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SAO Flashcards

1
Q

3 main purposes of the SAO

A
  1. State the actuary’s opinion about the reasonableness of the insurer’s reserves specified within the Scope of the SAO
  2. Notify the stakeholders about significant risks & uncertainties that may impact the reserves
  3. Disclose whether the risks could produce significant material adverse deviation
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2
Q

Requirements to be a “qualified actuary”

A
  • 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
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3
Q

List the requirements from the general standards of AAA’s Qualification Standards for Actuaries issuing SAOs

A
  • MAAA, FCAS, ACAS, or fully qualified member of another IAA member organization; and
  • 3 years of responsible actuarial experience; and
  • Knowledge of applicable law (via exams or documented professional development); and
  • Either:
    – attained highest possible level of membership in an IAA organization and have 1 year or responsible actuarial experience in the relevant area under the review of an actuary qualified to issue an SAO
    – have a minimum of 3 years of responsible experience under the review of an actuary qualified to issue the SAO
  • 30 hours of relevant continuing education
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4
Q

List the requirements from the standards specific to the SAO from AAA’s Qualification Standards for Actuaries issuing SAOs

A
  • Either:
    – successfully completed exams administered by the AAA or CAS certain topics
    – obtain a signed statement from another actuary who is qualified to issue an SAO that states 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 (Continuing Education) hours per year related directly to the particular topic
  • At least 6 CE hours per year of \organized” activities related directly to the topic
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5
Q

What does the insurer need to provide to the Commissioner within 5 days of the appointment of the actuary

A
  • Name & title
  • Manner of appointment of the actuary
  • Statement that the person meets the requirements to be a qualified actuary
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6
Q

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

A
  • 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.
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7
Q

4 exemptions from producing SAO

A
  1. small companies
  2. insurers under supervision or conservatorship
  3. nature of the business
  4. financial hardship
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8
Q

Requirement for the “small company” exemption

A

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

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9
Q

Requirement for the “financial hardship” exemption

A

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 written during the year for which the exemption is sought

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10
Q

Parts of the SAO

A
  • Identification paragraph
  • Scope
  • Opinion
  • Relevant Comments
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11
Q

5 types of Statement of Actuarial Opinion

A
  1. Reasonable Provision
  2. Deficient Provision
  3. Redundant Provision
  4. Qualified Opinion
  5. No Opinion
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12
Q

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

A
  • 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
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13
Q

Identification Paragraph mentions

A
  • the Appointed Actuary
  • the actuary’s relationship to the company
  • the actuary’s qualifications for acting as the appointed actuary
  • date of appointment
  • state that the appointment was made by the Board (or its equivalent)
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14
Q

What is listed in the Loss Reserve section of Exhibit A

A
  • Reserve for Unpaid Losses
  • Reserve for Unpaid LAE
  • Reserve for Unpaid Losses - D&A
  • Reserve for Unpaid LAE - D&A
  • Retroactive Reinsurance Reserve Assumed
  • Other Loss Reserve items
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15
Q

What is listed in the Premium Reserve section of Exhibit A

A
  • Reserve for D&A unearned premiums for long duration contracts
  • Reserve for net unearned premiums for long duration contracts
  • Other premium reserves on which actuary is expressing opinion
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16
Q

Areas that should be addressed by the Relevant Comments

A
  • Risk of Material Adverse Deviation
  • Other Disclosures in Exhibit B (Anticipated Salvage & Subrogation/ Discounting/ Voluntary or involuntary underwriting pools & associations/ Asbestos & environmental liabilities/ Extended reporting endorsements/ Long duration contracts)
  • Reinsurance
  • IRIS ratios
  • Methods & Assumptions
17
Q

The Relevant Comment paragraphs that address material adverse deviation would contain

A
  • The amount of deviation that the actuary considers to be material, and an explanation of how that standard was derived
  • A description of the factors or conditions underlying the significant risks or uncertainties that the actuary considers material
  • A statement about whether the actuary believes that there are significant risks or uncertainties that could result in material adverse deviation
18
Q

Comments about reinsurance that the actuary should make

A
  • retroactive reinsurance
  • financial reinsurance
  • reinsurance collectability
19
Q

4 sources to determine reinsurance collectability

A
  1. management
  2. reinsurer ratings
  3. Schedule F (look for regulatory action or overdue paid losses)
  4. Ceded reinsurance write offs disclosed in the Notes to the Financial Statements
20
Q

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

A
  • 1yr development to surplus
  • 2yr development to surplus
  • Estimated Current Reserve Deficiency to surplus
21
Q

What must be included in the Actuarial Report:

A
  • Description of the actuary’s relationship to the company
  • An exhibit that ties to the Annual Statement and compares the actuary’s conclusions to the carried amounts
  • An exhibit that reconciles and maps the data to Schedule P
  • An exhibit that indicates the changes in estimates
  • 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
22
Q

Items to be included in an AOS

A
  • 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
23
Q

Factors that could be considered when choosing a materiality standard

A
  • 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
24
Q

How long should the workpapers supporting the SAO be maintained at the company

A

At least 7 years

25
Q

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

A
  • 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
26
Q

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

A
  • 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
27
Q

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

A
  • 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
28
Q

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

A
  • 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 actuarial report.
29
Q

Actions that the actuary can take if the data problems are not explained/ corrected

A
  • Not rely on the questionable data
  • Conclude that an actuarial opinion can not be formed based on the data.
30
Q

Factors that the actuary should consider when there is insuffcient historical data

A
  • 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
31
Q

What should the actuary comment on if mass tort exposure exists

A
  • 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 diffculties involved in providing an actuarial estimate of these liabilities
  • Whether the liabilities are being handled by a dedicated and experienced claims/ legal unit
32
Q

Define “long duration contracts”

A

Contracts with terms greater or equal to 13 months where the insurer can not cancel or increase the premium

33
Q

List 3 exclusions from the definition of long duration contracts

A
  1. Financial guaranty
  2. Mortgage guaranty
  3. Surety
34
Q

Advantages of management seeking feedback from the actuary prior to setting the reserves

A
  • Management can benet from the actuarial analysis to help make the best decision
  • Helps avoid the scenario where management derives a reserve that requires them to put pressure on the actuary to come up with a larger range of reserves than they normally would have
35
Q

List 5 internal controls that are part of the Governance Structure

A
  1. segregation of duties (pricing vs reserving)
  2. use of reserve committees
  3. internal audit
  4. actuarial peer review
  5. report from the Appointed Actuary
36
Q

List 4 external controls that are part of the Governance Structure

A
  1. external audit
  2. attestations by the insurer about the control structure
  3. financial exams
  4. if the appointed actuary is replaced, both the insurer and the outgoing actuary need to provide letters to the regulator discussing any disagreements
37
Q

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

A
  • 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 management’s reserves
  • The opining actuary is replaced, and the new actuary immediately agrees with management’s position

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