Odomirok 16-17 - SAO

Question 1

Purpose of the Statement of Actuarial Opinion (SAO)

Answer 1

1) Opinion - provide the appointed actuary’s opinion on reserve amounts for items in SAO scope

2) Inform - inform regulators of significant risk factors regarding reserves

3) Advise - advise whether risk factors could lead to Material Adverse Deviation (MAD) in reserves

Question 2

Describe the organization of the SAO

Answer 2

1) Identification
2) Scope
3) Opinion
4) Relevant comments

Exhibit A: recorded amounts for items in scope
Exhibit B: disclosure items regarding NET reserves in scope

Question 3

Exemptions from filing the SAO for some insurers

Answer 3

• Size: insurer is small (<$1m annual GWP and <$1m gross reserves at year-end)
• LOB: some lines of businesses are exempt
• Supervision: exempt if insurer is under supervision
• Hardship: if insurer is under financial hardship (cost of SAO exceeds the lesser of 1) 1% of CY capital and surplus and 2) 3% of GWP for year)

Question 4

Contents of Identification section

Answer 4

• Actuary’s name/title + who made appointment, affirmation of qualifications, relationship to company, date of appointment
• Intended purpose/users

Question 5

Contents of Scope section

Answer 5

Identify reserve items in opinion and basis of presentation, accounting basis for reserves, review date, intercompany pooling, and data sources, consistency and reasonability, reconciliation to Schedule P

Question 6

Contents of Opinion section

Answer 6

A (laws) &B (standards) - statements about laws and actuarial standards
C - types of opinion (Reasonable, Inadequate, Excessive, Qualified, or None)
D - misc. - other loss reserve items, work of others,…

Question 7

Contents of Relevant Comments

Answer 7

• comments and disclosures to aid reader’s understanding
  -items 1&2 Material Adverse Deviation (Materiality standard regarding MAD, risks that may result in MAD)
  -items 3-8 - various

Question 8

Contents of the Exhibit A in SAO

Answer 8

recorded amounts for items mentioned in the scope

Question 9

Contents of Exhibit B in SAO

Answer 9

disclosure items regarding NET reserves in the scope

Question 10

Common methods for selecting materiality standard

Answer 10

Percentage-based standards:
- % of loss and LAE reserves
- % of surplus
- % of net income

Regulatory ratio based standards:
- reduction in surplus that would trigger the next RBC action level
- amount that would trigger an unusual IRIS ratio

Question 11

How is the materiality standard used within the SAO?

Answer 11

Used to examine risk factors that could lead to Material Adverse Deviation

Question 12

Intended audience for the Actuarial Opinion Summary Supplement (AOS)

Answer 12

• file with regulators of the domiciliary state (do not file AOS with NAIC)

Question 13

Is AOS a public document?

Answer 13

No - AOS contains proprietary company information, it is not a public document

Question 14

How is the AOS organized?

Answer 14

Comparison section
- Range of actuary’s reserves, if the actuary calculated a range
- Point estimate by actuary
- Carried reserves by company
- Difference (company - actuary)

Adverse development section
-Statement regarding whether there has been 1-year adverse development (relative to prior year surplus) greater than 5% in 3 of the last 5 calendar years

Question 15

Adverse development section of AOS statement

Answer 15

If there has been 1-year adverse development greater than 5% in 3 of last 5 calendar years, actuary should provide sufficient detail so the regulator can determine whether additional regulatory review is required.
If not, actuary should state this fact

Question 16

Where in the Annual Statement is the adverse development of reserves disclosed?

Answer 16

Five-Year Historical Data, line 74

Question 17

AOS statement in item e if there has been adverse development

Answer 17

• state that there has been adverse development and for which years
• summarize the reason for the adverse development (strengthened loss reserves)
• explain the reason in more detail (increased exposure - various specific reasons are given)
• mitigate the effects of this adverse development (purchase unaffiliated retroactive reinsurance)

Question 18

Intended users of the SAO

Answer 18

Regulators, Board of Directors, management, investors, general public

Question 19

Identify reserve items in the SCOPE section of the SAO

Answer 19

Loss and LAE reserves, retroactive reinsurance assumed reserves, unearned premium reserves for long-duration contracts

Question 20

Identify disclosure items in the SCOPE section of the SAO

Answer 20

• Whether reserves are discounted or undiscounted
• Basis for risk margin
• Gross or net of recoverables (reinsurance, salvage and subrogation)
• Whether uncollectible recoverables were considered
  -Types of expenses included in LAE (DCC, A&O,…)

Question 21

Define review date for the SAO

Answer 21

The date subsequent to the valuation date through which material information known to the actuary is included in forming the reserve opinion

Question 22

Describe the data reconciliation statement in the SAO

Answer 22

The actuary either performed or reviewed reconciliation to Schedule P

Question 23

Appropriate wording in the SAO when the opinion is reasonable

Answer 23

Amounts carried in Exhibit A make reasonable provision for unpaid loss & LAE obligations, both gross and net under terms of company’s contract and agreements

Question 24

Items in the Relevant Comments section of the SAO

Answer 24

1 & 2 - Material Adverse Deviation (Materiality Standard)
3 - Exhibit B - Significance of Exhibit B disclosure items including anticipated salvage and subrogation, discounting, insurer’s share of reserves for pools and 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 (for long duration contracts