Odomirok 16-17 SAO

Question 1

SAO filing requirements

Answer 1

Included with the Annual Statement that’s sent to the state insurance department

Question 2

AOS filing requirements

Answer 2

Filed with domiciliary state (not with NAIC) and separately from SAO
AOS is confidential and contains proprietary info

Question 3

Purpose of SAO

Answer 3

OIA
* Opinion: provide the appointed actuary’s opinion on reserve amounts for items in SAO scope
* Inform: inform readers/regulators of significant risk factors regarding reserves
* Advise: advise whether risk factors could lead to MAD in reserves

Question 4

Organization of SAO

Answer 4

ISOR + (A,B)
1. Identification
2. Scope
3. Opinion
4. Relevant Comments
* Exhibit A: recorded amounts for items in scope (loss reserves, reinsurance, …)
* Exhibit B: disclosure items regarding NET reserves in scope

Question 5

Exemption from SAO

Answer 5

SLuSH
* Size: insurer is small (less than $1m annual GWP) & (less than $1m gross reserves @ year-end)
* LOB: certain lines are exempt
* u
* Supervision: exempt if insurer is under supervision
* Hardship: if insurer is under financial hardship (cost of SAO is burden)
May qualify for hardship if cost of SAO exceeds the lesser of:
* 1% of CY capital & surplus (from latest quarterly statement)
* 3% of GWP for year (projected from last quarterly statement)

Question 6

Identification

Answer 6

• Actuary’s name/title + WARD
• Who made appointment
• Affirmation of qualifications
• Relationship to company
• Date of appointment
• Intended purpose/users (ASOP.36)

Question 7

Opinion organization

Answer 7

[A] & [B]: statements about laws & actuarial standards
[C]: type of opinion: R, I, E, Q, or N
[D]: miscellaneous

Question 8

Relevant Comments - list

Answer 8

MR BICUR
* 1 & 2: MAD (Material Adverse Deviation)
materiality standard; risks that may result in MAD
* 3: Exhibit B
significance of Exhibit B disclosure items including:
anticipated salvage & subrogation
discounting (tabular & non-tabular)
insurer’s share of reserves for (pools & associations)
* 4 & 5: Reinsurance
retroactive reinsurance
uncollectible reinsurance
* 6: IRIS
ratios 11, 12, 13
* 7: Changes
material changes in reserving assumptions/methods since prior opinion
* 8: Unearned Premium
UEP for long-duration contracts

Question 9

Exhibit A

Answer 9

Recorded amounts for items mentioned in the scope

Question 10

Exhibit B

Answer 10

Disclosure items regarding NET reserves in the scope

Question 11

Types of Opinion

Answer 11

I-REQN (I reckon)
* R - Reasonable
* E - Excessive
* I - Inadequate
* Q - Qualified
* N - None

Question 12

Considerations regarding disclosure of materiality

Answer 12

SIC
* Sophistication of user
* Importance of concept to user
* Complexity of concept (KISS)

Question 13

Possible actions of a report-writer based on materiality

Answer 13

IRD
* Include item? Ask yourself whether the item should be considered
* Refine item? Ask yourself whether the item is sufficiently accurate
* Disclose item? Ask yourself whether the item should be reported

Question 14

Selecting materiality standard

Answer 14

• % of loss & LAE reserves (10%)
• % of surplus (10-20%)
• % of net income
• Reduction in surplus that would trigger next RBC action level
• Amount that would trigger an unusual IRIS ratio
• Multiples of net retained risk
• Reinsurance considerations, such as levels of ceded reserves compared to surplus or concerns about solvency or collectability of reinsurance
• Upper limit of a company’s reinsurance protection on reserve development

Question 14

AOS Organization

Answer 14

Comparison section
* A: range of actuary’s reserves (case + IBNR on net & gross basis for all items)
* B: point estimate by actuary (Note: there is no requirement to produce both a range & point estimate)
* C: carried reserves by company
* D: difference (company - actuary)

Adverse Development section
* E: statement regarding whether there has been: 1-year adverse development (relative to prior year surplus) greater than 5% in 3 of last 5 calendar years
if there hasn’t been - actuary must state this fact
if there has been - actuary should provide sufficient detail so the regulator can determine whether additional regulatory review is required

Question 15

AOS E Statement

Answer 15

no dev: The Company has not had 1-year adverse development in excess of 5% of surplus in at least three of the last five calendar years, as measured by Schedule P, Part 2 Summary, and disclosed in the Five-Year Historical Data, on line 74, of the Company’s December 31, 2011 statutory-basis Annual Statement.

dev: 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.