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CAS Exam 6US > COPFLR > Flashcards

COPFLR Flashcards

1
Q

What is the Purpose of the SAO (Statement of Actuarial Opinion?

OIA

A
  • Opinion: To provide appointed actuary opinion on reserve amounts for items in SAO scope (reasonable, inadequate, excessive, etc.)
  • Inform: inform readers/regulators of significant risk factors regarding reserves
  • Advise: advise whether risk factors could lead to MAD in reserves

MAD = Material Adverse Deviation

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2
Q

What is the organization of the SAO?

ISOR + (A & B)

A
  • Identification
  • Scope
  • Opinion
  • Relevant Comments
  • Exhibit A: recorded amounts for items in scope, such as loss reserves and reinsurance
  • Exhibit B: disclosure items regarding NET reserves in scope
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3
Q

In what situations would an insurer not be required to provide an SAO?

excemptions

A
  • Size: small insurer, less than $1M GWP & $1M gross reserves at YE
  • LOB: certain lines are exempt from filing
  • u
  • Supervision: if under supervision
  • Hardship: if insurer is under financial hardship (cost higher than the lesser of (1% of CY Capital & Surplus, 3% of GWP for year)
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4
Q

What are the main components of the Identification section of the SAO?

A

WARD
* Who made the appointment?
* Typically board of directors
* Affirmation of qualifications
* What makes this person a “Qualified Actuary”?
* Relationship to company (employee or consultant)
* Date of Appointment

Intended Users and Purpose ←This is only mentioned in ASOP 36, so if get a question on what is “omitted”, just rely on WARD above

The identification section is only looking for an affirmation of being a qualified actuary…..not the defintion

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5
Q

What makes an actuary qualified to write SAO? (Section 2.1.2)

A

“Qualified Actuary” is a person who

(i)
Meets
**CE^3 **= (Education, experience, and continuing education requirements

Of the
SQS for SAO = (Specific Qualifications Standard for Statement of Actuarial Opinion)

As set forth in
**The QS **(Qualification Standards for actuaries issuing opinions in the US,)

Promulgated by
**AAA **(American Academy of Actuaries)

And

(ii.) has obtained and maintains an Accepted Actuarial Designation (AAD)

(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.

Remember Identification section only asks for an affirmation of above.

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6
Q

What needs to happen if there is a change in the Appointed Actuary

A
  • Within 5 Days: Company must advise domnicillary state DOI of the chage.
  • Within 10 Days: Company just write letter to DOI whether there were any material disagreements in preceding 24 months, including both resolved (how) and unresolved.
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7
Q

What are the possible disclosures in the Scope section of SAO?

A

I DR3EAD the disclosures

  • I = Intercompany Pooling, if applicable
  • D = Date of Review (ie Review Date)
  • R3 = Reconciliation to Schedule P, Reserve Items in
    Opinion, Review of methodologies and assumptions
  • E = Evaluation of data for reasonableness and consistency
  • A = Accounting Basis for reserves
  • D = Data Sources

Some of these disclosures are optional, if not applicable like if there is no Intercompany Pooling

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8
Q

What is the purpose the SCOPE section of the SAO?

A

To identify the reserve items upon which the Appointed Actuary is providing an opinion, such as:

  • Loss and LAE Reserves
  • Retroactive reinsurance assumed reserves
  • Unearned premium reserves for P&C long-duration contracts
  • Unearned premium reserves for extended reporting
    endorsements

Remember the if AA is not opining on all items in Exhibit A then: then they should clearly state this in the SCOPE section of the SAO.

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9
Q

What are some items the AA needs to disclose regarding the Accounting Basis of Reserves?

I DR3EAD

A
  • Nominal / Discounted: if discounted then which items, type no discount (tabular, etc), basis for interest rate
  • Risk Margin - yes or no
  • Gross or Net of Recoverables - example Sal/Sub
  • Are uncollectible recoverables considered
  • Types of LAE coveraged by reserves (defense costs, adjusting costs, etc).
  • which reserves are in opinion
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10
Q

What is the difference between Intercompany Pooling and Intercompany Reinsurance?

A
  • Intercompany reinsurance is transaction where one company agreeds to indemnify the other company for all or part of loss that may occur.
  • Intercompany pooling is an arrangement amongst related insurance companies to pool business and then allocate based on predetermined %’s.
    • In practice, it’s set up so all companies cede 100% back to lead company and then lead company retrocedes back to companies based on predetermined %’s.

Pooling: Schedule P (gross and net) for each company will be based on the pool %’s

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11
Q

What is the review date as it pertains to the SAO

A
  • Found in the Scope Section
  • As defined in ASOP 36 it is: the date (subsequent to the valuation date) through which material information known to the actuary is included in forming the reserve opinion.”

My review considered information provided to me through (**[date] ** OR [the date of this opinion]).

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12
Q

What information must be included in SAO if Intercompany pooling and Where?

A
  • Scope Section
  • Each Company in the pool provides the following:
    • Description of Pool
    • Identification of Lead Company
    • List of all companies including state of domicile and pool percentage
  • For companies with 0% share, must provide lead company information must be appended to SAO.
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13
Q

Who should be the provider of the data to the appointed actuary

A
  • An officer of the company
  • In the event of 3rd party preparing the data, company is still responsible and should be noted as the provider of the data

Language: In forming my opinion on the loss and loss adjustment expense reserves, I relied upon data prepared by (officer name and title at the Company).

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14
Q

What does the AA need to state regarding the Evaluation of data for reasonableness and consistency?

A

Simply states: I evaluated the data for reasonableness and consistency.

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15
Q

When checking the data for reasonableness and consitency, what is the key question?

A

Whether an unusual data point is so unusual that it indicates a possible error of signficance to the AA’s SAO

Or

special attention is warranted for unusual, but valid data

If data is not reasonable and remains unresolved, the AA can conclude that an opinion can not be formed or a qualified opinion (if error for one line)

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16
Q

What are the primary items regarding the reconciliation to Schedule P

A
  • Should be done both D&A and Net basis
  • Should done against Schedule P, Part 1
  • If relied upon the review of losses should include: Paid Loss, Incurred Case, Paid DCC, Incurred (case basis) DCC, Salvage, Claim Coiunts, and Earned Premium
    • If a data element no reviewed the AA should state why.
  • Should be done LOB and Year to extent that data was relied upon and is provided in Schedule P
  • If errors, then AA needs to comment that they are insignificant or do represent errors in data
17
Q

What does the AA need to state regarding the reconcilation to Schedule P?

A

If no errors:
* I reconciled the data to Schedule P - Part 1 of the company’s current Annual Statement.

If errors:
* State erorrs are insigificant (if they are) or explainable
* If errors can not be explained:
* Disclose in SAO and Actuarial Report
* Conclude that SAO can not be rendered (or maybe qualified)
* Recommend company inform external auditors

18
Q

What is the data testing requirement of the SAO?

A

The data testing requirement ensures that the auditor will become aware of the data and/or data elements that the Appointed Actuary identifies as being significant.

  • AA will determine what signifcant means when writing letter to auditor
  • Once informed of signficant items, the auditor has discretion on how and what to test. Does not need to test everything each year.
  • Auditor should inform AA of any discrepencies in the data they test
19
Q

What is the AA’s requirement regarding the review of methods and assumptoins

A

The AA shall disclose in the SCOPE section that they reviewed the methods and assumptions underlying the company’s reserves along with any tests that they deemed necessary.

20
Q

What are the 5 different opinions that the AA can issue in the SAO?

A
  • Reasonable
  • Inadequate/Deficient
  • Excessive/Redundant
  • Qualfied (if unable to review portion of reserves)
  • No Opinion (if unable to issue an opinion due to data, etc.)
21
Q

What are the necessary statements found within the OPINION section of SAO?

A
  • EXHIBIT A: In my opinion, the amounts carried in Exhibit A:
  • LAWS: Meet the requirements of the insurance laws of (state of domicile)
  • STANDARDS: Are computed in accordance with accepted actuarial standards.
  • OPINION: Make a (TYPE OF OPINION) provision for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements.
  • MISCELLANEOUS - other loss reserve items (UPR), work of others, etc.
22
Q

What is the appropriate statement regarding reserves for a reasonable provison?

A

Make a reasonable provision for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements.

Note if Net is reasonable, but gross is not state that.

23
Q

What additional information needs to be stated for an Excessive or Inadequate opinion

A
  • Inadequate - Must disclose what is the reasonable minimum
  • Excessive - Must disclose what is the reasonable maximum
24
Q

For a qualified opinion what disclosures does the AA need to make in the SAO?

A
  • Amount of the reserves that are subject to qualification
  • Items to which the qualifications exist
  • Reason for qualification (ie data, experience, etc.)
  • Opinion on remaining reserves

Relying on work of others does not mean a qualified opinion is needed

Remember a qualification does not imply negative connotation, but rather the component is not covered by SAO

25
Q

What should the AA do if their opinion is different between gross and net?

A
  • Item 4 on Exhibit B follows the conclusion for net reserves, but need to comment on it.
26
Q

What is the defintion of a long-term contract for the purposes of the SAO?

A

These are P&C contracts where:
* the contract term is greater than or equal to thirteen months
* the insurer can neither cancel the contract nor increase the premium during the contract term

Does not include: financial guaranty contracts, mortgage guaranty contracts and surety contracts.

27
Q

If the UPR for long duration contracts is material what should AA state?

A

Make a reasonable provision for the unearned premium reserves for P&C Long Duration Contracts of the Company under the terms of its contracts and agreements.

28
Q

Where should the AA discuss the use of “Work of Others” and what information should be disclosed?

A
  • OPINION Section
  • An Actuary: disclose -> name, credential, affiliation
  • Non-Actuary: disclose -> name, affiliation, type of analysis performed

Note this assumes that the work is material, it would be reasonable to exclude if work is immaterial

29
Q

What are some considerations for the AA when using the work of others?

P-NEC

A
  • Proportion of reserves covered by other person’s work, relative to total reserves
  • -
  • Nature of Coverage - What lines of business
  • Effect of variations in other persons estimates on appointed actuary’s opinion
  • Credentials of other person
30
Q

What is the ideal situation for use of Work of Others?

A
  1. P: Proportion of reserves by the other person is small.
  2. N: Would prefer that analysis was for a short-tailed line of business like Auto PD, where potential for unfavorable development is small.
  3. E: Would like the range of other person’s estimates to be small, so that there is little effect on the AA’s opinion
  4. C: Preferable that the credentials of the other person’s line align with work that was done.

CAS Exam 6US (19 decks)

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