RMAD -- RISK OF MATERIAL ADVERSE DEVIATION A Practitioner’s Viewpoint. CASUALTY LOSS RESERVE SEMINAR September 10-11, 2007 Chap Cook, FCAS FCA, MAAA, CPCU Consulting Actuary, MBA Actuaries, Inc. RMAD Requirements: Statutory.
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RMAD -- RISK OF MATERIAL ADVERSE DEVIATIONA Practitioner’s Viewpoint
CASUALTY LOSS RESERVE SEMINAR
September 10-11, 2007
Chap Cook, FCAS FCA, MAAA, CPCU
Consulting Actuary, MBA Actuaries, Inc.
Is there a Risk of
Material Adverse Deviation?
Significant risks and uncertainties are specific issues affecting ultimate claim liabilities such as:
How Many RMADS?
“Although the carried reserves as of 12/31/05 are within my reasonable range, I do believe that there is a substantial risk of material adverse deviation in the Company’s reserves as measured against a materiality standard of 10% of surplus. …Carried reserves are about 110% of surplus, so a 10% deficiency in reserves would results in a loss of more than 10% of surplus. A deviation of this magnitude, while not anticipated, is not a statistically insignificant possibility.”
“The Materiality Standard is established as 10% of reported statutory surplus, or $XXX,000 as shown in Exhibit B: Disclosures. I estimate the likelihood of material adverse deviation arising from normal variations in expected results to be about 16%. I estimate the likelihood of material favorable development to exceed 50%.”
“Based on my actuarial calculations, the lines of business written by the company, the company’s participation in the intercompany pool, and my consideration of other relevant factors, I reasonably believe there are no known significant risk factors or uncertainties that could cause material adverse deviation. While adverse development in excess of the materiality standard is possible, I consider it unlikely.”
“The company writes a variety of coverages whose risk factors expose the company’s reserves to significant variability. I do not believe that there are any such factors that are unusual to the lines of business written.
“A major risk factor underlying the recorded reserves is the inherent uncertainty associated with the long-tail business written by the company. I have considered this uncertainty by estimating a range of reasonable reserves. The difference between the recorded reserves and the high end of my range of reasonable estimates is X. I have selected a materiality standard of Y, which is Z percent of the company’s year-end policyholder surplus. Since the difference between the recorded reserves and the high end of my range of reasonable estimates exceeds this standard, I believe there are significant risks and uncertainties that could result in material adverse deviation from the recorded reserves.”
“In my opinion there is a risk of material adverse deviation…including uncertainties associated with the company’s changing mix of business and operations,…liabilities relating to the company’s discontinued operations, potential reinsurance collectibility issues and estimates of liability for the company’s A&E exposure.”
I would like to see a paragraph on each one
“There are points within my reasonable range of reserve estimates that … would materially reduce the company’s surplus… Certain points nearer the high end of my range would… change the company’s RBC status to company action level.”
. “There is a Risk of Material Adverse Deviation because of claims counting issues found in the audit. For at least 2 years, some open claims for the XX line of business were incorrectly coded as closed. So far the 2007 data appears to have been corrected. This line shows unusually large loss development in 2007, especially in claims count. We are uncertain of the amount of reopened claims, both past and future, and are not sure that there are not some remaining open claims coded as closed. Because of a small volume of large volatile claims, we have historically given significant weight to the number of open cases. We did not give that any weight this year because of the error issue, which is a significant change in method.”
. “There is a Risk of Material Adverse Deviation because of a claim department reorganization. In the past, the claim department had been centralized at the head office, but during late 2006 it was decentralized to eight regional claim offices. Many examiners and adjusters did not accept transfers and were replaced, so there are many new staff members. We are also not certain that expertise may not have been diluted for smaller lines and unusual claims: it is difficult to have a product liability expert in every office. Management is confident that the geographic specialization will improve local knowledge and reduce travel expenses, but we are concerned that for at least two years there will be some uncertainty as to both adjustment quality and development patterns.”
“There is a Risk of Material Adverse Deviation because the company is in runoff. The company has been in runoff since 2004. Business volume written in the latest 3 years is small, declining, and essentially involuntary. There is not enough data to be confident of recent years’ development patterns: it is quite certain that mix within line has changed substantially, and highly likely that there has been significant adverse selection because better business and better agents have moved on, while poorer risks and agents are hanging on as long as they can legally hold the company on the risk.”
“Expected loss ratios for budgetary methods are assumed to be higher, but how much higher? We have also made pessimistic assumptions about deterioration in development factors, but how bad? Because of the declining volume of new claims, it is certain that A&O expenses will increase as a % of incurred losses because payments and handling will continue even as incurred losses decline toward zero. The absence of underwriting revenues means that operations such as general management, data processing, actuarial and accounting lay a larger portion of overhead expenses on the claims side of the business. Finally, the ability to retain the best adjusters may affect the quality of the claims settling. ”