1. Ranges & Actuarial Opinions: A Regulatory Perspective Nicole Elliott, ACAS, MAAA Texas Dept of Insurance

2. 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

3. 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

4. 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?

5. AOS Review (Point, Range, or Both – Net basis) Point46754% Range14517% Point & Range24829% Total859

6. 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?

7. 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?

8. 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 0 9085% < 5% Below 7195% B/W 5 % 10% Below 1497% > 10% Below 17100% 666

9. 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?

10. 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

11. 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?

12. 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

13. 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?

14. 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

15. 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

16. Case Study cont  What else is happening in CY?  Where were Carried Reserves?

17. 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

18. 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