Are Your Opinions and Actuarial Reports Meeting Expectations of Regulators and Others

1. Are Your Opinions and Actuarial Reports Meeting Expectations of Regulators and Others Casualty Loss Reserve Seminar September 18 - 19 2008 Moderator: M. Wendy Germani, FCAS Panelists: Joseph A. Herbers, ACAS Richard Marcks, FCAS P. Sean O’Donnell

2. Meeting Expectations of Regulators Casualty Loss Reserve Seminar September 2008 By: Richard Marcks Property Casualty Actuary Connecticut Insurance Department

3. Overview • Opinion History • Regulator Observations • Recommendations • Resources

4. Opinion History • Pre-2004 • 2004: From Boilerplate to Specific Characteristics of the Company • Current Emphasis • Opinion Summary • Supporting Report • Annual Guidance

5. Regulator Observations • ASOP No. 9 vs. ASOP No. 41 • ASOP No. 36 vs. ASOP No. 43 • How many is too many? • Company vs. Consulting Actuary • Opinion vs. Report Quality • Caveats

6. ASOP No. 9 vs.. ASOP No. 41 • “… sufficient for another actuary practicing in the same field to evaluate the work. The documentation should describe clearly the sources of data, material assumptions, and methods.” • “… ensuring that the parties addressed are aware of the significance of the actuary's opinion or findings.” • “Any material changes in sources of data, assumptions, or methods from the last analysis should be documented. The actuary should explain the reason(s) for and describe the impact of the changes.

7. ASOP No. 36 vs. ASOP No. 43 • … relevant characteristics of the entity’s exposures to the extent that they are likely to have a material effect on the results of the actuary’s reserve analysis… influenced by the methods used to sell or provide coverages, the distribution channels from which the entity’s business is obtained, the general underwriting practices and pricing philosophy of the entity, and the marketing objectives and strategies of the entity. • The appropriate type and extent of reserve analysis will vary with the nature of the claims and exposures… • …likely to have a material impact on the estimate…

8. How Many Is Too Many? • 2007  2500 SAOs by 526 actuaries • 13% by actuaries who signed < __ ? • 14% by actuaries who signed > __ ?

9. Caveats & Disclaimers • Is it consistent with the analysis? • Does it appear to be a denial of responsibility? • Does it provide meaningful context?

10. Recommendations • Address the Statutory Entity in the Report • Peer Review  informed skepticism • Read other opinions • Have your opinion and report scrutinized • Consistent with Other Information • Talk to the Regulator of Domicile

11. Resources • www.naic.org/committees_c_catf.htm • Regulatory Guidance • Links to State web sites • www.casact.org • Statement of Principles • Publications, Research, Professional Ed • www.actuary.org • COPLFR Practice Note • Boot Camp

12. Q & A

13. Meeting Expectations Casualty Loss Reserve Seminar September 2008 By: Joseph A. Herbers Pinnacle Actuarial Resources, Inc.

14. OUTLINE OF PRESENTATION • Background on Herbers • General Observations & NAIC CATF Guidance • Others’ Review of My Work • My Review of Others’ Work • General Comments

15. Background on Herbers • COPLFR Member since 1998 • Faculty for AAA Seminar on Effective P/C Loss Reserve Opinions • Practice Note Subcommittee • Appointed Actuary for 24 domestic P/C companies / RRG’s in 2007 • Loss Reserve Specialist / AA for dozens of captives • CAS paper on Materiality and SAOs (2004)

16. Background on Herbers • 23 years consulting experience • SAOs, feasibility studies • Funding/reserve studies commonly reviewed by regulators, auditors, reinsurers, fronting carriers, competitors • Audit Support experience • Financial Examination feedback

17. General Observations • Focus of my comments are on actuarial reports – not on SAOs or AOS • NAIC CATF – Regulatory Guidance Memo on Actuarial Report noted three notable weaknesses in documentation of many actuarial reports: - Expected Loss Ratio - Actuarial Judgment - Entity

18. General Observations • Report should contain exhibit summarizing changes in estimates from prior analysis, with extended discussion of significant factors underlying the changes – in order to improve transparency of disclosures • Exhibit comparing held reserve amounts with actuarial indications • Reconciliation exhibit between financial statement and data provided to actuary • Added disclosures for “roll forward” type analyses

19. Others’ Review of My Work • Document judgments underlying important assumptions – “What are the soft spots” - annual trend rates - benchmark loss development patterns – source and reasonableness given situation at hand - implied loss ratios - ratios of ceded to direct - changes from prior years • Schedule P Reconciliation

20. Benchmark Loss Development Patterns • by Line / Subline [GL – OL&T/M&C/Products versus Prof. Liability] • Primary v Excess • by Sector (trucking, contractors, staffing, manufacturers) • specialty lines (garage, D&O, warranty, professional liability) • Sources

21. Schedule P Reconciliation • paid amounts gross/net of salvage/subrogation • loss v DCC • reconcile A&O expenses by calendar year • A&O as % of gross v net • reconcile to held IBNR? • by line v by program

22. My Review of Other’s Work • Document judgments underlying important assumptions - preponderance of optimistic v pessimistic assumptions - client confidential “benchmarks” - selected values compared with actuarial indications - perpetuation of “prior year” values when data shows movement - changes since prior year?

23. My Review of Other’s Work • Independent Review • Use same structure but use my own assumptions • Truly independent review • May impact only a portion of overall reserves • Peer Review • ASOP 41 (Actuarial Communications) states

24. Review Template Form • Is the client requesting the performance of the actuarial analysis clearly identified? • Is the actuary or actuaries responsible for the actuarial report clearly identified? • Is the project scope clearly defined? • Is the work product clear?

25. Review Template Content • Are all assumptions and methods specified? • Are the assumptions and methods reasonable for this assignment? • Are the data sources identified and appropriate for their use in the analysis? • Are the resulting calculations correct? • Are the results, findings and recommendations reasonable and adequately supported by the analysis? • Does the work product meet actuarial standards of practice or other professional standards? • Are any reliances and limitations appropriate and clearly delineated? • Is the potential variability of results adequately discussed?

26. General Comments • Documentation of assumptions is often sparse • Background section of report with info on retentions, deductibles, unique program features is invaluable • Are LAE included in losses? Was A&O LAE considered? • Footnotes to exhibits leave something to be desired • Data limitations are often significant and need discussion • Tables, charts and graphs can add immeasurably to understanding of report

27. Annual Trend Rates • -2.5% WC loss cost trend? • 0% severity trend for nonstandard auto? • +20% trend for nursing home professional liability? • Were exposure trends contemplated? • Sources - Masterson Indices - Rate Filings - Special Studies - Fast Track

28. Q & A

29. Risk Retention Groups Casualty Loss Reserve Seminar September 2008 By: Sean O’Donnell Director of Financial Examination Risk Finance Bureau D.C. Department of Insurance, Securities and Banking

30. Actuarial Requirements for Risk Retention Groups

31. D. C. Domestic Risk Retention Groups Overview

32. D. C. Experience with Risk Retention Groups Statement of Actuarial Opinions

33. Suggested Areas for Improvement Risk Retentions Groups Actuarial Opinions

34. Q & A