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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 - PowerPoint PPT Presentation
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CLRSNew Orleans, LA
September 10-11, 2001
Actuarial Standard of Practice No. 36 and
Codification of Statutory Accounting
Discussion of Implementation Considerations
Today’s discussion facilitated by:
Mary D. Miller, Moderator, Ohio Department of Insurance
Pat Teufel, KPMG LLP
Charles Yesker, Interstate Insurance Group
Today’s Discussion Will Focus on:
– Risk of Material Adverse Deviation
– Codification
– Materiality
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
Disclosure Requirements
Deficient or Excessive ReservesAmount 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 unknown amounts for such items
• Risk of Material Adverse Deviation
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
Practical Considerations
– For NAIC Opinions, Direct and Assumed vs. Net
Possibility for different conclusions
Implicit requirement for different disclosures
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
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
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
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
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
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
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
What financial values are important to the intended user?
Regulator
Statutory Surplus Risk Based Capital Total Reserves IRIS Tests
Investor
Net Worth Net Income Earnings per Share
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
Mutual Auto Insurance Company
1996 1997 1998 1999 2000
Surplus 25,120 30,054 37,608 41,766 45,792
NWP 24,283 25,060 25,223 24,733 23,994
NWP to Surplus 0.97 0.83 0.67 0.59 0.52
Reserves 14,525 14,555
Reserves to Surplus 0.35 0.32
Loss Reserve Development
-12.6% -9.5% -5.2% -3.9%
Net Income 972 2,343 2,450 1,013 842
Best’s Rating A++ A++ A++ A++ A++
RBC Ratio 7.0 7.1 6.5 7.9 9.8
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
Multi-line Casualty Insurance Company
1996 1997 1998 1999 2000
Surplus 121,337 115,728 128,811 123,289 84,851
NWP 122,945 158,182 93,341 99,390 75,892
NWP to Surplus 1.01 1.37 0.72 0.81 0.89
Reserves 113,867 111,829
Reserves to Surplus 0.92 1.32
Net Income <6,401> <2,893> 10,733 <5,231> <3,857>
Loss Reserve Development
+22.0% +21.9% +20.2% +17.0%
Best’s Rating A- A- A- A- B++
RBC Ratio 3.8 4.5 6.0 5.9 4.1
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
Small Nonstandard Auto Insurance Company
1996 1997 1998 1999 2000
Surplus 5,818 5,751 5,748 5,098 5,953
NWP 465 6,379 11,266 11,793 20,412
NWP to Surplus 0.08 1.11 1.96 2.31 3.43
Reserves 9,369 13,624
Reserves to Surplus 1.84 2.29
Net Income <179> <451> 60 1,185 34
Loss Reserve Development -33.3% -0.9% -9.0% +0.8%
Best’s Rating NR-1 NR-2 NR-2 NR-2
RBC Ratio 11.5 6.2 4.7 3.3 2.1
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
New Workers Compensation Insurance Company
1996 1997 1998 1999 2000
Surplus 5,016 5,377 6,210 6,361
NWP 1,553 3,390 6,009 7,863
NWP to Surplus 0.31 .63 0.97 1.24
Reserves 220 1,856 4,263 4,832
Reserves to Surplus 0.04 0.35 0.69 0.76
Net Income <46> 261 831 1,019
Loss Reserve Development
+13.6% -24.1% -10.1%
Best’s Rating NR-2 NR-2 B+
RBC Ratio 15.3 11.2 9.8 7.6
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
Lawyers Professional Liability Mutual Insurance Company
1996 1997 1998 1999 2000
Surplus 6,305 7,329 7,334 8,154 9,641
NWP 3,347 4,593 4,864 5,678 5,979
NWP to Surplus 0.53 0.63 0.66 0.70 0.62
Reserves 6,401 8,178 8,536 10,141 11,291
Reserves to Surplus 1.02 1.12 1.16 1.24 1.17
Net Income 742 703 278 721 1,079
Loss Reserve Development
+ 4.2% - 0.5% -18.4% -13.4%
Best’s Rating B++ B++ B++ B++ B++
RBC Ratio 4.7 4.8 4.5 4.6 4.4
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
Physicians’ Medical Malpractice Insurance Company
1996 1997 1998 1999 2000
Surplus 134,431 158,621 172,712 187,224 211,140
NWP 96,809 85,532 104,953 134,215 141,016
NWP to Surplus 0.72 0.54 0.61 0.72 0.67
Reserves 636,966 563,768 593,282 654,132 654,865
Reserves to Surplus
4.74 3.55 3.44 3.49 3.10
Net Income <3,157> 22,960 11,335 11,968 21,250
Loss Reserve Development
- 2.1% - 4.0% - 4.7% - 3.4%
Best’s Rating B B B+ B++ B++
RBC Ratio 3.9 4.5 5.6 6.0 5.7
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
Reinsurance Company
1996 1997 1998 1999 2000
Surplus 272,374 396,677 423,616 402,652 401,392
NWP 205,065 429,870 645,832 698,440 653,984
NWP to Surplus 0.75 1.08 1.52 1.73 1.63
Reserves 1,038,460 1,179,181
Reserves to Surplus 2.58 2.94
Net Income 22,980 <17,164> 35,794 1,264 8,375
Loss Reserve Development
+ 1.8% + 7.9% + 7.5% + 6.7%
Best’s Rating A A A+ A+ A+
RBC Ratio 25.2 18.9 15.7 12.4 9.8
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