MATERIALITY AND THE RISK OF MATERIAL ADVERSE DEVIATION: A REGULATORY PERSPECTIVE CASUALTY LOSS...

MATERIALITY AND THE RISK MATERIALITY AND THE RISK OF MATERIAL ADVERSE OF MATERIAL ADVERSE

DEVIATION: A REGULATORY DEVIATION: A REGULATORY PERSPECTIVEPERSPECTIVE

CASUALTY LOSS RESERVE SEMINARCASUALTY LOSS RESERVE SEMINARSeptember 11-12, 2006September 11-12, 2006

Moderator:Moderator: Kris DeFrain, FCAS, MAAAKris DeFrain, FCAS, MAAANAIC, Chief Managing Actuary - NAIC, Chief Managing Actuary -

Property/CasualtyProperty/CasualtyPanelists:Panelists: Wendy Germani, FCAS, MAAAWendy Germani, FCAS, MAAA

(retired) Texas Department of Insurance(retired) Texas Department of InsuranceMelissa GreinerMelissa GreinerP&C Actuary, Pennsylvania Insurance P&C Actuary, Pennsylvania Insurance

DepartmentDepartment

TopicsTopics

Within the context of Statutory Within the context of Statutory Statements of Actuarial Opinion:Statements of Actuarial Opinion:

What is materiality?What is materiality? What are acceptable standards of What are acceptable standards of

materiality?materiality? Is there a Risk of Material Adverse Is there a Risk of Material Adverse

Deviation?Deviation? Risks and UncertaintiesRisks and Uncertainties Other observationsOther observations

Why is Materiality Why is Materiality Important for Opinion Important for Opinion

Writers ?Writers ? NAIC Annual Statement Instructions NAIC Annual Statement Instructions

require the opining actuary to:require the opining actuary to: Provide specific paragraphs to address Provide specific paragraphs to address

the risk of material adverse deviation the risk of material adverse deviation (RMAD).(RMAD).

Identify the materiality standard and the Identify the materiality standard and the basis for establishing this standard.basis for establishing this standard.

Must explicitly state whether or not Must explicitly state whether or not there is RMAD.there is RMAD.

If there is RMAD, describe the major If there is RMAD, describe the major factors, etc. that could result in MAD.factors, etc. that could result in MAD.

Who Cares about Who Cares about Materiality and WHY?Materiality and WHY?

RegulatorsRegulators Rating AgenciesRating Agencies SEC?SEC? OthersOthers

WHAT IS MATERIALITY?WHAT IS MATERIALITY?

AAA Task Force on Materiality – AAA Task Force on Materiality – developed a generalized description of developed a generalized description of the concept of Materiality.the concept of Materiality.

ASOP 36 and other Standards of ASOP 36 and other Standards of Practice don’t define it per se.Practice don’t define it per se.

““Materiality & ASOP 36; Considerations Materiality & ASOP 36; Considerations for the Practicing Actuary” - CASfor the Practicing Actuary” - CAS

NAIC APPM has a definition.NAIC APPM has a definition. SEC’s definition is similar to the NAIC’s.SEC’s definition is similar to the NAIC’s.

Materiality Materiality Concepts on Concepts on

ProfessionalismProfessionalism Paper by AAA’s Task Force on Paper by AAA’s Task Force on

MaterialityMateriality ““An omission, understatement or An omission, understatement or

overstatement in a work product is overstatement in a work product is material if it is likely to affect either the material if it is likely to affect either the intended principal user’s decision-intended principal user’s decision-making or the intended principal user’s making or the intended principal user’s reasonable expectations.”reasonable expectations.”

““Reflecting on Materiality: The User is Reflecting on Materiality: The User is Key”Key”

According to NAIC According to NAIC Accounting Practices & Accounting Practices &

Procedures ManualProcedures Manual A omission or misstatement of an A omission or misstatement of an

item in a statutory financial item in a statutory financial statement may be material if it is of statement may be material if it is of such a magnitude that it is probable such a magnitude that it is probable that the judgment of a reasonable that the judgment of a reasonable person relying upon the statutory person relying upon the statutory financial statement would be financial statement would be changed or influenced by the changed or influenced by the inclusion or correction of the item.inclusion or correction of the item.

ASOP 36ASOP 36

Section 3.4:….”The actuary should Section 3.4:….”The actuary should consider the purposes and intended uses consider the purposes and intended uses for which the actuary prepared the for which the actuary prepared the Statement of Actuarial Opinion. The Statement of Actuarial Opinion. The actuary should evaluate materiality based actuary should evaluate materiality based on professional judgment, materiality on professional judgment, materiality guidelines or standards applicable to the guidelines or standards applicable to the Statement of Actuarial Opinion and the Statement of Actuarial Opinion and the actuary’s intended purpose for the actuary’s intended purpose for the Statement of Actuarial Opinion.”Statement of Actuarial Opinion.”

Know Your User !!!Know Your User !!!

Principal UserPrincipal User Intended UserIntended User Unintended UserUnintended User Different Users have different Different Users have different

expectations regarding materiality.expectations regarding materiality.

Identify the Materiality Identify the Materiality StandardStandard

and the Basis forand the Basis for

Establishing This Establishing This StandardStandard

Considerations in Considerations in Materiality Standard for Materiality Standard for

ReservesReservesFrom Materiality & ASOP 36From Materiality & ASOP 36

Would the misstatement put the insurer in Would the misstatement put the insurer in danger of a breach of covenant or danger of a breach of covenant or regulatory requirement?regulatory requirement? RBC Trigger?RBC Trigger? Minimum Capital RequirementMinimum Capital Requirement IRIS ratio failureIRIS ratio failure

Turn profit into loss?Turn profit into loss? Relative size is usually more important Relative size is usually more important

than absolute size.than absolute size. Lines of business written by companyLines of business written by company

Possible Standards of Possible Standards of MaterialityMateriality

% of Surplus% of Surplus % of Reserves% of Reserves Reinsurance (Zero Net Reserve Reinsurance (Zero Net Reserve

Companies)Companies) Minimum of % of Surplus, % of Minimum of % of Surplus, % of

Reserves and Amount to trigger an Reserves and Amount to trigger an RBC action level.RBC action level.

OtherOther

Standards Used for Texas Standards Used for Texas Domestics - 2005Domestics - 2005

TypeType CountCount PercentagePercentage

SurplusSurplus 126126 61%61%

Loss & LAE Loss & LAE ReservesReserves

2020 10%10%

CombinationCombination 2121 10%10%

ReinsuranceReinsurance 1313 6%6%

OtherOther 2525 12%12%

Standards Used for Texas Standards Used for Texas Domestics 2004 over 2005Domestics 2004 over 2005

TypeType % 2004% 2004 % 2005% 2005

SurplusSurplus 64%64% 61%61%


9%9% 10%10%

CombinationCombination 5%5% 10%10%

ReinsuranceReinsurance 1%1% 6%6%

OtherOther 20%20% 12%12%

Standards Used for Standards Used for Pennsylvania Domestics – 2005Pennsylvania Domestics – 2005

TypeType CountCount PercentagePercentage

SurplusSurplus 9797 68%68%


1212 8%8%

CombinationCombination 2828 20%20%

OtherOther 55 4%4%

Standards Used for Standards Used for Pennsylvania Domestics – 2005 Pennsylvania Domestics – 2005

over 2004over 2004TypeType % 2004% 2004 % 2005% 2005

SurplusSurplus 63.8%63.8% 68.3%68.3%


14.5%14.5% 8.5%8.5%

CombinationCombination 17.4%17.4% 19.7%19.7%

OtherOther 4.3%4.3% 3.5%3.5%

Combination of StandardsCombination of StandardsPA Domestic DataPA Domestic Data

36%

64%

Reserves &Surplus

Reserves,Surplus, RBC,et al

17%

83%

Reserves &Surplus

Reserves,Surplus, RBC,et al

2004 2005

General ObservationsGeneral ObservationsMateriality StandardsMateriality Standards

Regulatory actuaries generally observed Regulatory actuaries generally observed a more thorough discussion of the a more thorough discussion of the consideration of materiality standards in consideration of materiality standards in Opinions from 2004 to 2005Opinions from 2004 to 2005

Appears to be a general trend to consider Appears to be a general trend to consider multiple measures of materiality:multiple measures of materiality: More “combinations” of materiality bases in More “combinations” of materiality bases in

Opinions.Opinions. Less Opinions with a single basis of Less Opinions with a single basis of

materiality.materiality. Here are a few examples:Here are a few examples:

Combination – Example #1Combination – Example #1

““In determining the materiality standard, In determining the materiality standard, I note the Opinion is a I note the Opinion is a tool of solvency tool of solvency regulationregulation. Thus, the selected standard . Thus, the selected standard is oriented towards the potential is oriented towards the potential impact impact a misstatement of reserves would have a misstatement of reserves would have on surplus levelson surplus levels…and is a minimum of …and is a minimum of three values: (1) 20% of surplus, (2) 10% three values: (1) 20% of surplus, (2) 10% of loss and LAE reserves after pooling of loss and LAE reserves after pooling and (3) difference between surplus less and (3) difference between surplus less Company Action Level RBC.”Company Action Level RBC.”


““Based on my understanding of the use Based on my understanding of the use of this (Opinion), I evaluated of this (Opinion), I evaluated materiality in the context of 15% of materiality in the context of 15% of loss and LAE reserves, 25% of surplus, loss and LAE reserves, 25% of surplus, and action/control level from RBC, of and action/control level from RBC, of the minimum was selected…The the minimum was selected…The minimum was adjusted to reflect where minimum was adjusted to reflect where within the rangewithin the range of reasonable of reasonable estimates the Company’s reserves fell.”estimates the Company’s reserves fell.”


““Based on my review I consider a Based on my review I consider a deviation greater than $xxx,000 to deviation greater than $xxx,000 to represent a material adverse represent a material adverse deviation. This standard is deviation. This standard is based on based on my professional judgment with my professional judgment with considerationconsideration as to Company’s as to Company’s surplus, liquid assets, reserve surplus, liquid assets, reserve balance and authorized control level balance and authorized control level of the Company.”of the Company.”


““In developing the threshold for the In developing the threshold for the risk of material adverse deviation, I risk of material adverse deviation, I considered the company’s loss and considered the company’s loss and LAE reserves, statutory surplus and LAE reserves, statutory surplus and RBC position as of (year-end). Based RBC position as of (year-end). Based on review of these considerations, I on review of these considerations, I selected a materiality standard of selected a materiality standard of $xxx,000, which is about 10% of $xxx,000, which is about 10% of carried loss and LAE reserves.”carried loss and LAE reserves.”

Consideration of RBC PositionConsideration of RBC Position

““I have considered a MAD to be one in I have considered a MAD to be one in which the actual net outstanding loss and which the actual net outstanding loss and LAE exceed carried reserves by an LAE exceed carried reserves by an amount greater than 10% of surplus... amount greater than 10% of surplus... I I also verifiedalso verified that a 10% that a 10% deviation deviation in the in the Company’s net reserves Company’s net reserves would not reducewould not reduce the Company’s Total Adjusted Capital to the Company’s Total Adjusted Capital to below the Company Action Level Capital.”below the Company Action Level Capital.”

May be MORE appropriate to include this May be MORE appropriate to include this for companies with RBC scores at lower for companies with RBC scores at lower end of spectrum vs. healthy RBC scores.end of spectrum vs. healthy RBC scores.

Regulators do not necessarily have to see Regulators do not necessarily have to see this in all Opinions.this in all Opinions.

What is the Bright Line What is the Bright Line Indicator?Indicator?

Outside bound of what is material.Outside bound of what is material. If 10% of the Net Reserves are If 10% of the Net Reserves are

greater than the difference between greater than the difference between the Total Adjusted Capital and the Total Adjusted Capital and Company Action Level Capital,Company Action Level Capital,

Then regulators expect to see explicit Then regulators expect to see explicit Relevant Comment paragraphs Relevant Comment paragraphs discussing the factors giving rise to discussing the factors giving rise to the presence or absence of RMAD.the presence or absence of RMAD.

Consideration of RBC PositionConsideration of RBC Position

““YES” if the Bright Line Indicator is crossedYES” if the Bright Line Indicator is crossed Although reference to the BLI test is Although reference to the BLI test is

removed from the 2006 Regulatory Guidance removed from the 2006 Regulatory Guidance Draft document, the test is still part of the Draft document, the test is still part of the NAIC’s Financial Analysis Handbook.NAIC’s Financial Analysis Handbook.

We will discuss Guidance briefly at the end We will discuss Guidance briefly at the end of our presentation.of our presentation.

Should appointed actuaries be expected to Should appointed actuaries be expected to comment on the Bright Line Indicator in comment on the Bright Line Indicator in Opinions?Opinions?

Is there a Risk of Is there a Risk of

Material Adverse Material Adverse Deviation?Deviation?

I do not believe that there are I do not believe that there are significant risks and significant risks and

uncertainties that could uncertainties that could result in material adverse result in material adverse

deviation in the loss and loss deviation in the loss and loss adjustment expense reserves.adjustment expense reserves.

Relevant Comments should Relevant Comments should allow a regulator to answer allow a regulator to answer

these questions:these questions: Is there a Risk of Material Adverse Deviation?Is there a Risk of Material Adverse Deviation? What amount of adverse deviation does the What amount of adverse deviation does the

actuary consider material?actuary consider material? Why does the actuary consider that amount to Why does the actuary consider that amount to

be material for this company?be material for this company? Do I understand why the actuary believes that Do I understand why the actuary believes that

material adverse deviation is or is not a risk material adverse deviation is or is not a risk for this company?for this company?

Given this guidance, what are your thoughts Given this guidance, what are your thoughts on the following language:on the following language:

Example #1 – UnclearExample #1 – Unclear

““The Materiality Standard is established The Materiality Standard is established as 10% of reported statutory surplus, or as 10% of reported statutory surplus, or $xxx,000 as shown in Exhibit B: $xxx,000 as shown in Exhibit B: Disclosures. I estimate the likelihood of Disclosures. I estimate the likelihood of material adverse deviation arising from material adverse deviation arising from normal variations in expected results to normal variations in expected results to be about 16%. I estimate the likelihood be about 16%. I estimate the likelihood of material favorable development to of material favorable development to exceed 50%.”exceed 50%.”

Thoughts from audience??Thoughts from audience??

Example #1 - ImprovedExample #1 - Improved

““The Materiality Standard is established The Materiality Standard is established as 10% of reported statutory surplus, or as 10% of reported statutory surplus, or $xxx,000 as shown in Exhibit B: $xxx,000 as shown in Exhibit B: Disclosures. I estimate the likelihood of Disclosures. I estimate the likelihood of material adverse deviation arising from material adverse deviation arising from normal variations in expected results to normal variations in expected results to be about 16%, be about 16%, not a significant not a significant likelihoodlikelihood. I estimate the likelihood of . I estimate the likelihood of material favorable development to material favorable development to exceed 50%.”exceed 50%.”

Example #2 – UnclearExample #2 – Unclear I have established a materiality standard I have established a materiality standard

of ±5% from my point estimate…In my of ±5% from my point estimate…In my opinion, the Company’s reserves is $1.xxx opinion, the Company’s reserves is $1.xxx million in excess of my point estimate.million in excess of my point estimate. Actuary provides lengthy paragraph on Actuary provides lengthy paragraph on

changes to actuarial assumptions and changes to actuarial assumptions and approach.approach.

In addition to knowing the reinsurance In addition to knowing the reinsurance arrangements, actuary determined adequacy arrangements, actuary determined adequacy of Gross reserves, from which Net results of Gross reserves, from which Net results were determined.were determined.


Example # 3 – UnclearExample # 3 – Unclear Actuary did not believe there was RMAD. Actuary did not believe there was RMAD.

15% of Statutory Surplus was used as a 15% of Statutory Surplus was used as a materiality standard.materiality standard.

The Company’s RBC ratio was 200.6%; The Company’s RBC ratio was 200.6%; dropping from about 300% from previous dropping from about 300% from previous year.year.

Is this a suitable standard?Is this a suitable standard? Should the actuary check the Company’s Should the actuary check the Company’s

RBC ratio, when deciding on a materiality RBC ratio, when deciding on a materiality standard?standard?


So, is there RMAD?So, is there RMAD? Pennsylvania Pennsylvania

domesticsdomestics More appointed More appointed

actuaries concluded actuaries concluded “No RMAD” in 2005 “No RMAD” in 2005 from 2004.from 2004.

Statements on RMAD Statements on RMAD were more clear (or were more clear (or less vague) in less vague) in interpretation.interpretation.

Regulators want Regulators want appointed actuaries to appointed actuaries to be clear in their be clear in their position on RMADposition on RMAD

0

10

20

30

40

50

60

70

80

2004 2005

YesNoUnclear

So, is there RMAD?So, is there RMAD? Texas DomesticsTexas Domestics

““No RMAD” for 81% of No RMAD” for 81% of total companies.total companies.

““No RMAD” for 70% of No RMAD” for 70% of companies with net companies with net reserves greater than reserves greater than zero.zero.

Texas has a high Texas has a high concentration of concentration of companies that carry companies that carry $0 in net reserves…$0 in net reserves…then what?then what? To be continuedTo be continued

0

20

40

60

80

100

120

140

160

180

2004 2005

YesNoUnclear

General ObservationsGeneral ObservationsRMAD DiscussionRMAD Discussion

Regulatory actuaries generally observed a Regulatory actuaries generally observed a more thorough consideration and more thorough consideration and discussion of RMAD from 2004 to 2005discussion of RMAD from 2004 to 2005

Improvements likely due to combination of:Improvements likely due to combination of: Increased regulatory actuary review and Increased regulatory actuary review and

feedback on Opinionsfeedback on Opinions AAA Opinion Writers SymposiumAAA Opinion Writers Symposium Better understanding from appointed actuary Better understanding from appointed actuary

community on regulator’s expectationscommunity on regulator’s expectations Keep up the good work!Keep up the good work!

Net-Zero CompaniesNet-Zero Companies

Now, let’s switch Now, let’s switch gearsgears

What if the Company What if the Company has $0 carried net has $0 carried net reserves, due to a reserves, due to a pooling arrangement pooling arrangement or cession to the or cession to the parent?parent?

What are the options What are the options to the opining to the opining actuary?actuary?

Risk of MAD on Zero Net Risk of MAD on Zero Net Reserves – TX DomesticsReserves – TX Domestics

About 90 “net-zero” companiesAbout 90 “net-zero” companies 97% of Opinion writers concluded no RMAD97% of Opinion writers concluded no RMAD

Comments: remote or no risk since company cedes Comments: remote or no risk since company cedes 100%100%

13 included additional comments on Reinsurance13 included additional comments on Reinsurance there exists a contingent net liability with respect to there exists a contingent net liability with respect to

ceded reinsurance in the event that reinsurers become ceded reinsurance in the event that reinsurers become unable to meet obligations under existing reinsurance unable to meet obligations under existing reinsurance agreements.agreements.

2 concluded “yes” to RMAD, citing 2 concluded “yes” to RMAD, citing Reinsurance & Rapid Growth as risk factors.Reinsurance & Rapid Growth as risk factors.

1 conclusion about RMAD indeterminable.1 conclusion about RMAD indeterminable.

Risk of MAD on Zero Net Risk of MAD on Zero Net Reserves – PA DomesticsReserves – PA Domestics

8 “net-zero” companies8 “net-zero” companies 7 of 8 Opinion writers concluded no RMAD7 of 8 Opinion writers concluded no RMAD

Comments: remote or no risk since company cedes Comments: remote or no risk since company cedes 100%100%

4 of 8 included additional comment that there exists 4 of 8 included additional comment that there exists a contingent net liability with respect to ceded a contingent net liability with respect to ceded reinsurance in the event that reinsurers become reinsurance in the event that reinsurers become unable to meet obligations under existing unable to meet obligations under existing reinsurance agreements.reinsurance agreements.

1 of 8 concluded “yes” to RMAD, as the 1 of 8 concluded “yes” to RMAD, as the Company was in Action Level RBC at year-end, Company was in Action Level RBC at year-end, citing Reserve Variability in medical citing Reserve Variability in medical malpractice and Reinsurance Collectibility as malpractice and Reinsurance Collectibility as risk factors.risk factors.

Risks and UncertaintiesRisks and Uncertainties

Risks and UncertaintiesRisks and Uncertainties

Appointed actuaries are Appointed actuaries are expected to describe the expected to describe the major factors that could major factors that could

result in Material Adverse result in Material Adverse DeviationDeviation

Risks and UncertaintiesRisks and Uncertainties Opinion writers need to discuss in this Opinion writers need to discuss in this

section, why or why not there is RMAD and section, why or why not there is RMAD and the factors that would lead to RMAD.the factors that would lead to RMAD.

Explanation should not include general, Explanation should not include general, broad statements about risks and broad statements about risks and uncertainties due to economic changes, uncertainties due to economic changes, judicial decisions, regulatory actions, judicial decisions, regulatory actions, political or social forces, etc.political or social forces, etc.

List does not need to be exhaustive.List does not need to be exhaustive. Should be Should be specific to the Company’sspecific to the Company’s book book

of business and operations.of business and operations. We offer the following as good and bad We offer the following as good and bad

examples:examples:

Risk Factor DiscussionRisk Factor DiscussionGood Example #1Good Example #1

The major factors underlying the risks and The major factors underlying the risks and uncertainties which could result in MAD uncertainties which could result in MAD include:include: The significant concentration in premium The significant concentration in premium

volume in 2003 through 2005 from business volume in 2003 through 2005 from business that is relatively new to the Company.that is relatively new to the Company.

Lack of data available for reserve analysis on Lack of data available for reserve analysis on Company’s financial guaranty exposure.Company’s financial guaranty exposure.

Significant reliance on the use of judgment by Significant reliance on the use of judgment by the Company in selecting factors for setting the Company in selecting factors for setting loss reserves. loss reserves.


I have identified the major risks and I have identified the major risks and uncertainties as:uncertainties as: Significant changes in claims operations over Significant changes in claims operations over

the last xx years, which creates volatility in the the last xx years, which creates volatility in the development patterns and therefore development patterns and therefore necessitates considerable reliance on necessitates considerable reliance on benchmark development patterns.benchmark development patterns.

Rapid growth with net premium increasing six Rapid growth with net premium increasing six fold over the last xx years.fold over the last xx years.

Company’s cession of an amount of loss and LAE Company’s cession of an amount of loss and LAE reserves that exceeds its surplus to an unrated reserves that exceeds its surplus to an unrated (offshore) affiliate.(offshore) affiliate.


““There are a variety of risk factors that expose There are a variety of risk factors that expose the Company’s reserves to significant the Company’s reserves to significant variability. I have identified the major risk variability. I have identified the major risk factors:factors: Significant increase in policyholders in 2002;Significant increase in policyholders in 2002; New coverages offered beginning in 2002;New coverages offered beginning in 2002; Increases in the policy limit;Increases in the policy limit; The long-tail nature of medical professional liability The long-tail nature of medical professional liability

coverage.”coverage.” The opining actuary includes a The opining actuary includes a detailed detailed

paragraph on EACH of these pointsparagraph on EACH of these points within the within the body of the Opinion.body of the Opinion.

Risk Factor DiscussionRisk Factor DiscussionBad Example #1Bad Example #1

““Although the carried reserves as of 12/31/05 Although the carried reserves as of 12/31/05 are within my reasonable range, I are within my reasonable range, I do believe do believe that there is a substantial risk of that there is a substantial risk of material adverse deviationmaterial adverse deviation in the in the Company’s reserves as measured against a Company’s reserves as measured against a materiality standard of 10% of surplus. …materiality standard of 10% of surplus. …Carried reserves are about 110% of surplus, Carried reserves are about 110% of surplus, so a 10% deficiency in reserves would results so a 10% deficiency in reserves would results in a loss of more than 10% of surplus. A in a loss of more than 10% of surplus. A deviation of this magnitude, while not deviation of this magnitude, while not anticipated, is not a statistically insignificant anticipated, is not a statistically insignificant possibility.”possibility.”

WhatWhat are this risk factor(s) that could impact are this risk factor(s) that could impact the reserve to surplus ratio?the reserve to surplus ratio?

Risk Factor DiscussionRisk Factor Discussion

Opinions that contained Opinions that contained ONLY the ONLY the general uncertainty commentsgeneral uncertainty comments for for RMAD without consideration for RMAD without consideration for company specific comments.company specific comments.

PA: decrease from a few to nonePA: decrease from a few to none TX: decrease from 18 to 16**TX: decrease from 18 to 16**

Again, another positive trend for Again, another positive trend for improved Opinion disclosure!improved Opinion disclosure!

**mostly from a single firm**mostly from a single firm

Risks and Uncertainties Risks and Uncertainties DiscussedDiscussed

Even if no RMAD?Even if no RMAD? ““But the NAIC But the NAIC

Instructions don’t Instructions don’t require me, as an require me, as an appointed actuary to appointed actuary to provide a discussion of provide a discussion of risk factors when Risk risk factors when Risk of MAD is not present.”of MAD is not present.”

Statistics shown: % of Statistics shown: % of Opinions that discuss Opinions that discuss company specificcompany specific risk risk factors, after actuary factors, after actuary concluded no Risk of concluded no Risk of MAD.MAD.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

PA TX

20042005

Risks and Uncertainties Risks and Uncertainties Discussed Discussed

Even if no RMAD?Even if no RMAD? Company specific risk factors cited for “No Company specific risk factors cited for “No

RMAD”:RMAD”: Growth in long-tailed linesGrowth in long-tailed lines Medical cost inflation trendsMedical cost inflation trends A&E, claims initiatives, construction defect A&E, claims initiatives, construction defect

liabilitiesliabilities XS over large deductible and self-insured XS over large deductible and self-insured

exposuresexposures Regulators view this type of disclosure very Regulators view this type of disclosure very

positively.positively. These same factors could possibly lead to These same factors could possibly lead to

RMAD for the Company in the future. RMAD for the Company in the future. Again, keep up the good work!Again, keep up the good work!

Other ObservationsOther Observations

Materiality and Link to Materiality and Link to Actuarial Opinion SummaryActuarial Opinion Summary What if actuary said “no” to RMAD, yet What if actuary said “no” to RMAD, yet

company carried reserves in lower end company carried reserves in lower end of actuarial range?of actuarial range?

Consideration given to surplus and RBC Consideration given to surplus and RBC levels. If low, appointed actuaries levels. If low, appointed actuaries should expect a call from the domestic should expect a call from the domestic regulator.regulator. Why is there no RMAD?Why is there no RMAD? Is the Materiality threshold possibly set too Is the Materiality threshold possibly set too

high?high?

Regulatory Guidance - Regulatory Guidance - 20062006

Separate Guidance for Actuarial Opinion Separate Guidance for Actuarial Opinion and Actuarial Opinion Summary.and Actuarial Opinion Summary.

No longer need to attach (public) Opinion No longer need to attach (public) Opinion to the (confidential) Summaryto the (confidential) Summary

New Scope items actuary should be New Scope items actuary should be cognizant of:cognizant of: Coverage for Service ContractsCoverage for Service Contracts Prepaid loss adjustment expensesPrepaid loss adjustment expenses

Draft document exposed at NAIC Fall Draft document exposed at NAIC Fall meeting a few days ago – copies available.meeting a few days ago – copies available.

QUESTIONS ?????QUESTIONS ?????

MATERIALITY AND THE RISK OF MATERIAL ADVERSE DEVIATION: A REGULATORY PERSPECTIVE CASUALTY LOSS...

Documents

Transcript of MATERIALITY AND THE RISK OF MATERIAL ADVERSE DEVIATION: A REGULATORY PERSPECTIVE CASUALTY LOSS...