Reserve/Opinion Issues from a Regulatory Perspective Proposed Revision to the NAIC Annual Statement Instructions

1. Reserve/Opinion Issues from a Regulatory PerspectiveProposed Revision to the NAIC Annual Statement Instructions Richard Marcks, FCAS, MAAA State of Connecticut Insurance Department 2002 CLRS - Arlington, VA

2. Regulatory Contact for the Appointed Actuary Most contact is with the state of domicile Other states may show interest NAIC  Annual Statement Instructions

3. National Association of Insurance Commissioners • organization of regulators from the 50 states, DC and the four U.S. territories • helps regulators fulfill their primary responsibility to protect the interests of insurance consumers • provides a forum for the development of uniform policy when uniformity is appropriate

4. What is the CATF? • NAIC (8 standing committees)  Property & Casualty Insurance Committee Casualty Actuarial Task Force (14 states) Actuarial Opinion Instructions Working Group (6 states) formed after the Summer 2001 NAIC Meeting • Open Meetings Policy • You can participate • www.naic.org for information on when & how

5. Charges to the CATF from the Property & Casualty Committee • Consider improvements to the Opinion and related instructions. Present proposals to the Blanks Task Force by July 1 • Consider regulatory implications of revisions to CAS Statements of Principles or ASB Standards of Practice

6. Instructions Review: A 14 Month Process • Working Group: monthly conference calls and at NAIC Meetings • Identified issues: Structure and Substance • Researched related materials • Feedback:AAA and interested parties • Feedback: Chief Examiners, other regulators

7. 1 Overview 2 Definitions 3 Content 4 Exemptions 5 Required Sections 6 Identification 7 Illustrative Language 8 Scope 9 More Scope 10 Data Reliance 11 Scope Comment 12 Long Duration Contracts 13 Opinion 14 Relevant Comment 15 Adverse/Qualified Statement 16 Actuarial Report 17 Signature 18 Error Notice Current Instructions

8. Early Questions • Why so much detail in the Opinion? • What’s more important - Relevant Comments or lots of numbers? • Reliances - who are they? • Caveats, exclusions, disclaimers = Qualified Opinion?

9. Early Working Group Support For • Disclose the range • Include PDR • ASOPs (9 and 36) • Report confidentiality • Opine in the aggregate • Professional standards for a “Qualified Actuary”

10. Reasonable Reserves How different are these concepts? Adequate Reserves

11. Example 1“In my opinion … meet the requirements of the insurance laws of …” This year “In my opinion … meet the relevant requirements of the insurance laws of …”

12. Example 2 ASOP #36 Qualified Opinion—When, in the actuary’s opinion, the reserves for a certain item or items are in question because they cannot be reasonably estimated or the actuary is unable to render an opinion on those items, the actuary should issue a qualified statement of actuarial opinion.

13. Example 2“An indeterminable amount of additional liability may develop due to the general risks inherent in ….” • Should this be interpreted as a qualified opinion? • Does this imply a risk of material adverse deviation?

14. Example 3 “In my opinion... make a reasonable provision...” Subsequent review of workpapers showed held reserves were below the appointed actuary’s range of reasonable estimates. Is this a matter for ABCD referral?

15. 1 Overview 2 Required Sections 3 Identification 4. Scope 5 Opinion 6 Relevant Comment 7 Actuarial Report 8 Signature 9 Error Notice Exhibits A & B Proposed Revision

16. Qualified Actuarycurrent definition A. A member in good standing of the Casualty Actuarial Society, or B. A member in good standing of the American Academy of Actuaries who has been approved as qualified for signing casualty loss reserve opinions by the Casualty Practice Council of the American Academy of Actuaries, or C. A person who otherwise has competency in loss reserve evaluation as demonstrated to the satisfaction of the insurance regulatory official of the domiciliary state.

17. Qualified Actuaryproposed definition A. A member in good standing of the Casualty Actuarial Society, or B. A member in good standing of the American Academy of Actuaries who has been approved as qualified for signing casualty loss reserve opinions by the Casualty Practice Council of the American Academy of Actuaries. C. A person who otherwise has competency in loss reserve evaluation as demonstrated to the satisfaction of the insurance regulatory official of the domiciliary state.

18. Identification • No illustrative language • “… specifically indicate the relationship to the company, qualifications, date of appointment, and specify that the appointment was made by the Board of Directors...”

19. Scope • Exhibit A  all Scope items • Identification by name of the person relied upon for the data

20. Opinion • Consolidation • Aggregation in Scope. • Reliance • ASOP #36 definitions: Types of Opinions

21. Relevant Comment • Risk of Material Adverse Deviation • Disclosures in Exhibit B • Reinsurance • IRIS Ratios • Methods and Assumptions

22. Actuarial Report • Consistency with ASOP #9: Documentation and Disclosure • Narrative and Technical components • Specific exhibits, documentation and comment

23. What’s Next? October 7 NAIC Blanks Committee votes on changes for Annual Statement Effective Date: Opinions at year end 2004 2003 CATF Working Group Agenda • Model Law to address Opinion and Report disclosures; materiality, confidentiality, etc • Audit of the Actuarial Data • Indemnification Agreements • Premium Reserves

24. The Big Question:When is a carried reserve reasonable? ASOP No.36 Guidance: when the stated amount is within the actuary’s range of reasonable reserve estimates When is it adequate?

25. What does it mean to say“... is not material …” Practice Note Guidance: In evaluating materiality,the opining actuary should be guided by ASOP No.36 and may wish to consider ... In the final analysis, materiality will depend upon the actuary’s judgment

26. A Regulator’s Perspective How can I count on that judgement?