Revising ASOP No. 21 Michael G. McCarter, FCAS, MAAA American International Group, Inc. Casualty Loss Reserve Seminar Chicago, September 9, 2003

CAVEAT! zThe revisions to ASOP No. 21 are still under consideration and have NOT been adopted by the Actuarial Standards Board (ASB). zRevisions discussed in this presentation are subject to change and possibly even re-exposure by the ASB.

CAVEAT! (cont.) zThe current ASOP No. 21, The Actuary’s Responsibility to the Auditor, continues in place until the effective date of a replacement approved by the ASB. zHowever, I can talk about the issues under consideration, although no one is committed by what I say (not even me).

Current Status zExposure draft issued September, 2002 zComments received by March, 2003 zASOP No. 21 Task Force (TF) considered comments, revised draft May to July, 2003 zGeneral Committee (GC) of the ASB considered revised draft August, 2003

Next Steps zThe GC will make revisions to the TF’s revised draft and (I anticipate) recommend that it be adopted by the ASB. zThe ASB is scheduled to consider ASOP No. 21 in December. The ASP could adopt it with revisions, send it back to the GC or TF for more work, or re-expose it.

Next Steps (cont.) zIf the ASB adopts the revised draft, the effective date could be audits or examinations commencing after June 30, zIf the ASB requires re-drafting or re- exposure, the effective date becomes uncertain.

Today’s Discussion zCaveat and current status - Done! zBackground, intent, and key proposed elements of the revisions to ASOP No. 21. zIssues raised with the exposure draft and proposed responses. zContext of ASOP No. 21. zSummary and outlook.

Background zPredecessor standards adopted in 1974 and revised in 1983 by the Academy. zCurrent ASOP No. 21 adopted by the ASB to be effective October 1, zIn 2002, the ASB decided that the increased attention to audit issues as well as the development of actuarial practice made a review of ASOP No. 21 necessary.

Background (cont.) zASOP No. 21 applies to actuaries from all practice areas who are designated “responding” or “reviewing” actuaries. zThe GC is deals with ASOP’s that cross practice areas and designates task forces that include representatives from each. zThe challenge is to make the language meaningful to all actuarial practices.

Intent of Revisions zTake into account developments since 1993 (e.g., NAIC Statutory Accounting Codification and new ASOP’s including 23 and 41). zRecognize that the responding actuary may not be the preparing actuary. zProvide guidance to actuaries consistent with generally accepted actuarial practice.

Intent of Revisions (cont.) zNo intent to “raise the bar”, beyond expanding the scope to specifically recognize examinations of statutory financial statements. zHOWEVER, it’s possible that the “bar” has been raised by events in the outside world having nothing to do with the ASB, the GC, or the TF.

Key Proposed Changes zNew Title: Responding to or Assisting Auditors or Examiners in Connection with Financial Statements. zAvoids unintended possible legal implications of the word “responsibility”. zBetter expresses the nature of the guidance provided and the scope to which it applies.

Key Proposed Changes - 2 zAdd regulatory examiners and examinations to the scope of the standard, but clarify that the context is within the audit or examination of financial statements. zDoes not apply to tax returns or Form 5500 (pension) filings which may include financial information.

Key Proposed Changes - 3 zAddresses the “responding actuary” rather than the “preparing actuary”. zRecognizes that entities designate actuaries to respond to auditors or examiners. zOther ASOP’s provide standards applicable to preparing actuaries.

Key Proposed Changes - 4 zBriefly outlines the types of items the responding actuary should be prepared to discuss with the auditor or examiner, including circumstances having a significant effect the elements of the financial statement for which the actuary is designated the responding actuary.

Key Proposed Changes - 5 zReviewing actuaries are designated by the auditor or examiner to assist in the audit or examination. zClarifies the responsibilities of the reviewing actuary in regard to the planning and documentation of the audit or examination procedures.

Key Proposed Changes - 6 zRefers specifically to ASOP No. 41, Actuarial Communications. zBrings ASOP No. 21 into compliance with the ASB’s current format for ASOP’s

Issues and Responses zThe TF received and reviewed carefully 36 thoughtful and helpful comment letters based on the exposure draft. zMany clarifying changes were made as a result of consideration of these comments, including changing the proposed title of ASOP No. 21.

Issues and Responses - 2 zThe TF’s draft response to comments is actually longer than the ASOP itself, in order to show how the TF responded to each significant comment. zFollowing are some of the other issues raised along with an indication of the TF’s proposed response.

Issues and Responses - 3 zIssue: ASOP No. 21 should be eliminated because the meaningful issues are now addressed elsewhere. zResponse: The TF believes that responding to and assisting auditors and examiners is important to actuarial practice, even if there is some redundancy with other standards.

Issues and Responses - 4 zIssue: Concern that there could be conflicts with the legal rights of the actuary’s clients if the audit/exam was “hostile” or resulted in adversarial situation. zResponse: The TF clarified that the responding actuary is designated by the entity to respond.

Issues and Responses - 5 zIssue: Postpone revisions to ASOP No. 21 until changes to annual statement instructions being considered by the NAIC are made final. zResponse: The TF believes the ASOP is sufficiently broad to provide appropriate guidance without revision based on specific proposed changes.

Issues and Responses - 6 zIssue: There were concerns with the exposure draft’s use of the term “actuarial element” in the scope section. zResponse: The TF agreed and re-worded the section to eliminate the term. Note that commentators identified several other problematic terms, such as “controls”, which were eliminated.

Issues and Responses - 7 zIssue: There were concerns that the ASOP could be interpreted too broadly outside the context of a financial audit or examination. zResponse: The TF agreed and modified the scope paragraphs accordingly.

Issues and Responses - 8 zIssue: Commentators thought that the definitions of responding and reviewing actuaries could inadvertently sweep in unintended actuaries. zResponse: The TF agreed and clarified both definitions to say that the responding actuary is designated by the entity and the reviewing actuary by the auditor.

Context of ASOP No. 21 zSome commentators seemed to want ASOP No. 21 to address every possible situation within one standard. zThe TF View: ASOP No. 21 (and all other standards) are not standalone documents but must be used in conjunction with other standards applicable to particular issues.

Context of ASOP No. 21 zOther commentators wanted to eliminate all redundancy with other ASOP’s. zThe TF View: Some redundancy is good, because it makes the ASOP easier to understand and place in context.

Context of ASOP No. 21 zIn particular, that context includes the Code of Professional Conduct. zFor all actuaries, ASOP No Data Quality and ASOP No Actuarial Communications are particularly relevant to the issues discussed in ASOP No. 21.

Context of ASOP No. 21 zFor casualty actuaries, consider also: zASOP No. 9 - Documentation and Disclosure in Property and Casualty Insurance Ratemaking, Loss Reserving, and Valuations. zASOP No Discounting of Property and Casualty Loss and Loss Adjustment Expense Reserves

Context of ASOP No. 21 zAnd further: zASOP No Statement of Actuarial Opinion Regarding Property/Casualty Loss and Loss Adjustment Expense Reserves zNot to mention the work being done on a proposed new ASOP on casualty reserve estimation.

Outlook for ASOP No. 21 zThe revised draft has been revised both for clarity and to eliminate unintended implications. zIt has very little that is conceptually different from the exposure draft. zIt will be up to the ASB to determine if re- exposure is necessary.

Summary zThe revised ASOP No. 21 is close to being done (I hope). zIt expands the scope to include examiners, but does not “raise the bar”. zIt recognizes that “responding actuaries” are designated by the reporting entities and may not be the same people as “preparing actuaries”.

Summary (cont.) zThe language of ASOP No. 21 is intended to help actuaries understand and deal with expectations that are higher for all audit participants. zMany actuaries put a lot of thought into the comments and clarification of the new draft. zCheck the ASB Boxscore for updates.