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CAS Exam 6 US > SAO > Flashcards

SAO Flashcards

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1
Q

Upon initial appointment of the actuary, the insurer must notify the domiciliary commissioner within 5 days with the following information:

A

1) Name and title (if consulting, the name of firm)
2) Manner of appointment of the Appointed Actuary (e.g. who made appointment and when)
3) A statement that the person meets the requirements of a qualified actuary

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2
Q

Requirements for appointment of an actuary

A

Must be by the Board of Directors, or its equivalent,or by a committee of the Board
Must be by 12/31 of the calendar year for which the opinion is rendered
Upon initial appointment, must notify the domiciliary commissioner within 5 business days

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3
Q

If an actuary who was the Appointed Actuary for the immediately preceding filed Actuarial Opinion is replaced by an action of the Board of Directors

A
  • Insurer will notify the Insurance Department of the state of domicile within 5 business days.
  • Insurer will send a separate letter within 10 business days to the domiciliary Commissioner stating whether in the 24 months preceding such event there were any substantive disagreements with the former Appointed Actuary
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4
Q

Types of disagreements within the past 24 months with the former Appointed Actuary that the Domiciliary Commissioner must be made aware of within 10 business days of new appointment

A 
resolved or unresolved disagreements regarding: 
  matters of the risk of material adverse deviation
  required disclosures
  scopes
  procedure
  type of opinion issued
  substantive wording of the opinion
  data quality.
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5
Q

What must an Actuary be in order to be a Qualified Actuary for Appointment?

A

either

i) A member in good standing of the Casualty Actuarial Society
ii) A member in good standing of the American Academy of Actuaries who has been approved as qualified for signing casualty loss reserve opinions by the Casualty Practice Council of the American Academy of Actuaries

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6
Q

Number of Statements of Actuarial Opinion required when there is an affiliated company pooling arrangement

A

One Actuarial Report for the aggregate pool is sufficient, but there must be addendums to the Actuarial Report to cover non-pooled reserves for individual companies.

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7
Q

An insurer who intends to file for one of the exemptions to the requirement for an SAO must submit a letter of intent to its domiciliary commissioner no later than

A

December 1 of the calendar year for which the exemption is to be claimed.
The commissioner may deny the exemption prior to December 31 of the same year if deemed inappropriate.

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8
Q

Types of SAO exemptions

A

Exemption for Small Companies
Exemption for Insurers under Supervision or Conservatorship
Exemption for Nature of Business
Financial Hardship Exemption

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9
Q

SAO Exemption for Small Companies

A

An insurer that has less than 1M total direct plus assumed WP during a calendar year and less than 1M total direct plus assumed L and LAE reserves at year end.

Insurer must submit an affidavit under oath of an officer of the insurer that specifies the amounts of direct plus assumed WP and direct plus assumed L and LAE.

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10
Q

SAO Exemption for Insurers under Supervision or Conservatorship

A

Unless ordered by the domiciliary commissioner, an insurer that is under supervision or conservatorship pursuant to statutory provision is exempt from the filing requirements

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11
Q

SAO Exemption for Nature of Business

A

An insurer otherwise subject to the requirement and not eligible for any other type of exemption may apply to its domiciliary commissioner for an exemption based on the nature of the business. (This is all that was included from the text)

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12
Q

SAO Exemption for Financial Hardship

A

Financial hardship is presumed to exist if the projected reasonable cost of the Actuarial Opinion would exceed the lesser of:

i) One percent of the insurer’s capital and surplus reflected in the insurer’s latest quarterly statement for the calendar year for that the exemption is sought
ii) Three percent of the insurer’s direct plus assumed premiums written during the calendar year for which the exemption is sought as projected from the insurer’s latest quarterly statements filed with its domiciliary commissioner.

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13
Q

Reporting Requirements for Pooled Companies

A

For each company in the pool, the actuary shall include
a description of the pool,
identification of the lead company
and a listing of all companies in the pool,
state of domicile
and their respective pooling percentages

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14
Q

Exhibits A and B for each company in a pool

A

should represent the company’s share of the pool and should reconcile to the financial statement for each company

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15
Q

Reporting requirements for companies that have a 0% share of the pool (no reported Schedule P data)

A

The company shall submit an Opinion that reads similar to that provided for the lead company.
Q5: $0
Q6: “not applicable”
Exhibits A and B of the lead company should be attached as an addendum to the PDF file and/or hard copy being filed (but would not be reported by the 0% companies in their data capture)

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16
Q

Distinction between pooling to a 100 percent lead company with no retrocession and ceding 100 percent via a quota share reinsurance agreement

A

Any proportional reinsurance agreement with affiliates must be approved by the regulator as either an intercompany pool arrangement or a quota share reinsurance agreement

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17
Q

An intercompany pooling agreement applies, the lead company retains 100 percent of the pooled business, and the other pool participants each retain 0 percent

A

Schedule P for the lead company will contain the total gross and net reserves for the pool. The gross and net reserves in Schedule P for the other companies will be zero.

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18
Q

Schedule P for each in an intercompany pooling agreement where more than one pool participant retains a share of the pooled business, and other pool participants each retain 0 percent

A

Schedule P, for each company that retains a non-zero share of the pooled business, will show its share of the gross and net reserves. The gross and net reserves in Schedule P for the other companies will be zero.

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19
Q

Schedule P for a company with a reinsurance agreement, and the company cedes 100 percent of its reserves under a quota share reinsurance agreement

A

Schedule P for the company ceding 100 percent of its reserves shows gross reserves but zero net reserves.

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20
Q

The Statement of Actuarial Opinion must consist of at least 4 paragraphs. Name the 4 parts of the SAO.

A

Each must be clearly designated.

Identification paragraph: identifying the Appointed Actuary
Scope paragraph: identifying the subjects on which the opinion is to be expressed and describing the scope of the actuary’s work
Opinion paragraph: expressing his or her opinion with respect to such subjects
Relevant Comments paragraph(s): to address Risk of material adverse deviation, other disclosures in Exhibit B, Reinsurance, IRIS ratios, and Methods and Assumptions

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21
Q

Identification Paragraph

A

Indicate the Appointed Actuary’s relationship to the company, qualifications for acting as appointed actuary, date of appointment, and specify that the appointment was made by the Board of Directors, or its equivalent, or by a committee of the board

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22
Q

Scope Paragraph example wording

A

“I have examined the actuarial assumptions and methods used in determining 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, YYYY, and reviewed information provided to me through XXX date.”

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23
Q

Scope paragraph sample regarding the data used by the Appointed Actuary in forming the opinion

A

“In forming my opinion on the loss and loss adjustment expense reserves, I relied upon data prepared by ___ (name, affiliation and relationship 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.”

24
Q

The Statements of Actuarial Opinion are required to explicitly identify the review date

A

if it differs from the date the opinion is signed.

However suggest to include wording to clear any confusion that it may have been omitted by mistake.

25
Q

The review date

A

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

26
Q

Opinion Paragraph

A

“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 of domicile).

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.

If the Scope includes material Unearned Premium Reserves for Long Duration Contracts or Other Loss Reserve items on which the Appointed Actuary is expressing an Opinion, the Opinion should cover the following illustration:

D. Make a reasonable provision for the unearned premium reserves for long duration contracts and/or of the Company under the terms of its contracts and agreements.

27
Q

Types of Actuarial Opinion

A 
Reasonable Provision
Deficient or Inadequate Provision
Redundant or Excessive Provision
Qualified Opinion
No Opinion
28
Q

Determination of Reasonable Provision

A

When the carried reserve amount is within the actuary’s range of reasonable reserve estimates, the actuary should issue a Statement of Actuarial Opinion that the carried reserve amount makes a reasonable provision for the liabilities associated with the specified reserves

29
Q

Determination of Deficient or Inadequate Provision

A

When the carried reserve amount is less than the minimum amount that the actuary believes is reasonable, the actuary should issue a Statement of Actuarial Opinion that the carried reserve amount does not make a reasonable provision for the liabilities associated with the specified reserves. In addition, the actuary should disclose the minimum amount that the actuary believes is reasonable.

30
Q

Determination of Redundant or Excessive Provision

A

When the carried reserve amount is greater than the maximum amount that the actuary believes to be reasonable, the actuary should issue a Statement of Actuarial Opinion that the carried reserve amount does not make a reasonable provision for the liabilities associated with the specified reserves. In addition, the actuary should disclose the maximum amount that the actuary believes is reasonable.

31
Q

Qualified Opinion

A

When, in the actuary’s opinion, the reserves for a certain item or items are in question because they cannot be reasonably estimated or the actuary is unable to render an opinion on those items, the actuary should issue a qualified Statement of Actuarial Opinion. The actuary should disclose the item (or items) to which the qualification relates, the reason(s) for the qualification and the amounts for such item(s), if disclosed by the Company. Such a qualified opinion should state whether the carried reserve amount makes a reasonable provision for the liabilities associated with the specified reserves, except for the item (or items) to which the qualification relates. The actuary is not required to issue a qualified opinion if the actuary reasonably believes that the item or items in question are not likely to be material

32
Q

No Opinion

A

the actuary’s ability to give an opinion is dependent upon data, analyses, assumptions, and related information that are sufficient to support a conclusion. If the actuary cannot reach a conclusion due to deficiencies or limitations in the data, analyses, assumptions, or related information, then the actuary may issue a statement of no opinion. A statement of no opinion should include a description of the reasons why no opinion could be given.

33
Q

According to section 3.7.2 of ASOP 36, what things should an actuary consider when determining whether it is reasonable to make use of the work of another

A

a) The amount of the reserves covered by another’s analyses or opinions in comparison to the total reserves subject to the actuary’s opinion
b) The nature of the exposures and coverage
c) The way in which reasonably likely variations in estimates covered by another’s analyses or opinions may affect the actuary’s opinion on the total reserves subject to the actuary’s opinion
d) The credentials of the individual(s) that prepared the analyses or opinions

34
Q

If the actuary does rely on the work of another actuary (such as for pools and assocations, for a subsidiary, or for a special line of business) for a Material portion of the reserves, the actuary must disclose

A

a) identification of the other actuary by name and affiliation
b) whether he/she reviewed the other’s analysis
c) if a review was performed, the extent of the review

35
Q

Deficient or Redundant Provision Illustrative Wording

A

“The provision for unpaid loss and loss adjustment expenses is $X less than (or greater than) the minimum (maximum) amount I consider necessary to be within the range of reasonable estimates.

36
Q

When insurance laws and regulations are in conflict with actuarial standards and principles, which takes precedence?

A

Insurance laws and regulations

37
Q

Where can the type of opinion given by the Appointed Actuary for the loss and LAE reserves be found

A

In the opinion paragraph of the SAO

In Exhibit B, item 4.

38
Q

What 5 items must be discussed in the RELEVANT COMMENTS?

A

a) Risk of Material Adverse Deviation (RMAD)
b) Other disclosures in Exhibit B
c) Reinsurance
d) IRIS ratios 11, 12, 13
e) methods and assumptions

39
Q

In the RELEVANT COMMENTS section of the SAO, what must the Appointed Actuary include about the Risk of Material Adverse Deviation

A

Must identify the materiality standard in USD and the basis for establishing this standard.
The actuary should explicitly state whether or not he/she reasonably believes that there are significant risks and uncertainties that could result in material adverse deviation.
The actuary should discuss major factors, combos of factors, or particular conditions that the actuary finds relevant. The actuary should NOT include general items such as economic uncertainty, political forces, regulatory actions, etc.

40
Q

Before commenting on Reinsurance Collectibility in the RELEVANT COMMENTS section of the SAO, what must the Appointed Actuary do?

A

The actuary should solicit information from management on any actual collectibility problems, review ratings given to reinsurers by a recognized rating service, and examine Schedule F for the current year for indications of regulatory action or reinsurance recoverable on paid losses over 90 days past due.

41
Q

Does an Appointed Actuary’s RELEVANT COMMENTS on Reinsurance collectibility imply an opinion on the financial condition of any of its reinsurers?

A

No, the actuary’s comments do not imply an opinion on the financial condition of any reinsurer

42
Q

What does the Appointed Actuary need to comment on regarding Reinsurance in the RELEVANT COMMENTS section of the SAO

A

Reinsurance collectibility
Retroactive reinsurance
Financial reinsurance

43
Q

What must the Appointed Actuary discuss regarding IRIS ratios in the REVELANT COMMENTS section of the SAO

A

The actuary must include RELEVANT COMMENTS on factors that lead to any unusual values if the company reserves will create exceptional values for
One-Year Reserve Development to Surplus,
Two-Year Reserve Development to Surplus, and
Estimated Current Reserve Deficiency to Surplus

44
Q

What must the AA discuss reguardind Methods and Assumptions in the RELEVANT COMMENTS section of the SAO

A

Any significant change in the actuarial assumptions and/or methods from those previously employed should be described. If the actuary is unable to review the work of the prior Appointed Actuary, then the actuary should disclose this.

The actuary is only obliged to comment on changes that are, in the actuary’s professional judgment, material. It is advisable to describe the change and the reason for it.

45
Q

Examples of considerations for the choice of a materiality standard

A
  • Percentage of surplus
  • Percentage of reserves
  • The amount of adverse deviation that would cause a drop in financial strength ratings
  • The amount of adverse deviation that would cause surplus to fall below minimum capital requirements
  • The amount of deviation that would cause RBC to fall to the next action level
  • Multiples of net retained risk
  • Reinsurance considerations, such as levels of ceded reserves compared to surplus or concerns about solvency or collectability of reinsurance
  • The upper limit of a company’s reinsurance protection on reserve development
46
Q

the NAIC’s 2014 Statement of Actuarial Opinion Instructions require the actuary to comment on the risks and other factors considered, even when no risk of material adverse deviation is judged to exist. List some possible risk factors

A
  • Asbestos and environmental losses
  • Construction defects
  • Catastrophic weather events
  • Exposure related to mortgage defaults
  • High Excess layers
  • Impact of soft market conditions
  • Large deductbile workers’ compensation claims
  • Medical professional liability legislative issues
  • New products or new markets
  • Rapid growth in one or more lines of business or segment
  • Lack of data or unexpected and unexplained changes in data
  • Operational changes that are not objectively quantified
  • Sudden unexplained changes in frequency or severity of reported data for a line of business or segment
  • Changes in adequacy of known case reserves
47
Q

The Instructions direct the actuary to address the potential that a combination of factors or particular conditions that the actuary considers relevant could develop, increasing the entity’s risk of RMAD. List some types of combinations of risk factors and conditions about which comment maybe appropriate

A
  • Rapid growth in a soft market in a line of business in which the company has limited historical experience
  • Risk of adverse medical inflation on a large book of excess workers’ compensation business
  • Risk of increased sustained unemployment, along with reductions in home prices on a mortgage insurance book of business
  • Significant shifts upwards in policy limits and attachment points sold, along with a reduction in reinsurance protection purchased
48
Q

The NAIC Financial Analysis Handbook suggests that RMAD exists when, what percentage (%) of the insurer’s net loss and LAE reserves exceeds the difference between the Total Adjusted Capital and the Company Action Level capital?

A

10% of the insurer’s net loss and LAE

The AA may consider describing in the explanatory paragraph why he/she does not feel there is an RMAD, if that is the conclusion.

49
Q

What must the Appointed Actuary disclose regarding discounting of loss reserves in the SAO?

A

The amount of discount must be disclosed seperately for tabular and non-tabular reserves

50
Q

Where can one find the amount of non-tabular discount in the Annual Statement?

A

Exhibit B of the SAO
Schedule P, Part 1
Notes to the Financial Statements

51
Q

What must the Appointed Actuary disclose regarding subro and salvage in the RELEVANT COMMENTS and Exhibit B of the SAO?

A

It is required that the actuary state whether reserves are net or gross of future salvage and subrogation.

52
Q

By when should the SAO for a Pool or Association be forwarded by the pool administrator to each pool member?

A

By January 31st of the succeeding year or as otherwise agreed by voluntary pool members

53
Q

For a Pool and Association, what does the SCOPE of the net reserves include?

A

The net reserves include cessions used to distribute the losses to pool members, but are net of reinsurance

54
Q

For Pools and Associations, what must the actuary include in the RELEVANT COMMENTS?

A

issues such as collectibility of assessments, the mechanism for recovering any pool deficits, or the nature of member’s liability as part of the pool

Exhibit B should be modified to provide only those items relevant to Pools and Associations

In lieu of comments about IRIS ratios, if the entity’s current reserves indicate adverse development of greater than 20% on reserve valuations established at the same date one year and/or two years prior, the actuary must include RELEVANT COMMENT on the factors that lead to the unusual value(s) along with explanation.

55
Q

What document could an actuary refer to when considering the materiality of levels of asbestos and/or environmental liability claims activity for a publicly held company?

A

the company’s form 10K (SEC document) and compare to other publicly traded company’s form 10K.

56
Q

List some of the disclosure requirements not included in Exhibit B of the SAO.

A

The intended users of the SAO

The intended purpose of the SAO

The stated basis of reserve presentation

Whether any material assumption or method was prescribed by law

Whether the actuary disclaims responsibility for any material assumption or method that originated from another source

57
Q

How does the disclosure of Extended loss and expense reserve in the SAO Exhibits A and B differ from that in Schedule P, Interrogatory No. 1?

A

Schedule P, Interrogatory No. 1 relates to yet-to-be issued Extended Reporting Endorsements (ERE) arising from DDR provisions in Medical Professional Liability Claims-Made insurance policies. The DDR reserves for lines of business other than Medical Professional Liability (e.g. Lawyers’ Prof Liability), if any, are not disclosed in Interrogatory No 1. However, Exhibit A and B disclosure 12 should include all of the company’s extended loss and expense reserves, not just the Medical Prof Liability portion of these reserves

CAS Exam 6 US (3 decks)

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