Statement of Actuarial Opinion

Question 1

What is the Statement of Actuarial Opinion?

Answer 1

The Statement of Actuarial Opinion (SAO) is the appointed actuary’s opinion on the reasonableness of loss and LAE reserves and material risk and uncertainties.

Question 2

What sections must the SAO includes?

Answer 2

1. Identification: paragraph identifying the Appointed Actuary
2. Scope: paragraph identifying the subjects on which an opinion is to be issued and describing the actuary’s scope of work
3. Opinion: paragraph expressing the appointed actuary’s opinion on the subject in section 2
4. Relevant Comments: regarding risk of material adverse deviations, reinsurance, abnormal IRIS ratios, significant changes in methods and assumptions

Question 3

Requirements of the Identification section

Answer 3

1. A statement the relationship between the appointed actuary and the company
2. The date of appointment
3. A statement the actuary was appointed by the board or equivalent

Question 4

Requirements of the Scope section

Answer 4

1. A statement that the actuary has examined the actuarial methods and assumptions used to determine the reserves in Exhibit A
2. Exhibit A should list the items and amounts the actuary is expressing an opinion on
3. A statement of which items the actuary is expressing an opinion on
4. A statement of who provided the actuary with the data
5. A statement that the actuary has reviewed the data for reasonableness
6. A statement that the actuary has reconciled the data with Schedule P

Question 5

Requirements of the Opinion section

Answer 5

1. A statements that the reserves listed in Exhibit A meet the requirements of the insurance laws in the domiciliary state
2. A statement that the reserves listed in Exhibit A were prepared in accordance with actuarial standards and practices
3. The type of opinion which the actuary is issuing for the reserves listed in Exhibit A

Question 6

Requirements of the Relevant Comments section

Answer 6

1. Risk of Material Adverse Deviations (RMAD): the basis for the materiality standard, the amount of the materiality standard, and whether or not a RMAD exists
2. Other Disclosure in Exhibit B: commentary on the material impact of disclosures in Exhibit B
3. Reinsurance: commentary on retroactive reinsurance, financial reinsurance, and reinsurance collectability
4. IRIS Ratios: if IRIS Ratio 11 (1-Year Development / Prior PHS), IRIS Ratio 12 (2-Year Development / Second Prior PHS), or IRIS Ratio 13 (Estimate Current Reserve Deficiency / PHS) are outside of the normal range, the actuary should provide commentary as to what led to the abnormal ratios
5. Methods and Assumptions: disclosure of any significant changes to the actuarial methods or assumptions

Question 7

What is contained on Exhibit A?

Answer 7

1. Unpaid Loss Reserve
2. Unpaid LAE Reserve
3. Unpaid Loss Reserve - Direct & Assumed
4. Unpaid LAE Reserve - Direct & Assumed
5. Retroactive Reinsurance Assumed
6. Other Loss Reserve Items
7. Unearned Premium Reserve on Long-Duration Contracts - Direct & Assumed
8. Net Unearned Premium Reserve on Long-Duration Contracts
9. Other Premium Reserve Items

Question 8

Types of Opinions which Appointed Actuary may issue and what the actuary must disclose

Answer 8

1. Reasonable Opinion: booked reserves are within actuary’s range; disclosures include: the carried reserves
2. Inadequate/Deficient Opinion: booked reserves are below the minimum of the actuary’s range; disclosures include: the carried reserves, the minimum of the actuary’s range
3. Redundant/Excessive Opinion: booked reserves are above the maximum of the actuary’s range; disclosures include: the carried reserves, the maximum of the actuary’s range
4. Qualified Opinion: if the actuary is unable to make an estimate for an item which is believed to be material, the actuary should make a statement of whether or not they believe the booked reserves are reasonable for the items they can estimate
5. No Opinion: if the actuary cannot reach a conclusion due to limitations in data, assumptions, or related information they should issue a statement of no opinion

Question 9

What is contained in Exhibit B?

Answer 9

Various disclosures including:
1. Name of Appointed Actuary

2. Appointed Actuary’s relationship with the company
3. Which qualification the Appointed Actuary is qualified under
4. Type of opinion issued
5. The materiality standard in dollars
6. Whether or not a risk of material adverse deviation is present
7. Statutory surplus
8. Anticipated net salvage and subrogation recoverables on loss reserves
9. Amount of discount included in loss & LAE reserves
10. Unpaid loss & LAE reserves for voluntary and involuntary pools
11. Asbestos and environmental unpaid loss & LAE reserves
12. Claims-made extended loss & LAE reserves
13. Other items in which the Appointed Actuary is providing relevant comments

Question 10

Requirements of Appointed Actuary

Answer 10

1. An actuarial designation (FCAS, ACAS, FSA, ASA, EA, MAAA)
2. At least three (3) years of actuarial experience in a relevant line of business
3. Knowledge of U.S. insurance laws and actuarial standards
4. Perform 30 hours of continuing education including at least 6 hours of organized activities

Question 11

What must the Statement of Actuarial Opinion report contain?

Answer 11

1. An exhibit which ties to the Annual Statement and compares the Actuary’s estimate to the carried amount
2. Summary exhibit of either the actuary’s best estimate, range of reasonable estimates, or both which supports the actuary opinion
3. Documentation of reconciliation to Schedule P
4. Extended comments on trends that indicated the presence or absence of significant risk and uncertainties which could result in material adverse deviation
5. Extended comments on factors which lead to unusual 1-Year Adverse Development (IRIS Ratio 11), 2-Year Adverse Development (IRIS Ratio 12), or Estimated Current Reserve Deficiency (IRIS Ratio 13) and how these factors were addressed