1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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