SAO

Question 1

Purpose of SAO

Answer 1

Opinion: provide actuaries opinion on reserve amounts for items in SAO Scope
Inform: Inform readers/regulators of significant risk factors regarding reserves
Advise: whether risk factors could lead to MAD

Question 2

Intended users of SAO

Answer 2

Regulators
Board of Directors
Management
Investors
General Public

Question 3

Organization of SAO (ISOR + AB)

Answer 3

Identification
Scope
Opinion
Relevant Comments
Exh A: Recorded Amts for items in scope
Exh B: Disclosure Items regarding NET reserves in scope

Question 4

Reasons for an Exemption to SAO (SLuSH)

Answer 4

Size (<1m annual GWP and <1m gross res @ YE)
LOB: certain LOBs are exempt
Under Supervision: exempt if insurer is under supervision
Hardship: cost of SAO is burden (>1% of CY surplus or >3% CY GWP)

Question 5

Identification Section (WARD)

Answer 5

Info About AA:
- Who made appointment
- Affirmation of qualifications
- Relationship to company
- Date of appointment
Intended purpose/users

Question 6

Scope Section (5)

Answer 6

• Reserve Items in opinion
• Acct Basis of Res
• Review Date
• Data Sources (officer who provided data) (also contains evaluation of consistency and reasonability)
• Reconciliation to Sch P

Question 7

Reserve Items in Scope

Answer 7

Loss & LAE
Retroactive Reins Assumed
UEP for long-duration contracts
Any other other items in scope

Question 8

Disclosures in Scope (6 + misc)

Answer 8

Reserves discounted or not
Risk Margin Basis
Gross or net of S/S or reins
Uncollectible reins considered
Types of Expenses included in LAE (DCC, A&O)
Accounting Basis
Also any other items that are needed to describe reserves sufficiently

Question 9

Review Date

Answer 9

Date subsequent to eval date through which material info known to actuary is included in forming the reserve opinion

Question 10

Data Reconciliation Statement

Answer 10

States that actuary either performed OR reviewed Sch P recon

Question 11

Opinion Language

Answer 11

Reserve Amts Held in Exh A:
- Meet ins laws of domiciliary state
- Are computed in accordance with actuarial standards
- Type of opinion on gross/net basis
- Misc: other res items, work of others…

Question 12

Reasonable Opinion

Answer 12

held res w/in actuary’s reasonable range

Question 13

Inadequate/Deficient Opinion

Answer 13

held res below actuary’s reasonable range

Question 14

Excessive/Redundant Opinion

Answer 14

held res above actuary’s reasonable range

Question 15

Qualified opinion

Answer 15

unable to issue opinion on certain material items (reserves could still be within actuary’s range)

Question 16

Qualified opinion disclosures

Answer 16

• Items qualification relates to
• Reason for qualification
• Amt of items related to qualification
• Opinion on non-qualified items

Question 17

No Opinion

Answer 17

unable to conclude that res are reasonable

Question 18

Reasonable Opinion Language

Answer 18

Amts carried in Exh A make reasonable provision for unpaid loss & lae both gross and net under terms of company’s contracts and agreements

Question 19

If inadequate or excessive, what must actuary disclose further?

Answer 19

must disclose own min or max reasonable reserve level

Question 20

SAO public or confidential

Answer 20

Public
(Ex: investors want to know if reserves are adequate and understand company’s risks)

Question 21

AOS public or confidential

Answer 21

Confidential
- regulator needs access to proprietary and sensitive info to assess solvency risks

Question 22

Actuarial Report public or confidential and use

Answer 22

Confidential
- A formal means of conveying to the state regulators and BOD the actuary’s professional conclusions and the underlying methods and assumptions used to derive these conclusions
(public shouldn’t see this info)

Question 23

Relevant Comments Section (6)

Answer 23

• RMAD (standard + calc, risks that may result in MAD, whether actuary believes RMAD exists)
• Reins (uncollectible reins, retroactive reins, financial reins)
• IRIS Ratios (11, 12, 13, disclose if unusual)
• Changes in assumptions and methods
• UEP for long-duration contracts

Question 24

Is comment req. if no RMAD?

Answer 24

yes (even if no such risks, must be stated)

Question 25

Common Materiality Stds

Answer 25

% of reserves % of surplus % of net income Reduction in surplus for next RBC action lvl Amt that would trigger unusual IRIS ratio Reduction in capital that would reduce financial rating

Question 26

Company Specific Risks

Answer 26

Data (thin data or unexplained changes) Operations (qualitative changes in operations) New (new products or new markets) Growth (rapid growth in 1 or more business segments) Adequacy (changes in adequacy of case reserves) Severity (changes in severity or frequency) - A&E losses (Asbestos & Environmental) - catastrophic weather events - cyber liability (this is very topical) - mass torts (asbestos) - constructions defects (it seems a lot of bridges have been falling down lately) - new legislation - distributional changes in limits / attachment points / deductibles - terms of reinsurance contracts

Question 27

Due Dates

Answer 27

SAO: March 1 AOS: March 15

Question 28

Intended Audience of AOS

Answer 28

- Regulators in domiciliary state (do NOT file with NAIC) - Board of Directors - Confidential as has proprietary info

Question 29

AOS Organization

Answer 29

On both gross/net basis A: reasonable range B: point est. (no req. for both range and point) C: company's held res D: Diff (company - actuary) E: has there been 1 yr adverse dev greater than 5% in 3 of last 5 yrs

Question 30

Where in AS is adverse dev of reserves?

Answer 30

5 yr historical data, line 74

Question 31

If there has not been more than 5% adverse dev in last 3 of 5 yrs

Answer 31

Best practice to state (not req. though)

Question 32

If there has been more than 5% adverse dev in last 3 of 5 yrs

Answer 32

- state that there has been adverse dev and for which years - explain reasons for adverse dev - mitigate effects of adverse dev (explain how it would be done)

Question 33

Exh/Items in actuarial report

Answer 33

- Exhibit that ties to the annual statement - Exhibit that ties to Sch P BY LINE - Exhibit that indicates changes in estimates from prior report - Extensive comments on trends/assumptions

Question 34

How should AOS reflect pooled companies?

Answer 34

The AOS should only reflect the companies pool % responsibility If the company is a 0% participant, then the info in the adverse development paragraph should reflect that of the lead company

Question 35

Bright Line Indicator Test

Answer 35

If the following holds true: 0.1 x Net reserves > Total Adj Capital - Company Action Level The actuary needs to disclose why they do not believe that there is a risk for RMAD

Question 36

If can't reconcile to Sch P

Answer 36

- Confirm that the person responsible for the data is aware - Recommend that the company notifies auditors - Discuss the issue in SAO, elaborate in report

Question 37

Intercompany Pooling Disclosures

Answer 37

- Description of the pool - Identification of the lead company - Listing of all companies pool % and domicile state

Question 38

Items to consider when making use of the work of another (ENPC)

Answer 38

- Effect of variations in other person's estimates on appointed actuary's opinion - Nature of Coverage - Proportion of reserves covered by other person's work - Credentials of other person

Question 39

Disclosures when using another's work

Answer 39

Actuary: name, credential, affiliation Non-Actuary: name, affiliation type of analysis performed

Question 40

Qualified Actuary Requirements

Answer 40

i.) Meets education, experience, and continuing education requirements of the SQS for SAO set forth in the US Qualification Stds for actuaries issuing opinions in the US promulgated by the AAA ii.) maintains an accepted actuarial designation iii.) is a member of a professional actuarial assocation that requires adherence to the AAA code of conduct, requires adherence to the US qualification standards, and participates in the ABCD for members practicing in the US

Question 41

Define unpaid claim estimate

Answer 41

actuary's estimate of the obligation for future payment resulting from claims due to past events