Opinion Writers Symposium Casualty Loss Reserve Seminar September 10-11, 2007 Moderator: Mary D Miller, Ohio Dept of Insurance Panelists: Nicole Elliott, Texas Insurance Dept Melissa Greiner, Pennsylvania Insurance Dept Melissa Greiner, Pennsylvania Insurance Dept Session 4: 3:30-5:00 pm

Opinion Symposium 2007 Who is signing opinions? 480 actuaries signed 2735 opinions (4,361 CAS members as of 11/13/06, about 11%) 480 actuaries signed 2735 opinions (4,361 CAS members as of 11/13/06, about 11%) 33% Company – 67% Consultants 33% Company – 67% Consultants 35% from top 5 consulting firms (at least 100 opinions) 35% from top 5 consulting firms (at least 100 opinions) 30% signed 1 opinion 30% signed 1 opinion 21 actuaries signed 593 opinions = 23% of opinions submitted = 4% of signers 21 actuaries signed 593 opinions = 23% of opinions submitted = 4% of signers

Opinion Symposium 2007 Our Advice for This Year Use your resources Use your resources Focus on RMAD Focus on RMAD Prepare a good Actuarial Report Prepare a good Actuarial Report Meet with the Board annually Meet with the Board annually Provide better comments on adverse development Provide better comments on adverse development

Opinion Symposium 2007 Use Your Resources Annual Statement Instructions Annual Statement Instructions ASOP 36 ASOP 36 COPLFR Practice Note COPLFR Practice Note Practice Note’s Regulatory Guidance Practice Note’s Regulatory Guidance Regulatory actuaries Regulatory actuaries Papers re: MAD, ranges, etc. Papers re: MAD, ranges, etc. AAA 1 day Opinion Seminar AAA 1 day Opinion Seminar

Opinion Symposium 2007 Focus on RMAD Statutory A/S Instructions vs. ASOP 36 Statutory A/S Instructions vs. ASOP 36 Use the COPLFR Practice Note Regulatory Guidance Use the COPLFR Practice Note Regulatory Guidance Consider your audience – focus on solvency, capitalization, RBC level, and IRIS ratios, but don’t forget income 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 Don’t confuse RMAD with a range of reasonable reserve estimates

Opinion Symposium 2007 RMAD: What standard should I use? Consider specific company risks & operations Consider specific company risks & operations 62% use surplus, 13% use LLAE 62% use surplus, 13% use LLAE 18% use a combination of surplus, LLAE, and/or RBC 18% use a combination of surplus, LLAE, and/or RBC Net vs. gross standards (reinsurance considerations) Net vs. gross standards (reinsurance considerations) Sample disclosures Sample disclosures

Opinion Symposium 2007 What did you use? Data from 886 companies domiciled in CT, IL, NY, OH, PA and TX Data from 886 companies domiciled in CT, IL, NY, OH, PA and TX

Opinion Symposium 2007 Is there RMAD? Consider specific company risks Consider specific company risks RMAD amount vs. the Range RMAD amount vs. the Range Carried reserves vs. actuarial indications Carried reserves vs. actuarial indications RMAD on a Gross basis, but not Net? RMAD on a Gross basis, but not Net? Explicitly state if risk exists; 36% said Yes Explicitly state if risk exists; 36% said Yes ‘Attorney approved’ language ‘Attorney approved’ language Sample disclosures Sample disclosures

Opinion Symposium 2007 What is your answer? Data from companies domiciled in CT, IL, NY, OH, PA, and TX Data from companies domiciled in CT, IL, NY, OH, PA, and TX Risk of Material Adverse Deviation Risk of Material Adverse Deviation Yes 36% Yes 36% No 64% No 64% Ambiguous <1% Ambiguous <1%

Opinion Symposium 2007 Actuarial Report Define report: ASOP 36, A/S Instructions, Regulatory Guidance Define report: ASOP 36, A/S Instructions, Regulatory Guidance Who is the audience for the Report? Who is the audience for the Report? Does the Report support the Actuarial Opinion and the Actuarial Opinion Summary? Does the Report support the Actuarial Opinion and the Actuarial Opinion Summary? AOS range should match range in Report AOS range should match range in Report Does it support carried reserves? Does it support carried reserves?

Opinion Symposium 2007 Actuarial Report Documentation ASOP 9 RIP, now ASOP 41 ASOP 9 RIP, now ASOP 41 Narrative and technical exhibits Narrative and technical exhibits Document changes in assumptions or methods Document changes in assumptions or methods Document operational changes Document operational changes Discuss reinsurance – support gross and net estimates Discuss reinsurance – support gross and net estimates Relate the analysis to Schedule P lines of business Relate the analysis to Schedule P lines of business

Opinion Symposium 2007 Actuarial Report Documentation Support needed for assumptions and methods Support needed for assumptions and methods 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 Explain your thought process Explain your thought process

Opinion Symposium 2007 Actuarial Report Documentation Reconciliation to Schedule P Reconciliation to Schedule P Account for all the pieces Account for all the pieces At least Paid LLAE and case reserves At least Paid LLAE and case reserves Other elements if significant to your analysis Other elements if significant to your analysis Inadequate reconciliations cost time and money Inadequate reconciliations cost time and money

Opinion Symposium 2007 Meet with the Board Best to present your Report in person Best to present your Report in person When that is not possible, meet with them at some other time When that is not possible, meet with them at some other time Regulators expect the Board to understand the significance of your findings Regulators expect the Board to understand the significance of your findings

Opinion Symposium 2007 When in Doubt… Disclose, disclose, disclose Disclose, disclose, disclose Talk with management Talk with management Seek help from a regulatory actuary Seek help from a regulatory actuary

Opinion Symposium 2007 Actuarial Opinion Summary Why do regulators need this? Why do regulators need this? How do regulators use this document? How do regulators use this document? What are regulators’ expectations? What are regulators’ expectations?

Opinion Symposium 2007 Actuarial Opinion Summary – WHY? A bridge between the Actuarial Opinion and Actuarial Report A bridge between the Actuarial Opinion and Actuarial Report

Opinion Symposium 2007 Actuarial Opinion Summary – WHY? Actuarial Opinion Public document Public document Due March 1 Due March 1 Readily available Readily available Actuarial Report Confidential document Confidential document Available May 1 Available May 1 Provided at regulator request Provided at regulator request

Opinion Symposium 2007 Actuarial Opinion Summary Uses Provide a confidential forum for appointed actuary to present actuarial estimates earlier in the financial solvency process Provide a confidential forum for appointed actuary to present actuarial estimates earlier in the financial solvency process

Opinion Symposium 2007 Actuarial Opinion Summary Uses Tool for deciding when to request Report Tool for deciding when to request Report Used in conjunction with Opinion and Report when planning for financial examination process. Used in conjunction with Opinion and Report when planning for financial examination process. Quality and consistency of actuarial documents is a factor in the risk-focused approach currently underway at the NAIC. Quality and consistency of actuarial documents is a factor in the risk-focused approach currently underway at the NAIC.

Opinion Symposium 2007 (In)Consistency Clue Example: Inter-company Pool – 3 Companies – 50%, 30%, 20% - Difference between Actuary’s estimate and carried reserves -D&A Company A = (-2,000) Company B = (-1,200) Company C = 1,000

Opinion Symposium 2007 Regulator Expectations of AOS All appointed actuaries would understand one-year development test All appointed actuaries would understand one-year development test Management would communicate with appointed actuaries Management would communicate with appointed actuaries Appointed actuaries would understand company risks Appointed actuaries would understand company risks Existing clients – what changed? Existing clients – what changed? New clients – review prior actuary’s work AND understand what changed in current year New clients – review prior actuary’s work AND understand what changed in current year

Opinion Symposium 2007 Did You Meet Expectations? One-Year Development Generally everyone understands the one- year development test – but some were confused?????? Generally everyone understands the one- year development test – but some were confused?????? In both 2005 and 2006 handful of actuaries missed the calculation and did not comment as required In both 2005 and 2006 handful of actuaries missed the calculation and did not comment as required Calculation is already provided on A.S. Five-Year Historical page, line 71. Calculation is already provided on A.S. Five-Year Historical page, line 71.

Opinion Symposium 2007 Did You Meet Expectations? One-Year Development Actuary required to comment when: One-year development > 20% PY surplus in any single year (IRIS #11) One-year development > 20% PY surplus in any single year (IRIS #11) One-year development > 5% PY surplus in three of five years (AOS) One-year development > 5% PY surplus in three of five years (AOS) Do I have to comment otherwise? Do I have to comment otherwise?

Opinion Symposium 2007 One-Year Dev > Last Year’s MAD? Does actuary comment? Does actuary comment? How did actuarial estimates change? How did actuarial estimates change? Did management’s reserving practices or operational approach change? Did management’s reserving practices or operational approach change? Was this due to a catastrophe or single claim? Was this due to a catastrophe or single claim? Regulator expects at least an acknowledgement Regulator expects at least an acknowledgement

Opinion Symposium 2007 Did You Meet Expectations? Management Communication Management communication is not always evident Management communication is not always evident Carried reserves didn’t always match AS Carried reserves didn’t always match AS Surplus differences even more common Surplus differences even more common Size of error is usually less important than the breakdown in communication process Size of error is usually less important than the breakdown in communication process

Opinion Symposium 2007 Did You Meet Expectations? Management Communication What does management say in MD&A - Management Discussion & Analysis? What does management say in MD&A - Management Discussion & Analysis? Due April 1 to regulator Due April 1 to regulator What does management say in Note 25? What does management say in Note 25? Changes to Incurred Losses & LAE reserves Changes to Incurred Losses & LAE reserves Regulator will look for consistency in Management statements and Actuarial documents Regulator will look for consistency in Management statements and Actuarial documents

Opinion Symposium 2007 Did You Meet Expectations? Company Risks Regulator always interested in trends Regulator always interested in trends Some disclosure always better than none Some disclosure always better than none Clear explanation or understanding of company risks Clear explanation or understanding of company risks

Opinion Symposium 2007 Other AOS Observations Reasons for adverse development could be single explanation or a lengthy list Reasons for adverse development could be single explanation or a lengthy list Be specific with explanations! Be specific with explanations! Single explanation may affect several calendar years of development. Single explanation may affect several calendar years of development. Development observed in one AY may not be same as development in another. Development observed in one AY may not be same as development in another. May need to address several LOB’s May need to address several LOB’s

Opinion Symposium 2007 What have we learned? The majority of actuaries “get it” The majority of actuaries “get it” Some actuaries better than others in level of disclosure; may be a matter of personal style. Some actuaries better than others in level of disclosure; may be a matter of personal style. Actuarial firms do NOT take the same approach in developing actuarial estimates (point, range or both) Actuarial firms do NOT take the same approach in developing actuarial estimates (point, range or both)

Opinion Symposium 2007 What did you use? Combined Net Data from Companies domiciled in CT, IL, NY, OH, PA and TX Combined Net Data from Companies domiciled in CT, IL, NY, OH, PA and TX

Opinion Symposium 2007 How did you compare? Net Data from Companies domiciled in CT, IL, NY, OH, PA and TX Net Data from Companies domiciled in CT, IL, NY, OH, PA and TX

Opinion Symposium 2007 How did you compare? Combined Net Data from Companies domiciled in CT, IL, NY, OH, PA and TX Combined Net Data from Companies domiciled in CT, IL, NY, OH, PA and TX

Opinion Symposium 2007 When in Doubt… Disclose, disclose, disclose Disclose, disclose, disclose Talk with management Talk with management Seek help from a regulatory actuary Seek help from a regulatory actuary

Opinion Symposium 2007 Our Advice for This Year Use your resources Use your resources Focus on RMAD Focus on RMAD Prepare a good Actuarial Report Prepare a good Actuarial Report Meet with the Board annually Meet with the Board annually Provide better comments on adverse development Provide better comments on adverse development

Questions? Comments?