Casualty Loss Reserve Seminar Minneapolis, Minnesota September 18 – 19, 2000

1. Actuarial Standard of Practice No. 36 Discussion of Implementation Considerations Casualty Loss Reserve Seminar Minneapolis, Minnesota September 18 – 19, 2000

2. Today’s discussion facilitated by: Bob Miccolis, Chairperson, ASB Subcommittee on Reserving Pat Teufel, Chair, COPLFR; Member, ASB Subcommittee on Reserving Bob Wainscott, COPLFR

3. Historical Perspective • 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

4. 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

5. Practical Considerations • Include the words “Statement of Actuarial Opinion” when opinion in prepared in accordance with ASOP 36 (Section 4.1) • Workproducts generally not within the scope: • Rate filings • Reinsurance pricing • Reports for Internal Purposes only • Workpapers of actuaries supporting independent auditors • Actuaries may wish to state specifically whether workproducts have been prepared in accordance with ASOP36 to mitigate potential misuse

6. Types of Stmts. of Actuarial Opinion • Determination of Reasonable Provision • Determination of Deficient or Inadequate Provision • Determination of Redundant or Excessive Provision • Qualified Opinion • No Opinion

7. Types of Stmts. of Actuarial Opinion • 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 unknown amounts for such items

8. Practical Considerations • How will user of the opinion know what type of opinion is being rendered? • Opinion Paragraph • Disclosures • Deficient or Excessive Provisions Expected language for Opinion Paragraph: …do NOT make reasonable provision for the unpaid loss and loss adjustment expense obligations of the company… OR …make insufficient provision… …make conservative provision…

9. Practical Considerations Disclosure of the amounts by which the stated reserve would need to increase/decrease to be within the range of reasonable reserve estimates • Qualified Opinions Possible Language for Opinion Paragraph In my opinion, except with respect to (qualified items) as noted herein, the amounts carried in the scope paragraph… Possible Language for Disclosure Paragraph Discussion of the items being qualified and the reasons for the qualification….No opinion is rendered with respect to the reasonableness of these provisions.

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

11. Today’s Discussion Topics • Materiality • Risk of Material Adverse Deviation • Range of Reasonable Reserve Estimates • Gross vs. Net Reserves • Discounting • Risk Margin • Reliance • Second Opinions

12. 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

13. 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

14. Range of Reasonable Reserve Estimates • A range of reasonable estimates is a range of estimates that could be produced by appropriate actuarial methods or alternative sets of assumptions that the actuary judges to be reasonable. • Actuary is NOT required to calculate a range, in most circumstances • Are standard rules of thumb appropriate?

15. Gross vs. Net Reserves • Standard does NOT require an opinion on Gross and Net reserves, but does prescribe behavior if the scope of the opinion is both Gross and Net Reserves • Use Gross, ceded and net data as appropriate • Consider the relationship between gross and net • Reinsurance Considerations • If the amount of ceded reinsurance reserves is material, the actuary should consider the collectibility of ceded reinsurance in evaluating net reserves (including whether there is risk of material adverse deviation). • Uncollectible reinsurance and commutations • Risk transfer considerations

16. Discounting • ASOP 20: Discounting of Property and Casualty Loss and Loss Adjustment Expense Reserves • Disclosure requirements If reliance on present values is likely to have a material effect on the results of the actuarial analysis, disclose: • That present values were used in forming the opinion • Interest rate(s) used by the actuary • Monetary amount of discount included in the stated reserve amount

17. Risk Margin • Does not require, but does ALLOW, consideration of risk margins in evaluating reasonableness of reserves • Disclosure requirements If reliance on risk margins is likely to have a material effect on the results of the actuarial analysis, disclose: • That risk margins were used in forming the opinion • If practical, disclose the amount of risk margin that was included in the stated reserve amount

18. Reliance • Reliance is discussed in two segments: • Reliance on Others for Supporting Analysis Actuary who issues the Statement of actuarial opinion assumes responsibility for us, expect to the extent to which the opinion indicates reliance on the work of others • Reliance on Opinions of Other Actuaries • Are such segments material to the subject reserves? • Can a determination of significant risk and uncertainty concerning material adverse deviation of the subject reserves be made? • Intended use of the Opinion of the Other Actuary

19. Second Opinions • Review of the work of another actuary and an opinion given based on that review is a second opinion • Purpose and intended use • Code of Professional Conduct guides responsibilities • If the conclusions reached by the reviewing actuary differ materially from the reviewed actuary: • Where practical, discuss the differences • Issues underlying the differences should be understood by the reviewing actuary and disclosed in the review opinion • Reviewed actuary should be available to respond to questions regarding methodology, assumptions and conclusions. If the opinion changes, the original statement should be withdrawn or revised