Actuarial Opinions and ASOP Nos. 36 and 43

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1 Actuarial Opinions and ASOP Nos. 36 and 43 Lisa Slotznick, FCAS, MAAA Member, COPLFR February 2, 2011 February 2011

2 The advice presented here: Is discretionary, not mandatory Is not intended to set or enforce binding standards Is not a standard or statement of opinion of the Actuarial Standards Board, the Joint Committee on the Code of Professional Conduct, or the Committee on Qualifications Does not purport to describe accepted practice Should not be used as a substitute for your own professional judgment and discretion The views expressed in this presentation are those of the presenter and do not purport to represent the position of the American Academy of Actuaries. February

3 AGENDA ASOP No. 43, Unpaid Claim Estimates History Structure Purpose & Scope Issues & Recommended Practices Disclosures ASOP No. 36 (revision pending), Statements of Actuarial Opinion Refresher Second Exposure Draft February

4 History Until 2007, there was no ASOP on Unpaid Claim Estimates (or Loss Reserves). The Casualty Actuarial Society s Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves (currently under review) had served as guidance. Therefore, ASOP No. 43 was conceived and issued to be the authoritative guidance. February

5 Structure of the Standard Section 1: Purpose and Scope Section 2: Definitions Section 3: Analysis of Issues and Recommended Practice Section 4: Communications and Disclosures February

6 Section 1: Purpose and Scope of the Standard Applies to unpaid claim (loss and expense) estimates for events that have occurred as of a given balance sheet date Does not apply to estimates solely for ratemaking or health/disability claims that may be covered by other ASOPs (but applies to health benefits in connection with workers compensation liabilities) Applies to unpaid claim estimates communicated as an actuarial finding in written or electronic form Internal work products supporting a position on reserves Analysis and report supporting a prescribed Statement of Actuarial Opinion on Loss Reserves February

7 Section 1: Scope of the Standard COPLFR s Practice Note for the Statement of Actuarial Opinion (SAO) on Property and Casualty Loss Reserves includes a reminder to document work to demonstrate compliance with ASOP No. 43. ASOP No. 43 raises issues related to documentation and consistency of practice. The actuarial report supporting a prescribed SAO must contain the documentation required by ASOP No. 43. February

8 Section 2: Definitions This section of the standard provides good definitions of useful terms. As I go through the presentation, I will discuss particular definitions in the context of detailed portions of the standard. Consider using the definitions within the standard in the report supporting the prescribed SAO. February

9 Section 3: Issues and Recommended Practices Purpose of the unpaid claim estimate Constraints Scope of the estimate Materiality Nature of unpaid claims Methods and models, assumptions, etc. Reasonability, consistency, and presentation Documentation February

10 Section 3.1: Purpose or Use of Unpaid Claim Estimate For the Prescribed Statement of Actuarial Opinion on Property and Casualty Loss Reserves (under the revised U.S. Qualification Standards, all PSAOs are considered SAOs), the intended purpose is self-evident, and the users would likely be: Regulators Board of Directors Management Any other users are ancillary. The purpose of the actuarial report related to an SAO is to support the conclusions in the opinion. February

11 Section 3.3: Scope of the Unpaid Claim Estimate Intended Measure Identification of the intended measure of the unpaid claim estimate examples: Mean Mean plus risk margin Median Low estimate High estimate 75th percentile Best estimate and actuarial estimate are not sufficient identifications of the intended measure. February

12 Section 3.3: Scope of the Unpaid Claim Estimate Intended Measure Intended measure in the context of an NAIC actuarial opinion Management s best estimate Opining actuary s measure of reasonability of management s best estimate Places to put a reference to the actuary s intended measure for NAIC opinions Actuarial Opinion Summary (AOS) Report supporting the NAIC opinion February

13 Section 3.3: Scope of the Unpaid Claim Estimate Intended Measure Definition of Actuarial Central Estimate An estimate that represents an expected value over the range of reasonably possible outcomes Does not include all conceivable outcomes Is not necessarily result of a probability distribution Is not a precise statistical measure, not a statistical mean February

14 Section 3.3: Scope of the Estimate Gross and net indication Collectability risk Types of claims adjustment expense Types of claims Other scope items (exclusions) February

15 Section 3.4: Materiality Actuary to evaluate materiality based on professional judgment to determine what might be disregarded Not exactly the same as materiality for a Risk of Material Adverse Deviation February

16 Section 3.5: Nature of Unpaid Claims The actuary should understand the nature of the unpaid claims being estimated: Coverage Conditions or circumstances that make a claim more or less likely or the cost more or less severe frequency and severity characteristics The underlying claim adjustment process Potential recoverables February

17 Section 3.5: Nature of Unpaid Claims Other considerations in understanding the nature of claims: Methods used to sell or provide coverages Distribution channels from which the entity s business is obtained General underwriting and pricing practices of the entity Marketing objectives and strategies of the entity, and Relevant reinsurance program changes February

18 Case Study Changes to Operation and Markets Details Claim department operations New management Change to case reserving and settlement practices Significant growth and expansion into new markets in the past 5 years Key Issues/Considerations Add l Financial Data/Information Net reserves (held and indicated): $400 million Reserve in new lines: $200 million Surplus: $200 million Operational changes and rapid growth make prior experience less relevant to the estimate of unpaid liabilities. External data and benchmark development patterns used to supplement company data May not match the company s future experience Increased uncertainty February

19 Case Study Sample opinion language Significant changes in claim operations over the past five years create additional uncertainty in estimating the company s loss and LAE development patterns due to lack of complete historical data. The company experienced rapid growth in net premium over the past five years. Primary drivers of this growth include the introduction of MGA business and the entrance into new workers compensation markets in This rapid growth into new areas, for which there is not complete historical data, necessitates considerable reliance on benchmark development patterns. In my opinion, these benchmarks are relevant to the operations of the company; however, their use increases the uncertainty of the company s reserves. February

20 Section 3.6: Unpaid Claim Estimate Analysis Methods and models Assumptions Data Recoverable interaction Gross versus net External conditions Changing conditions Uncertainty February

21 Section 3.6.1: Methods and Models Nature of the claims and underlying exposures Claim development characteristics Characteristics of available data Applicability of methods or models to the data Reasonableness of the assumptions underlying each method or model Use of more than one method Consistency with prior valuations February

22 Section 3.6.1: Methods and Models Multiple methods Disclosure if only one method Apply to one or many components of the reserve Consistency Across time Across coverages February

23 Section 3.6.2: Assumptions Reasonability of explicit and implicit assumptions Sensitivity of the results to reasonable alternative assumptions Particular requests for assumptions and disclosure February

24 Sections and External and Changing Conditions External conditions Cognizant of environment that might impact estimates economic, regulatory, legal, and judicial Changing conditions Consideration of changes not fully reflected in data related to claims handling, exposures, reinsurance Support for such changes February

25 Section 3.6.8: Uncertainty Types and sources of uncertainty: Correlation Model risk Parameter risk Process risk February

26 Section 3.7: Unpaid Claim Estimate Reasonableness of estimates Benchmarks Peer review Consistency of estimate across components Comparison among components Consider materiality Presentation in relation to intended purpose February

27 Section 4.1: Actuarial Communication Primary Disclosures: Intended purpose Significant limitations and constraints Scope of the unpaid claim estimate Key dates (accounting, valuation, and review) Specific significant risks and uncertainties Significant events, assumptions, or reliances February

28 Section 4.1: Actuarial Communication Mandatory dates to disclose: Accounting date, which is the date used to separate paid versus unpaid claim amounts; Valuation date, which is the date through which transactions are included in the data; and Review date, which is the cutoff date for including information known to the actuary in the analysis. Sample Language: The unpaid claim estimate as of December 31, 2009 was based on data evaluated as of November 30, 2009 and additional information provided to me through January 17, February

29 Section 4: Communications and Disclosures Additional Disclosures When the actuary specifies a range of estimates, the actuary should disclose the basis of the range provided. When the actuary has performed an analysis in the past, changes in assumptions from prior analysis are to be described but not quantified. February

30 Section 4: Communications and Disclosures Deviation from standard Disclosure item when a deviation exists Alert the reader of the deviation Describe why there is a deviation Consideration of discipline and litigation February

31 ASOP No. 36 (revision pending) Statements of Opinion Regarding Property Casualty Loss and Loss Adjustment Expense Reserves Refresher on ASOP No. 36 Second Exposure Draft of Revised ASOP No. 36 ASB has not adopted this version and has the right to make any changes to ASOP No. 36. February

32 ASOP No. 36 (revision pending) Refresher Opinions Required by law Represented by actuary as an SAO Professional qualifications Professional guidance Statement of Principles on Loss Reserves ASOP No. 20, Discounting of Property and Casualty Loss and Loss Adjustment Expense Reserves Contents of a Statement of Opinion Disclosures February

33 ASOP No. 36 (revision pending) Contents of Actuarial Opinions Items covered by the opinion Types of Statements of Actuarial Opinions Significant risks and uncertainties Materiality Reserve analysis Uncertainty Range of reasonable estimates Reinsurance ceded February

34 ASOP No. 36 Second Exposure Draft Motivations for a re-written ASOP Consistency with ASOP No. 43 Status revision pending Comment deadline was June 30, 2010 Comments posted on Actuarial Standards Board website Not effective for 2010 Opinions February

35 ASOP No. 36 Second Exposure Draft: Scope and Purpose Scope NAIC (specifically mentioned) Prescribed by law or regulation SAO represented by actuary as in compliance with the standard Legal and regulatory requirements Knowledge of these requirements Purpose of the Statement of Actuarial Opinion Identify the purpose of the SAO. February

36 ASOP No. 36 Second Exposure Draft: Reserves opined upon Identify reserves being opined upon Reserve amount Accounting date Accounting standards Basis of the reserves being opined upon Nominal or discounted Existence of risk margin Gross or net of specified recoverables Extent collectability risk reflected Specific types of loss adjustment expense covered Claims covered by the reserve February

37 ASOP No. 36 Second Exposure Draft: Analysis Scope of the analysis underlying SAO Valuation and review dates Separate reserves opinion in aggregate or not Materiality Reserve analysis Reasonable range discussion Actuary s analysis or review of another actuary s analysis. Removal of reference to relying on another actuary s opinion February

38 ASOP No. 36 Second Exposure Draft: Other Practices Prior opinion Adverse deviation Reinsurance ceded Types of SAOs February

39 ASOP No. 36 Second Exposure Draft: Disclosures Statement of Actuarial Opinion Intended users Intended purpose Reserves opined upon Basis of reserves Scope of analysis Type of opinion Significant risk and uncertainties that could result in material adverse deviation Additional disclosures February

40 For more information, contact: Lauren Pachman, Casualty Policy Analyst (202) February