Part 19 (SAO Papers) (****) Flashcards
What are the main purposes of the SAO (Statement of Actuarial Opinion)
- State the actuary’s opinion about the reasonableness of the insurer’s reserves within the scope of the SAO
- Notify stakeholders about significant risks and uncertainties that may impact the reserve
- Disclose whether the risks could produce significant material adverse deviation
The AA (appointed actuary) who creates the Statement of Actuarial Opinion needs to be what
a qualified actuary
What does the SAO define a qualified actuary as
- Meets the education, experience, and continuing education requirements
- Currently has an accepted Actuarial designation (FCAS, ACAS, FSA)
- 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 members are practicing in the U.S
What can be done to be exempt from first two requirements by the Academy’s Causalty Practice Council
Each year the insurer must attach the approval and reference this in the identification paragraph
General Standards from U.S Qualification Standards
- Basic Education
- Experience
- U.S Specific Knowledge
- Subject Area Knowledge
- 30 hours of relevant continuing education
Basic Education includes
Fellow or Associate of the SOA or CAS; Enrolled Actuary designation, or MAAA
Experience needed
3 years of responsible actuarial experience
U.S. Specific Knowledge
Knowledge of applicable U.S law and U.S actuarial practices and principles (via exams or proff dev)
Subject Area Knowledge needed
Fellow or Associate of the SOA or CAS
and minimum of 3 years of responsible experience under the review of an actuary qualified to issue the SAO
30 hours of relevant continuing education (breakdown)
- 6 organized (at least)
- 3 covering professionalism related topics (at least)
- 1 bias topic (at least)
- 3 general business sessions (up to)
Standards Specific to SAO from U.S. Qualification Standards
- Basic Education
- Experience
- Continuing Education
Continuing Education requirements
15 Continuing education hours per year related directly to the particular topic, at least 6 CE which should be organized
When does an appointed actuary need be appointed by the Board
By 12/31 of the calendar year for which the opinion will be given
Can the appointed actuary be a firm
No, it must be a person
Does the AA need to be reappointed annually?
No, unless the appointment is specific to a particular year
When does the Appointed Actuary need to provide qualification documentation to the board
When appointed and also on an annual basis after appointment
What should the documentation to the board for qualification include
- Brief biographical information
- How the definition of “Qualified Actuary” is met or will be met for that year
- Description of the Actuary’s experience relevant to the subject of the SAO
What if there is minimal experience for an actuary because the subject is an emerging risk or line of business
Experience with other risks as they have emerged, or broad familiarity of the topic and insurance coverages may be considered
Within 5 days of the appointment what does the actuary need to provide to the Insurance Commissioner
- Actuary’s name and title (and if consulting, name of firm)
- Manner of appointment of the actuary
- Statement that the person meets requirements to be a qualified actuary and documentation was provided to BOD
What needs to be done if the actuary is replaced
- Notify the Insurance Department in writing within five days
- In 10 days: a letter to the commissioner stating whether in the 24 months prior to the actuary being replaced, were there any disagreements regarding items
- A response from the former AA whether they agree with the letter or not
- Newly appointed actuaries should review this correspondence before they begin work on the SAO
List of items the actuary may disagree on
- risk of material adverse deviation
- required disclosures
- scopes
- procedures
- category of opinion issued
- data quality
What reasons may an insurer be exempt from producing a SAO
- Small company
- Insurers under supervision or conservatorship
- Nature of the business
- Financial hardship
Small company exemption
What do they do instead
Under 1mill of total direct and assumed prem written in a CY and under 1 mill total direct and assumed loss and LAE reserves at year end
Submit an affidavit under oath that specifies the direct and assumed WP and assumed loss reserves
Financial Hardship exemption
Projected reasonable cost of the actuarial opinion would be more than the minimum of:
1% of the insurer’s capital and surplus from the latest quarterly statement
3% of the direct and assumed premiums written during the year
When does the insurer have to file a letter of intent for exemption
Before 12/1 of the CY to the insurance commissioner
When can commissioner deny the request
Prior to 12/31 of same year
What are the 4 things an SAO must consist of
- Identification Paragraph
- Scope Paragraph
- Opinion Paragraph
- Relevant Comments
What should the Identification Paragraph show
- Appointed Actuary
- Actuary’s relationship to the company
- Actuary’s qualifications for acting as the appointed actuary
- Date of appointment
- State that the appointment was made by the Board
- Statement of Asserts that actuary has complied with requirements to provide qualification documentation to the board of directors
What is the purpose of the Scope Paragraph
Mention the reserve elements upon which the actuary is giving an opinion on, and the basis for presentation of the reserves
What are the reserve items that the Scope Paragraph can include
- Loss and LAE reserves
- Retroactive reinsurance assumed reserves
- UEPR for Long Duration contracts
- UEPR for extending reporting endorsements
- Other reserve items for which the appointed actuary is giving an opinion on
First Paragraph to include about the Scope
The thoroughness of the examination of assumptions and methodology that support the booked reserves
Levels of review for the thoroughness of the examination of assumptions and methedology
i. Review the methods and assumptions behind the reserves
ii. Perform independent tests to evaluate the reserves
What should be said if opinion formed by reviewing the methods and assumptions
I have examined the actuarial assumptions and methods used in determining the reserves listed in Exhibit A, as shown in the Annual Statement of the Company as prepared for filing with state regulatory officials, as of December 31, 20XX, and reviewed information provided to me through XXXX date… my examination included such review of the actuarial assumptions and methods used and such tests of the calculations as I considered necessary.
What should be said if opinion formed by performing independent tests
I have examined the reserves listed in Exhibit A, as show in the annual statement of the company as prepared for filing with state regulatory officials, as of December 31, 20XX, and reviewed information provided to me through XXXX date… my examination included the use of such actuarial assumptions and methods and such tests of the calculations as I considered necessary.
Exhibit A
Loss and LAE Reserves:
1. Reserve for Unpaid Losses
2. Reserve for Unpaid LAE
3. Reserve for Unpaid Losses - Direct and Assumed
4. Reserve for Unpaid LAE - Direct and Assumed
5. The page 3 write-in item reserve, “Retroactive Reinsurance Reserve Assumed”
6. Other Loss Reserve items on which Actuary is expressing opinion (separately listed)
Premium Reserves:
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
What should be done if actuary is not giving opinion on certain items from Exhibit A
What if the items excluded are believed to be material
clearly state this in the Scope
SAO would need to be qualified
What should be entered in the right side of exhibit A if there is no value to input
enter $0
What is an additional disclosure in the Scope that should be included about dates
The Review Date - Date that information known to the actuary is used to form the reserve opinion
What to do if review date is same date as when SAO is signed
Still disclose the review date, otherwise it may seem as if the actuary overlooked it
Who is expected to be responsible for the data in Scope
A senior executive
What is an additional disclosure in the Scope that should be included about the data
Who provided the data and either
- A statement that the data was reconciled to Schedule P by the actuary
- A statement that the actuary reviewed the reconciliation prepared by the insurer
What to identify if the data was provided by an external party
Company and company official identified
Who will be responsible for the data if an external party provided it in SCOPE
The regulated entity
Wording for Scope when determining data
In forming my opinion on the loss and LAE 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.
Full wording for Scope when using assumptions and methods
I have examined the actuarial assumptions and methods used in determining the reserves listed in Exhibit A, as shown in the Annual Statement of the Company as prepared for filing with state regulatory officials, as of December 31, 20XX, and reviewed information provided to me through XXXX date… my examination included such review of the actuarial assumptions and methods used and such tests of the calculations as I considered necessary.
In forming my opinion on the loss and LAE 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.
Stated Basis of the reserve presentation
Full wording for Scope when using independent tests
I have examined the reserves listed in Exhibit A, as show in the annual statement of the company as prepared for filing with state regulatory officials, as of December 31, 20XX, and reviewed information provided to me through XXXX date… my examination included the use of such actuarial assumptions and methods and such tests of the calculations as I considered necessary.
In forming my opinion on the loss and LAE 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.
Stated Basis of the reserve presentation
In SCOPE, the stated basis of reserve presentation includes
- If reserves are discounted
- If reserves include a risk margin
- If reserves are gross or net of recoverable
- If reserve considers potential for uncollectible receivables
- What types of unpaid ULAE reserve covers
- Categories of loss
Statements about the level of book reserves relative to actuary’s range of reasonable estimates
- Reasonable Provision
- Deficient Provision
- Redundant Provision
- Qualified Opinion
- No Opinion
When do we state the reserve is a Reasonable Provision
What needs to be stated
If in the range of the actuary’s range of reasonable estimates
State just that it is reasonable provision
When do we state the reserve is a Deficient Provision
What needs to be stated
When reserve is less than the actuary’s minimum end of range
Disclose that reserve does not make a reasonable provision and the minimum amount that actuary deems is reasonable
When do we state the reserve is a Redundant Provision
What needs to be stated
When reserve is greater than the actuary’s maximum end of range
Disclose that the reserve does not make a reasonable provision and the maximum amount that actuary deems is reasonable
When do we state the reserve as No Opinion
What needs to be stated
If the actuary cannot reach a conclusion due to limitation in data, analyses, assumptions.
Issue statement of no opinion and state why no opinion could be given
Does an actuary need to issue a qualified opinion if they believe the items are not likely to be material
No
When do we issue a qualified opinion
What needs to be disclosed
If the actuary is unable to provide an opinion about those items
Disclose the items to which the qualification relates, reason for qualification, amount for the items.
Does a qualified opinion mean there is something wrong with the reserves (negative connotation)
No
Opinion wording
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)
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
(Include only if scope includes unearned prem for long duration contracts or other loss reserve items)
D. Make a reasonable provision for the unearned premium reserves for long duration contracts and/ or (other loss reserve item) of the company under the terms of its contracts and agreements.
Change item B if actuary instead performed an independent analysis
B. Are consistent with reserves computed in accordance with accepted actuarial standards and principles
from B. Are computed in accordance with accepted actuarial standards and principles
What to change if reserves are anything but reasonable
May need to reconsider A and B
Change C. Make an inadequate/excessive provision for the unpaid loss and LAE obligations of the company under the terms of its contracts and agreements. The provision for unpaid losses and LAE is $X less/greater than the min/max amount I consider necessary to be within the range of reasonable estimates
Wording if gave a qualified opinion
In my opinion, with the qualification that it does not include the (qualified opinion item), the amounts carried in Exhibit A on account of the items identified:
A
B
C
then add: The qualified reserve include $X on a net of reinsurance basis and $Y on a direct and assumed basis, informed to me by company’s management. I did not include in my review an evaluation of the reserves related to [] 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.
If different opinion on net and gross reserves
items to change in opinion
C. make a reasonable provision for all net unpaid loss and LAE obligations of the company under the terms of its contracts and agreements, but a redundant provision on a gross of reinsurance basis. The provision for gross unpaid loss and LAE is $X greater than the max amount I consider necessary to be within the range of reasonable estimates.
What can you say if the actuary relied on the opinion of another actuary in the creation of the opinion (example used Joe who is chief of pool)
The company participates in the pool. In forming my opinion, I made use of the analysis and opinion by Mr. Joe Actuary, FCAS, MAAA, Chief Actuary for the Pool, regarding reserves held by the Company for the pool.
