SAO 1

Question 1

Requirements to be a “qualified actuary”:

Answer 1

• member in good standing with the CAS; or
• a member in good standing with the AAA, and who has been approved as qualified for signing casualty loss reserve opinions by the Casualty Practice Council of the AAA

Question 2

What does the insurer need to provide to the

Commissioner within 5 days of the appointment of the actuary:

Answer 2

• Name & title
• Manner of appointment of the actuary
• Statement that the person meets the requirements to be a qualied actuary

Question 3

What does the insurer need to do if the actuary is replaced:

Answer 3

-notify the Insurance Department within five days
-within ten days, provide an additional letter to the Commissioner stating whether in the 24months prior to the actuary being replaced, were there any disagreements with
the actuary regarding the risk of material adverse deviation; required disclosures; scopes; procedures or data quality.
-request in writing to the former actuary whether he/she agrees with the statements in the aforementioned letter. This letter from the actuary should be forwarded to the
Commissioner together with the insurer’s letter.

Question 4

4 exemptions from producing SAO:

Answer 4

1. small companies
2. insurers under supervision or conservatorship
3. nature of the business
4. nancial hardship

Question 5

Requirement for the “small company” exemption:

Answer 5

Insurers with under $1M of total direct & assumed premiums in a CY, and under $1M total direct & assumed loss & LAE reserves at year end

Question 6

Requirement for the “financial hardship” exemption:

Answer 6

If the projected reasonable cost of the actuarial opinion would exceed the lesser of:

• 1% of the insurer’s capital & surplus from the latest quarterly statement of the year for which the exemption is sought
• 3% of the direct & assumed premiums during the year for which the exemption is sought

Question 7

Parts of the SAO:

Answer 7

• Identification paragraph
• Scope
• Opinion
• Relevant Comments

Question 8

5 types of Statement of Actuarial Opinion:

Answer 8

1. Reasonable Provision
2. Deficient Provision
3. Redundant Provision
4. Qualified Opinion
5. No Opinion

Question 9

3 things that the actuary needs to disclose if he provides a Qualified Opinion:

Answer 9

• the item(s) to which the qualification relates,
• the reason(s) for the qualification
• amount(s) for the above items, if disclosed by the insurer

Question 10

Identification Paragraph mentions:

Answer 10

• the Appointed Actuary
• the actuary’s relationship to the company
• the actuary’s qualifications for acting as the appointed actuary
• date of appointment

Question 11

What is listed in the Loss Reserve section of Exhibit A:

Answer 11

• Reserve for Unpaid Losses
• Reserve for Unpaid LAE
• Reserve for Unpaid Losses - D&A
• Reserve for Unpaid LAE - D&A
• Retroactive Reinsurance Reserve D&A
• Other Loss Reserve items

Question 12

Disclosures about the Risk of Material Adverse Deviation that the actuary should make:

Answer 12

• the materiality standard
• how this standard was derived
• whether there are significant risks that could produce material adverse deviation
• if the risk exists, major factors that could result in material adverse deviation.
• major factors, combination of factors, or particular conditions underlying the risk and uncertainties that the actuary considers relevant

Question 13

Comments about reinsurance that the actuary should make:

Answer 13

• retroactive reinsurance
• financial reinsurance
• reinsurance collectability

Question 14

3 sources to determine reinsurance collectability:

Answer 14

1. management
2. reinsurer ratings
3. Schedule F (look for regulatory action or overdue paid losses)

Question 15

List the IRIS ratios that the actuary will have to discuss if the ratios have exceptional values:

Answer 15

• 1yr development to surplus
• 2yr development to surplus
• Estimated Current Reserve Deciency to surplus

Question 16

What must be included in the Actuarial Report:

Answer 16

• An exhibit that ties to the Annual Statement and compares the actuary’s conclusions to the carried amounts
• Summary exhibit that contains the actuary’s best estimate and/ or range
• Documentation of the data reconciliation to Schedule P
• More extensive comments on trends that indicate the presence/ absence of risks & uncertainties that may result in material adverse deviation
• More extensive comments on factors that caused unusual IRIS ratios, in addition to how these factors were addressed in the prior and current analyses

Question 17

Items to be included in an AOS:

Answer 17

-Range of reasonable estimates for loss & LAE reserves, net and gross of reinsurance (if calculated)
-Point estimate for loss & LAE reserves, net and gross of reinsurance (if calculated)
-The company’s recorded loss& LAE reserves, net and gross of reinsurance.
-The difference between the carried reserves, and point estimate and/or range, net and gross of reinsurance.
-If there is adverse development in excess of 5% of surplus in at least 3 of the 5 past years, a description of the reserve elements and/ or management decisions that were major
contributors to this adverse development

Question 18

Factors that could be considered when choosing a materiality standard:

Answer 18

• percentage of surplus
• percentage of reserves
• 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
• multiples of retained risk

Question 19

Actions that the actuary should take if they realize between submitting the opinion, and the date of the balance sheet for which the next opinion shall be issued, that there is an error in the data that would have materially impacted the opinion

Answer 19

• alert the audit committee within five business days
• this notification needs to include an amended opinion.
• the insurer needs to forward this amended opinion to the insurance Commissioner within the next five days, and also copy the actuary
• If the actuary does not receive this copy, he should notify the Commissioner

Question 20

If there is an error in the AOS, the revised AOS should:

Answer 20

• be submitted to the regulator within 10 business days
• clearly state that it is an amended document
• contain or accompany an explanation for the change
• include the revised date

Question 21

Factors that the actuary should consider when trying to determine whether to rely on the work of others:

Answer 21

• The amount of the reserves covered by the other actuary’s analysis in comparison to the total reserves
• The nature of the exposure and coverage
• How reasonably likely variations in the other actuary’s analysis may impact the total reserves on which the actuary is opining.
• Credentials of the other actuary

Question 22

Actions that the actuary can take if the data cannot be reconciled to Schedule P:

Answer 22

• Confirm that the person responsible for the data is aware of the differences
• Recommend that the company inform the auditors about the difference
• Discuss the issue in the SAO, and elaborate on it in the AOS.

Question 23

Factors that the actuary should consider when there is insufficient historical data:

Answer 23

• Whether there is adequate data to evaluate the reserves
• If industry data or another company’s data were used, is this data reasonably similar to the company for which the actuary is providing an opinion
• Whether to provide disclosures about the data used
• Whether to provide disclosures about the resulting variability & uncertainty

Question 24

What should the actuary comment on if mass tort exposure exists:

Answer 24

• Whether there is material exposure
• The aggregate amount of money held
• The significant variability & uncertainty inherent in the estimate
• Whether the actuary believes the liability is actuarially estimable
• The difficulties involved in providing an actuarial estimate of these liabilities
• Whether the liabilities are being handled by a dedicated and experienced claims/ legal unit

Question 25

Define “long duration contracts”:

Answer 25

Contracts with terms greater than 13 months where the insurer can not cancel or increased the premium

Question 26

List 3 exclusions from the definition of long duration contracts:

Answer 26

1. Financial guaranty
2. Mortgage guaranty
3. Surety

Question 27

Signs of undue management influence that may be apparent during an executive session:

Answer 27

• The actuary is not provided with comprehensive information on emerging problem areas
• Information is provided late to the actuary, leaving inadequate time for the analysis
• The actuary is denied access to certain employees
• Management makes it clear to the actuary that his continued employment is contingent on agreement with managements reserves
• The opining actuary is replaced, and the new actuary immediately agrees with managements position