CAS Exam 6 (US) - SAO, AOS, Actuarial Report Questions and Answers 2023

CAS Exam 6 (US) - SAO, AOS, Actuarial ReportNAIC National Association of Insurance Commissioners -- coordinates regulation of (but does NOT regulate) insurance across the US -- missions: protect PHs by combining market and financial regulation Common documents filed with state insurance regulators SAO (Statement of Actuarial Opinion), AOS (Actuarial Opinion Summary), IEE (Insurance Expense Exhibit), RBC (Risk-Based Capital), IRIS Ratios (Insurance Regulatory Information System) SAO Submission Statement of Actuarial Opinion -- included with the Annual Statement -- submitted by Mar 1 to domiciliary state and NAIC -- public document What is the purpose of the SAO? OIA Opinion - Provide the appointed actuary's opinion on reserve amounts for items in SAO scope (reasonable, inadequate, excessive, etc.) Inform - inform readers/regulators of significant risk factors regarding reserves Advise - advise whether risk factors could lead to Material Adverse Deviation (MAD) Intended Users of SAO regulators, board of directors, management, investors, general public Organization of the SAO ISOR + (A,B) -- identification -- scope -- opinion -- relevant comments -- exhibit A -- exhibit B Exemptions from filing the SAO or AOS SLuSH -- Size: 1M annual GWP or 1M gross reserves at year-end -- LOB: certain lines -- Supervision: insurer under supervision -- Hardship: cost of the SAO exceeds the lesser of (1) 1% of CY capital & surplus from last quarterly statement, or (2) 3% of GWP for year (projected from last quarterly statement) SAO Identification -- Actuary's name/title (name of firm if consulting actuary) -- intended purpose/users WARD -- who made appointment (ex: board of directors) -- affirmation of qualifications -- relationship to company -- date of appointment (by 12/31 of opinion CY) SAO Scope PAID -- [intercompany] pooling -- accounting basis for reserves -- [reserve] items in opinion -- [reflects] disclosures in Exhibit B paragraph about data source -- "In forming my opinion on the LLAE reserves, I relied upon data evaluated as of ... prepared by ..., [title], and other information provided to me through the date of this opinion." -- data source/provider (must be a company officer) -- review date -- reviewed data for reasonableness/consistency -- reviewed methods/assumptions -- reconciliation to SchP, Part 1 of current Annual Statement Review Date date subsequent to valuation date (and prior to sign date) through which material info known to the actuary is included in the analysis SAO Opinion In my opinion, on Exhibit X: (A): reserves meet insurance laws for State X (B): reserves are computed in accordance with actuarial standards (C): type of opinion; R, I, E, Q, or N (reasonable, inadequate, excessive, qualified, none) (D) miscellaneous (other loss reserve items, work with others, etc.) SAO Opinion Language - Part C -- inadequate: state min estimate and difference from carried -- excessive: state max estimate and difference from carried -- qualified: state the item(s) excluded, the reason, and the amount of carried reserve for the excluded items -- none: state that a reasonable estimate is unable to be determined and why SAO Relevant Comments -- comments & disclosures to aid reader's understanding -- items 1: materiality standard; discuss company-specific risks (don't need to be RMAD) -- item 2: RMAD -- item 3: exhibit B (Disclosure items 8-14) -- item 4: reinsurance (retroactive) -- item 5: reinsurance (uncollectible) -- item 6: IRIS ratios 11, 12, 13 -- item 7: material changes in reserving assumptions/methods since prior opinion -- item 8: other material info SAO Exhibit A recorded amounts for items mentioned in the scope 1. reserve for unpaid losses 2. reserve for unpaid LAE 3. reserve for unpaid losses - direct & assumed 4. reserve for unpaid LAE - direct & assumed 5. [write-in] retroactive reinsurance reserve assumed 6. other loss reserve items opined upon 7. reserve for direct & assumed UEP for P&C long duration contracts 8. reserve for net UEP for P&C long duration contracts 9. other premium reserve items opined upon SAO Exhibit B - first 6 disclosures disclosure items regarding NET reserves in the scope 1. name of appointed actuary 2. relationship to company (E = employee, C = consultant) 3. designation (F = FCAS, A = ACAS, M = MAAA, O = Other) 4. Opinion Type (R, I, E, Q, N) 5. Materiality Standard 6. any risks that could result in MAD? (Yes, No, N/A) Materiality Standard An omission, understatement, or overstatement that's likely to affect either the intended principal user's decision-making or their reasonable expectations. Add the selected standard to carried reserves. If this amount if the max estimate, there is RMAD. Materiality Considerations SIC: -- Sophistication of the user -- Importance of concept to user -- Complexity of concept Materiality Possible Actions RID -- Refine the item (sufficiently accurate?) -- Include the item (consider it in data) -- Disclose the item Common Methods for Selecting Materiality Standard Percentage-Based Standards: -- % of L+LAE reserves, bc this may cause management to make different decisions -- % of surplus, bc regulators use this to monitor solvency -- % of net income Regulatory Ratio Based Standards: -- reduction in surplus that would trigger next RBC action level -- amount that would trigger unusual IRIS ratio SAO Opinion Types -- Reasonable: within actuary's range of unpaid claim liabilities -- Excessive: recorded is high -- Inadequate: recorded is low -- Qualified: unable to issue opinion on certain material items (reserves can still be in range) -- None: unable to conclude if reasonable Last Thing Actuary Must Do Regarding SAO -- sign -- submit with Annual Statement by March 1 -- keep all supporting docs for 7 years AAA American Academy of Actuaries aka "Academy" ABCD Actuarial Board for Counseling and Discipline "Qualified Actuary" (i) Meets education, experience, and CE requirements of Specific Qualification Standards promulgated by the AAA (ii) maintains an Accepted Actuarial Designation (iii) is a member of a professional actuarial association that requires adherence to the AAA code of conduct, requires adherence to US Qualification Standards, and participates in ABCD when practicing in US Exceptions to parts (i) and (ii) of "Qualified Actuary" when the actuary is evaluated by the AAA's Casualty Practice Council and is determined to be a Qualified Actuary for particular lines of business and business activities If "Qualified Actuary" is approved by the domiciliary commissioner the company must attach, each year, the approval letter and reference it in the Identification paragraph US Qualification Standards (General) -- MAAA, FCAS, ACAS, FSA, or fully qualified member of another IAA-member organization -- 3 years responsible actuarial experience -- knowledge of applicable law through exam or documented professional development -- either: highest membership level in IAA org and 1 year experience in relevant area, OR 3 years experience in relevant area -- 30 hours of "relevant" CE: 6+ "organized activities," 3+ professionalism, = 3 general business US Qualification Standards (Specific) -- Complete relevant exams administered by AAA or CAS, or obtain signed statement from another qualified actuary -- 3 years experience relevant to SAO subject -- 15 CE hours per year related to the particular topic -- 6+ CE "organized activities" Any Required "Experience" as a Qualified Actuary responsible actuarial experience in the relevant area under review of an actuary qualified at the time Required Actuarial Exam Subjects/Categories -- policy forms and coverages, underwriting, and marketing -- principles of ratemaking -- statutory insurance accounting and expense analysis -- premium, loss, and expense reserves -- reinsurance Exams that span multiple categories can be entered under the most applicable or spread across multiple Exception to Accepted Actuarial Designation use experience and/or CE in place of specific exams; applies only to those who earned their FCAS or ACAS prior to 2021 Change in Appointed Actuary (actions) -- within 5 bus days, notify the DOI -- within 10 bus days, inform commissioner of any disagreements with former AA in last 24 months about SAO content -- contact the former AA for their response to any disagreement(s) -- appoint a new AA by year-end to opine the current year's SAO Scope - Basis for Presentation -- Nominal or discounted? What is the basis for the interest rate? -- Explicit risk margin included? What's the basis? -- Gross or net of specified recoverables? -- Potential for uncollectible recoverables? -- Types of unpaid LAE? -- If opinion is only for a portion of the reserve, what's the claim exposure to be covered by the opinion? -- Any other items needed to describe the reserves sufficiently for evaluation Intercompany Pooling (definition) Uses quota share reinsurance to cede all pooled business to a lead entity and then retrocede back to participating insurance companies per fixed and predetermined shares. Intercompany Reinsurance vs Pooling SAO -- pool: opinion similar to lead entity; scope disclosures needed -- reins: normal opinion Collectibility -- pool: none -- reins: disclose potential uncollectability of losses RMAD -- pool: standard = 0, or RMAD = n/a -- reins: normal disclosures Data Testing Requirement Auditor's responsibility to determine which data elements are to be included in the testing procedures of the financial statement audit. -- Actuary is responsible for identifying the data they deem significant to their reserve evaluation -- Auditor is retained by the insurance company (not actuary) Where can relevant state laws be found? -- 2020 P/C Reserve Law Manual -- Website of the state regulatory authority -- Directly contact the state regulator Qualified Opinion Disclosures -- the item(s) excluded -- reason for qualification -- amount for such item(s) or that the information wasn't disclosed by the company Using Work of Another Considerations: -- Credentials of other person -- Proportion of reserves relative to total -- Nature of coverage (short or long tailed?) -- Effect of variations in their estimate Opinion section: -- other actuary: identify name, credential(s), and affiliation -- non-actuaries: identify name and affiliation, and provide description of the type of analysis performed -- if unable to determine if it's reasonable to use their work, may issue a qualified opinion Net Paid Loss Reconciliation -- what: cumulative or incremental CY net paid loss -- where: reconcile to SchP Part 1 -- granularity: by line of business and AY -- disclose any differences -- disclose if relying on reconciliation performed by someone else Revelant Comments - ASOP 36 Disclosures -- intended user(s)/purpose of the SAO -- stated basis of reserve presentation -- whether any material asssumption or method was prescibed by applicable laws -- whether the Appointed Actuary disclaims responsibility for any material assumption/method selected by another party Relevant Comments - COVID impacts (particularly for AY 2020) -- premium refunds -- rate reductions -- policyholder dividends Revelant Comments - Company Risk Factors Company-specific (DONGAS) -- data (thin or unexplained changes) -- operations (qualitative changes) -- new products/markets -- growth (rapid in 1+ segments) -- changes in adequacy of case reserves -- changes in severity or frequency General (CACCLD) -- catastrophic weather -- A&E, mass torts (asbestos) -- cyber liability -- COVID -- [new] legislation -- distributional changes in limits, attachment points, deductibles Revelant Comments - Risk of Material Adverse Deviation (RMAD) ~1/3 SAOs conclude that RMAD exists RMAD -- RISK: identify major factors underlying significant risks relevant to the entity -- ** Materiality Standard: identify materiality standard ($) and how the amount was determined (ExhB, item 5) and state if there's reasonable belief of RMAD (ExhB, item 6). Language must at least include these 3 items. -- ANY steps taken to mitigate risks? -- DIFFERENCE: explain if RMAD conclusions differ on net and direct/assumed reserves Revelant Comments - Reinsurance (Collectability) -- default risk: unable to pay -- dispute risk: unwilling to pay when assessing collectability, Actuary should review [ReInS]: -- REinsurer ratings from a recognized rating service -- INfo from management on known issues -- SchF for current year paid losses 90 days past due considerations in collectability [ACCEPT]: -- amount material? -- concentrated? -- collateral or other reserves held to offset -- evaluate financial strength of reinsurer -- public information -- the reliance on work of others Relevant Comments - Reinsurance (Balances) Ceded reinsuranace recoverable balances can be found: -- SchF, part 3: all balances -- Page 2 (Assets): ceded paid losses -- Page 3 (Liabilities): ceded case and IBNR reserves -- U/W & Investment Exhibit and SchP: ceded case and IBNR reserves -- Statutory Annual Statement Note 23D: uncollectible reinsurance Revelant Comments - Material Changes to Methods and Assumptions Disclose what they are, or disclose if it's a newly Appointed Actuary that doesn't review the work of the prior Appointed Actuary. Revelant Comments - Other Items RCOM (like Relevent COMments) -- reinsurance with affiliates -- catastrophic risk -- other premium reserves -- mergers or acquisitions Exhibit A & B Format -- follow NAIC SAO instructions; no items deleted and include write-in lines if applicable -- any non-zero values should be explained in Relevant Comments -- ExhB: identify and discuss any differences to direct/assumed amounts in Relevant Comments Intercompany Pooling in SAO -- List the companies share amounts (Exh A/B, SchP) unless 0% share, then provide lead company info as an addendum Scope: -- description of the pool -- identification of lead company -- participating company list with state of domicile and pool % -- how the data was reconciled to SchP (pooled basis or for each company?) Concerns when Reconciling Data to Schedule P T-SALAD -- SchP Part 1 may include TABULAR discounts not included in the data -- different accounting for S&S (net vs. gross) -- different AGGREGATION of data -- some coverages are LONG tailed and SchP only includes 10 years of data -- manual ADJUSTMENTS in either SchP or data -- different DATE of information Concerns when Determining Materiality -- different users may have different expectations -- professional judgment is used -- Actuary doesn't know the impact of the work product on indirect users Unpaid Claim Estimate Appointed Actuary's estimate of the obligation for future payment resulting from claims due to past events Actions when data errors impact the SAO FIRST, check if the error is material, if so then: -- within 5 bus days, AA should notify the company with a summary of the error reason and an amended SAO -- within 5 bus days of notificaiton, the company forward a copy of the summary and amended SAO to the comiciliary commissioner and notify the AA -- if AA not notified, they must notify the domiciliary commission within 5 bus days that the submitted SAO should no longer be relied upon