Opinion Writers Symposium Casualty Loss Reserve Seminar September 10-11, 2007

1. Opinion Writers SymposiumCasualty Loss Reserve SeminarSeptember 10-11, 2007 Moderator: Mary D Miller, Ohio Dept of Insurance Panelists: Nicole Elliott, Texas Insurance Dept Melissa Greiner, Pennsylvania Insurance Dept Session 4: 3:30-5:00 pm

2. Who is signing opinions? • 480 actuaries signed 2735 opinions (4,361 CAS members as of 11/13/06, about 11%) • 33% Company – 67% Consultants • 35% from top 5 consulting firms (at least 100 opinions) • 30% signed 1 opinion • 21 actuaries signed 593 opinions = 23% of opinions submitted = 4% of signers

3. Our Advice for This Year • Use your resources • Focus on RMAD • Prepare a good Actuarial Report • Meet with the Board annually • Provide better comments on adverse development

4. Use Your Resources • Annual Statement Instructions • ASOP 36 • COPLFR Practice Note • Practice Note’s Regulatory Guidance • Regulatory actuaries • Papers re: MAD, ranges, etc. • AAA 1 day Opinion Seminar

5. Focus on RMAD • Statutory A/S Instructions vs. ASOP 36 • Use the COPLFR Practice Note Regulatory Guidance • Consider your audience – focus on solvency, capitalization, RBC level, and IRIS ratios, but don’t forget income • Don’t confuse RMAD with a range of reasonable reserve estimates

6. RMAD: What standard should I use? • Consider specific company risks & operations • 62% use surplus, 13% use LLAE • 18% use a combination of surplus, LLAE, and/or RBC • Net vs. gross standards (reinsurance considerations) • Sample disclosures

7. What did you use? • Data from 886 companies domiciled in CT, IL, NY, OH, PA and TX

8. Is there RMAD? • Consider specific company risks • RMAD amount vs. the Range • Carried reserves vs. actuarial indications • RMAD on a Gross basis, but not Net? • Explicitly state if risk exists; 36% said Yes • ‘Attorney approved’ language • Sample disclosures

9. What is your answer? • Data from companies domiciled in CT, IL, NY, OH, PA, and TX • Risk of Material Adverse Deviation • Yes 36% • No 64% • Ambiguous <1%

10. Actuarial Report • Define report: ASOP 36, A/S Instructions, Regulatory Guidance • Who is the audience for the Report? • Does the Report support the Actuarial Opinion and the Actuarial Opinion Summary? • AOS range should match range in Report • Does it support carried reserves?

11. Actuarial Report Documentation • ASOP 9 RIP, now ASOP 41 • Narrative and technical exhibits • Document changes in assumptions or methods • Document operational changes • Discuss reinsurance – support gross and net estimates • Relate the analysis to Schedule P lines of business

12. Actuarial Report Documentation • Support needed for assumptions and methods • Loss ratios used in B-F methods • Loss development factors • Interpolated factors and roll forwards • Ultimate selections • Segmentation of data • Explain your thought process

13. Actuarial Report Documentation • Reconciliation to Schedule P • Account for all the pieces • At least Paid LLAE and case reserves • Other elements if significant to your analysis • Inadequate reconciliations cost time and money

14. Meet with the Board • Best to present your Report in person • When that is not possible, meet with them at some other time • Regulators expect the Board to understand the significance of your findings

15. When in Doubt… • Disclose, disclose, disclose • Talk with management • Seek help from a regulatory actuary

16. Actuarial Opinion Summary • Why do regulators need this? • How do regulators use this document? • What are regulators’ expectations?

17. Actuarial Opinion Summary – WHY? • A bridge between the Actuarial Opinion and Actuarial Report

18. Actuarial Opinion Public document Due March 1 Readily available Actuarial Report Confidential document Available May 1 Provided at regulator request Actuarial Opinion Summary – WHY?

19. Actuarial Opinion Summary Uses • Provide a confidential forum for appointed actuary to present actuarial estimates earlier in the financial solvency process

20. Actuarial Opinion Summary Uses • Tool for deciding when to request Report • Used in conjunction with Opinion and Report when planning for financial examination process. • Quality and consistency of actuarial documents is a factor in the risk-focused approach currently underway at the NAIC.

21. (In)Consistency Clue • Example: Inter-company Pool – 3 Companies – 50%, 30%, 20% - Difference between Actuary’s estimate and carried reserves -D&A • Company A = (-2,000) • Company B = (-1,200) • Company C = 1,000

22. Regulator Expectations of AOS • All appointed actuaries would understand one-year development test • Management would communicate with appointed actuaries • Appointed actuaries would understand company risks • Existing clients – what changed? • New clients – review prior actuary’s work AND understand what changed in current year

23. Did You Meet Expectations?One-Year Development • Generally everyone understands the one-year development test – but some were confused?????? • In both 2005 and 2006 handful of actuaries missed the calculation and did not comment as required • Calculation is already provided on A.S. Five-Year Historical page, line 71.

24. Did You Meet Expectations?One-Year Development Actuary required to comment when: • One-year development > 20% PY surplus in any single year (IRIS #11) • One-year development > 5% PY surplus in three of five years (AOS) • Do I have to comment otherwise?

25. One-Year Dev > Last Year’s MAD? • Does actuary comment? • How did actuarial estimates change? • Did management’s reserving practices or operational approach change? • Was this due to a catastrophe or single claim? • Regulator expects at least an acknowledgement

26. Did You Meet Expectations?Management Communication • Management communication is not always evident • Carried reserves didn’t always match AS • Surplus differences even more common • Size of error is usually less important than the breakdown in communication process

27. Did You Meet Expectations?Management Communication • What does management say in MD&A - Management Discussion & Analysis? • Due April 1 to regulator • What does management say in Note 25? • Changes to Incurred Losses & LAE reserves • Regulator will look for consistency in Management statements and Actuarial documents

28. Did You Meet Expectations?Company Risks • Regulator always interested in trends • Some disclosure always better than none • Clear explanation or understanding of company risks

29. Other AOS Observations • Reasons for adverse development could be single explanation or a lengthy list • Be specific with explanations! • Single explanation may affect several calendar years of development. • Development observed in one AY may not be same as development in another. • May need to address several LOB’s

30. What have we learned? • The majority of actuaries “get it” • Some actuaries better than others in level of disclosure; may be a matter of personal style. • Actuarial firms do NOT take the same approach in developing actuarial estimates (point, range or both)

31. What did you use? • Combined Net Data from Companies domiciled in CT, IL, NY, OH, PA and TX

32. How did you compare? • Net Data from Companies domiciled in CT, IL, NY, OH, PA and TX

33. How did you compare? • Combined Net Data from Companies domiciled in CT, IL, NY, OH, PA and TX

34. When in Doubt… • Disclose, disclose, disclose • Talk with management • Seek help from a regulatory actuary

35. Our Advice for This Year • Use your resources • Focus on RMAD • Prepare a good Actuarial Report • Meet with the Board annually • Provide better comments on adverse development

36. Questions? Comments?