Actuarial Credibility Task Force Report & The Potential Impact to ASOP 36 Chris Carlson, FCAS, MAAA Pinnacle Actuarial Resources, Chair Casualty Committee of the Actuarial Standards Board Pat Teufel, FCAS, MAAA KPMG, Chair, CAS Board Task Force on Actuarial Credibility

CAS Task Force Report Recommendation Impacting ASOP 36 A. To enhance the transparency of the actuary’s conclusions by clearly identifying differences, if any, that exist between management’s “best estimate” of the loss and loss adjustment expense reserves as of a valuation date and the actuary’s “best estimate” of the reserve need as of that valuation date within the statement of actuarial opinion.

Section 8 of the 2005 Instructions for Actuarial Opinions The Actuarial Opinion Summary should include at least the following: A. The Appointed Actuary’s range of reasonable estimates for loss and loss adjustment expense reserves, both gross and net of reinsurance; and/or B. The Appointed Actuary’s point estimates for loss and loss adjustment expense reserves, net and gross of reinsurance; and C. The Company’s recorded loss and loss adjustment expense reserves, net and gross of reinsurance; and D. The difference between the company’s carried reserves and the Appointed Actuary’s point estimate and/or range of reasonable estimates, net and gross of reinsurance…

Recommended Specific Activity Determine whether the CAS wishes to recommend to the Actuarial Standards Board that a revision to ASOP 36 to incorporate required disclosure of the difference between management’s recorded reserves and the actuary’s best estimate be considered. Target - Fourth Quarter 2005

Disclosure and Scope The Task Force sees its recommendation as a natural extension of the NAIC requirement, moving the required disclosure from a confidential document to the public domain. Further, the Task Force believes that such disclosure would be appropriate for all statements of actuarial opinion; while relevant for NAIC statements of actuarial opinion, our recommendation is not confined to that venue.

Recommended Specific Activity Develop and expose a revision to ASOP 36 to incorporate required disclosure of the difference between management’s recorded reserves and the actuary’s best estimate. Target – Fourth Quarter 2006

Suggested Addition to ASOP 36 Disclosure Section k.The actuary should disclose the amount by which the stated reserve amount differs from the actuary's expected value estimate. In circumstances where the actuary does not derive a single, most likely expected value estimate but instead develops a range of expected value estimates (the actuary's range of reasonable reserve estimates), the actuary should disclose the amount by which the stated reserve amount differs from the midpoint of the range of the actuary's expected value estimates.

Suggested New Addition to ASOP Changes in the Opining Actuary's Estimates of Liability. - The actuary should include within the documentation a reconciliation of the current estimates of liability to the estimates that existed as of the prior evaluation period, if any. Such reconciliation should be performed at a level, by accident year and business segment that the actuary deems to be appropriate. In addition, the actuary should provide an extended discussion of the factors underlying the change in estimates, including the facts and circumstances that have emerged during the period and how these factors have been considered in the evaluation process.

ASB Process on ASOP Changes 1. Recommendation to ASB to initiate review 2. ASB charges Casualty Committee to review 3. Casualty Committee or Subcommittee develops exposure draft for ASB review 4. ASB votes to expose to members for comments

ASB Process on ASOP Changes (continued) 5. Casualty Committee receives and reviews comments – considers and responds to all of the comments 6. Casualty Committee considers and responds to all of the input and revises draft accordingly 7. ASB reviews revision and comments. – If changes are significant, draft ASOP is re-exposed (step 4). – If not significantly changed, ASB can vote to adopt.