Ranges & Actuarial Opinions: A Regulatory Perspective Nicole Elliott, ACAS, MAAA Texas Dept of Insurance
Scope of Discussion Focus on statutory entities that require an SAO Consider the AOS and Report also Focus on Ranges and how they relate to the Carried reserves Stats based on six states, about 900 companies Regulatory Review Sequence
Regulatory Review Sequence Review SAO – solvency focus What is the SAO category? Review AOS – is there a Point, Range or both? Where are Carried reserves in relation to info in AOS? Review Actuarial Report for further details
Opinion Category Five choices – Reasonable, Redundant, Excessive, Qualified, No Opinion 98% of SAOs are Reasonable, < 1% Excessive What does it mean to be Reasonable? What is the Regulator’s opinion of the Opinion?
AOS Review (Point, Range, or Both – Net basis) Point46754% Range14517% Point & Range24829% Total859
AOS Review cont. What is driving Ranges? Consultants vs. Company Officers Consultant practice across the board? Dependent on company characteristics? Dependent on reserving methods or line of business? Did the client request it?
Where are the Carried reserves? Carried reserves in relation to actuarial indications helps prioritize the Regulatory review If only Range given, are Carried reserves at or near midpoint? If only a Point given or both, are Carried reserves at or near the Point? If both given, how does the Point compare to midpoint of the Range?
Carried Reserves cont. Carried Net Reserves compared to Point or Midpoint TotCum % > 10% Above 16425% B/W 5 & 10% Above 8738% < 5% Above 22371% Equal to % < 5% Below 7195% B/W 5 % 10% Below 1497% > 10% Below 17100% 666
Focus on Ranges Narrow discussion to situations where a Range is provided Assume where Point only given, Carried reserves are at or near Point Per ASOP 36 and A/S Instructions, Carried reserves anywhere in Range is Reasonable Begs the question: Is the Range Reasonable?
What types of Ranges are Regulators seeing? Not discussed in Report Methods considered proprietary Used actuarial judgment - common % +/- a point estimate - common Scenario testing Statistical distributions - rare
Are these methods Reasonable? What does the Actuarial Report say? Is the calculation of the Range discussed and supported by exhibits? Is the documentation sufficient to appreciate the conclusions? What was your thought process?
Range vs. the Carried Reserve Are they independent? Relationship: SAO supports carried reserves, AOS supports SAO AOS could include a Range which supports determination of a Reasonable provision SSAP 55: The Carried reserve is Management’s responsibility
Management’s Responsibility? Actuary should discuss the meaning of the Range with Management Actuary should understand Management’s choice of Carried reserve within the Range If not based on a distribution, and all points within the Range are equally likely, is it Reasonable for Management to carry at other than the Midpoint?
Professional Responsibility Document how the Range was determined Understand how the Range will be used Prevent its misuse Discuss any limitations of the Range Talk with Management
Case Study Long tail business with history of severe reserve development PY -> no Range, only a Point; Carried = Point CY ->Range by client request, width of Range was 67% of surplus; Point = Midpoint All other AOSes issued by actuarial firm were Point only for CY
Case Study cont What else is happening in CY? Where were Carried Reserves?
Case Study – Actuarial Report No support for Low and High selections Inquiry response – where indications did not provide a reasonable spread, used 10% or 20% for endpoints Upon request, Management provided reasons for carrying at the end point
Case Study lessons Degree of ‘actuarial rigor’ used to develop the Range Reasonable to carry anywhere within the Range, but was the Range itself Reasonable? How will Management use the Range? Transparency: documentation of assumptions and calculations