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Regulatory Guidance to the 2004
Changes to the Actuarial Opinion
SWAF Fall 2004
Wendy Germani, FCAS, MAAA
Nicole Elliott, Aspiring Actuary
Fun Facts (2003)
• Lead states for 2003 Direct Earned Premium
(40% of total): CA, NY, TX, FL, IL
• Lead states for # of P&C companies: VT (519),
NY (257), TX (247), IL (225), PA (217) (32% of
total)
• Texas:
• 225 P&C domestics; 204 opinions
reviewed (interns)
• 93 different actuaries submitting opinions
– two actuaries submitted 15 or more
opinions
• 41 actuaries submitted more than one
opinion, 52 submitted one
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More Fun Facts about Texas
57
28%
82
40%
122
60%
147
72%
Company
ACAS
Consultant
FCAS
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More Fun Facts about Texas
8
4% 11
5%
23
11%
185
91%
181
89%
Same
New
Clean
Qualified
Unusual
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Overview of 2004 Changes:
Structure
• Now includes exhibit summaries
• Exhibit A: Scope
• Loss Reserves
• Premium Reserves
• Exhibit B: Disclosures
• Materiality Standard
• Statutory Surplus
• Discounting, Salvage, Asbestos, etc.
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Overview of 2004 Changes:
Major Revisions
• Requires identification of person
responsible for providing data used in
actuarial analysis
• Requires auditor to test key data used
in opinion
• Expanded definition and discussion of
Actuarial Report
• Requires explicit statements and
consideration for risk of material
adverse deviation
• Requires identification of type of
opinion provision (from ASOP 36)
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Focus
• DATA
• MAD
• REPORT
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2004 Changes: Data
• Data Reliance
– Identification of data source
• Reconciliation
– Must be included with Actuarial
Report
• New Data Testing Requirements
– Independent Auditor must test
actuarial data
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Data Testing Requirements
• Auditor must obtain an understanding
of data identified by the appointed
actuary as significant to reserve
projections
• Separate testing may be required
• This requirement may cause difficulties
• Early Discussions are advisable
• Anticipates significant interaction
between auditor, company and
appointed actuary
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2004 Changes: MAD
Risk of Material Adverse Deviation
• The opinion must state whether or
not there are “significant risks and
uncertainties that could result in
material adverse deviation”
• The actuary needs to judge:
– Whether the risk is significant
– What is MATERIAL
• Materiality standard must be
disclosed in all opinions
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Materiality Standard
• General approach is to consider how
user will be influenced
– An item is material if it would change the
user’s interpretation of the situation
• Thresholds could include amounts:
– Above a specified % of Surplus or
Reserves
– That threaten a change in the company’s
RBC level
– Sufficient to change an underwriting or
operating gain into a loss
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Other MAD Considerations
• Degree of precision that is attainable in
estimating the judgment item
• ASOP 36
• Amounts arising from abnormal or
unusual circumstances
• Would it trigger an IRIS ratio?
• What should a regulator think when
quarterly reserve development is > 10%
of surplus but there was no MAD
discussion in the opinion?
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MAD Disclosure
• Explanatory paragraph must describe:
– Major risk factors
– Combination of factors
– Particular Conditions underlying the risks
and uncertainties
• Include basis of the materiality standard
• Should not include broad general
statements
• The list need not be exhaustive
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MAD in Texas (2003)
• Number of opinions that included
MAD comments/standard: 39 (19%)
– Most use Surplus as a measure: 25
(64%)
– Reserves as a measure: 5 (13%)
– Other (usually dollar amount) as a
measure: 8 (20%)
– Reinsurance as a measure: 1 (3%)
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What is Material?
• SEC: exclusive reliance on quantitative
benchmarks is inappropriate
• NAIC: the dollar amount above which
the examiner’s perspective of the
company’s financial position would be
influenced
• AICPA: matter of professional judgment
• Threshold values: rules of thumb
• Common sense: “reasonable person”
test
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NAIC Bright Line Test
• Regulators plan to use a bright line test
for 2004 in evaluating if there is a risk of
MAD
• If
– 10% of held reserves is greater than
– Difference between Total Adjusted Capital
(usually Surplus) and Company Action
Level Capital
• Then regulator expects to see explicit
Relevant Comment paragraphs
discussing the factors giving rise to the
presence or absence of the risk of MAD
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NAIC Bright Line Test (cont.)
• Test is not a substitute for the
individual actuary’s judgment
• Does not relieve the actuary of
independently establishing own
materiality standards
• Regulators expect that an
Appointed Actuary would choose
a more restrictive standard in the
great majority of situations
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2004 Changes: Actuarial Report
• Reminder: Report is to be available
by May 1 or within two weeks of a
regulatory request
• Confidential, not intended for
public inspection
• Consistent with documentation
and disclosure requirements of
ASOP #9
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2004 Changes: Actuarial Report
• Narrative:
• Should provide sufficient detail to clearly
explain findings, recommendations, and
conclusions as well as their significance
• Support all assumptions
• Technical:
• Should provide sufficient documentation
and disclosure for another actuary
practicing in the same field to evaluate
the work
• Must show the analysis from the basic
data (eg, loss triangles) to the
conclusions
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2004 Changes: Actuarial Report
• Summary exhibit(s) of actuary’s
best estimate, range, or both
• Extended comments on trends
relating to risks and uncertainties
that could result in MAD
• Extended comments on factors that
led to unusual IRIS ratios and how
these factors were addressed in
prior and current analyses
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IRIS in Texas
• Failed at least one reserve IRIS
ratio: 24 (12%)
• Failed more than one: 10 (5%)
• Failed IRIS #10: 9 (4%)
• Failed IRIS #11: 15 (7%)
• Failed IRIS #12: 16 (8%)
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2004 Changes: Actuarial Report
• Exhibit which ties to the A/S and
compares the actuary’s
conclusions to the carried amounts
• Documentation of the required
Reconciliation from the data used
for the analysis to Schedule P
• CATF believes that regulators
should be able to rely on the
Report as an alternative to
developing independent estimates
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Questions for Opinion Writers
• How can the Instructions be improved?
• What can regulatory actuaries do to
improve their role in solvency
monitoring?
• Do you feel regulators should play a
role in ABCD referrals?
• Would you benefit from a peer review
counseling letter?
• What would you do differently if you
were a regulator?
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Questions for Regulators
• How can my work product be
improved?
• Are you satisfied with the quality of
Actuarial Reports?
• What do you consider a “Qualified”
opinion? Does your definition vary
from other states?
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Final Comments/Contacts
• Refer to e-mail bulletin in handout
• Financial Actuarial Division
– P&C Actuaries:
• Wendy Germani, FCAS, MAAA
• Holmes Gwynn, ACAS, MAAA
• Nicole Elliott, aspiring to the above
– MC 302-3A
333 Guadalupe St
Austin, TX 78701
– 512-322-5067 main line
512-322-5083 fax
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