Copyright 2011 by the American Academy of Actuaries Southwest Actuarial Forum June 2011 0 Lisa...

Copyright © 2011 by the American Academy of ActuariesSouthwest Actuarial ForumJune 2011

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Lisa Slotznick, FCAS, MAAAMember, COPLFR

Revised ASOP No. 36 & Revised ASOP No. 36 & ASOP No. 43ASOP No. 43

Southwest Actuarial ForumSouthwest Actuarial ForumJune 10, 2011June 10, 2011


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The advice presented here: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.


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AgendaAgenda

Practical applications of ASOP No. 36 and ASOP No. 43 ASOP No. 36, Statements of Actuarial Opinion

History and Background Structure Purpose and Scope New or Reframed Sections Mostly Unchanged Sections

ASOP No. 43, Unpaid Claim Estimates History Purpose and Scope Definitions, Issues, and Recommended Practice Actuarial Communications and Disclosures


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Practical applications Practical applications ASOP No. 36 and ASOP No. 43 ASOP No. 36 and ASOP No. 43

Direct application Reserving assignments Statement of actuarial opinion assignments

Indirect application Pricing assignments the results of which may be used in

a reserving assignment Areas in which there are no on-point standards and

nonbinding guidance is sought Litigation


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ASOP No. 36 ASOP No. 36 History and backgroundHistory and background

Statements of Actuarial Opinion regarding property/casualty loss and loss adjustment expense reserves

Originally adopted in 2000 Reasons to revise ASOP No. 36:

Consistency with ASOP No. 43 Consistency with current ASOPs

Revision process included two exposure drafts Effective date: Opinions issued on and after May 1,

2011


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ASOP No. 36ASOP No. 36Structure of the standardStructure of the standard

Section 1: Purpose and scope

Section 2: Definitions

Section 3: Analysis of issues and recommended practice

Section 4: Communications and disclosures


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ASOP No. 36ASOP No. 36Purpose and scope of the standardPurpose and scope of the standard

Written statement of actuarial opinion (SAO) under particular circumstances In compliance with NAIC Property and Casualty Annual

Statement Instructions

Otherwise prescribed by law or regulation

Represented by actuary as being in compliance with this standard

Items other than loss and loss-adjustment expense reserves are not covered by this ASOP, even if the particular SAO includes those items


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ASOP No. 36ASOP No. 36New or reframed sectionsNew or reframed sections

Dates—explicit definitions the same for ASOP No. 36 and ASOP No. 43

Accounting date, used to separate paid versus unpaid claim amounts

Valuation date, through which transactions are included in the data

Review date, the cutoff for including information known to the actuary in the analysis

Disclosure requirements differ between ASOP No. 36 and ASOP No. 43

ASOP No. 36 requires accounting and review dates;

ASOP No. 43 requires all three dates.

Sample Language: The unpaid claim estimate as of Dec. 31, 2010, was based on data evaluated as of Nov. 30, 2010, and additional information provided to me through Jan. 17, 2011.


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Reserve opined upon—explicit disclosure requirement

Reserve amounts

In the aggregate or not aggregated

Accounting standards—Statutory, GAAP, IFRS, etc.


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Role of ASOP No. 43

Previously, ASOP No. 36 provided guidance on performing the underlying review of the unpaid claim estimates and included reference to Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves

ASOP No. 43 reference replaces that guidance

ASOP No. 43 governs the work underlying the report that is prepared to support an NAIC opinion


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Use of another’s unpaid claim estimate Making use of the work of another

Previously, reliance on the opinion of another

Making use is not the same as reliance

Inclusion of the analysis, as well as the opinion of another

Use only when reasonable to do so

Review Opinion no longer is recognized

Explicit guidance for determining when it is reasonable to use another’s work


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Use of another’s unpaid claim estimate Additional explicit review procedures and disclosures

Amount of reserves relied upon

Nature of exposure and coverage of this portion of the reserve

Inherent variability of the exposure and impact on aggregate reserves of this variability

Credential of the individual preparing the analysis

Additional review procedures over work relied upon and the results


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ASOP No. 36ASOP No. 36New or reframed sectionsNew or reframed sections—s—summaryummary

Dates—explicit disclosure requirements

Reserve opined upon—explicit disclosure requirement

Accounting standards

Acknowledgement of role of ASOP No. 43

Use of another’s unpaid claim estimate


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ASOP No. 36ASOP No. 36Mostly unchanged sectionsMostly unchanged sections——summarysummary

Basis of presentation

Scope of analysis

Materiality

Reserve evaluation

Types of opinions

Explanatory paragraph and significant risks of material adverse deviation


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ASOP No. 36ASOP No. 36Mostly unchanged sectionsMostly unchanged sections

Basis of Presentation Understand nature of the reserves

Nominal versus discounted

Monetary value of the discount

Interest rate used

Explicit risk margin—explicit disclosure

Gross or net of specified recoverables

Potential for uncollectable recoverables, particularly reinsurance


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ASOP No. 36ASOP No. 36Mostly unchanged sectionsMostly unchanged sections

Scope of analysis Explicit statement of scope

Reserve evaluation Responsible for work of staff

Types of opinions

Significant risks of material adverse deviation (RMAD)

Explanatory paragraph accompanies assertion of RMAD


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ASOP No. 36ASOP No. 36Mostly unchanged sections of ASOPMostly unchanged sections of ASOP

Materiality

Actuary to evaluate materiality based on professional judgment

Not only materiality for an RMAD Applies to determination of applicability of various sections of

the ASOP Materiality defined in both ASOP No. 36 and ASOP

No. 43


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ASOP No. 36ASOP No. 36Guidance for preparing opinionsGuidance for preparing opinions

COPLFR’s Practice Note for the SAO on Property and Casualty Loss Reserves

P/C Effective Loss Reserve Opinion Seminar: Tools for the Appointed Actuary

COPLFR’s Property/Casualty Law Manual

http://www.actuary.org/pdf/casualty/2010_PN_12210_EFINAL.pdf



http://www.actuary.org/pcmanual10.asp


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ASOP No. 43 ASOP No. 43 HistoryHistory

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 had served as guidance

ASOP No. 43 therefore was conceived and issued to be the authoritative guidance

Effective June 2007


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ASOP No. 43ASOP No. 43Section 1: Purpose and scope of the standardSection 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 (PSAO) on loss reserves (under the revised U.S. Qualification Standards, all PSAOs are considered SAOs)


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ASOP No. 43ASOP No. 43Section 2: Definitions Section 2: Definitions

Consider using the definitions within the standard in the written report supporting the work performed pursuant to the ASOP


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ASOP No. 43 ASOP No. 43 Section 3: Issues and recommended practicesSection 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


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ASOP No. 43ASOP No. 43Section 3.1: Purpose or use of unpaid claim estimateSection 3.1: Purpose or use of unpaid claim estimate

For the prescribed SAO on property and casualty loss reserves, the intended purpose is self-evident, and the users likely would be: Regulators Boards of Directors ManagementAny other users are ancillary

The purpose of the actuarial report related to an SAO is to support the conclusions of the opinion.


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ASOP No. 43ASOP No. 43Section 3.3: Scope of the unpaid claim estimate Section 3.3: Scope of the unpaid claim estimate

intended measureintended 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


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ASOP No. 43ASOP No. 43Section 3.3: Scope of the unpaid claim estimate Section 3.3: Scope of the unpaid claim estimate


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


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ASOP No. 43ASOP No. 43Section 3.3: Scope of the unpaid claim estimateSection 3.3: Scope of the unpaid claim estimate


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


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ASOP No. 43ASOP No. 43Section 3.3: Section 3.3: Scope of the estimateScope of the estimate

Gross and net indication Collectability risk Types of claims adjustment expense Types of claims Other scope items (exclusions)


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ASOP No. 43ASOP No. 43Section 3.5: Nature of unpaid claimsSection 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


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ASOP No. 43ASOP No. 43Section 3.5: Nature of unpaid claimsSection 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 Relevant reinsurance program changes


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Case studyCase study——Changes to operation and Changes to operation and marketsmarkets

Claim department operations New management Change to case reserving and

settlement practices Significant growth and expansion

into new markets in the past five years

Net reserves (held and indicated): $400 million

Reserves 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

Details Add’l Financial Data/Information

Key Issues/Considerations


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Case studyCase study——Sample opinion languageSample 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 2009. 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. Their use, however, increases the uncertainty of the company’s reserves.


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ASOP No. 43ASOP No. 43Section 3.6: Unpaid claim estimate analysisSection 3.6: Unpaid claim estimate analysis

Methods and models Assumptions Data Recoverable interaction Gross versus net External conditions Changing conditions Uncertainty


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ASOP No. 43ASOP No. 43Section 3.6.1: Methods and modelsSection 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


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ASOP No. 43ASOP No. 43Section 3.6.1: Methods and modelsSection 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


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ASOP No. 43ASOP No. 43Section 3.6.2: AssumptionsSection 3.6.2: Assumptions

Reasonability of explicit and implicit assumptions

Sensitivity of the results to reasonable alternative assumptions

Particular requests for assumptions and disclosure


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ASOP No. 43ASOP No. 43Sections 3.6.6 and 3.6.7 Sections 3.6.6 and 3.6.7

External and changing conditionsExternal and changing conditions

External conditions Cognizant of environment that might affect estimates

—economic, regulatory, legal, and judicial

Changing conditions Consideration of changes not fully reflected in data

related to claims handling, exposures, and reinsurance Support for such changes


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ASOP No. 43ASOP No. 43Section 3.6.8: UncertaintySection 3.6.8: Uncertainty

Types and sources of uncertainty: Correlation Model riskParameter riskProcess risk


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ASOP No. 43ASOP No. 43Section 3.7: Unpaid claim estimateSection 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


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ASOP No. 43ASOP No. 43Section 4.1: Actuarial CommunicationSection 4.1: Actuarial Communication

Disclosures: Some of the items we have discussed today are

explicitly listed as required disclosures Other areas are just “good practice” Deviation from standard—disclosure

Both ASOP No. 43 and ASOP No. 36 Include a description of why Protection against discipline and litigation


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For more information, contact:Lauren Pachman, Casualty Policy Analyst

[email protected](202) 223-8196

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