SOA-COPFLR Flashcards
identify the purpose of the SAO (Statement of Actuarial Opinion) (3)
OPINION:
- provide appointed actuary’s OPINION on reserve amounts for items in SAO scope
INFORM:
- INFORM readers/regulators of significant risk factors regarding reserves
ADVISE:
- ADVISE whether risk factors could lead to MAD in reserves (MAD = Material Adverse Deviation!!)
identify intended users of the SAO (5)
- regulators
- Board of Directors
- management
- investors
- general public
describe the organization of the SAO (Statement of Actuarial Opinion) (6)
4 Required Sections (ISOR): • 1. Identification • 2. Scope • 3. Opinion • 4. Relevant Comments 2 Exhibits: • Exhibit A: RECORDED AMOUNTS for items in scope • Exhibit B: DISCLOSURE ITEMS regarding NET reserves in scope
identify reasons for an exemption from the SAO (Statement of Actuarial Opinion) requirement (4)
Size:
• (< $1m annual GWP) and (< $1m gross reserves @ year-end)
LOB: certain Lines of Business are exempt
Supervision: exempt if insurer is under supervision
Hardship: exempt if insurer is under financial hardship (cost of SAO is a burden)
• cost > 1% of CY capital & surplus (from latest quarterly statement)
or
• cost > 3% of annual GWP (projected from last quarterly statement)
describe the IDENTIFICATION section of the SAO (4+)
• information about appointed actuary
- name/title (that's super-obvious!)
- WHO made the appointment (Ex: Board of Directors)
- AFFIRMATION of qualifications
- RELATIONSHIP to company
- DATE of appointment
• intended purpose/usersdescribe the SCOPE section of the SAO (5)
identifies the following: (see also the section headings in chapter 3 of the COLFR source reading)
- reserve items in opinion and basis of presentation
- accounting basis for reserves
- intercompany pooling
- review date (also defined in ASOP 36)
- data sources (who, where), consistency & reasonability, reconciliation to Schedule P
identify some reserve items (3) & disclosure items (6) in the SCOPE section of the SAO
reserve items:
- loss & LAE reserves
- retroactive reinsurance assumed reserves
- unearned premium reserves for long-duration contracts
should disclose: (see section 3.2 of the COPLFR source reading)
- whether reserves are discounted or undiscounted
- basis for risk margin (or state there is no risk margin)
- gross or net of recoverables (reinsurance, sa/vage& subrogation)
- whether uncollectible recoverables were considered
- types of expenses included in LAE (DCC, A&O,..)
→ and anything else the actuary thinks is necessary to understand the analysis
define ‘review date’ for the SAO
he date subsequent to the valuation date through which material information known to the actuary is included in forming the reserve opinion
NOTE:
- the ‘review date’ is NOT the same as the ‘signing date’
- the ‘signing date’ comes ON/AFTER the ‘review date’
- info arising between ‘review date’ & ‘signing date’ is NOT relied on by the actuary
describe the ‘data reconciliation statement’ in the SAO
it states: the actuary either performed OR reviewed reconciliation to Schedule P
describe the contents/language of the OPINION section of the SAO (4)
In my opinion, on Exhibit A:
[A] LAWS:
- reserves meet insurance laws in domiciliary state
[B] STANDARDS:
- reserves computed in accordance with actuarial standards
[C] TYPE of OPINION: R, I, E, Q, or N
- reasonable / inadequate / excessive / qualified / none
[D] MISCELLANEOUS
- other loss reserve items, work of others,..
define reasonable actuarial opinion
recorded reserves are WITHIN actuary’s reasonable range of unpaid claim liabilities
define inadequate / deficient actuarial opinion
recorded reserves are BELOW actuary’s reasonable range of unpaid claim liabilities
define excessive / redundant actuarial opinion
recorded reserves are ABOVE actuary’s reasonable range of unpaid claim liabilities
define qualified actuarial opinion
actuary is UNABLE TO ISSUE an opinion on certain material items (reserves could still be within actuary’s range)
define no opinion actuarial opinion
actuary is UNABLE TO CONCLUDE that reserves are reasonable
if the opinion is reasonable, what is the appropriate wording in the SAO
amounts carried in Exhibit A..
make
reasonable provision for unpaid loss & LAE obligations, both gross & net..
under
terms of company’s contracts & agreements
if the opinion is inadequate (or excessive), what must the actuary further disclose
actuary must further disclose their own minimum (or maximum) reasonable reserve level
is this document public OR confidential and how does that align with its purpose: SAO
PUBLIC:
- investors want to know if reserves are adequate and to understand the company’s risks
is this document public OR confidential and how does that align with its purpose: AOS
CONFIDENTIAL:
- regulator needs access to proprietary & sensitive information to assess solvency risks
is this document public OR confidential and how does that align with its purpose: Actuarial Report
CONFIDENTIAL:
- users (ex: management) would see significant proprietary information that the public (ex: competitors) shouldn’t see
describe the RELEVANT COMMENTS section of the SAO
- comments & disclosures to aid the reader’s understanding (of reserves)
- there are 8 required items
identify the items required in the RELEVANT COMMENTS section of the SAO
1 & 2: MAD (Material Adverse Deviation)
- MATERIALITY STANDARD regarding risk of MAD
- RISKS that may result in MAD
3: Exhibit B
- significance of Exhibit B disclosure items including
- anticipated salvage & subrogation
- discounting (tabular & non-tabular)
- insurer’s share of reserves for (pools & associations)
4 & 5: Reinsurance
- retroactive reinsurance
- uncollectible reinsurance
6: IRIS
- ratios 11, 12, 13
7: Changes
- material changes in reserving assumptions / methods since prior opinion
8: UEP (Unearned Premium)
- UEP for long-duration contracts
is a comment required in the SAO if there are no risks that could result in MAD (Material Adverse Deviation)
Yes (even if there are no such risks, it must be stated)
identify common types of materiality standards (5)
percentage-based standards:
- % of reserves (loss & LAE) [10% is typical]
- % of surplus [10-20% is typical]
- % of net income
regulatory ratio based standards:
- RBC: reduction in surplus that would trigger the next RBC action level
- IRIS: amount that would trigger an unusual IRIS ratio
identify examples of major risk factors
there are many answers (you should have some in your back pocket)
- mass tort claims
- catastrophic weather events
- asbestos claims
- Pandemics
- website hack by Martian bots!
What is the very last thing the actuary must do regarding the SAO
Sign the damn thing
submit with Annual Statement by March 1, and keep all supporting docs for 7 years
identify the intended audience for the AOS
- regulators in the domiciliary state (do NOT file with NAIC)
- Board of Directors
→ the AOS is NOT a public document (contains proprietary company information)
how is the AOS organized (Actuarial Opinion Summary)
Comparison section (4 items):
A: range of actuary’s reserves
B: point estimate by actuary (no requirement for both range and point estimate)
C: carried reserves by company
D: difference (company - actuary)
Adverse Development section (1 item):
E: has there been (1-year adverse development GREATER than 5% in 3 of last 5 calendar years)
where in the Annual Statement is the adverse development of reserves disclosed
Five-Year Historical Data, line 74 (raw data is in Schedule P, Part 2 - Summary)
if there HAS NOT been adverse development more than 5% in 3 of last 5 years, describe item E of the AOS
state this fact (but be precise - see Mr. Smith’s example in Odomirok)
if there HAS been adverse development more than 5% in 3 of last 5 years, describe item E of the AOS
provide sufficient detail so regulator can determine if additional review is required
- detail depends on the specific situation
a possible way to structure the item E statement:
STATE there has been adverse development & for which years
SUMMARIZE the reason for the adverse development
EXPLAIN the reason in more detail
MITIGATE the effects of the adverse development (explain how that might be done)
