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Revised ASOP No. 36 & ASOP No. 43

Revised ASOP No. 36 & ASOP No. 43. Southwest Actuarial Forum June 10, 2011. Lisa Slotznick, FCAS, MAAA Member, COPLFR. The advice presented here:. Is discretionary, not mandatory Is not intended to set or enforce binding standards

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Revised ASOP No. 36 & ASOP No. 43

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  1. Revised ASOP No. 36 & ASOP No. 43 Southwest Actuarial Forum June 10, 2011 Lisa Slotznick, FCAS, MAAA Member, COPLFR

  2. The advice presented here: Is discretionary, not mandatory Is not intended to set or enforce binding standards Is not a standard or statement of opinion of the Actuarial Standards Board, the Joint Committee on the Code of Professional Conduct, or the Committee on Qualifications Does not purport to describe accepted practice Should not be used as a substitute for your own professional judgment and discretion The views expressed in this presentation are those of the presenter and do not purport to represent the position of the American Academy of Actuaries.

  3. Agenda Practical applications of ASOP No. 36 and ASOP No. 43 ASOP No. 36, Statements of Actuarial Opinion History and Background Structure Purpose and Scope New or Reframed Sections Mostly Unchanged Sections ASOP No. 43, Unpaid Claim Estimates History Purpose and Scope Definitions, Issues, and Recommended Practice Actuarial Communications and Disclosures

  4. Practical applications ASOP No. 36 and ASOP No. 43 Direct application Reserving assignments Statement of actuarial opinion assignments Indirect application Pricing assignments the results of which may be used in a reserving assignment Areas in which there are no on-point standards and nonbinding guidance is sought Litigation

  5. ASOP No. 36 History and background Statements of Actuarial Opinion regarding property/casualty loss and loss adjustment expense reserves Originally adopted in 2000 Reasons to revise ASOP No. 36: Consistency with ASOP No. 43 Consistency with current ASOPs Revision process included two exposure drafts Effective date: Opinions issued on and after May 1, 2011

  6. ASOP No. 36Structure of the standard Section 1: Purpose and scope Section 2: Definitions Section 3: Analysis of issues and recommended practice Section 4: Communications and disclosures

  7. ASOP No. 36Purpose and scope of the standard Written statement of actuarial opinion (SAO) under particular circumstances In compliance with NAIC Property and Casualty Annual Statement Instructions Otherwise prescribed by law or regulation Represented by actuary as being in compliance with this standard Items other than loss and loss-adjustment expense reserves are not covered by this ASOP, even if the particular SAO includes those items

  8. ASOP No. 36New or reframed sections Dates—explicit definitions the same for ASOP No. 36 and ASOP No. 43 Accounting date, used to separate paid versus unpaid claim amounts Valuation date, through which transactions are included in the data Review date, the cutoff for including information known to the actuary in the analysis Disclosure requirements differ between ASOP No. 36 and ASOP No. 43 ASOP No. 36 requires accounting and review dates; ASOP No. 43 requires all three dates. Sample Language: The unpaid claim estimate as of Dec. 31, 2010, was based on data evaluated as of Nov. 30, 2010, and additional information provided to me through Jan. 17, 2011.

  9. ASOP No. 36New or reframed sections Reserve opined upon—explicit disclosure requirement Reserve amounts In the aggregate or not aggregated Accounting standards—Statutory, GAAP, IFRS, etc.

  10. ASOP No. 36New or reframed sections Role of ASOP No. 43 Previously, ASOP No. 36 provided guidance on performing the underlying review of the unpaid claim estimates and included reference to Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves ASOP No. 43 reference replaces that guidance ASOP No. 43 governs the work underlying the report that is prepared to support an NAIC opinion

  11. ASOP No. 36New or reframed sections Use of another’s unpaid claim estimate Making use of the work of another Previously, reliance on the opinion of another Making use is not the same as reliance Inclusion of the analysis, as well as the opinion of another Use only when reasonable to do so Review Opinion no longer is recognized Explicit guidance for determining when it is reasonable to use another’s work

  12. ASOP No. 36New or reframed sections Use of another’s unpaid claim estimate Additional explicit review procedures and disclosures Amount of reserves relied upon Nature of exposure and coverage of this portion of the reserve Inherent variability of the exposure and impact on aggregate reserves of this variability Credential of the individual preparing the analysis Additional review procedures over work relied upon and the results

  13. ASOP No. 36New or reframed sections—summary Dates—explicit disclosure requirements Reserve opined upon—explicit disclosure requirement Accounting standards Acknowledgement of role of ASOP No. 43 Use of another’s unpaid claim estimate

  14. ASOP No. 36Mostly unchanged sections—summary Basis of presentation Scope of analysis Materiality Reserve evaluation Types of opinions Explanatory paragraph and significant risks of material adverse deviation

  15. ASOP No. 36Mostly unchanged sections Basis of Presentation Understand nature of the reserves Nominal versus discounted Monetary value of the discount Interest rate used Explicit risk margin—explicit disclosure Gross or net of specified recoverables Potential for uncollectable recoverables, particularly reinsurance

  16. ASOP No. 36Mostly unchanged sections Scope of analysis Explicit statement of scope Reserve evaluation Responsible for work of staff Types of opinions Significant risks of material adverse deviation (RMAD) Explanatory paragraph accompanies assertion of RMAD

  17. ASOP No. 36Mostly unchanged sections of ASOP Materiality Actuary to evaluate materiality based on professional judgment Not only materiality for an RMAD Applies to determination of applicability of various sections of the ASOP Materiality defined in both ASOP No. 36 and ASOP No. 43

  18. ASOP No. 36Guidance for preparing opinions COPLFR’s Practice Note for the SAO on Property and Casualty Loss Reserves P/C Effective Loss Reserve Opinion Seminar: Tools for the Appointed Actuary COPLFR’s Property/Casualty Law Manual

  19. ASOP No. 43 History Until 2007, there was no ASOP on unpaid claim estimates (or loss reserves) The Casualty Actuarial Society’s Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves had served as guidance ASOP No. 43 therefore was conceived and issued to be the authoritative guidance Effective June 2007

  20. ASOP No. 43Section 1: Purpose and scope of the standard Applies to unpaid claim (loss and expense) estimates for events that have occurred as of a given balance sheet date Does not apply to estimates solely for ratemaking or health/disability claims that may be covered by other ASOPs (but applies to health benefits in connection with workers’ compensation liabilities) Applies to “unpaid claim estimates communicated as an actuarial finding in written or electronic form” Internal work products supporting a position on reserves Analysis and report supporting a prescribed Statement of Actuarial Opinion (PSAO) on loss reserves (under the revised U.S. Qualification Standards, all PSAOs are considered SAOs)

  21. ASOP No. 43Section 2: Definitions Consider using the definitions within the standard in the written report supporting the work performed pursuant to the ASOP

  22. ASOP No. 43 Section 3: Issues and recommended practices Purpose of the unpaid claim estimate Constraints Scope of the estimate Materiality Nature of unpaid claims Methods and models, assumptions, etc. Reasonability, consistency, and presentation Documentation

  23. ASOP No. 43Section 3.1: Purpose or use of unpaid claim estimate • For the prescribed SAO on property and casualty loss reserves, the intended purpose is self-evident, and the users likely would be: • Regulators • Boards of Directors • Management Any other users are ancillary • The purpose of the actuarial report related to an SAO is to support the conclusions of the opinion.

  24. ASOP No. 43 Section 3.3: Scope of the unpaid claim estimate intended measure Identification of the intended measure of the unpaid claim estimate—examples: Mean Mean plus risk margin Median Low estimate High estimate 75th percentile “Best estimate” and “actuarial estimate” are not sufficient identifications of the intended measure

  25. ASOP No. 43Section 3.3: Scope of the unpaid claim estimate intended measure Intended measure in the context of an NAIC actuarial opinion Management’s best estimate Opining actuary’s measure of reasonability of management’s best estimate Places to put a reference to the actuary’s intended measure for NAIC opinions Actuarial opinion summary (AOS) Report supporting the NAIC opinion

  26. ASOP No. 43 Section 3.3: Scope of the unpaid claim estimate intended measure Definition of “actuarial central estimate” An estimate that represents an expected value over the range of reasonably possible outcomes Does not include all conceivableoutcomes Is not necessarily result of a probability distribution Is not a precise statistical measure, not a statistical mean

  27. ASOP No. 43 Section 3.3: Scope of the estimate Gross and net indication Collectability risk Types of claims adjustment expense Types of claims Other scope items (exclusions)

  28. ASOP No. 43Section 3.5: Nature of unpaid claims The actuary should understand the nature of the unpaid claims being estimated: • Coverage • Conditions or circumstances that make a claim more or less likely or the cost more or less severe—frequency and severity characteristics • The underlying claim adjustment process • Potential recoverables

  29. ASOP No. 43Section 3.5: Nature of unpaid claims Other considerations in understanding the nature of claims: Methods used to sell or provide coverages Distribution channels from which the entity’s business is obtained General underwriting and pricing practices of the entity Marketing objectives and strategies of the entity Relevant reinsurance program changes

  30. Case study—Changes to operation and markets Claim department operations New management Change to case reserving and settlement practices Significant growth and expansion into new markets in the past five years Net reserves (held and indicated): $400 million Reserves in new lines: $200 million Surplus: $200 million Details Add’l Financial Data/Information Key Issues/Considerations • Operational changes and rapid growth make prior experience less relevant to the estimate of unpaid liabilities • External data and benchmark development patterns used to supplement company data • May not match the company’s future experience • Increased uncertainty

  31. Case study—Sample opinion language Significant changes in claim operationsover the past five years create additional uncertainty in estimating the company’s loss and LAE development patterns due to lack of complete historical data. The company experiencedrapid growthin net premium over the past five years. Primary drivers of this growth include theintroduction of MGA businessand theentrance into new workers’ compensation markets in 2009. This rapid growth into new areas, for which there is not complete historical data, necessitates considerablereliance on benchmark development patterns. In my opinion, these benchmarks are relevant to the operations of the company. Their use, however, increases the uncertaintyof the company’s reserves.

  32. ASOP No. 43Section 3.6: Unpaid claim estimate analysis Methods and models Assumptions Data Recoverable interaction Gross versus net External conditions Changing conditions Uncertainty

  33. ASOP No. 43Section 3.6.1: Methods and models Nature of the claims and underlying exposures Claim development characteristics Characteristics of available data Applicability of methods or models to the data Reasonableness of the assumptions underlying each method or model Use of more than one method Consistency with prior valuations

  34. ASOP No. 43Section 3.6.1: Methods and models Multiple methods Disclosure if only one method Apply to one or many components of the reserve Consistency Across time Across coverages

  35. ASOP No. 43Section 3.6.2: Assumptions Reasonability of explicit and implicit assumptions Sensitivity of the results to reasonable alternative assumptions Particular requests for assumptions and disclosure

  36. ASOP No. 43Sections 3.6.6 and 3.6.7 External and changing conditions External conditions Cognizant of environment that might affect estimates—economic, regulatory, legal, and judicial Changing conditions Consideration of changes not fully reflected in data related to claims handling, exposures, and reinsurance Support for such changes

  37. ASOP No. 43Section 3.6.8: Uncertainty • Types and sources of uncertainty: • Correlation • Model risk • Parameter risk • Process risk

  38. ASOP No. 43Section 3.7: Unpaid claim estimate Reasonableness of estimates Benchmarks Peer review Consistency of estimate across components Comparison among components Consider materiality Presentation in relation to intended purpose

  39. ASOP No. 43Section 4.1: Actuarial Communication Disclosures: Some of the items we have discussed today are explicitly listed as required disclosures Other areas are just “good practice” Deviation from standard—disclosure Both ASOP No. 43 and ASOP No. 36 Include a description of why Protection against discipline and litigation

  40. Southwest Actuarial Forum For more information, contact: Lauren Pachman, Casualty Policy Analyst Pachman@actuary.org (202) 223-8196

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