case reserves)
*Severity (changes in severity or frequency)
Others:
- A&E losses (Asbestos & Environmental)
- catastrophic weather events
- cyber liability (this is very topical)
- mass torts (asbestos)
- constructions defects (it seems a lot of bridges have been falling down lately)
- new legislation
- distributional changes in limits / attachment points / deductibles
- terms of reinsurance contracts
Impacts from COVID-19 may include:
*direct impacts: loss and unearned premium reserves, claims patterns and loss trends, collectability of reinsurance and/or premiums, exposure
*indirect impacts: claims handling delays and procedural changes resulting from public health orders
Although not explicitly referenced, nor required, in the NAIC SAO instructions or AOWG Regulatory Guidance, non-employee Appointed Actuaries often request a letter of representation from company management.
Items cited in this could include:
*Company-provided complete and accurate data
*Information on subsequent events
*Basis of carried reserves (net/gross of reinsurance, salvage & subrogation, risk margin,…)
*Changes in reserving methodology
7 considerations in choice of a materiality standard
- Percentage of surplus
- Percentage of reserves
- The amount of adverse deviation that would cause surplus
to fall below minimum capital requirements - The amount of adverse deviation that would cause RiskBased Capital (RBC) to fall to the next action level
- Multiples of net retained risk
- Reinsurance considerations, such as levels of ceded
reserves compared to surplus or concerns about solvency
or collectability of reinsurance - The upper limit of a company
RMAD if reserves + materiality standard < high end of range?
(reserves + materiality standard) < (high end of actuary’s reserve range) ==> YES (to RMAD)
(reserves + materiality standard) ≥ (high end of actuary’s reserve range) ==> NO (to RMAD)
Definition of unpaid claim estimate
The actuary’s estimate of the obligation for future payment resulting from claims due to past events
