Statement of Actuarial Opinion and the Annual Statement Changes and Statistics Casualty Loss Reserve Seminar September 18-19, 2008 Moderator: Mary D. Miller, Ohio Dept of Insurance Panelists: Sarah McNair-Grove, Alaska Division of Insurance Melissa Greiner, Pennsylvania Insurance Dept Melissa Greiner, Pennsylvania Insurance Dept

Topics of Presentation Changes for 2007 Successes Successes Challenges Challenges 2007 Opinion and AOS Statistics Review of Last Year’s Advice Changes for 2008

Review of 2007 Changes Expansion of Exhibit B disclosures: Name of Appointed Actuary Name of Appointed Actuary Relationship of Actuary to Company Relationship of Actuary to Company Qualifications of Actuary Qualifications of Actuary Type of Opinion Type of Opinion Definitive Statement on RMAD (Y or N) Definitive Statement on RMAD (Y or N) Electronic submission of data in Opinion Exhibits A & B.

Why the 2007 Changes? Make it easier for regulators to view key elements of Opinion at a glance Gather Opinion statistics on national level Previously, statistics compiled only from states with active regulatory actuary staff Previously, statistics compiled only from states with active regulatory actuary staff Analyze statistics year to year

Successes Electronic reporting allowed cross check of “electronically” filed information to language from Actuary’s Opinion. RMAD conclusion – eliminated the ambiguity of “could be risk of MAD” responses Look to Exhibit B for the Y or N response Look to Exhibit B for the Y or N response If vague in narrative, rely on Exh B response to follow up or clarify. If vague in narrative, rely on Exh B response to follow up or clarify.

Successes Can compare individual states to national results Will be able to more easily track trends from year to year Enhances ability to check for: Consistency across affiliated entities Consistency across affiliated entities Consistency across individual actuaries Consistency across individual actuaries

Challenges With any new requirement or change to financial reporting instructions, regulators expect reporting hiccups in first few years. Burden is on the company to accurately report Exhibit B data Letters being sent to companies with obvious errors

Exhibit B Reporting Hiccups Missing information Improperly filed information Inconsistently reported information Small company exemptions not easily identified Total error ratio: nearly 25%

Challenges to Exhibit B Reporting One state intern spent 40+ hours to clean up electronically reported information. Some states, through analysis and/or actuarial support functions requested companies to correctly refile. We’re not sure how many states took the initiative to request corrections to electronic reporting of Exhibit B in 2008.

Challenges – Small Company Exemptions NAIC Instructions allow exemptions from an Opinion based on specific criteria. Total exemptions across all states is unknown. Total exemptions across all states is unknown. Some of these companies completed Exhibit B, when not needed to. We may discuss with NAIC to avoid unnecessary reporting.

What did we find?

Name of Actuary Collected in three fields by Last Name, First name, Middle Actual results looked like: GreinerMelissaL GREINERMELISSA GreinerMLynn MelissaLynnGreiner GreinerMelissaLynn Difficult to run a quick query or pivot table on single actuary’s results.

Relationship to Company Valid responses are C, E Invalid responses: blanks, ~, D, N, S Invalid response ratio ~ 5.2% Invalid response ratio ~ 5.2% Of valid responses: 68.7% Consultants 68.7% Consultants 31.3% Employees 31.3% Employees

Actuary’s Qualification Valid responses are F, A, M or O M = Academy member, but approved by Casualty Practice Council of AAA M = Academy member, but approved by Casualty Practice Council of AAA O = Other O = Other Invalid responses: ~, 0, C, Y, N Error ratio = 5.2% Error ratio = 5.2% Of valid responses: 76% Fellows 76% Fellows 23% Associates 23% Associates 1% AAA Member or Other 1% AAA Member or Other

Type of Opinion Valid responses are R, E, I, N, Q Invalid responses: blanks, ~, 0, O, F Error ratio = 6.3% Error ratio = 6.3% Of valid responses: 99.0% Reasonable 99.0% Reasonable 0.3% Excessive 0.3% Excessive <0.1% Inadequate <0.1% Inadequate 0.2% No opinion 0.2% No opinion 0.4% Qualified opinion 0.4% Qualified opinion

Non Reasonable Opinions 8 Excessive opinions 1 Inadequate opinion 6 No Opinion 10 Qualified opinions

Risk of MAD Valid responses are Yes or No Answers of Y, N, none easily interpreted Answers of Y, N, none easily interpreted Invalid responses: blanks or exemptions Of valid responses: 31.6% Yes to RMAD 31.6% Yes to RMAD 68.4% No to RMAD 68.4% No to RMAD

What RMAD standard did you use? 62% use surplus 11% use LLAE 20% use a combination of surplus, LLAE, and/or RBC Net vs. gross standards (reinsurance considerations) Always consider specific company risks & operations Source: multi-state sample

What did you use? Data from 887 companies domiciled in CT, IL, NY, OH, PA, TX and AK

Is there RMAD? Consider specific company risks RMAD amount vs. the Range Carried reserves vs. actuarial indications RMAD on a Gross basis, but not Net? Explicitly state if risk exists; 32% said Yes “Attorney approved” language

What is your answer? Data from companies domiciled in CT, IL, NY, OH, PA, TX and AK 887 total companies Risk of Material Adverse Deviation Yes 31% Yes 31% No 69% No 69%

What is your answer? Data from NAIC database of Exhibit B responses Adjusted for missing and invalid responses 2560 total companies Risk of Material Adverse Deviation Yes 32% Yes 32% No 68% No 68%

What can we learn? State sample consistent with NAIC electronic reporting

Does RMAD vary by employer?

Does RMAD vary by credentials?

Is there Risk of MAD? Fewer actuaries concluded “yes” to RMAD over time.

AOS Statistics Combined Net Data from 825 Companies domiciled in seven states Reflects 2007 AOS data Includes some companies that carry net zero

AOS Statistics – Carried to Actuary Estimate Combined Net data from 732 companies in 7 states Excludes companies that carry zero-net reserves

Our Advice Last Year Use your resources Focus on RMAD Prepare a good Actuarial Report Meet with the Board annually Provide better comments on adverse development

Use Your Resources Annual Statement Instructions ASOP 36 COPLFR Practice Note Practice Note’s Regulatory Guidance Practice Note’s Regulatory Guidance Regulatory actuaries Papers re: MAD, ranges, etc. AAA Opinion Seminar

Focus on RMAD Statutory A/S Instructions vs. ASOP 36 Use the COPLFR Practice Note Regulatory Guidance Consider your audience – focus on solvency, capitalization, RBC level, and IRIS ratios, but don’t forget income Don’t confuse RMAD with a range of reasonable reserve estimates

Actuarial Report Define report: ASOP 36, A/S Instructions, Regulatory Guidance Does it support the Actuarial Opinion, the Actuarial Opinion Summary and carried reserves? AOS range should match range in Report AOS range should match range in Report

Actuarial Report Documentation Document assumptions and methods and any changes Loss ratios used in B-F methods Loss ratios used in B-F methods Loss development factors Loss development factors Interpolated factors and roll forwards Interpolated factors and roll forwards Ultimate selections Ultimate selections Segmentation of data Segmentation of data Schedule P reconciliation

Meet with the Board Best to present your Report in person, as soon as possible Regulators expect the Board to understand the significance of your findings

When in Doubt… Disclose, disclose, disclose Talk with management Seek help from a regulatory actuary

2008 Changes Intercompany Pooling Only applies when there is one lead company with 100% of pool; the rest of the companies have 0% Only applies when there is one lead company with 100% of pool; the rest of the companies have 0% Each company files a single Opinion that covers entire Pool Each company files a single Opinion that covers entire Pool File Exhibits A&B with company specific values even though most are 0 for 0% companies File Exhibits A&B with company specific values even though most are 0 for 0% companies File Exhibits A&B of lead company as appendix for 0% companies File Exhibits A&B of lead company as appendix for 0% companies

2008 Changes Not Applicable added as acceptable RMAD response for intercompany pooling Only for use by 0% companies All others must check either yes or no Cross checks added to Exhibits A and B Clarifies how exhibits tie back to Annual Statement Letters generated by NAIC when exhibits do not tie to the Annual Statement

2008 Changes Actuarial Guidance to Financial Analysis Handbook provides additional “tests” to review on materiality and context within the range

Analysis Guidance Example What if actuary said “no” to RMAD, yet company carried reserves in lower end of actuarial range? Consideration given to surplus and RBC levels. If low, appointed actuaries should expect a call from the domestic regulator. Why is there no RMAD? Why is there no RMAD? Is the Materiality threshold possibly set too high? Is the Materiality threshold possibly set too high?

Our Advice for This Year Use your resources Focus on RMAD Prepare a good Actuarial Report Meet with the Board annually Provide better comments on adverse development

Questions? Comments?