1. 2003 Casualty Loss Reserve Seminar NAIC/AAA Loss Reserve Symposium for Readers and Writers of Loss Reserve Opinions

2. Symposium Panel Nancy Watkins FCAS, MAAA – Milliman USA Robert Eramo ACAS, MAAA – EPIC Actuaries Richard J. Roth FCAS – Bickerstaff Whatley Ryan & Burkhalter, Inc. Wendy Germani FCAS, MAAA – Texas Richard Marcks FCAS, MAAA – Connecticut Moderated by : Andrea Sweeny FCAS, MAAA- Casualty Actuarial Assistance Mary Miller FCAS, MAAA - Ohio

3. Who’s Signing Opinions Today? Domestics Only TXNYILPAOHCT Consultants Company 61% 39% 73.5% 26.5% 58% 41% 64% 36% 46% 54% 22% 78% FCAS72%N/A79%70%86%96% New in 2002 23%23.5%21% 20%19%

4. What’s Covered Today? Domestics Only TXNYILPAOHCT Number of companies 20820017714211969 Loss and LAE Reserves Direct Net 15.3 B 8.2 B 98.7 B 49.4 B 92.3 B 63.3 B 57.8 B 25.7 B 37.4 B 21.3 B 58.9 B 38.9 B Total Surplus12.8 B31.0 B76.3B21.3B20.7 B31.6 B

5. Distribution of Domestics by Surplus Size (in Millions) Less than $1 $1 to $5 $5 to $10 $10 to $50 $50 to $100 $100 to $500 Over $500

6. 2004 Changes Requires identification of person responsible for providing data used in actuarial analysis Moves numbers to Exhibit A – Scope and Exhibit B – Disclosures Greater definition of Actuarial Report Requires auditor to test key data for opinion

7. 2004 Changes -Risk of MAD Requires explicit statement of whether or not actuary reasonably believes there are significant risks and uncertainties that could result in material adverse deviation and why. The explanatory paragraph should not include general, broad statements about risks and uncertainties… nor is the actuary required to include an exhaustive list of all potential sources of risks and uncertainties. Materiality standard disclosed in $US.

8. Actuarial Report Defined Narrative and technical components. Requires exhibit which ties to AS and compares Actuary’s conclusions to carried amounts. Summary exhibit(s) of either the actuary’s point estimate, range of reasonable estimates, or both, that led to the conclusion in the OPINION paragraph regarding the reasonableness of the reserves.

9. Actuarial Report: New Specifications Requires Extended Comments on: Trends that indicate the presence or absence of risks and uncertainties that could result in material adverse deviation Factors that led to unusual IRIS ratios for Reserve tests (10,11,12), and how these factors were addressed in prior and current analyses.

10. Model Law What it Does Creates an Actuarial Opinion Summary document submitted March 15. Summary contains very basic data on the appointed actuary’s range or point estimate Protects the confidentiality of material in both the Report and the Summary Provides legal protection to the appointed actuary except in cases of fraud or willful misconduct by the actuary

11. Model Law The Enactment Process Passed Casualty Actuarial Task Force at the NAIC in June 2003 Must be ratified by parent committee at the NAIC in September, then Executive Committee and Plenary in December. Referred to states for legislative or regulatory action Expected to be requirement for accreditation

12. Model Law Actuarial Opinion Summary Required to be Sent only to domiciliary state Other states may request if they can demonstrate they can protect confidentiality Contains Net and Gross point estimate and/or range Company’s Net and Gross Carried Reserve Difference between the Company’s Net and Gross Carried reserves and the Appointed Actuary’s point estimate and/or range Discussion of any persistent adverse development (Schedule P 1 year test adverse by 5% of surplus or more in 3 of the last 5 years)

13. Whose Best Estimate? Management’s vs. the Actuary’s Why is there a difference? What is a reasonable tolerance? What’s a material difference between management’s and the actuary’s evaluation? What kind of documentation does management have for their estimate?

14. What is a Reasonable Range? Ranges often picked judgmentally. May be based on rules of thumb or actuary uses several estimation techniques and uses highest and lowest result as range. Should ranges rely more on stochastic analysis? Should ranges explicitly consider both process and parameter risk? What sort of ranges would such analysis yield?

15. What’s Material? SEC NAIC Threshold values Common Sense

16. What is it and should I think it’s a good thing? “It seems to be a matter of style” whether or not it is included “The company should have a plan as to when and how it is going to correct this defect” Is there resistance to including it in Opinion? Material Adverse Deviation Paragraph

17. Who’s Commenting on Risk of Material Adverse Deviation (MAD) Domestics Only TXNYILPAOHCT Number of opinions 353360301526 Percent of opinions 16%17%34%21%13%38% Surplus as measure 60%70%80%43%73%85% Reserves as measure 26%0%13%17%0% 4% Dollar amount(or other) 14%30%7%40%27%11%

18. Material Adverse Deviation and 1 st Quarter Development What should a regulator think when 1 st Quarter reserve development was over 10% and there was no material adverse deviation discussion in the opinion? Performance re: 2002 reserves 75 out 0f 2500 companies report > 10% development 18 had material adverse development discussions 20 didn’t file opinion for 2002 37 had no adverse deviation paragraph. One of these said adverse development was unlikely

19. What Kind of Opinion? Differences in Language ASOP 36 Classes Reasonable Excessive Inadequate Qualified No Opinion Reserve Certifications? “Clean” Opinions?

20. What is a Reasonable Opinion? Reasonable in the context of what is known/available to the actuary today? Can/Should it include the “there’s an outside shot if everything goes right” scenario?

21. Qualified Opinions ASOP 36 definition: “the reserves for certain items are in question because they can not be reasonably estimated” When does risk of material adverse deviation produce a qualified opinion? If the difference between the high end of a reasonable range and carried reserves is more than surplus, are those reserves reasonably estimable? Is a qualified opinion necessarily bad?

22. Disclosures Asbestos and Environmental reserves Are they estimable? reasonably estimable? Is the opinion a qualified one or not? Pools and Associations and Assumed Reinsurance. Reliance on Others: ASOP 36 guidance NAIC guidance Is the opinion a qualified one or not?

23. Disclosures Do I have to say that the company would be at the authorized control level if they had recorded my point estimate reserve? IRIS Tests “The company failed IRIS Test 10 because it increased its reserves on prior years”

24. IRIS 10, 11, 12 Failures Domestics Only TXILCTPAOH IRIS 10 4% 6%32%9% 3% IRIS 11 9%14%41%16% 6% IRIS 12 8%13%20%18%11% One or more 13%20%49%29%14%

25. Reports and Documentation Schedule P, Documentation MIA? “There has been a speed up in claim payments?” “There has been a strengthening of case reserves”, therefore…. Roll forwards of interim work Support for selected development factors

26. Do The Numbers Have to Add Up? Tying the report to the opinion and the Annual Statement ASOP 9 documentation Note 25(2003) and Schedule P Part 2 – Summary and by Line Change to A&E Note 33(2003) - Gross means Direct & Assumed

27. Questions for Regulators How can my work product be improved? Are you satisfied with the quality of Actuarial Opinions/Reports? If not, what is needed to make them better? What is your preferred definition of qualified opinion and what should I do if the definition varies from state to state?

28. Questions for Opinion Writers How can our Instructions be improved? What can we do to improve our partnership role in solvency monitoring? If you were a regulator for a day, what would you do differently and why?