SAO and AOS Flashcards
Purpose of SAO
Opinion on reserve amounts in scope
Inform readers/regulators of significant risk factors
Advise whether risk factors may lead to material adverse deviation
Organization of SAO
Identification
Scope
Opinion
Relevant Comments
Exhibit A
Exhibit B
Identification of SAO (5)
Actuary’s name, title
Who made the appointment
Relationship to company
Date of Appointment
Intended users
Items in Scope of SAO
Reserve items in opinion:
Loss & LAE
Retroactive reins assumed premium
UPR
Disclosures in Scope of SAO (11)
Discounting
Reconciliation to SchP
State review of methods and assumptions & data evaluation
Gross or net of recoverables
Uncollectibility of recoverables
Types of expenses included in LAE
Intercompany pooling
Review or accounting date
Data source
Accounting basis
Work of others
Relevant comments of SAO (7)
Materiality standard
Risks that may result in MAD
Exhibit B significance
Reinsurance - uncollectible and retroactive
IRIS ratios 11, 12, 13
Changes in assumptions or methods since prior opinion
Unearned Premium for long-duration contracts
Exhibit A of SAO
recorded amounts for items mentioned in scope
Exhibit B of SAO
disclosure items regarding net reserves in scope
Exemptions from SAO filing (4)
Size: both GWP and gross reserves at year end less than $1M
LOB
Supervision
Hardship: cost of SAO exceeds lesser of 1% CY capital and surplus or 3% GWP for the year
Materiality standards (5)
Percent of loss and LAE reserves (10%)
Percent of surplus (10-20%)
Percent of net income
Reduction in surplus would trigger RBC action
Trigger an unusual IRIS ratio
Organization of AOS
Comparison
A: range of actuary’s reserves, net and gross
B: point estimate
C: carried reserves
D: difference (company-actuary)
Adverse Development
E: statement regarding whether there has been 1-yr adverse development relative to prior year surplus greater than 5% in 3 of the last 5 years (?)
Wording of AOS if there is adverse development (4)
State there has been
Summarize the reason
Explain more detail
Mitigate the effects
Types of SAO Opinion
Reasonable
Inadequate
Excessive
Qualified
None
SAO work of others disclosures (4) (P-NEC)
Proportion of reserves covered by others
Nature of coverage
Effect of variations in other’s estimate on AA’s opinion
Credentials of other person
SAO Relevant Comments Company-Specific Risk Factors (21)
Covid-19
Opioid epidemic
Asbestos & environmental
Emerging mass torts
Construction defects
Cats
Conflagration events
Mortgage defaults
Cyber liability
High excess layers
Soft market conditions
Large deductible WC claims
Medical professional liability legislative issues
New products/markets
Rapid growth in one or more LOB
Lack of data or unexpected, unexplained changes in data
Operational changes not objectively quantified
Sudden, unexplained freq/sev changes
Known case reserve adequacy change
Policy limit or attachment/deductible changes
Reins contract terms and conditions changes
Phrasing of Opinion
In my opinion, the amounts carried in Exhibit A on account of the items identified
[A] meet the requirements of the insurance laws in state X
[B] are computed in accordance with accepted actuarial standards and principles
[C] make a [opinion] provision for all unpaid loss and loss adjustment expense obligations of the company under the terms of its contracts and agreements
[D] make a [opinion] provision for unearned premium reserves for long duration contracted (and possibly other reserve items)
qualified actuary
meets the education, experience, and continuing education requirements of the SQS for the SAO as set forth in the Qualification Standards for actuaries issuing opinions in the US promulgated by the AAA and both maintains an accepted actuarial designation AND is a member of a professional actuarial association that requires adherence to the AAA code of conduct and USQS and participates in the ABCD for members practicing in the US
Phrasing of Scope
In forming my opinion on the loss and loss adjustment expense reserves, I relied upon data evaluated as of 12/31/2017 prepared by John Doe, Chief Information Officer, and other information provide to me through the date of this opinion. 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.
Exhibit A Layout
Unpaid Losses, net: 16,500
Unpaid Loss Adjustment Expense, net: 3,680
Unpaid Losses, Direct & Assumed: 19,000
Unpaid Loss Adjustment Expense, Direct & Assumed: 4,200
Retroactive Reinsurance Reserves: 0
Other Items Actuary is Opining On: 0
