Statements of Actuarial Opinion (SAOs) at Year End 2020

Derek Freihaut, FCAS, MAAAAaron Hillebrandt, FCAS, MAAA

January 21, 2021

About the Presenters

Derek Freihaut, FCAS, MAAAPrincipal and Consulting Actuary

Property/casualty industry since 2002

Chair, AAA Committee on Property-Liability Financial Reporting (COPLFR)

Advises multiple self-insured entities, captives and insurance companies on matters relating to setting rates and financial reporting of unpaid claims liabilities

Assists state insurance departments, audit firms and insurance companies on determining risk transfer in reinsurance contracts consistent with FASB 113 and SSAP 62

About the Presenters

Aaron Hillebrandt, FCAS, MAAAPrincipal and Consulting Actuary

Faculty Member, AAA Seminar on Effective P/C Loss Reserve Opinions

Exam Chair, CAS Syllabus and Examination Committee

Vice-Chair, CAS Annual and Spring Meeting Planning Committee

Experience providing SAOs for a variety of risk-bearing entities

Co-author of a paper on history of the SAO, solvency regulation and the actuarial profession in the US (Variance, 2018)

Our Eighth Annual Review of SAOs at Year End

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Why This Presentation?

5

When an actuary prepares a statement of actuarial opinion to satisfy the

requirements of law or regulation, the actuary should have the necessary

knowledge to comply with the specific requirements of that law or regulation.

The actuary should make a reasonable effort to consider the relevant generally

distributed interpretations by governing regulatory authorities.

- ASOP No. 36

““

Agenda

• Ground Rules

• Changes for Year-End 2020

• Real-World Situations

• Resources

• Closing Thoughts and Takeaways

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Ground Rules

• All discussion herein relates to P/C insurance companies domiciled in the US that are subject to NAIC Annual Statement filing requirements

• No consideration of issues relating to SAOs for captives, self-insureds, large deductible programs, public entities, syndicates

• No discussion of unusual situations that may apply to risk retention groups in certain jurisdictions (DC, MT) that have to file a yellow book

Changes for Year-End 2020

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• NAIC SAO Instructions

• Requirement for the appointed actuary (AA), (subject to the USQS) to annually attest to having met continuing education (CE) requirements for issuing SAOs

10

Changes for Year-End 2020

• NAIC SAO instructions, continued

– Additional categorization of CE activities for Specific Qualification Standard

• Required if selected for review

• 2020 – allowed to add a column to existing log

• Regulatory guidance encourages tracking

Changes for Year-End 2020

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Changes for Year-End 2020

• COPLFR Practice Note

– New section 2.2.3 on CE requirements re: changes in NAIC SAO Instructions

– New Section 5.7 on COVID-19 considerations

• No required discussion per NAIC SAO Instructions

• Regulatory guidance strongly encourages discussion

• Guidance within practice note and AAA central repository of COVID-19 Resources

– COPLFR published updated COVID-19 FAQs on January 13

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Changes for Year-End 2020

• COPLFR Practice Note, continued

– Additional discussion and clarifying edits:

• 2019 change in “Qualified Actuary” definition and qualification documentation requirements

• Data testing requirements

• D&A RMAD

• Discounting

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Changes for Year-End 2020

• Regulatory Guidance Memo

– Appendix II of Practice Note

– Additional guidance regarding:

• Qualification document to board of directors (BoD) (Section IV)

• CE logging (Section IV.C)

• New Section V: COVID-19

– Actuarial report should discuss direct and indirect impacts

– SAO should make relevant comment if significant impact on reserves

– SAO in any case strongly encouraged to mention review of effects “to demonstrate that it has not been overlooked or disregarded”

Situation 1: Signing the SAO

The AA is ready to sign and issue the SAO.

How do I sign the SAO?

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Situation 1: Signing the SAO

• Electronically?

• Black ink?

• Blue ink?

• Any ink?

• Did COVID-19 change the answer?

• How do I know?

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Situation 2: Redundant/Excessive SAO

Company holds conservatively stated reserves and has a long

history of reserve redundancies:

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Current analysis shows company’s held reserves are $1.5M

above high end of your reasonable range. What do you do?

IRIS Test Results for One Year Development to Surplus

2019 2018 2017 2016 2015

Development in estimated losses and loss expenses incurred prior to current year

($5,000) ($7,000) ($6,000) ($5,000) ($3,500)

Percentage of development of losses and LAEincurred to policyholder surplus of prior year-end

-55.0% -80.0% -80.0% -80.0% -68.0%

Situation 2: Redundant/Excessive SAO

• Issue Redundant/Excessive SAO?

• Stretch the upper limit of your reasonable range?

• Other?

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Polling Question

In 2019, out of 2,430 NAIC SAOs, how many had an opinion other than “Reasonable”?

0-25

26-50

51-100

101-200

201-300

A

B

C

D

E

Polling Question

In 2019, out of 2,430 NAIC SAOs, how many had an opinion other than “Reasonable”?

0-25

26-50

51-100

101-200

201-300

A

B

C

D

E

Situation 3: CATs

Company writes property business in

Louisiana that was significantly affected by

hurricanes in 2020

How might this impact the SAO?

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Situation 3: CATs

• Stick with standard loss development methods and explain to the Company that this is just how it’s done?

• Base CAT loss reserve estimates on Company’s CAT model estimates of ultimate loss; add disclosures re: ASOP #38?

• Use benchmark CAT LDFs from RAA studies?

• Qualified opinion?

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Situation 4: COVID-19

Company writes CMP policies with Business

Interruption coverage that was significantly

affected by COVID-19.

How might this impact the SAO?

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Situation 4: COVID-19

• Stick with standard loss development methods and explain to the Company that this is just how it’s done?

• Discussion and analysis with company claims department re: COVID-19 loss projections?

• Review guidance in COPLFR Practice Note and COVID-19 FAQ, along with Regulatory Guidance Memo?

• Qualified opinion?

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Disclosure will set you free.

- Dale Ogden

““

Polling Question

What percentage of companies booked within +/- 5% of the actuary’s point estimate in 2018?

54%

64%

74%

84%

94%

A

B

C

D

E

Polling Question

What percentage of companies booked within +/- 5% of the actuary’s point estimate in 2018?

54%

64%

74%

84%

94%

A

B

C

D

E

Situation 5: Roll Forward

SAO depends on Q3 analysis with a “roll

forward” estimate to December 31. Claim

activity in Q4 was significantly greater than

expected.

How might this affect the SAO?

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Situation 5: Roll Forward

• Stick with the roll forward estimate – that was the type of analysis upon which agreement was made?

• Discuss with the company the causes of the unexpected claim activity; determine if this warrants an additional adjustment to the roll forward estimate?

• Negotiate performing a full analysis with the company?

• Issue a “No Opinion” SAO?

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Situation 6: IRIS Test 13

IRIS Test 13 (Estimated Current Reserve Deficiency to Surplus)

indicates an unusual value:

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Calendar Year Ratio of Reserves to EP Change in Average Premium Restated Ratio to EP

2015 0.615 4.3% 0.515

2016 0.627 7.6% 0.565

2017 0.568 11.0%

IRIS Test 13 Result: 29.7% -15.9%

How far should your comments on reason(s) for such failure

extend?

Situation 6: IRIS Test 13

• IRIS Test 13 is a simplistic test of reserve adequacy that can easily be biased

• Impact of prior rate adjustments has been significant, rendering the current year ratio of reserves to premiums to be low

• Restating prior year ratios to today’s rate level produces a much different answer

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Polling Question

What percentage of SAOs had a significant RMAD in 2013 vs 2017?

2013: 28% 2017: 34%

2013: 38% 2017: 44%

2013: 36% 2017: 36%

2013: 44% 2017: 38%

2013: 34% 2017: 28%

A

B

C

D

E

Polling Question

What percentage of SAOs had a significant RMAD in 2013 vs 2017?

2013: 28% 2017: 34%

2013: 38% 2017: 44%

2013: 36% 2017: 36%

2013: 44% 2017: 38%

2013: 34% 2017: 28%

A

B

C

D

E

Situation 7: Schedule P Errors

The SAO is due, but there are still material

errors in data reported on Schedule P.

What should the AA do?

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Situation 7: Schedule P Errors

• Disclose material errors and send SAO by deadline?

• Attach memo to the SAO noting it will be amended once errors are worked out and send SAO by deadline?

• Issue a “No Opinion” by deadline; consider amending later?

• Wait for auditors to catch error; have company reissue annual statement; AA issues amended SAO?

• Discuss situation with domiciliary regulator?

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Situation 8: RMAD

A company has negative surplus.

What considerations affect RMAD

threshold?

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Situation 8: RMAD

• Company is in rehabilitation

• $1?

• Already below mandatory control level RBC

• % of held/indicated loss + LAE reserves?

• Other?

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Polling Question

In 2017, 70% of SAOs used surplus as the basis for their materiality threshold. What was the most common threshold used?

5% of surplus

10% of surplus

15% of surplus

20% of surplus

Other

A

B

C

D

E

Polling Question

In 2017, 70% of SAOs used surplus as the basis for their materiality threshold. What was the most common threshold used?

5% of surplus 7% of SAOs

10% of surplus 52% of SAOs

15% of surplus 11% of SAOs

20% of surplus 25% of SAOs

Other 6% of SAOs

A

B

C

D

E

Resources

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• NAIC Annual Statement Instructions

• Domicile regulator

• DOI websites

• COPLFR Practice Note

• AAA Law Manual

• Financial Analysis Handbook – P/C SAO Checklist

• AAA Opinion Writer’s Seminar

Resources

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• Statements of Statutory Accounting Principles (SSAPs)

• ASOPs

• Sessions at CLRS, other professional meetings

• CAS & AAA publications

• Publicly-available SAOs (Best’s, SNL, internet search)

• COPLFR members

• AAA FAQ: P&C Financial Reporting Considerations With Respect to COVID-19

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Closing Thoughts and Takeaways

• Regulators continue to strongly encourage AA to communicate directly with BoD or audit committee

• How to communicate with BoD or audit committee is a webinar session in and of itself (read Appendix III.6 of COPLFR Practice Note) – updated in 2020

• If you haven’t read ASOP 36 in a while, read it again; if you have read it recently, read it again anyway

• Proliferation of new SAO requirements for captives, self-insured entities, municipal pools

• Standards for SAOs becoming less consistent (more focus on adequacy rather than reasonableness)

• Standardized reporting formats vary state-by-state

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Questions

Final Notes

• We’d like your feedback and suggestions• Please complete our survey

• For copies of this APEX presentation• Visit the Resource Knowledge Center at Pinnacleactuaries.com

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Derek Freihaut

Thank You

Aaron Hillebrandt

309.807.2313

dfreihaut@pinnacleactuaries.com

309.807.2312

ahillebrandt@pinnacleactuaries.com