Statement of Actuarial Opinion Flashcards
What is the purpose of the Statement of Actuarial Opinion?
Opinion: provide the appointed actuary’s opinion on reserve items in SAO scope
Inform: inform readers/regulators of significant risk factors regarding reserves
Advise: advise whether risk factors could lead to MAD (Material Adverse Deviation) in reserves
Odomirok 16
Describe the organization of the SAO
Identification
Scope
Opinion
Relevant comments
A - Recorded amounts for items in scope(loss reserves, reinsurance…)
B - Disclosure items regarding NET reserves in scope
Odomirok 16
How might an insurer get an exemption from filing the SAO?
Size - insurer is small (less than $1m annual GWP and less than $1m gross reserves at year end)
LOB - certain lines of business are exempt
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Supervision - exempt if insurer is under supervision
Hardship - if insurer is under financial hardship - if cost of SAO exceeds lesser of 1% of CY capital & surplus from latest quarterly statement or 3% of GWP for year projected from latest quarterly statement
Odomirok 16
Identify users of the SAO
Regulators
Board of Directors
Management
Investors
General Public
Describe Identification section of SAO
Actuary’s name/title + WARDIN’
Wwho made appointment
Affirmation of qualifications
Relationship to the company
Date of appointment
INtended purpose/users
Odomirok 16
Describe Scope section of SAO
Must identify:
* Reserve items in opinion
* accounting basis for reserves
* intercompany pooling
* review date
* data source
Odomirok 16
Describe Opinion section of SAO
- [A] & [B]: statements about laws and actuarial standards
Odomirok 16
Describe Relevant Comments section of SAO
- comments and disclosures to aid reader’s understanding
- items 1 & 2: MAD (materiality standard regarding MAD, risks that may result in MAD)
- items 3-8: various
Odomirok 16
Describe Exhibit A of SAO
Recorded amounts for items mentioned in the scope
6+3 items
Loss and LAE Reserves
* Reserve for Unpaid Losses
* Reserve for Unpaid Loss Adjustment Expenses
* Reserve for Unpaid Losses - Direct and Assumed
* Reserve for Unpaid Loss Adjustment Expenses - Direct and Assumed
* Page 3 write in item reserve, “Retroactive Reinsurance Reserve Assumed”
* Other Loss Reserve Items on which AA is expressing an opinion
Premium Reserves
* Reserve for Direct and Assumed Unearned Premiums for P&C Long Duration Contracts
* Reserve for Net Unearned Premiums for P&C Long Duration Contracts
* Other Premium Reserve items on which the AA is expressing an opinion
Odomirok 16
Describe Exhibit B of SAO
Disclosure items regarding NET reserves in the scope
14 items
Odomirok 16
Define Review Date for the SAO
The date subsequent to the valuation date through which material information known to the actuary is included in forming the reserve opinion
Odomirok 16
Describe the data reconciliation statement in the SAO
The actuary either performed or reviewed reconciliation to Schedule P
Odomiork 16
Describe the 5 opinions (R, I, E, Q, N)
Reasonable - recorded reserves are within the AA’s reasonable range of Unpaid Liabilities
Inadequate - recorded reserves are below the AA’s reasonable range of Unpaid Liabilities
Excessive - recorded reserves are above the AA’s reasonable range of Unpaid Liabilities
Qualified - AA in unable to issue an opinion on certain material items
No Opinion - AA unable to conclude that reserves are reasonable
Odomirok 16
If the opinion is inadequate (or excessive) what must the actuary furthur disclose?
Must disclose the minimum (or maximum) reasonable reserve level
Odomiork 16
Describe if following document is public/confidential, as well as how it aligns with its purpose: SAO, AOS, Actuarial Report
SAO - public, so that investors, policy holders are informed
AOS - confidential, sent to state regulator, proprietary information to assess solvency risks
Actuarial Report - confidential, internal management uses
Odomirok 16
What is the appropriate wording in SAO (assume reasonable)
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 practices
C make reasonable provision for all unpaid loss and loss adjustment expense obligations of the company under the terms of its contracts and agreements
D (if necessary) make a reasonable provision for the unearned premium reserves for long duration contracts (and possibly other loss reserve items on which the AA is expressing an opinion of the company under the terms of its contracts and agreements)
Odomirok 16 / COPFLR
How is the materiality standard used within the SAO?
Identify common methods for selecting a materiality standard
The materiality standard is used to examine risk factors that could lead to MAD
Percentage-Based Standards
* % of loss and LAE reserves (10% is typical and reasonable)
* % of surplus (10-20% is typical and reasonable)
* % of net income
Regulatory based Standards
* reduction in surplus that would trigger the next RBC action level
* amount that would trigger an unusual IRIS ratio
Others from COPLFR
* 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, if any
Odomirok 16
By what date does the Annual statement (SAO) have to be submitted? How long to keep supporting documents?
March 1st
7 years
Odomirok 16
Is a comment required in SAO if there are no riks that could result in Material Adverse Deviation?
Yes, it must be stated
Odomiork 16
Examples of major risk factors that could result in MAD
- Asbestos Claims
- Mass Tort Claims
- Catastrophic Weather Claims
Odomirok 16
Who is the intented audience for the Actuarial Opinion Summary?
Regulators of the domiciliary state (is not filed with NAIC, not a public document because it contains proprietary company information)
Odomirok 16
How is the AOS organized?
A-D estimates both on Net and Gross of reinsurance basis
A - Actuary’s Reasonable Range of Reserves Lower and Upper bounds (not required if not calculated)
B - Actuary’s Point Estimate
C - Carried Reserves by company
D - Difference between C and A/B
E - Statement regarding whether there has been 1-year adverse development (relative to prior year surplus) greater than 5% in 3 of the last 5 calendar years (if there hasn’t been, best practice to state this fact although not required; if there has been, actuary should provide sufficient detail so that the regulator can determine whether additional regulatory review is required) (This is IRIS ratio 11)
Odomirok 17
Where in the annual statement is the adverse development of reserves disclosed?
Five-Year Historical Data, line 74 (statutory basis Annual Statement), though the raw data comes from Schedule P, Part 2 - Summary
Odomirok 17
If there has been adverse development, how could item E in the AOS be worded?
- state that there has been adverse development and for which years
- summarize the reason for the adverse development (for example, strengthened loss reserve)
- explain the reason in more detail (increased exposure…)
- mitigate the effects of this adverse development (puchased unaffiliated retroactive reinsurance)
Odomirok 17
Describe the purpose of AOS
Show how booked reserves compare to actuarial estimates (gross/net) and disclose historical adverse development if necessary
Odomirok 17
Describe the purpose of the Actuarial Report
Provide a more lengthy/detailed report including the items in the SAO and AOS as well as an explanation on Actuary’s analysis, data reconciliation to schedule P, etc… Fully Describes the work so another actuary practicing in the field can understand and replicate.
Odomirok 17
Define Qualified Actuary
A Qualified Actuary is a person who:
* meets the basic education, experience, and continuing education requirements of the Specific Qualifications Standards for Statements of Actuarial Opinion, NAIC Property and Casualty Annual Statement, as set forth in the Qualification Standards for Actuaries Issuing Statements of Actuarial Opinion in the United States, promulgated by the Americna Academy of Actuaries, and
* has obtained and maintains an Accepted Actuarial Designation; and
* is a member of a professional actuarial association that requires adherence to the same Code of Professional Conduct promulgated by the Academy, requires adherence to the U.S. Qualification Standards, and participates in the Actuarial Board for Counseling and Discipline when its members are practicing in the U.S.
COPLFR
What disclosures should be made as part of the Scope section of SAO?
Data Sources
Rserve items being opined on
Evaluation of data for reasonableness
Accounting basis for reserves
Review Date
Intercompany pooling (if applicable)
Revewed reserve setting methods and assumptions
Reconciliation of Data to Schedule P
COPLFR
How to reconcile data to Schedule P for SAO?
- reconcile the given data on a direct + assumed basis and net of reinsurance basis or explain why omitted reconciliations were not done
- reconcile by line of business and accident year
- explain any discrepancies
- Also, note that reconciliation often include complicated mapping of data used by AA to data in schedule P
Use language “I reconciled the data to Schedule P - part 1 of the company’s current ANnual Statement. If discrepencies, provide explanation, if not, say so
COPLFR
What items should the appointed actuary cosider when making use of the work of another?
Proportion of reserves covered by other person’s work
-
Nature of coverage
Effect of variations in other person’s estimates on AA’s opinion
Credentials of other person
COPLFR
What disclosures are necessary if work is taken from an actuary vs non actuary for SAO?
Actuary - Disclose name, credential, affiliation within Opinion paragraph
Non-Actuary - Disclose name, affiliation, type of analysis performed
COPLFR
What are some risk items related to company operations?
Data (thin data or unexplained changes)
Operations (qualitative changes in operations)
New products or markets
Growth (rapid growth in one or more business segments)
Adequacy (changes in adequacy of case reserves)
Severity (changes in frequency and severity)
COPLFR
What are other general risk factors that could apply to all companies
- Asbestos & Environmental losses
- Catastrophic weather events
- cyber liability
- mass torts (asbestos)
- construction defects
- new legislation
- distributional changes in limits / attachment points / deductibles
- terms of reinsurance contracts
COPLFR
What is a letter of representation?
A document from company management assuring a non-employee appointed actuary that they have all the relevant information on which to form an opinion. Could include:
* company provided complete and accurate data, information on subsequent events, basis of carried reserves (net/gross of reinsurance, salv/subro, risk margin), changes in reserving methodology
COPLFR
If no risk of material adverse deviation is judged to exist, what should the appointed actuary do?
Still should comment on potential risk factors
COPLFR
Think of combos of risk factors that could magnify each other
Increase in limits on policies sold with decrease in reinsurance
Text lists others
COPLFR
COVID 19 impacts (risk factor)
- Direct: loss and unearned premium reserves, claims patterns and loss trends, collectability of reinsurance and/or premiums, exposure
- Indirect: claims handling delays and procedural changes resulting from public health orders
COPLFR
Identify some examples of COVID-19 Impacts and considerations
- Worker’s Compensation: Some states have passed regulations whereby an exmployee working outside of their home who tests positive for COVID-19 is presumed to have acquired the disease related to their employement and is eligible for workers’ compensation benefits.
- Actuarial Loss Data: Delays in the court system may have impacted loss payment and reporting
- Exposure Assumptions: The COVID-19 Impact on the overall economy could bring about changes in exposure assumptions that were established before COVID-19
COPLFR
What is the bright line indicator test?
IF:
[1] the AA does not address material adverse deviation
[2] .1 x (net L & LAE reserves) > TAC - CAL
THEN:
The financial analyst should pursue comments from the AA
COPLFR
Example of illustrative language for comments regarding existance of Risk of Material Adverse Deviation (in Relevant Comments)
- I believe there are significant risks and uncertainties associated with the company’s net loss and loss adjustment expense reserves that could result in material adverse deviation
- I have identified those risk factors as ____, _____, and _____
- These risk factors are discussed in more detail here and elsewhere in this opinion
- Other risks may arise in the future
COPLFR
What topics of regulatory importance must be addressed in the Relevent Comments section of SAO?
- Company-Specific Risk Factors
- Risk of Material Adverse Deviation and Materiality Standard
Must Identify MS - Other Disclosures in Exhibit B
- Reinsurance
Collectability, retroactive - IRIS Ratios (11, 12, 13)
- Methods and Assumptions (State if change has been made)
- (COVID-19)
COPLFR
What disclosures are made in Exhibit B?
- Anticipated Salvage and Subrogation
- Discounting (non-tabular and tabular in Schedule P)
- Voluntary/Involuntary Underwriting Pools and Associations
- A&E liabilities
- Extended Reporting Endorsements
- Accident and Health Long Duration Contracts
- Other items
COPLFR
Describe the necessary conditions for an insurance policy to be considered a long-duration contract
Refers to contracts, excluding financial guaranty contracts and surety contracts, that fulfill both of the following conditions:
1. The contracted term is greater than or equal to thirteen months
2. The insurer can neither cancel nor increase the premium during the contract term
COPLFR
