2005 Opinions & 2006 Regulatory Guidance

1. 2005 Opinions & 2006 Regulatory Guidance Nicole Elliott, ACAS Texas Department of Insurance

2. Topics To Be Covered • Opinion statistics • Results from Year 1 of the AOS • Regulatory Guidance – 2006 Draft

3. Who is opining? • 32% of Opinions are done by a company actuary • 36% are done by the top five actuarial consulting firms • Top actuary signed > 50 opinions (a large pooled group) • In TX, 78% are Fellows • In TX, 125 of companies had a change in Appointed Actuary

4. Material Adverse Deviation Standards (TX) *Nearly half of the ‘Yes’ companies used standard language

5. Material Adverse Deviation(TX) cont. • Companies using Surplus as the MAD standard: • Companies using ‘Other’ as the MAD standard: most used some combination of the minimum of some percentage each of surplus and LLAE reserves and the amount required to change RBC level

6. AOS – Year 1 (TX) *Most companies’ point estimate was within 5% of the midpoint of the range

7. AOS – Year 1 (TX and a few other states*) Comparison of carried reserves to Actuary's point estimate or mid-point of range *Represents nearly 25% of opinions submitted #Represents < 20% of opinions submitted

8. Regulatory Guidance - History • Developed by the CATF for inclusion in the COPLFR Practice Note • First appeared in 2004 to coincide with the major changes made to the SAO Instructions (type of opinion issued and RMAD discussion) • Effort to convey regulatory issues in a timely responsive manner • Substantially revised in 2005 based on review of 2004 opinions

9. Regulatory Guidance – 2005 Highlights • Bright Line Indicator still maintained • Substantial discussion on “cookie cutter” opinions • Net zero companies and pooled companies • Explicit statement of whether or not RMAD exists • Reinsurance/Risk Transfer issues • Better discussion of adverse results (IRIS ratios) • Actuarial Report should contain a comparison of actuary’s indicated amounts to carried reserves • AOS required for the first time – no real guidance provided

10. Regulatory Guidance – 2006 Draft • Currently presented to COPLFR for discussion/open comment period to coincide with CLRS • Will be included in 2006 Practice Note • Minor changes to the Opinion guidance • Includes a new document addressing the AOS – based on comments & questions compiled by COPLFR

11. Regulatory Guidance – 2006 Opinion Changes • General clean-up • Current issues addressed in Scope section: Coverage for Service Contracts and Prepaid LAE • Comment on risk factors encouraged even when no RMAD is judged to exist • Removed the Bright Line Indicator • Consideration of RBC level when choosing MAD standard • Recognized better discussion in 2005

12. Regulatory Guidance – 2006 New AOS Guidance • Questions/comments from COPLFR • Many questions regarding how to file – chose to focus more on substance • Wording is mostly unchanged from 2005 • AOS instructions are now included in the Supplement Filings section of the NAIC Instructions • It is advised that the AOS not have the Opinion attached to it

13. Regulatory Guidance – 2006 New AOS Guidance cont. • Required for all companies that submit an Opinion, even risk retention groups • AOS intended to be simple and concise – straightforward examples provided in the Practice Note • Loss & LAE exhibit presented at a minimum • Other items (UEP and retroactive reinsurance) can be shown, but should be separate • Content should reflect the analysis performed by the AA

14. Regulatory Guidance – 2006 New AOS Guidance cont. • Other discussions (such as percentiles) can be included as long as the basic exhibit is presented separately • Comment required if AD > 5% of surplus in at least 3 of the past 5 years • Based on historical data, < 14% of companies meet this criteria • Regulators’ view of “persistent adverse development” • Newly Appointed Actuaries should research this as part of their current reserve estimation