Statement of Actuarial Opinion

Question 1

What is the purpose of the SAO?

Answer 1

OIA
1. Opinion - provide the Actuary’s opinion on reserve amounts for items in SAO scope (whether reserves are reasonable, inadequate, or excessive)
2. Inform - inform readers/regulators of significant risk factors regarding reserves
3. Advise - advise whether risk factors could lead to MAD in reserves (Material Adverse Deviation)

Question 2

Who are the users of the SAO?

Answer 2

MR. BIG
* Management
* Regulators
* Board of Directors
* Investors
* General Public

Question 3

How insurer get exemption from filing the SAO?

Answer 3

SLuSH
- Size: if insurer < 1M GWP and Gross Reserves
- Certain LOBs are exempt
- Under supervision
- Hardship: insurer is under financial hardship

Question 4

Organization of the SAO

Answer 4

ISOR + (AB)
- Identification
- Scope
- Opinion
- Relevant comments
- Exhibit A – recorded amounts for items (loss reserves, reinsurance, etc)
- Exhibit B – disclose items regarding net reserves in scope

Question 5

Idenfitication (Section of SAO)

Answer 5

WARDIN
- Who made appointment
- Affirmation of qualifications
- Relationship to company
- Date of appointment
- Intended purpose and users
- Name and title of the actuary

Question 6

Disclosures in Scope Section

Answer 6

Need to state: (DR3EAD)
- Data source (who provided the data which the actuary used)
- Reserve items in opinion
- Reconciliation to Schedule P
- Review of methods and assumptions in estimating the reserves
- Evaluation of data for reasonableness and consistency
- Accounting basis for reserves (basis of the reserves)
- Date of review
- Intercompany pooling arrangements (if applicable)

Question 7

Disclosures for Basis for Reserves (Scope Section)

Answer 7

• Whether reserves are net or gross of recoverables
• If the potential for uncollectable reinsurance is considered
• Types of unpaid LAE covered by the reserve
• If the reserves are discounted or not, along with the assumptions used

Question 8

Definition of Qualified Actuary (Identification)

Answer 8

• Meets basic education, experience, continuing education requirements
• Of the SQS (Specific Qualification Standards) for SAO
• As set forth in the QS (Qualification Standard)
• Promulgated by the AAA
• And both:
  
  • Maintains an AAD (Accepted Actuarial Designation)
  • Member of a ProAA that:
    
    • Requires adherence of the AAA code of conduct
    • Requires adherence to the U.S. qualification standards
    • Participates in ABCD for practicing members in the U.S.

Question 9

Describe the Reconciliation to Schedule P (Scope)

Answer 9

• Reconcile the data on a direct + assumed (gross) basis and net of reinsurance basis to schedule P (part 1) or explain why omitted reconciliations were not done
• Reconcile by line of business & accident year
• Explain any discrepancies

Question 10

Type of Opinion

Answer 10

I-REQN
- Inadequate - recorded reserves are BELOW actuary’s reasonable range of unpaid claim liabilities
- Reasonable - …are WITHIN…
- Excessive - …ABOVE…
- Qualified - actuary is UNABLE TO ISSUE an opinion on certain material items (reserves can still be reasonable)
- None - actuary is UNABLE TO CONCLUDE that reserves are reasonable

Question 11

If Qualified Opinion, need to disclose:

Answer 11

• Amount of reserves subject to qualification
• Reason for qualification
• Opinion on remaining portion of reserves
• Which items qualification applies to

Question 12

Propose Language of Opinion

Answer 12

SAUL Up
- IMO, the amounts carried in Exhibit A on account of the items identified:
- State X – meets requirement of insurance laws in
- Accepted actuarial principles and standards – computed in accordance of
- Unpaid Loss and LAE of the company – make a reasonable provision for all the
- Unearned premium reserves for long duration contracts – make a reasonable provision of

Question 13

Work/Opinion of Others (Considerations)

Answer 13

Appointed Actuary (AA) should consider when making use of others’ work: (ENPC)
- Effect of variation in other person’s estimate on AA’s opinion
- Nature of the exposures and coverage
- Proportion of reserved covered by other person’s work
- Credentials of other person

Question 14

Company Specific Risk Factors Relating to Operations

Answer 14

A SCOLDiNG
- Adequacy (changes in known case reserve adequacy)
- Severity (unexplained changes in freq/severity)
- Catastrophic weather events
- Operational changes that’re not objectively quantified
- Law – changes in legislation or court rulings
- Data (thin or unexplained changes)
- New (new product or market)
- Growth (rapid growth in one or more LOBs)

Question 15

%-Based Materiality Standard (Relevant Comments)

Answer 15

• % of Loss & LAE reserves (10% is typical & reasonable)
• % of surplus
• % of net income

Question 16

Unpaid Claim Estimate (ASOP 36)

Answer 16

• The actuary’s estimate of future payment obligations resulting from claims due to past events

Question 17

Actuarial Opinion Summary (AOS)

User and Purpose

Answer 17

• Filed with regulators of the domiciliary state (NOT the NAIC)
  
  • Purpose: regulators to access solvency risk
  • NOT public – contains private company information

Question 18

Actuarial Opinion Summary (Comparision Section)

Answer 18

A. Range of actuary’s reserves (case + IBNR on net and gross basis)
B. Point estimate of reserves (no requirement to produce both range and point)
C. Carried reserves by company
D. Difference (carried reserves – reserve estimate)

Question 19

Actuarial Opinion Summary (Adverse Development Section)

Answer 19

• Statement regarding whether there has been 1-year adverse development > 5% in 3 of the last 5 calendar years (IRIS 11)
  
  • No – state this fact
  • Yes – provide sufficient detail so the regulator can determine whether additional regulatory review is required

Question 20

Exhibit A

Answer 20

Recorded amounts for items in scope (loss reserves, reinsurance, etc)

Question 21

Exhibit B

Answer 21

Disclose items regarding net reserves in scope

Question 22

Regulatory Ratio-Based Materiality Standards

Answer 22

• Reduction in surplus that would trigger the next RBC action level
• Amount that would trigger an unusual IRIS ratio