STATUTORY STATEMENTS OF ACTUARIAL OPINION – Changes for Today and Tomorrow

1. STATUTORY STATEMENTS OF ACTUARIAL OPINION – Changes for Today and Tomorrow Wendy Germani, FCAS, Texas Department of Insurance Richard Marcks, FCAS, Connecticut Insurance Department Chet Szczepanski, FCAS, Pennsylvania Insurance Department 2003 CLRS– Chicago, IL

2. Opinion Changes for 2004 • Revision of Structure • Scope – Exhibit A • Opinion – Category • Relevant Comments - Exhibit B • Actuarial Report

3. reasonable material ReasoNabLe In my judgement reasonable reasonable In myjudgement In my judgement REASONABLE MATERIAL JUDGEMENT reasonable What is it? reasonable Where is it? material

4. Current Instructions - Year End 2003 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 LDC Scope, Opinion, Comment 13 Opinion 14 Relevant Comment 15 Adverse/Qualified Statement 16 Actuarial Report 17 Signature 18 Error Notice

5. Current Instructions - Year End 2003 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 LDC Scope, Opinion, Comment 13 Opinion 14 Relevant Comment 15 Adverse/Qualified Statement 16 Actuarial Report 17 Signature 18 Error Notice

6. 1. Overview 2. Required Sections 3. Identification 4. Scope 5. Opinion 6. Relevant Comments 7. Actuarial Report 8. Signature 9. Error Notice Exhibits A & B Structure for 2004

7. Scope “4. The SCOPE paragraph should contain a sentence such as the following: “I have examined the actuarial assumptions and methods used in determining reserves listed below in Exhibit A, as shown in the Annual Statement of the Company as prepared for filing with state regulatory officials, as of December 31, 20__.” Exhibit A should list those items and amounts with respect to which the Appointed Actuary is expressing an opinion. The Appointed Actuary should state that the items in the SCOPE, on which he or she is expressing an opinion, reflect the Loss Reserve Disclosure items (3 thru 8) in Exhibit B.”

8. Loss Reserves A. Reserve for Unpaid Losses (Liabilities, Surplus and Other Funds Page, Line 1) B. Reserve for Unpaid Loss Adjustment Expenses (Liabilities, Surplus and Other Funds Page, Line 3) C. Reserve of Unpaid Losses – Direct and Assumed (Schedule P, Part 1, Totals from Cols 13 and 15) D. Reserve for Unpaid Loss Adjustment Expenses – Direct and Assumed (Schedule P, Part 1 Totals from Cols. 17, 19 and 21) E. The Page 3 write-in-reserve, “Retroactive Reinsurance Reserve Assumed.” F. Other Loss Reserve items on which the Appointed Actuary is expressing an Opinion (List separately) Amount $ ________ $ _______ $_______ $_______ $________ $________ Exhibit A: Scope

9. Premium Reserves G. Reserve for Direct and Assumed Unearned Premiums for Long Duration Contracts. H. Reserve for Net Unearned Premiums for Long Duration Contracts. I. Other Premium Reserve items on which the Appointed Actuary is expressing an Opinion (List separately) Amount $ ______ $ ______ $ ______ Exhibit A: Scope(continued)

10. Opinion Paragraph –ASOP 36 Definitions • Determination of Reasonable Provision • Determination of Deficient or Inadequate Provision. • Determination of Redundant or Excessive Provision. • Qualified Opinion. • No Opinion.

11. Opinion Paragraph Reliance on Others • “If the actuary has relied on the Actuarial Opinion of another actuary (such as for pools and associations, for a subsidiary, or for special lines of business), the other actuary must be identified by name and affiliation within the OPINION paragraph”

12. Relevant CommentsMAD • “The Appointed Actuary must provide specific RELEVANT COMMENT paragraphs to address the risk of material adverse deviation. The actuary must identify the materiality standard and the basis for establishing this standard. The materiality standard must be disclosed in $US in Exhibit B: Disclosures. 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.”

13. Relevant Comments MAD (continued) • “If such risk exists, the actuary should include an explanatory paragraph to describe the major factors, combination of factors, or particular conditions underlying the risks and uncertainties that the actuary reasonably believes could result in material adverse deviation. The explanatory paragraph should not include general, broad statements about risks and uncertainties due to economic changes, judicial decisions, regulatory actions, political or social forces, etc., nor is the actuary required to include an exhaustive list of all potential sources of risks and uncertainties.”

14. Materiality Standard Expressed in $US. Statutory Surplus. Anticipated net salvage and subrogation included as a reduction to loss reserves as reported in Schedule P. Items 1. and 2. are new. $ _________ $ _________ $ __________ Relevant Comments Exhibit B: Disclosures

15. Discount included as a reduction to loss reserves and LAE as reported in Schedule P Nontabular Discount Tabular Discount The net reserves for losses and expenses for the company’s share of voluntary and involuntary underwriting pools’ and associations’ unpaid losses and expenses that are included in the reserves. The net reserves for Losses and LAE that the company carries for the following: Asbestos as disclosed in the Notes Environmental as disclosed in the Notes $ _________ $ _________ $ __________ $___________ $____________ Exhibit B(continued)

16. The total claims made extended loss and expense reserve (Schedule P Interrogatories) Amount reported as loss reserves. Amount reported as UPR. Other items on which the Appointed Actuary is providing Relevant Comment (list separately) $ _________ $ __________ $____________ Exhibit B(continued)

17. Actuarial Report • The Report is to be held as confidential and not intended for public inspection. • The Report should be consistent with documentation and disclosure requirements of ASOP #9. • The Report should contain both narrative and technical components.

18. Narrative Component • Should provide sufficient detail to clearly explain to company management, the regulator, or other authorities: • The findings, • The recommendations • And conclusions.

19. Technical Component • Should provide sufficient documentation and disclosure for another actuary practicing in the same field to evaluate the work.

20. Components of the Report • Exhibit which ties to the AS and compares the Actuary’s conclusions to the carried amounts; • Summary exhibit of either the Actuary’s • Best estimate, • Range of reasonable estimates, • Or both. • Documentation of the required reconciliation from the data used for analysis to Schedule P.

21. Components of the Report(continued) • Extended comments on trends that indicated the presence or absence of risks and uncertainties that could result in material adverse deviation; and • Extended comments on factors that led to unusual IRIS ratios for one and two year development or Estimated Current Reserve Deficiency to Surplus and how these factors were addressed in prior and current analysis.

22. Actuarial Standards of Practice • The report and Opinion should be consistent with the AAA Actuarial Standards of Practice; • ASOP 9 – Documentation and Disclosures in P & C Insurance Ratemaking, Loss Reserving and Valuation. • ASOP 23 – Data Quality • ASOP 36 – Statement of Actuarial Opinion Regarding P & C Loss and LAE Reserves. • And Statements of Principles adopted by the CAS.

23. Actuarial Opinion 2004 QUESTIONS