COPLFR

Question 1

The SAO instructions define a qualified actuary as someone who:

Answer 1

1. Meets the education, experience, and continuing education requirements.
2. Currently has an accepted Actuarial designation (FCAS, ACAS, ASA)
3. Is a member of a professional actuarial association that requires adherence to the Academy’s Code of Professional Conduct as well as the U.S. Qualification Standards, and which participates in the Actuarial Board for Counseling and Discipline when its members are practicing in the U.S.

Question 2

AAA has produced “Qualification Standards for Actuaries Issuing Statements of Actuarial Opinion in the U.S. Including Continuing Education Requirements, effective January 1, 2008.” The requirements for the standards specific to the SAO include:

Answer 2

Either:
-Successfully completed exams administered by the AAA or CAS on:
-Policy forms and coverage, underwriting and
marketing
-Principles on ratemaking
-Statutory insurance accounting and expense
analysis
-Premium, loss and expense reserves
-Reinsurance
-Obtained a signed statement from another actuary who is qualified to issue an SAO that states that the writer is familiar with the actuary’s professional history and that the actuary has obtained sufficient alternative education to satisfy the basic educational requirement for the specific qualification standard

-At least 3 years of responsible experience related to the subject of the SAO under the review of an actuary qualified to issue the SAO

-15 CE hours per year related directly to the particular topic

-At least 6 CE hours per year of “organized” activities related directly to this topic

Question 3

When does the SAO need to be filed by?

Answer 3

It needs to be filed with the Annual Statement by 3/1.

Question 4

What are the 3 main purposes of the SAO

Answer 4

1. OPINION: State the actuary’s opinion about the reasonableness of the insurer’s reserves specified within the Scope of the SAO
2. INFORM: Notify stakeholders about significant risks & uncertainties that may impact the reserves
3. ADVISE: Disclose whether the risk factors could produce significant material adverse deviation in reserves

Question 5

Intended Users of SAO

Answer 5

Board of Directors
Regulators
Management
Investors
General Public

Question 6

The insurer may be exempt from producing a SAO for one of the following reasons:

Answer 6

SLuSH
-Small Companies
-Line of Business
-Supervision
-Hardship

1. Small Companies
   Insurers with:
   -under $1M of total direct & assumed written premiums (GWP) in a CY, AND
   -under $1M total direct & assumed loss & LAE reserves (gross reserves) at year end

Instead of creating an opinion, insurer and submit an affadavit under oath of an officer of the insurer that specifies the direct & assumed written premium, and direct & assumed loss reserves

2. Insurers under supervision or conservatorship(unless ordered to do so by the domiciliary commissioner)
   Because we already know these companies are in trouble, SAO won’t add valuable information
3. Nature of the business (LOB)
   If an insurer is not exempt due to one of the above reasons, it may apply for an exemption due to the nature of business written
4. Financial Hardship
   This would exist if the projected reasonable cost of the actuarial opinion would exceed the lesser of:
   -cost > 1% of the insurer’s capital & surplus from the latest quarterly statement of the year for which the exemption is sought
   -cost > 3% of the direct & assumed written premiums (GWP) during the year for which the exemption is sought (as provided in the latest filed quarterly statement) (projected from the latest quarterly statement)

Question 7

When must the insurer file a letter of intent for exemption by?

Answer 7

Insurer has to file a letter of intent for exemption to the insurance commissioner before 12/1 of the calendar year for which the exemption is being claimed.

The commissioner may deny this request prior to 12/31 of the same year. A copy of the approved exemption must be filed with the Annual Statement in all jurisdictions in which the insurer is authorized.

Question 8

Is the SAO confidential?

Answer 8

No. It is a public document.

Question 9

The SAO must consist of:

Answer 9

ISOR

-Identification Paragraph
-Scope Paragraph
-Opinion Paragraph
-Relevant Comments

2 Exhibits:
Exhibit A: Recorded Amounts for Items in Scope
Exhibit B: Disclosure Items Regarding Net Reserves in Scop

Question 10

What is included in Loss & Loss Adjustment Reserves Section of Exhibit A

Answer 10

1. Reserve for Unpaid Losses
2. Reserve for Unpaid LAE
3. Reserve for Unpaid Losses - Direct & Assumed
4. Reserve for Unpaid LAE - Direct & Assumed
5. Retroactive Reinsurance Reserve Assumed
6. Other Loss Reserve items on which Actuary is expressing opinion

Question 11

What is included in Premium Reserves Section of Exhibit A

Answer 11

7. Reserve for D&A Unearned Premiums for Long Duration Contracts
8. Reserve for Net Unearned Premiums for Long Duration Contracts
9. Other Premium Reserve items on which Actuary is expressing opinion

Question 12

Identification Paragraph should identify:

Answer 12

actuary’s name/title + WARD + Intended purpose + users

-The appointed actuary
-The actuary’s relationship to the company (e.g. Chief Actuary, consultant)
-The actuary’s qualification for acting as the appointed actuary (FCAS/MAAA/etc.)
-Date of appointment
-State that the appointment was made by the Board (or its equivalent)

• Who made appointment
• Affirmation of qualifications
• Relationship to company
• Date of appointment

Question 13

Appointment and Replacement Procedures

Answer 13

The qualified actuary needs to be appointed by the Board of Directors by 12/31 for the calendar year for which the opinion will be given.

The qualified actuary needs to be a person, not a firm.

The appointed actuary does not need to be reappointed annually (unless the appointment is specific to a particular year)

Question 14

Within five business days of the appointment of the actuary, the company needs to provide the following information to the Insurance Commissioner:

Answer 14

-Actuary’s name and title
-Manner of appointment of the actuary
-Statement that the person meets the requirements to be a qualified actuary (or was approved by the domiciliary commissioner) and that documentation was provided to the Board of Directors

Question 15

If the actuary is replaced, the insurer needs to do the following:

Answer 15

-Notify the Insurance Department in writing within five days

-Within ten days, provide an additional letter to the Commissioner stating whether in the 24 months prior to the actuary being replaced, were there any disagreements with the actuary regarding the content of the opinion regarding:
-Risk of material adverse deviation;
-Required disclosures;
-scopes;
-procedures;
-category of opinion issues;
-substantive wording of opinion; or
-data quality
This includes statements both resolved and not resolved to the former actuary’s satisfaction.

-The aforementioned letter needs to include a response from the former Appointed Actuary addressed to the company stating if the actuary agrees with the statements in the letter, and if not, stating the reasons why she does not agree.

Question 16

Scope Paragraph

Answer 16

This mentions the reserve elements upon which the actuary is opining, and the basis for
presentation of the reserves

The reserve items can include:
-Loss & LAE reserves
-Retroactive reinsurance assumed reserves
-UEPR for Long Duration contracts
-UEPR for extended reporting endorsements
-Other reserve items for which the Appointed Actuary is opining

Question 17

Exhibit A: Scope

Answer 17

**Image in manual. Very important

Question 18

Additional Disclosures: Data Source

Answer 18

“In forming my opinion on the loss and loss adjustment expense reserves, I relied upon data prepared by ________ (name, affiliation and relation to company). I evaluated that data for reasonableness and consistency. I also reconciled that data to Schedule P, Part 1 of the company’s current Annual Statement. In other respects, my examination included such review of the actuarial assumptions and methods used and such tests of the calculations as I considered necessary.”

Question 19

Stated Basis of Reserves

Answer 19

As mentioned previously, the actuary needs to identify the “stated basis of the reserve presentation,” which is a description of the nature of the reserves. It includes (if applicable):

-Whether the reserves are discounted
-Whether the reserves include an explicit risk margin
-Whether the reserve is gross or net of recoverables (e.g. deductibles, ceded reinsurance, salvage & subrogation)
-Whether the reserve considers the potential for uncollectible receivables
-The types of unpaid LAE covered by the reserve
-If the opinion is only for a portion of the reserve, the categories of loss that are incorporated by the opinion (e.g. type of loss, line of business, year, state)
-Anything else that is necessary to describe the reserves sufficiently for the actuary’s evaluation of the reserves

Question 20

Opinion Paragraph

Answer 20

This paragraph must list the opinion of the actuary regarding the reserves of the company. It must state whether the opinion is for losses & LAE combined or separately.

Question 21

Reasonable Provision

Answer 21

The stated reserve is in the actuary’s range of reasonable estimates

Question 22

Deficient Provision

Answer 22

The state reserve is less than the actuary’s minimum end of the range. The actuary should make an opinion that the reserve does not make a reasonable provision. She also needs to disclose the minimum amount that she believes is reasonable.

Question 23

Redundant Provision

Answer 23

The stated reserve is greater than the actuary’s maximum end of the range. Again, the actuary should make an opinion that the reserve does not make a reasonable provision. She also needs to disclose the maximum amount that she believes is reasonable.

(Company may have higher reserve estimate to benefit tax wise, IRS would be concerned)

Question 24

Qualified Opinion

Answer 24

If certain items can’t be estimated, or if the actuary is unable to provide an opinion about those items, she should issue a qualified statement of actuarial opinion. A qualified opinion does not necessarily have a negative connotation… it simply means there is a portion of the reserve that are not covered by the SAO. The actuary does not need to issue a qualified opinion if she believes that the item(s) are not likely to be material.

Question 25

No opinion

Answer 25

If the actuary cannot reach a conclusion due to limitations in the data, analyses, assumptions or related information, she should issue a statement of no opinion, as well as provide a description of why no opinion could be given.

Question 26

The Opinion paragraph should include text that covers at least the following points: (Memorize word for word)

Answer 26

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 and principles.

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.

In addition, if the scope includes unearned premium reserves for Long Duration contracts
or other Loss Reserve items on which the Actuary is expressing an opinion,

D. Make a reasonable provision for the unearned premium reserves for long
duration contracts and/ or (Insert Other Loss Reserve item on which Actuary is
expressing an opinion) of the Company under the terms of its contracts and
agreements.

Question 27

The above assumes that the actuary reviewed the assumptions and methods that were
used to set the reserves. If the actuary instead performed an independent analysis of the
reserves, item B above can be changed to read:

Answer 27

B. Are consistent with reserves computed in accordance with accepted actuarial
standards and principles.

Question 28

If the actuary indicates that the reserves are anything but reasonable, she may want to
reconsider whether the carried amounts being opined upon satisfy items A & B. Also,
item C can be changed:

Answer 28

C. Make an inadequate [or excessive] provision for the unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements. The provision for unpaid losses and loss adjustment expenses is
$X less [greater] than the minimum [maximum] amount I consider necessary to be within the range of reasonable estimates.

Question 29

If the actuary gave a qualified opinion, the following wording could instead be used:

Answer 29

In my opinion, with the qualification that it does not include the {Identify the item(s) to
which the qualification(s) relate(s)}, 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 and principles.
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. The Company’s management has informed me that the reserves listed in Exhibit A
include $X (x.x%) on a net of reinsurance basis, and $Y (y.y%) on a direct and assumed basis, for {item(s) to which the qualification(s) relate(s)}. I did not include in my review an evaluation of the reserves related to {item(s) to which the qualification(s) relate(s)} because there was not sufficient information available for me to assess the reasonableness of those reserves. Thus, this is a qualified statement of actuarial opinion.

Question 30

If the actuary has different opinions about the different Scope items (e.g. reasonable net
reserves, but redundant gross reserves), she should ensure that this section clearly
conveys the appropriate opinion for each item. Item C in the opinion can be changed to:

Answer 30

C. Make a reasonable provision for all net unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements, but a c [or redundant] provision on a gross of reinsurance basis. The provision for all gross unpaid losses and loss adjustment expenses is $X less than [or greater than] the minimum [or maximum] amount I consider necessary to be within the range of reasonable estimates.

Question 31

If the actuary relied on the Opinion of another actuary (defined as one not within the actuary’s control) for a material portion of the reserves covered by the scope, she must identify that actuary (name, credential & affiliation) in this section. Sample wording that can be used is as follows (this deals with the scenario where the actuary is relying on the work of another actuary for an underwriting pool that the insurer participates in):

Answer 31

The Company participates in the [name of underwriting pool] (“the Pool”). In forming my opinion, I made use of the analysis and opinion issued by Mr. Joe Actuary, FCAS, MAAA, Chief Actuary for the Pool, regarding reserves held by the Company for the Pool.

Question 32

Relevant Comments

Answer 32

This section provides context, enabling the regulators to better understand the Opinion, including the actuary’s justification. It refers to Exhibit B, which is an exhibit that provides for various disclosures. The Relevant Comments section is considered to be the most valuable section of the SAO.

Question 33

Relevant Comments should address the following:

Answer 33

i. *Risk of Material Adverse Deviation
ii. Other Disclosures in Exhibit B, including:
a. Anticipated Salvage & Subrogation (company chooses whether reserves are net or gross of future salvage and subrogation)
b. Discounting
c. Voluntary and/or involuntary underwriting
pools & associations
d. Asbestos & environmental liabilities
e. Extended reporting endorsements
f. Long duration contracts
g. Other Items
iii. Reinsurance
a. Retroactive reinsurance
b. Financial Reinsurance
c. Uncollectible reinsurance
iv. IRIS Ratios
v. Changes in Methods & Assumptions
vi. COVID-19 Considerations

Question 34

Exhibit B

Answer 34

This exhibit contains disclosures about net reserves identified in the Scope section that are addressed in the Relevant Comments.

Question 35

Actuarial Report

Answer 35

A document or other presentation, prepared as a formal means of conveying to the state regulatory authority and board of directors, or its equivalent, the actuary’s professional conclusions and recommendations, of recording and communicating the methods and procedures, or assuring that the parties addressed are aware of the significance of the actuary’s opinion or findings and that documents the analysis underlying the opinion.

Question 36

When is the Actuarial Report Due?

Answer 36

5/1 (or within 2 weeks after a request from a state commissioner).

Question 37

Is the Actuarial Report confidential?

Answer 37

Yes. The report contains significant proprietary information and is not available for public inspection (Typically contains more information than what is required by the SAO).

Question 38

What does the actuary comment on in the Actuarial Report?

Answer 38

The actuary would typically include commentary on all the material items covered in the SAO, including how the materiality threshold was selected.

The report should address the risk factors identified in the SAO, and also include descriptions of alternate outcomes that could result in adverse development in excess of the materiality threshold.

Question 39

An exhibit that ties to the Annual Statement and compares the actuary’s conclusions (point estimates, range, or both) to the carried amounts (this needs to be consistent with the segmentation of exposures or liability groupings used in the analysis). Note that the AOS already contains this information at the highest level of aggregation. The Actuarial Report includes a comparison at a more detailed level that is consistent with how reserves were analyzed.

Answer 39

Chart in manual **

Question 40

Actuarial Opinion Summary (AOS)

Answer 40

The AOS is a supplement to the SAO. It needs to be signed by the same Appointed Actuary who signed the SAO.

The exemptions for filing the SAO also apply to the AOS.

Question 41

Is the AOS confidential?

Answer 41

Yes. It contains significant proprietary information. It is filed with the domiciliary state separately from the Annual Statement.

Question 42

When is the AOS due?

Answer 42

3/15

Question 43

Main content of the AOS is included in 5 items:

Answer 43

A. The actuary’s range of reasonable estimates for loss and LAE reserves, net and gross of reinsurance, when calculated.

B. The actuary’s point estimates for loss and LAE reserves, net and gross of reinsurance, when calculated.

C. The company’s carried loss and LAE reserves, net and gross of reinsurance

D. The difference between the company’s carried reserves and the actuary’s estimated calculated in A and B, net and gross of reinsurance.

E. Whether the insurer has experienced adverse development in excess of 5% of the respective prior year surplus in 3 or more of the past 5 years (note that this is the same as which is used to produce IRIS ratio 11). If so, the actuary must provide an explanation for the adverse experience.

Question 44

Sample AOS Exhibit

Answer 44

**In manual

Question 45

Sample wording by an insurer that has experienced adverse development exceeding 5%
of surplus from 2008 to 2010:

Answer 45

The company had one-year adverse development in excess of 5% of statutory surplus in three of the past five years. The exceptional values occurred in years 2008 through 2010. The exceptional values resulted from a strengthening in loss reserves made by management to reflect unexpected trends in asbestos and environmental claims on excess liability policies written by the company from 1968 to 1986.

These trends include increased likelihood of exposure to higher-layer policies as a result of greater than expected emergence of reported claims on underlying policies and efforts by insureds to expand coverage periods and expose additional policies.

It should be noted that in 2011 the company entered into a retroactive reinsurance agreement whereby 100% of this run-off business is ceded to an unaffiliated reinsurance company. Going forward, this reinsurance agreement will mitigate the impact of adverse development of loss reserves on the company’s statutory surplus.

Question 46

Material Adverse Deviation

Answer 46

A risk of “material adverse deviation” is said to exist if there is a reasonable possibility that the company will experience adverse deviation that will cause it to reach an adverse condition. About one third of SAOs reach the conclusion that there is a risk of material adverse deviation.

Question 47

Examples of factors that could be considered when choosing a materiality standard:

Answer 47

-percentage of surplus (10-20% of surplus is common)

-percentage of reserves (10% of reserves is common)

-amount of adverse deviation that would cause a drop in financial strength ratings

-amount of adverse deviation that would cause surplus to fall below minimum capital requirements

-amount of deviation that would cause RBC to fall to the next action level (discussed in Odomirok 19)

-multiples of retained risk

-the upper limit of the insurer’s reinsurance protection on reserve development (if
any)

Question 48

Sample Language for Materiality Standard:

Answer 48

My Materiality Standard for purposes of addressing the risk of material adverse
deviation of the Company’s reserves for unpaid losses and loss adjustment expenses has
been established as $Y million. This represents the reduction in surplus that would result
in additional action based on the NAIC RBC formula. A reduction in surplus of $Y would
result in the Company moving into the [state which RBC level, e.g., Company] Action
Level.

Question 49

Examples of factors that can cause material adverse deviation include:

Answer 49

 COVID-19
 asbestos & environmental losses
 construction defect
 catastrophic weather events
 conflagration events (event that can result in a large loss, especially of life)
 exposure related to mortgage defaults
 exposure to cyber liability
 other mass torts
 high excess layers
 large deductible Workers’ compensation claims
 medical malpractice legislative Issues
 new products or new markets
 opioid epidemic
 rapid growth
 lack of data or unexpected & unexplained changes in data
 sudden unexplained changes in frequency or severity for a segment
 changes in reserve adequacy of case reserves
 impact of soft market conditions

Question 50

Bright Line Indicator Test

Answer 50

The NAIC Financial Handbook contains a Bright Line Indicator Test. If the actuary does not address material adverse deviation, comments from the actuary should be sought if the following relationship applies:

10% * Net Loss & LAE Reserves > Total Adjusted Capital - Company Action Level Capital

If this is trigged, the actuary should disclose why she does not believe there is a risk of material adverse deviation (assuming that is the case).