Statements of Actuarial Opinion Midwest Actuarial Forum March 23, 2004

1. Insurance and Actuarial Advisory Services Statements of Actuarial OpinionMidwest Actuarial ForumMarch 23, 2004 Robert H. Wainscott, FCAS, MAAA, FCIA Principal, Ernst & Young

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3. 3 Statement of Actuarial Opinion Historical Perspective

4. 4 Today�s Statement of Actuarial Opinion �Good and Sufficient� has become �Reasonable� The actuary is appointed by the Board Commentary is required on such items as: Anticipated salvage & subrogation Discount for time value of money Reinsurance collectibility Retroactive reinsurance � and more Long-duration unearned premiums are included Documentation report is required

5. 5 Statements of Actuarial Opinion Reference Documents ASB #36 SSAP #55; SSAP #65; SSAP #62; others AAA Practice Note on SAO AAA Loss Reserve Law Manual

6. 6 Actuarial Standard of Practice #36 Six-year effort Three exposure drafts, with many comments Public Hearing Effective: For all Statements of Actuarial Opinion provided for reserves with a valuation date on or after October 15, 2000

7. 7 Scope Written statements of actuarial opinion for which: Opinion is provided to comply with requirements of law or regulation Opinion is represented by the actuary as a statement of actuarial opinion Applies to loss and loss adjustment expense reserves of insurance companies, reinsurance companies and of other property/casualty risk financing systems, such as self-insurance

8. 8 Codification and The Actuary Management Records (and Supports) Best Estimate of Reserves Actuary Continues to Opine Upon Reasonableness of Reserves

9. 9 SSAP #55 Unpaid Claims, Losses, and Loss Adjustment Expenses For each line of business and for all lines of business in the aggregate, management shall record its best estimate of its liabilities for unpaid claims, unpaid losses, and loss/claim adjustment expenses. If, for a particular line of business, management develops its estimate considering a range � management�s best estimate of the liability within that range shall be recorded. Management�s range shall be realistic and, therefore, shall not include the set of all possible outcomes but only those that are considered reasonable.

10. 10 SSAP #55 - Continued Unpaid Claims, Losses, and Loss Adjustment Expenses In the rare instances when � it is determined that no point within management�s estimate of the range is a better estimate than any other point, the midpoint � shall be accrued. If management determines that the high end of the range cannot be quantified, then a range does not exist, and management�s best estimate shall be accrued. If a reporting entity chooses to anticipate salvage and subrogation recoverables, the recoverables shall be estimated and shall be deducted from the liability for unpaid claims or losses.

11. 11 SSAP #65 � Property and Casualty Contracts P/C contracts can be written on the following bases: Occurrence Cover insured events that occur within the effective dates of the policy regardless of when they are reported. Liabilities for losses shall be recorded when the insured event occurs. Claims made Cover insured events that are reported within the effective dates of the policy, subject to retroactive dates when applicable. Liabilities for losses shall be recorded when the event is reported to the reporting entity. Extended reporting Endorsements to claims made policies covering insured events reported after the termination of a claims made contract but subject to the same retroactive dates where applicable.

12. 12 SSAP #65 - Continued Defines the accounting practices to follow for reporting the following items: Extending reporting guidelines Discounting Structured settlements Policies with coverage periods >= to 13 months High deductible policies Asbestos and environmental exposures Excess statutory reserve Policyholder dividends

13. 13 Unresolved Issues and Interpretations What constitutes management�s �Best Estimate�? Who is �management�? Who owns the estimate? Role of the Actuary Set reserves or review management�s reserves?

14. 14 Whose Best Estimate? Management�s vs. the Actuary�s Why is there a difference? What is a reasonable tolerance? What�s a material difference between management�s and the actuary�s evaluation? What kind of documentation does management have for their estimate?

15. 15 What Kind of Opinion?Differences in Language ASOP 36 Classes Reasonable Excessive Inadequate Qualified No Opinion Reserve Certifications? �Clean� Opinions?

16. 16 What is a Reasonable Opinion? Reasonable in the context of what is known/available to the actuary today? Can/Should it include the �there�s an outside shot if everything goes right� scenario?

17. 17 What is a Reasonable Range? Ranges often picked judgmentally. May be based on rules of thumb or actuary uses several estimation techniques and uses highest and lowest result as range. Should ranges rely more on stochastic analysis? Should ranges explicitly consider both process and parameter risk? What sort of ranges would such analysis yield?

18. 18 Qualified Opinions ASOP 36 definition: �the reserves for certain items are in question because they can not be reasonably estimated� When does risk of material adverse deviation produce a qualified opinion? If the difference between the high end of a reasonable range and carried reserves is more than surplus, are those reserves reasonably estimable? Is a qualified opinion necessarily bad?

19. 19 2004 Changes Requires identification of person responsible for providing data used in actuarial analysis Moves numbers to Exhibit A � Scope and Exhibit B � Disclosures Whether or not there is significant risk of material adverse duration Greater definition of Actuarial Report Requires auditor to test key data for opinion

20. 20 2004 Changes Exhibit A: SCOPE Loss Reserves A. � D. Same as current Scope E. �Retroactive Reinsurance Reserve Assumed� moves to E from F as �claims made extended loss and LAE reserve is removed from Scope section. F. Other Loss Reserve items on which the Appointed Actuary is expressing an Opinion (list separately) �Premium Reserves G. Reserve for Direct and Assumed Unearned Premiums for Long Duration Contracts H. Reserve for Net Unearned Premiums for Long Duration Contracts (Ceded no longer listed separately) I. Other Premium Reserve items on which the Appointed Actuary is expressing an Opinion (list separately) �

21. 21 2004 Changes Exhibit B � Disclosures New items 1 & 2 � 1. Materiality Standard expressed in $US 2. Statutory Surplus $ Items 3-7 are the same as current A-E Disclosures except claims made extended loss and loss expense reserve is separately broken out by amounts reported as loss reserves and as unearned premium reserves Item 8 - Other items on which the Appointed Actuary is providing Relevant Comment (list separately)

22. 22 2004 Changes � Risk of MAD Requires explicit statement of whether or not actuary reasonably believes there are significant risks and uncertainties that could result in material adverse deviation and why. The explanatory paragraph should not include general, broad statements about risks and uncertainties� nor is the actuary required to include an exhaustive list of all potential sources of risks and uncertainties. Materiality standard disclosed in $US.

23. 23 What�s Material? SEC NAIC Threshold Common Sense

24. 24 Materiality Consider the purposes and intended uses for which the actuary prepared the statement of actuarial opinion Use professional judgment as well as guidelines or standards For NAIC Opinions, the actuary may wish to consider: Quantitative �rule of thumb� measures, (I.e., % of statutory surplus) Risk Based Capital implications Minimum capital and surplus requirements IRIS ratio exceptional value triggers Accounting Guidance � Staff Accounting Bulletin 99 Discussion with regulators/auditors may be useful

25. 25 Actuarial Report Defined Narrative and technical components. Requires exhibit which ties to AS and compares Actuary�s conclusions to carried amounts. Summary exhibit(s) of either the actuary�s best estimate, range of reasonable estimates, or both, that led to the conclusion in the OPINION paragraph regarding the reasonableness of the reserves.

26. 26 Actuarial Report: New names, same intent Narrative and technical components. The narrative component - sufficient detail to clearly explain to company management, the regulator, or other authority the findings, recommendations and conclusions, as well as their significance. The technical component - sufficient documentation and disclosure for another actuary practicing in the same field to evaluate the work. This technical component must show the analysis from the basic data, e.g., loss triangles, to the conclusions.

27. 27 Actuarial Report: New Specifications Requires Extended Comments on: Trends that indicate the presence or absence of risks and uncertainties that could result in material adverse deviation Factors that led to unusual IRIS ratios for Reserve tests (10,11,12), and how these factors were addressed in prior and current analyses.

28. 28 Data Testing: Auditor/Actuary Consultation The independent auditor consults with the actuary to ��obtain an understanding of the data identified by the appointed actuary as significant �� to the decision regarding the reasonableness of the reserves so that the data may be tested by the auditor.

29. 29 2005 Changes Notification of change in Actuary procedure will be similar to that required when Auditor is changed including letters stating there were no material disagreements on items within the Scope of the Opinion. Actuarial Opinion Summary(AOS) to be due March 15 Explicit discussion regarding continued pattern of adverse development (if 3 of last 5 years) Model Law to protect confidentiality of AOS

30. 30 Model Law: What it Does Creates an Actuarial Opinion Summary document submitted March 15. Summary contains very basic data on the appointed actuary�s range or point estimate Protects the confidentiality of material in both the Report and the Summary Provides legal protection to the appointed actuary except in cases of fraud or willful misconduct by the actuary

31. 31 Model Law: The Enactment Process Passed Casualty Actuarial Task Force at the NAIC in June 2003 Ratified by parent committee at the NAIC in September, then Executive Committee and Plenary in December. Referred to states for legislative or regulatory action Expected to be requirement for accreditation

32. 32 Model Law: Actuarial Opinion Summary Required to be sent only to domiciliary state Other states may request if they can demonstrate they can protect confidentiality Contains Net and Gross point estimate and/or range Company�s Net and Gross Carried Reserve Difference between the Company�s Net and Gross Carried reserves and the Appointed Actuary�s point estimate and/or range Discussion of any persistent adverse development (Schedule P 1 year test adverse by 5% of surplus or more in 3 of the last 5 years)