1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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?

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. California Workers Comp Opinion Requirement- page 3
CA WC insurer insolvencies 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 CA WC specific

15. 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

16. 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

17. 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