Reserve/Opinion Issues from a Regulatory Perspective Andrea Sweeny, FCAS, MAAA, FCA Casualty Actuarial Assistance LLC Chair, American Academy of Actuaries Committee on Property/Liability Financial Reporting CLRS September 2002

Consideration of Proposed Changes to the Opinion What Can/Should the NAIC Statement of Actuarial Opinion Do Consideration of Proposed Changes to the Opinion CLRS September 2002

COPLFR Committee on Property/Liability Financial Reporting WHO? 15-20 Practitioners who Work Day to Day in GAAP and Statutory Financial Reporting Mix of Insurance Company, Consulting and Regulatory Actuaries Credentialed Actuaries Welcomed. Answer CAS Participation Survey or Contact Me CLRS September 2002

COPLFR What? Provide Actuarial Input to Bodies Making Financial Reporting Rules (e.g. NAIC, Individual States, AICPA, SEC, International Organizations) Alert Actuaries to New Requirements, Suggest Ways to Comply with New Rules( e. g. Codification) Provide Information on Current Practices (e.g. Practice Note) CLRS September 2002

What Should the NAIC Opinion Do? Provide Regulator with Formal Assurance from a Qualified Internal or External Actuary that Overall Reserves are: Reasonable Consistent with Generally Accepted Practice Meet the Requirements of the State CLRS September 2002

What Should the NAIC Opinion Do? Highlight Important Circumstances Surrounding the Reserves ,e.g. Implications of Deviations Discounting Changes in Data or Methods of Review Reinsurance Uncertainty CLRS September 2002

How Does Actuary Get to a Point to Provide this Assurance? Independently Recalculate Reserves Review the Work of Others Decide a Component Reserve is Unlikely to be Far Enough Off the Affect the Overall Reserve Rely on the Formal Opinion of Another Actuary Talk to Management It is the Actuary’s Professional Judgment CLRS September 2002

Professional Standards: ASOP 36 Effective for Year End 2000 Some Key Elements: Must Discuss if Significant Risk of Material Adverse Deviation Must Discuss Significant Factors Surrounding the Reserves. E.g. Reinsurance, Discounting, Risk Margins, Changes in Data or Actuarial Methods Only 5 Choices for Types of Opinion: Reasonable, Deficient, Excessive, Qualified, or No Opinion Qualified Opinion – When an Element of the Overall Reserve that Could be Material “Cannot be Reasonably Estimated” or the Actuary “is Unable to Render an Opinion” on that Element CLRS September 2002

Criteria for Gauging Any Proposed Changes to Statements of Actuarial Opinion Enhance Meaningfulness of Opinion Maximize Clarity Balance Cost with Benefit Keep Actuaries to Tasks they Can Do and Are Best Suited to Do Recognize Implications of the Opinion as a Public Document CLRS September 2002

Concerns re: CATF Proposal The Actuary must state “whether or not he or she believes that there are significant risks of material adverse deviation” “No Significant Risk” Statement Looks Like a Guaranty. Actuary can not Reasonably Guarantee Reserves No Significant Risk Statement is Easily Misunderstood Caveats Needed to Make Clear that there is Not a Guarantee Will Clutter the Opinion CLRS September 2002

Concerns re: CATF Proposal Required Comments on All Exhibit B Items and Reinsurance Issues List of Items that were “hot buttons” to Someone at Some Time Just Discuss the Item if it is Material to the Company Easy Way for Regulators to Judge Materiality Can Bind the Actuary to Confirm that an Item Carrying Immaterial Reserve is in Fact Immaterial Required Comments on Non Material Items Clutter the Opinion and Potentially Confuse the Reader CLRS September 2002

Concerns re: CATF Proposal Rush to Implement Revisions: Went from First Concrete Proposal March 1 to Final Proposal June 20 Critical Document with Important Ramifications for Regulators, Companies and Actuaries Unintended Consequences of Hastily Drafted Wording CLRS September 2002

What the Opinion Can Do Provide Valuable Assurances and Information to Regulators re: the Largest Liability on the Balance Sheet Identify Important Reserve Related Issues Provide a Trigger for Further Confidential Dialog CLRS September 2002

What The Opinion Doesn’t/Can’t Do Guarantee Reserves are Correct Provide a Source of Substitute Numbers to those Recorded by Management Substitute for Regulatory Oversight Provide Assurance on Reserves by Line Be the Tool to Make a Company Make Operational Changes Reinsurance Plans Capital Levels Growth CLRS September 2002

An Evolving Process: Issues that are Currently Surfacing Adverse Deviation Paragraph Does not Mean that Reserves need to be “Fixed” in Some Way Confidentiality Materiality Clear Distinction of when an Opinion is Qualified Relying on the Work of Others, Especially re: Pools, Assumed Reinsurance Need for Adverse Deviation Paragraph CLRS September 2002