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The Actuary’s Responsibility to Auditors and Examiners

The Actuary’s Responsibility to Auditors and Examiners. Actuarial Support in an Audit - Auditor Expectations. Michael J. Grillaert, Partner KPMG LLP. Introduction. An Auditor’s Expectations of Actuarial Support in an Audit Environment How were these Expectations Developed?.

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The Actuary’s Responsibility to Auditors and Examiners

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  1. The Actuary’s Responsibility to Auditors and Examiners Casualty Loss Reserve Seminar - September 9, 2003

  2. Actuarial Support in an Audit - Auditor Expectations Michael J. Grillaert, Partner KPMG LLP Casualty Loss Reserve Seminar - September 9, 2003

  3. Introduction • An Auditor’s Expectations of Actuarial Support in an Audit Environment • How were these Expectations Developed? Casualty Loss Reserve Seminar - September 9, 2003

  4. Topics of Discussion • Professional Requirements • Statement of Auditing Standards # 73 “Using the Work of a Specialist” • Sarbanes-Oxley Section 404 Internal Control Compliance Reviews • Views Toward the Future Casualty Loss Reserve Seminar - September 9, 2003

  5. Professional Standards – SAS # 73 • Requires the Auditor to Gain an Understanding of: • Specialist’s Qualifications (FCAS, ACAS, etc.), reputation and standing & experience • The Specialist’s relationship to the client (Independence) • Methods and assumptions used and comparability to the prior period Casualty Loss Reserve Seminar - September 9, 2003

  6. Traditional Areas of Actuarial Assistance • Review or Independent evaluation of Loss and LAE adequacy • Review of Reinsurance Risk-Transfer elements (SSAP 62 & SFAS 113) • Review of Overall Reinsurance program construct • Evaluation of Breadth and Depth of client actuarial resources (people, systems, etc.) • Review of Guide 6 disclosures, MD&A and financial statement footnotes for actuarial related matters. Casualty Loss Reserve Seminar - September 9, 2003

  7. Traditional Areas of Actuarial Assistance • Recent SEC Focus on much more robust disclosures of actuarial matters: • Reasons and timing of changes in estimates on prior year reserve developments – how long has a change in pattern been observed, why now and not last quarter or last year??? • Disclosure of critical accounting estimates, key assumptions used therein and potential volatility • More robust MD&A disclosures re: frequency and severity by line, etc. • Some restatements of Financial Statements have been mandated Casualty Loss Reserve Seminar - September 9, 2003

  8. Sarbanes-Oxley Section 404 Compliance • Requires a compliance audit of the Internal Control mechanisms covering all significant financial statement items and disclosure items • Part of comprehensive legislation which requires each registrant’s CEO and CFO, every 90 days, to certify that the internal control mechanisms in place are sufficient to prevent and/or detect financial statement errors before they emerge in the financial statements Casualty Loss Reserve Seminar - September 9, 2003

  9. Sarbanes-Oxley Section 404 Compliance • Requires the CEO/CFO to advise the Auditor of Internal Control deficiencies • New Auditing Standards require that process documentation be maintained for significant financial statement processes • Lack of Documentation = Qualified Audit Report!!!! Impact on Financial Markets - Unknown Casualty Loss Reserve Seminar - September 9, 2003

  10. Sarbanes-Oxley Section 404 Compliance • Virtually all significant Insurance Company operations are in some way actuarially related: • Product development • Product pricing • Policy underwriting • Agent compensation and retention • Loss adjudication and reserving • Compliance with laws and regulations Casualty Loss Reserve Seminar - September 9, 2003

  11. FCAS = MVP • The engagement Actuary typically has the most comprehensive insurance industry knowledge of any team professional • Risk-Management Perspective • Appreciation of the importance of industry specific functions such as: • Underwriting policies • Loss adjudication • Reinsurance • Rating agency / Financial analysis considerations Casualty Loss Reserve Seminar - September 9, 2003

  12. What This Means • The actuary is well positioned to take a lead role in Client service in the years ahead. • The status of the Actuary in an audit will be elevated substantially; it is my expectation that actuaries will be present in many more Audit Committee settings covering both general business and actuarial matters. Casualty Loss Reserve Seminar - September 9, 2003

  13. Questions / Comments Casualty Loss Reserve Seminar - September 9, 2003

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