Statement of Actuarial Opinion Changes for 2007- A Regulatory Actuary’s Perspective Casualty Loss Reserve Seminar September 2007 Ron Dahlquist, Senior Casualty Actuary State of California Department of Insurance

Personal Background FCAS 1980 Former Chief Actuary for 2 companies Nine years with CDI Serve on several NAIC committees, including Casualty Actuarial Task Force Much of my experience is with workers compensation

Overview of Presentation Comments on Specific Changes to Opinion Requirements Discussion of California Workers Compensation Opinion Requirement (2004) Brief Discussion of Large Deductible Regulation Proposal

Changes to Opinion Requirements for 2007 New Disclosures in Exhibit B: Name of Appointed Actuary Relationship of Appointed Actuary to Company Qualifications of Appointed Actuary Specific Identification of Type of Opinion Definitive Statement on Risk of Material Adverse Deviation (RMAD)- does one exist or not? Items in Exhibit B to be Net unless otherwise indicated Exhibits A and B to be submitted electronically

Overall View None of these changes is major Overall idea is to make it easier for regulators to view key elements of the Opinion “at a glance” There is no new substantive requirement here- just new requirements to make main conclusions obvious

Purpose of Opinion Exhibits A and B A new requirement for 2004 Annual Statements Originally conceived as a way to take all of the numbers spread throughout the body of the Opinion and to “collect” them all in one place Exhibit A contains all of the individual reserve amounts the Appointed Actuary is opining on Exhibit B contains amounts of key items that Appointed Actuary is not opining on separately but that are significant if present- e.g. Anticipated salvage & subrogation discounting of reserves Asbestos and environmental Exhibit B also requires disclosure of Appointed Actuary’s materiality standard, compared to Policyholders’ Surplus

New Disclosures in Exhibit B for 2007 New disclosures are of a different type than previously existing disclosures Identification of Appointed Actuary, relationship to company, and qualifications Statement of Type of Opinion- Reasonable Deficient or Inadequate Excessive or Redundant Qualified No Opinion Risk of Material Adverse Deviation- does it exist or not?

New Disclosures in Exhibit B for 2007- page 2 None are new requirements- Identification of Appointed Actuary, relationship to company, and qualifications- Existing requirement in “Identification” paragraph Statement of Type of Opinion- Existing requirement in “Opinion” paragraph Statement on existence of Risk of Material Adverse Deviation- Existing requirement in “Relevant Comments” paragraph

New Disclosures in Exhibit B for 2007- page 3 What is new is placement in Exhibit B This is for ease of review- these items belong in any basic summary

Other Changes Items in Exhibit B to be Net unless otherwise indicated Focus of regulatory review is primarily on the net basis If direct basis is significantly different, expect to see discussion in the “Relevant Comments” paragraphs: for example, If type of opinion is different on direct basis than on net If RMAD exists on a direct basis but not on net basis If A&E reserves are heavily reinsured

Other Changes- page 2 Exhibits A and B to be submitted electronically This is to facilitate ease of review by regulatory actuaries Also allows NAIC to compile and analyze statistics on Opinions Exact format of NAIC requirements must be followed

California Workers Comp Opinion Requirement (2004) CA is one of several states that require deposits equal to insurer’s liability for unpaid claims This is a requirement of state law Purpose is to guarantee payment of claims to injured workers

California Workers Comp Opinion Requirement- page 2 CA requires annual submission of Special California Schedule P Includes company’s direct and net loss and LAE reserves by accident year Provides calculation of deposit requirement Deposit is net of reinsurance CA still uses old 65% minimum loss ratio (written into law) Deposit requirement can be based on discounted reserves Allowable discount rate is company’s average yield on invested assets or 6%, whichever is smaller

California Workers Comp Opinion Requirement- page 3 CA WC insurer insolvencies 2000-2002 proved that deposits were inadequate because reserves were inadequate Financial Analysis Division wanted actuarial certification that reserves were adequate- in order to improve likelihood that deposits would be sufficient in the future We settled on a requirement that reserves be “reasonable”, using Opinion language Result- a new Opinion required for 2004- CA WC specific

California Workers Comp Opinion Requirement- page 4 CA WC Opinion is free-form- we are only asking for statement that CA WC reserves are reasonable This is the only situation I am aware of in which an opinion is required for a single state-line combination Questions regarding credibility and ability to segregate CA WC data CA is the largest state WC laws different by state CA WC has performed differently than any other state, probably should be analyzed separately anyway Credibility issues can occur for small companies even when viewed in total- so this issue is not new to Opinion writers Bottom line- we need this Opinion for a specific regulatory purpose

CA WC Large Deductible Regulation Proposal Issue- Large Deductibles a large proportion of total CA WC market- approx. $5 billion in premium credits in 2006 CA law requires insurer to pay WC deductible claims on first dollar basis, seek reimbursement from insured employer This creates potential credit risk issue NAIC accounting principles require reserves to be established net of collectible deductible amounts- doesn’t require reporting of the deductible amounts to be collected, hence doesn’t provide regulators with the ability to assess the credit risk Existing deposits are for insured losses only- net of deductible CA law allows Commissioner to establish deposit requirements for deductible amounts

CA WC Large Deductible Regulation Proposal- page 2 Regulations drafted to require deposits for deductible amounts- offset by suitable collateral This would require modification to our Opinion requirements Current status- Recent legislation affecting deposit requirements for deductible losses has been enacted Draft regulations are being reevaluated and will be reworked