Ranges & Actuarial Opinions: A Regulatory Perspective

1. Ranges & Actuarial Opinions: A Regulatory Perspective Nicole Elliott, ACAS, MAAA Texas Dept of Insurance

2. Scope of Discussion • Focus on statutory entities that require an SAO • Consider the AOS and Report also • Focus on Ranges and how they relate to the Carried reserves • Stats based on six states, about 900 companies • Regulatory Review Sequence

3. Regulatory Review Sequence • Review SAO – solvency focus • What is the SAO category? • Review AOS – is there a Point, Range or both? • Where are Carried reserves in relation to info in AOS? • Review Actuarial Report for further details

4. Opinion Category • Five choices – Reasonable, Redundant, Excessive, Qualified, No Opinion • 98% of SAOs are Reasonable, < 1% Excessive • What does it mean to be Reasonable? • What is the Regulator’s opinion of the Opinion?

5. AOS Review (Point, Range, or Both – Net basis)

6. AOS Review cont. • What is driving Ranges? • Consultants vs. Company Officers • Consultant practice across the board? • Dependent on company characteristics? • Dependent on reserving methods or line of business? • Did the client request it?

7. Where are the Carried reserves? • Carried reserves in relation to actuarial indications helps prioritize the Regulatory review • If only Range given, are Carried reserves at or near midpoint? • If only a Point given or both, are Carried reserves at or near the Point? • If both given, how does the Point compare to midpoint of the Range?

8. Carried Reserves cont.

9. Focus on Ranges • Narrow discussion to situations where a Range is provided • Assume where Point only given, Carried reserves are at or near Point • Per ASOP 36 and A/S Instructions, Carried reserves anywhere in Range is Reasonable • Begs the question: Is the Range Reasonable?

10. What types of Ranges are Regulators seeing? • Not discussed in Report • Methods considered proprietary • Used actuarial judgment - common • % +/- a point estimate - common • Scenario testing • Statistical distributions - rare

11. Are these methods Reasonable? • What does the Actuarial Report say? • Is the calculation of the Range discussed and supported by exhibits? • Is the documentation sufficient to appreciate the conclusions? • What was your thought process?

12. Range vs. the Carried Reserve • Are they independent? • Relationship: SAO supports carried reserves, AOS supports SAO • AOS could include a Range which supports determination of a Reasonable provision • SSAP 55: The Carried reserve is Management’s responsibility

13. Management’s Responsibility? • Actuary should discuss the meaning of the Range with Management • Actuary should understand Management’s choice of Carried reserve within the Range • If not based on a distribution, and all points within the Range are equally likely, is it Reasonable for Management to carry at other than the Midpoint?

14. Professional Responsibility • Document how the Range was determined • Understand how the Range will be used • Prevent its misuse • Discuss any limitations of the Range • Talk with Management

15. Case Study • Long tail business with history of severe reserve development • PY -> no Range, only a Point; Carried = Point • CY ->Range by client request, width of Range was 67% of surplus; Point = Midpoint • All other AOSes issued by actuarial firm were Point only for CY

16. Case Study cont • What else is happening in CY? • Where were Carried Reserves?

17. Case Study – Actuarial Report • No support for Low and High selections • Inquiry response – where indications did not provide a reasonable spread, used 10% or 20% for endpoints • Upon request, Management provided reasons for carrying at the end point

18. Case Study lessons • Degree of ‘actuarial rigor’ used to develop the Range • Reasonable to carry anywhere within the Range, but was the Range itself Reasonable? • How will Management use the Range? • Transparency: documentation of assumptions and calculations