Rmad risk of material adverse deviation a regulator s viewpoint
Download
1 / 23

RMAD _ RISK OF MATERIAL ADVERSE DEVIATION A Regulator s Viewpoint - PowerPoint PPT Presentation


  • 251 Views
  • Uploaded on

RMAD _ RISK OF MATERIAL ADVERSE DEVIATION A Regulator’s Viewpoint. CASUALTY LOSS RESERVE SEMINAR September 10-11, 2007 Wendy Germani, FCAS, MAAA (retired) Texas Department of Insurance. WHAT IS MATERIALITY?.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'RMAD _ RISK OF MATERIAL ADVERSE DEVIATION A Regulator s Viewpoint' - khanh


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Rmad risk of material adverse deviation a regulator s viewpoint

RMAD _ RISK OF MATERIAL ADVERSE DEVIATIONA Regulator’s Viewpoint

CASUALTY LOSS RESERVE SEMINAR

September 10-11, 2007

Wendy Germani, FCAS, MAAA

(retired) Texas Department of Insurance


What is materiality
WHAT IS MATERIALITY?

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

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

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

  • NAIC APPM has a definition.

  • SEC’s definition is similar to the NAIC’s.


According to naic accounting practices procedures manual
According to NAIC Accounting Practices & Procedures Manual

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


Know your user
Know Your User !!!

  • Principal User

  • Intended User

  • Unintended User

  • Different Users have different expectations regarding materiality.


Considerations in materiality standard for reserves from materiality asop 36
Considerations in Materiality Standard for ReservesFrom Materiality & ASOP 36

  • Would the misstatement put the insurer in danger of a breach of covenant or regulatory requirement?

    • RBC Trigger?

    • Minimum Capital Requirement

    • IRIS ratio failure

  • Turn profit into loss?

  • Relative size is usually more important than absolute size.

  • Lines of business written by company


Possible standards of materiality
Possible Standards of Materiality

  • % of Surplus

  • % of Reserves

  • Reinsurance (Zero Net Reserve Companies)

  • Minimum of % of Surplus, % of Reserves and/or Amount to trigger an RBC action level.

  • Other


Standards used in 2006 for ct il ny oh pa tx domestics
Standards Used in 2006For CT IL NY OH PA TX Domestics



Standards used for pennsylvania domestics 2004 to 2006
Standards Used for Pennsylvania Domestics 2004 to 2006


General observations materiality standards
General ObservationsMateriality Standards

  • Appears to be a general trend to consider multiple measures of materiality:

    • More “combinations” of materiality bases in Opinions.

    • Less Opinions with a single basis of materiality.


Combination example 1
Combination – Example #1

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


Combination example 2
Combination – Example #2

  • “Based on my understanding of the use of this (Opinion), I evaluated materiality in the context of 15% of loss and LAE reserves, 25% of surplus, and action/control level from RBC, of which the minimum was selected as a materiality standard.


Consideration of rbc position
Consideration of RBC Position

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

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

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


Is there a Risk of

Material Adverse Deviation?


I do not believe that there are significant risks and uncertainties that could result in material adverse deviation in the loss and loss adjustment expense reserves.


Is there a risk of mad
Is there a risk of MAD uncertainties that could result in material adverse deviation in the loss and loss adjustment expense reserves.

  • “The actuary should explicitly state whether or not he or she reasonably believes that there are significant risks and uncertainties that could result in material adverse deviation.”

  • Exhibit B for 2007 Actuarial Opinions has a box to check Yes or No if there is RMAD.


So is there rmad using data from ct il ny oh pa tx
So is there RMAD? uncertainties that could result in material adverse deviation in the loss and loss adjustment expense reserves.Using data from CT, IL, NY, OH, PA, TX


Relevant comments should allow a regulator to answer these questions
Relevant Comments should allow a regulator to answer these questions:

  • Is there a Risk of Material Adverse Deviation?

  • What amount of adverse deviation does the actuary consider material?

  • Why does the actuary consider that amount to be material for this company?

  • Do I understand why the actuary believes that material adverse deviation is or is not a risk for this company?


Is there a risk of mad for zero net reserve companies
Is there a risk of MAD for Zero Net Reserve Companies? questions:

  • The opining actuaries concluded that 95% of the companies in Ohio, Pennsylvania and Texas with zero net reserves do not have a risk of RMAD.

  • Reinsurance and/or rapid growth are cited as reasons for possibility of RMAD.


Companies with zero net reserves 2006 oh pa tx domestics
Companies with zero net Reserves – 2006 questions:OH PA TX Domestics


Crusap report observations on communication
CRUSAP Report : questions:Observations on Communication

  • “..many users of actuarial services don’t adequately understand the inherent variability and uncertainty that attach to actuarial opinions and projections.”

  • This is “..one of the most significant communication problems the profession currently faces.”

  • “… placing too much emphasis on the variability of actuarial results could undermine the perceived value of actuarial services in the eyes of the users.”


Materiality and link to actuarial opinion summary
Materiality and Link to Actuarial Opinion Summary questions:

  • What if actuary said “no” to RMAD, yet company carried reserves in lower end of actuarial range?

  • Consideration given to surplus and RBC levels. If low, appointed actuaries should expect a call from the domestic regulator.

    • Why is there no RMAD?

    • Is the Materiality threshold possibly set too high?


Questions

Questions ????? questions:


ad