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CLRS New Orleans, LA September 10-11, 2001

Actuarial Standard of Practice No. 36 and Codification of Statutory Accounting Discussion of Implementation Considerations. CLRS New Orleans, LA September 10-11, 2001. Today’s discussion facilitated by: Mary D. Miller, Moderator, Ohio Department of Insurance Pat Teufel, KPMG LLP

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CLRS New Orleans, LA September 10-11, 2001

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  1. Actuarial Standard of Practice No. 36 and Codification of Statutory Accounting Discussion of Implementation Considerations CLRS New Orleans, LA September 10-11, 2001

  2. Today’s discussion facilitated by: Mary D. Miller, Moderator, Ohio Department of Insurance Pat Teufel, KPMG LLP Charles Yesker, Interstate Insurance Group

  3. Today’s Discussion Will Focus on: • Risk of Material Adverse Deviation • Codification • Materiality

  4. Overview: ASOP 36 • Effective: For All Statements of Actuarial Opinion provided for reserves with a valuation date on or after October 15, 2000 • Defines 5 Types of Opinions • Determination of Reasonable Provision • Determination of Deficient or Inadequate Provision • Determination of Redundant or Excessive Provision • Qualified Opinion • No Opinion • Introduces Disclosure Requirements

  5. Disclosure Requirements • Deficient or Excessive Reserves Amount by which the stated reserve would need to increase/decrease to equal the minimum/maximum reasonable amount • Qualified Opinion • Description of the qualification and reasons • Amounts for such items included in the stated reserves, if disclosed by the entity • If amounts not disclosed by the entity, a statement that the stated reserves include unknownamounts for such items • Risk of Material Adverse Deviation

  6. Risk of Material Adverse Deviation • Where the actuary believes that there are significant risks and uncertainties that could result in material adverse deviation, an explanatory paragraph is required • The explanatory paragraph should contain: • The amount of adverse deviation that the actuary judges to be material • A description of the major factors or particular conditions underlying risks and uncertainties

  7. Practical Considerations • For NAIC Opinions, Direct and Assumed vs. Net • Possibility for different conclusions • Implicit requirement for different disclosures

  8. Overview: Codification • Effective January 1, 2001 • Recognized as OCBOA by accounting profession • Considerations for opining actuary • Management’s Best Estimate • Major Risk Factors vs. Material Adv. Deviation • Premium Deficiency Reserves • Pools and Associations • Assessments, e.g. Guaranty Fund

  9. Management’s Best Estimate • By “line of business” and in aggregate • Required for loss reserves and recordable loss contingencies • But “best estimate” and “line of business” are undefined • Reasonably certain that “best estimate” is not mean, median, or mode • “Line of business” is not necessarily annual statement LOB, and may relate more to marketing considerations • BI vs. PD vs. PhysDam vs. Personal Auto vs. Homeowners vs. Personal Lines

  10. Management’s Best Estimate • Management’s best estimate may differ from actuary’s point estimate • Management should be prepared to document reason for differences • Actuary can work with management to construct a letter that documents the reasons for differences • It will be the auditors (not the actuaries) who will be concerned about how management’s best estimate is determined • Actuary may wish to obtain a letter of representation stating that reserves reflect management's best estimate by LOB and in aggregate

  11. What does this mean? • Management currently should be booking its best estimate • Required documentation could be more stringent • It is uncertain how the auditors will interpret this requirement • Seems to place the spotlight on management’s decision

  12. Materiality (Section 3.4) • “Material” or “materiality” mentioned at least thirteen (13) times in the ASOP The actuary is directed to: • Consider the purposes and intended uses for which the actuary prepared the statement of actuarial opinion • Use professional judgment as well as materiality guidelines or standards applicable to the Standard of Actuarial Opinion and the actuary’s intended purpose for the opinion. • Principal use of materiality in the ASOP is to determine if an explanatory paragraph is needed

  13. Where Can We Look for Guidance? Property and Casualty Practice Note for Statements of Actuarial Opinion: Appendix 7 • Summarizes materiality references in ASOP 36 • Reviews materiality as referenced in • SEC Staff Accounting Bulletin No. 99 • NAIC Accounting Practices and Procedures Manual • Highlights relevant numerical considerations

  14. Materiality Considerations • Single vs. Multiple Line Company • Net Retention • Single Company vs. Member of a Group • Access to Capital • Management • Prior loss reserve runoff • Financial Strength

  15. Regulator Statutory Surplus Risk Based Capital Total Reserves IRIS Tests Investor Net Worth Net Income Earnings per Share What financial values are important to the intended user?

  16. Case Studies • Mutual Auto Insurance Company • Multi-Line Casualty Company • Small Nonstandard Auto Insurance Company • New Workers Compensation Insurance Company • Lawyers Professional Liability Mutual Insurance Company • Physicians’ Medical Malpractice Insurance Company • Reinsurance Company

  17. Mutual Auto Insurance Company

  18. Mutual Auto Insurance Company • Actuarial Point Estimate = 14,300 • Range of Reasonable Reserves • 13,825 to 14,972 • High End of Range - Carried = 417 • 2.9% of Reserves • .9% of Surplus • 49.5% of Net Income

  19. Multi-line Casualty Insurance Company

  20. Multi-line Casualty Insurance Company • Actuarial Point Estimate = 114,500 • Range of Reasonable Reserves • 109,687 to 119,458 • High End of Range - Carried = 7,629 • 6.8% of Reserves • 9.0% of Surplus • -197.8% of Net Income

  21. Small Nonstandard Auto Insurance Company

  22. Small Nonstandard Auto Insurance Company • Actuarial Point Estimate = 13,250 • Range of Reasonable Reserves • 12,867 to 14,458 • High End of Range - Carried = 834 • 6.1% of Reserves • 14.0% of Surplus • 2452.9% of Net Income

  23. New Workers Compensation Insurance Company

  24. New Workers Compensation Insurance Company • Actuarial Point Estimate = 4,800 • Range of Reasonable Reserves • 4,287 to 6,058 • Maximum Adverse Deviation = 1,226 • 25.4% of Reserves • 19.3% of Surplus • 120.3% of Net Income

  25. Lawyers Professional Liability Mutual Insurance Company

  26. Lawyers Professional Liability Mutual Insurance Company • Actuarial Point Estimate = 10,900 • Range of Reasonable Reserves • 9,647 to 12,798 • High End of Range - Carried = 1,507 • 13.3% of Reserves • 15.6% of Surplus • 139.7% of Net Income

  27. Physicians’ Medical Malpractice Insurance Company

  28. Physicians’ Medical Malpractice Insurance Company • Actuarial Point Estimate = 630,175 • Range of Reasonable Reserves • 579,647 to 692,789 • High End of Range- Carried = 37,924 • 5.8% of Reserves • 18.0% of Surplus • 178.5% of Net Income

  29. Reinsurance Company

  30. Reinsurance Company • Actuarial Point Estimate = 1,225,850 • Range of Reasonable Reserves • 1,079,647 to 1.292,481 • High End of Range - Carried = 113,300 • 9.6% of Reserves • 28.2% of Surplus • 1352.8% of Net Income

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