SAO

Question 1

SAO PURPOSES

Answer 1

1) state appointed actuary’s opinion about the reasonableness of the insurer’s reserves
2) notify stakeholders about the significant risks and uncertainties that may impact the reserves
3) disclose whether the risks could produce significant adverse material deviation

Question 2

Qualified Actuary

Answer 2

1) meets education, experience and continuing CE
2) has a designation
3) member who of professional actuarial association that requires adherence to the Academy’s Code of Professional Conduct as well as the U.S Qualification Standards (AAAA)

Question 3

Appointment Procedures

Answer 3

need to be appointed by the board by 12/31

does not need to be reappointed annually

Question 4

Qualification Documentation

Answer 4

provided by the AA to the board when appointed

needs to be provided on an annual basis

Question 5

Documentation Sent to the Commissioner

Answer 5

within FIVE days of appointment, the company needs to provide the following:

Name and title of Actuary

Manner of appointment (employee vs consultant)

Statement that the person meets the requirements to be a qualified actuary and the respective documentation

Question 6

Replacement Procedures

Answer 6

If actuary is replaced, the insurer needs to:

Notify the DOI in 5 days

Within 10 days provide an additional letter to the commissioner stating :
1) if there were disagreements with the actuary regarding certain topics within the past 24 months
-Include disagreements that are resolved AND not resolved
- include a description of disagreement and the nature of its resolution (or a statement that it was not resolved)

2) needs to include a response from the former AA stating if they agree with the statements

3) May be appropriate to include disagreements regarding the AOS

(SAO is mandatory, AOS is optional)

Question 7

Replacing Actuary

Answer 7

should review all of these documents to understand and get comfortable around

Question 8

Exemptions from producing SAOs

Answer 8

Insurer may be exempted:
1) small companies
-under 1M total D&A WP in a CY
AND
-under 1M total D&A L+LAE reserves at YE

2) INSURERS under supervision or conservatorship
-insurers already being scrutinized by regulators. SAO will not provide additional benefits / value.

3) nature of business
-catchall bucket

4) Financial hardship
-reasonable cost of SAO would exceed the lessor of
a) 1% of capital and surplus from the latest quarterly statement
b) 3% of the D&A WP during the year

Question 9

SAO STRUCTURE

Answer 9

1) identification
2) Scope
3) opinion
4) relevant comments

Question 10

Identification

Answer 10

include:
1) AA
2) relationship to company (Chief / cosnsultant)
3) qualification for acting as AA
4) date of appointment
5) state the appointment was made by the board

Question 11

Scope

Answer 11

Need to include the reserve elements and basis of presentation of reserves.

Reserve items can include:
1) L+LAE Reserves
2) Retro Reins Assumed
3) UEPR for LDC
4) UEPR for Extended reporting ENdt
5) Other reserve items for which the AA is opining

Question 12

RMAD - qualitative factors supporting RMAD

Answer 12

When there is RMAD, consider:
1) ceded significant reserves to a reinsurer of weak financial strength
-IC may not recover from RC and net reserves will jump unreasonably

2) Long tailed or high volatility LOBs
-could be reflected in a wider range which would cause the reserves + difference in the surplus and control level to fall within range

3) catastrophes that occurred late in the year

4) unreported excess insurance claims since the retention has not been breached
-xs insurance claims that have not pierced into the layer. if they do pierce, it could result in high severities.

5) high volume of policies with high retained limits relative to claim volume
- high volatility (the actuary SHOULD increase range of reserves)

6) company writes xs layers with potential high severity claims

Question 13

RMAD - Conclusion

Answer 13

if RMAD conclusion is reached from a quantitative standpoint but not at a qualitative stand point. the AA can say there is NO RMAD (low chance of RMAD)

Question 14

Factors that cause RMAD

Answer 14

AA needs to comment even if she believes no RMAD
-A&E, CD, CATs

AA does NOT need to comment on risks due to judicial decisions, regulatory actions, polictical/social forces (impacts all companies)

AA not required to provide an exhaustive list

*Consider combination of factors that cause RMAD
-company growing rapidly in a soft market

Question 15

Combination of Factors that cause RMAD

Answer 15

*Consider combination of factors that cause RMAD
-company growing rapidly in a soft market(business is underpriced-> book is under reserved)
-adverse medical inflation on a large XS WC book
-significant upward shift in limits and attachment point, combined with reduction in reinsurance (retaining more business with less reinsurance coverage)

Question 16

Scenarios for qualified opinion

Answer 16

1) AA determines insufficient info to conduct analysis/determine the materiality of a potential material portion of reserves
-disclosure is necessary

2) AA does not review a portion that is outside the scope of review
-helpful to disclose info on its matreriality

Question 17

Scenarios for no opinion

Answer 17

AA cannot reach a conclusion due to limitations in data, analyses, assumptions or related information
-must describe why no opinion could be given

Question 18

NAIC PREAMBLE

Answer 18

Includes accounting details relavant to statutory accounting

Question 19

NAIC PREAMBLE:
Unique Components

Answer 19

Different accounting concepts covered:
1) Conservatism
2) Consistency
3) Recognition

Question 20

NAIC PREAMBLE: Conservatism

Answer 20

Purpose: Financial reporting for insurers requires substantial judgment and estimates.

Conservatism:
-prevents sharp fluctuations in surplus (surplus that plummets)

SAP is conservative in SOME respects but NOT unreasonably conservative over the span of economic cycles.

Translation: Consistent and balanced surplus and measurement of income, I.E not overstating surplus or understating income

Question 21

NAIC PREAMBLE: Consistency

Answer 21

Provides accurate indication

Envt is changing and may be necessary to make updates (changes accounting principles)

Question 22

NAIC PREAMBLE: Recognition

Answer 22

Solvency measurement is focused on determining the financial condition via analysis of the balance sheet

the income statement is a secondary focus as it demonstrates the insurer’s ability to exist as a going concern

Question 23

NAIC PREAMBLE: Asset Recognition

Answer 23

Neet to make sure the assets are able to satisfy various obligations

if the assets:
- have economic value other than what can be used to fulfill policyholder obligations
-unavailable due to encumbrances (real estate with mortgage balance outstanding)

then: the assets should not be recognized in the measurement of surplus

Question 24

NAIC PREAMBLE: Liability Recognition

Answer 24

Recognized when incurred

Question 25

NAIC PREAMBLE: Liability Revenue

Answer 25

recognized when the earning process of underlying underwriting or investment business is completed i.e premiums are only earned as coverage is provided

Question 26

NAIC PREAMBLE: Codification

Answer 26

Process that provides a comprehensive guide to SAP. Lack of consistency pre-codification.

Question 27

NAIC PREAMBLE: Codification Continued

Answer 27

-provides uniform accounting rules -not intended to pre-empt state authority (state can override these rules) -SAP needs to be applied in unique circumstances, and should be consistent with the concepts of conservatism, consistency, and recognition.

Question 28

NAIC PREAMBLE: Heirarchy

Answer 28

Hierarchy of rules to abide by Level 1: SSAPS Level 2: Consensus of Emerging Accounting Issues Working Group -Interpretations of existing SSAPs by SAP Working Group Level 3: NAIC Annual Statement Instructions Level 4: SAP Statement of Concepts Level 5: Sources of nonauthoritative GAAP Accounting guidance and Lit Look to follow SSAPs, but if nonexistent move to level 2 then 3.

Question 29

NAIC PREAMBLE: Materiality

Answer 29

A MATERIAL item is one large enough that users of the information would be swayed. Materiality standars can vary depending on the nature of the item E.G: 1) an accounting adjustments puts insurer in danger of being in breach of a regulatory requirement (should receive a lower materiality threshold) 2) mis categorization of assets and liability that would trigger an event under RBC Requirements 3) amounts too small to warrant disclosure under normal circumstances if they arise from abnormal events -could suggest theres underlying issues a lower amount of deviation will be considered material as the degree of precision increases

Question 30

NAIC PREAMBLE: Interim Financial Statements

Answer 30

Not as comprehensive as the annual statement. Issued in addition to the AS Need to include disclosure sufficient to prevent the information presented as being misleading duplicate disclosures (already mad in the AS) made be omitted A disclosure MUST be provided if events which may have material impact on the insurer have occurred since year end (things that have chnaged since the last date of the AS)

Question 31

Materiality Paper

Answer 31

A MATERIAL item is one large enough that users of the information would be swayed in the conclusion Need to understand the purpose and intended users

Question 32

Materiality Paper: Tasks vs Practice

Answer 32

Materiality standards used in different practices are relatively consistent but vary by TASK Practice refers to different LOBs or different geographic areas

Question 33

Materiality Paper: Tasks Vs Practice

Answer 33

Materiality standard for setting reserves for HO & WC should be similar Materiality standard between setting reserves v pricing for WC is not necessarily as similar Once a standard is selected, it should be consistent over the years. one exception, if the company is approaching threshold (approaching next RBC Level), precision becomes more important and it may be prudent to change the standard

Question 34

Materiality Paper: Disclosure

Answer 34

Important to disclose the materiality standard selected should take into accounts: 1) sophistication of user 2) importance of concept to user

Question 35

ASOP 20: Calculating Discounted Reserves

Answer 35

Actuary should know: 1) context in which the DC reserves will be used (i.e, is this going to be used in actual financials, or for internal analysis purposes): -actuary should select Methods and Assumptions appropriate for that context (i.e, for financials, may want to be more conservative) 2) significance of certain assumptions may vary when calculating the DC vs Un-DC reserves -E.G the LDF selection at a very old maturity would have a greater impact on the undiscounted reserve than the discounted reserve 3) Actuary can provide a range for the DC reserves. The uncertainty associated with the discounted reserve estimate may be different to the uncertainty associated with the un-DC Reserve

Question 36

ASOP 20: Calculating Discounted Reserves Payment Timing

Answer 36

To DC, the actuary has to project: 1) timing 2) Magnitude *payments made farther in the future are going to have more DC thus lower NPV Assumptions used to determine the payment timing should be the same as those used to determine the full value reserves. -the actuary should consider the sensitivity of the timing of payments to different assumptions (i.E, what happens when payments are made in next 5 years vs 10 years) Actuary needs to consider the timing of RECOVERIES (reinsurance and sal/sub)

Question 37

ASOP 20: Calculating Discounted Reserves Discounting Rate

Answer 37

Can use: 1) risk free rate (advantage: hard to manipulate, easy to prove) 2) portfolio approach (the company's actual return on the investment portfolio. higher rate -> lower NPV -> better surplus) 3) DC rate requested by another party

Question 38

ASOP 41:

Answer 38

Purpose—This actuarial standard of practice (ASOP) provides guidance to actuaries with respect to actuarial communications.