1. Reserve/Opinion Issues from a Regulatory Perspective Items not in the recent actuarial opinion proposal Ralph Blanchard September 24, 2002

2. Auditing the actuarial data Materiality standards – GAAP definition Range and/or best estimate (public) disclosure Confidentiality protection Forward looking statements (e.g., IRIS ratios) 51 Different Flavors How to be heard Items not in the recent proposal Overview 2002 CLRS – September 24, 2002

3. Items not in the recent proposal Auditing the actuarial data Original proposal -Required audit of the actuarial data -Certification of the data (“accurate and complete”) Rationale -Good analysis of incomplete data = incomplete review -Life side has certification 2002 CLRS – September 24, 2002

4. Items not in the recent proposal Auditing the actuarial data Cont’d. Opposition -Actuaries aren’t auditors -High cost, strain on resources -Overlap with reconciliation requirement -Audit scope too large relative to benefit -“Accurate and complete” and statistical data – oxymoron -Life side reserving data versus P&C side data -Is this really a problem? 2002 CLRS – September 24, 2002

5. Resolution -Disclose the data source -Raise audit issue with AICPA, statutory audit rule makers -Issue still open Items not in the recent proposal Auditing the actuarial data Cont’d. 2002 CLRS – September 24, 2002

6. Items not in the recent proposal Materiality standards – GAAP definition GAAP Definition of Materiality SEC Staff Accounting Bulletin No. 99 “A matter is “material” if there is a substantial likelihood that a reasonable person would consider it important” Statement of Financial Accounting Concepts (SFAC) No. 2 “The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.” 2002 CLRS – September 24, 2002

7. Original Proposals -Dictate a materiality threshold -Require disclosure if threshold different from X Rationale -Need to know what standard the actuary is using when they say no risk of material adverse deviation exists Items not in the recent proposal Materiality standards – GAAP definition Cont’d 2002 CLRS – September 24, 2002

8. Opposition -Inconsistent with GAAP standard -Dollar threshold may (should?) vary by reserving issue -Still subjective – doesn’t solve anything Resolution -Disclose fixed dollar amount materiality standard -Only apply to discussion of “risk of material adverse deviation” discussion Items not in the recent proposal Materiality standards – GAAP definition Cont’d 2002 CLRS – September 24, 2002

9. Original Proposals -Include in actuarial opinion either actuary’s best estimate OR range of reasonable estimates Rationale -Recent failure – held was moving down the range -Regulator needs more info than just yes/no opinion Items not in the recent proposal Range and/or best estimate (public) disclosure 2002 CLRS – September 24, 2002

10. Opposition Items not in the recent proposal Range and/or best estimate (public) disclosure Cont’d. -Public disclosure will be misused -Requires actuary to publicly second-guess management’s “best estimate” -If actuary lower, IRS will use to raise taxes -If actuary higher, regulators or rating agencies can use against company Which number would (should) public use, management’s or actuaries? 2002 CLRS – September 24, 2002

11. Items not in the recent proposal Range and/or best estimate (public) disclosure Cont’d. Resolution -Include best estimate or range in the actuarial report -Develop model law to protect report confidentiality -Once confidentiality protected, have protected estimate/range filed 2002 CLRS – September 24, 2002

12. Items not in the recent proposal Confidentiality of actuarial report Original proposal -Make actuarial report confidential -Possibly require (confidential) report to be filed with state Rationale -Actuarial opinion doesn’t provide enough info for regulator -Actuarial reports provide better info -Companies resist filing actuarial report (confidentiality concerns) -Life insurer actuarial “memorandum” are confidential 2002 CLRS – September 24, 2002

13. Items not in the recent proposal Confidentiality of actuarial report Cont’d. Opposition -Annual Statement instructions can’t protect confidentiality -Need a law change to protect confidentiality Resolution -Model law being developed to protect confidentiality -Possibly have summary (protected) report filed with state 2002 CLRS – September 24, 2002

14. Items not in the recent proposal Forward looking statements (e.g., IRIS ratios) Original Proposal -If unusual values for IRIS ratios 10, 11 or 12, discuss: “why the regulator should have confidence that unusual factors should not be expected next year?” Rationale -Force awareness of issues raised by IRIS ratio unusual values -Require action to fix the problems indicated by such unusual values 2002 CLRS – September 24, 2002

15. Items not in the recent proposal Forward looking statements (e.g., IRIS ratios) Cont’d Opposition -Requires statements as to future management actions (not actuary’s role) -Presumes that unusual IRIS ratios always indicate problems -Legal liability for actuary Resolution -Require discussion of how situation causing IRIS ratio unusual value is addressed in opinion 2002 CLRS – September 24, 2002

16. Items not in the recent proposal 51 Different Flavors Each state is free to interpret annual statement instructions as they see fit Potential solution -Minimize ambiguity in opinion instruction language -COPLFR practice note (not binding on actuary or state) 2002 CLRS – September 24, 2002

17. Items not in the recent proposal How to be heard How can you be heard in the opinion development process? Pay attention early on Know the NAIC process Actuarial Opinion set by annual statement instructions Instruction change for opinion has to flow through -NAIC CATF – Actuarial Opinion Instructions Working Group -NAIC CATF (June 30, X-2) -NAIC Blanks Committee (October, X-2) -NAIC Financial Condition (E) Committee(December, X-2) -NAIC Plenary (March, X-1) -Effective 1Q, year X 2002 CLRS – September 24, 2002

18. Items not in the recent proposal How to be heard Cont’d How can you be heard in the opinion development process? Cont’d Respond early – with focus on -What the real problem is -How to fix the problem -Whether the proposed fix is worthwhile -Can the proposed fix be improved Don’t focus on implementation mechanics/fine details The earlier in the process, the easier it is to make changes 2002 CLRS – September 24, 2002