2018.F.23

The examiner report lists a common error as "Suggesting corrections that are incorrect or do not need to be made", but some of these are items in the scope. For example,
Stated basis of presentation.

Why was this considered an incorrect answer?

Comments

  • And so a related question is: is every part of DREARIRR not a required part of the Scope?

  • You're correct that something doesn't seem right here. When I went back to COPLFR to research this however, I think the examiner's report is probably ok, but it's a tricky question.

    First note that for something like inter-company pooling, if the company doesn't participate then nothing needs to be disclosed according to COPLFR. Here's a the text from section 3.3:

    • For companies participating in an intercompany pool, the Appointed Actuary is required to include a description of the intercompany pool in the SAO. This could be included in the SCOPE.

    The implication is that if a company doesn't participate in inter-company pooling then nothing needs to be disclosed.

    For the Stated basis of presentation however, COPLFR definitely states the following requirement in section 3.2:

    • a description of the nature of the reserves, usually found in the financial statement and the associated footnotes and disclosures. The stated basis often depends upon regulatory or accounting requirements. It includes, as appropriate, the following...

    Then there's a bullet point list labelled "a" through "g". So the phrase "as appropriate" seems to qualify whether the disclosures are required. It could be that none of the points "a" through "g" is appropriate. And COPLFR goes on to give an example of illustrative language for "Stated basis of presentation" as follows:

    • I have reviewed the December 31, 2020 loss and loss adjustment expense reserves recorded under U.S. Statutory Accounting Principles.

    To me, that doesn't sound like much of a disclosure, but apparently it's acceptable depending on circumstances. So getting back to the exam question, you aren't given any information on what's appropriate to disclose here so you can't say it's an error to leave it out.

    Let's now look at Reconciliation to Schedule P. In section 3.7, COPLFR states:

    • The NAIC SAO Instructions require the Appointed Actuary to make a statement regarding the reconciliation of data relied upon in the analysis underlying the opinion to Schedule P of the company’s Annual Statement.

    Note that this is not qualified in any way. In other words, you always have to disclose your reconciliation to Schedule P.

    My Final Comments:

    The required disclosures in the SCOPE section are nuanced. The items in DREARIRR are potential disclosure items but whether you have to include a particular item depends on circumstances.

    I think a better methodology for completing the SCOPE section would be to say that all items are required but if something isn't appropriate, like inter-company pooling, then the actuary should state there was no inter-company pooling. This is not the case however.

    This was actually a hard question to score full points on because aside from just knowing the potential disclosure items in the SCOPE section, you had to know which can be left out and which cannot be left out.

    I'm going to link to this post from the wiki because I think others probably have the same question you did.

  • edited October 2021

    Thank you Graham

    So among DEARRIR, the bolded letters are what is required

    Data provider (must be officer of company)
    Reserve items in the scope (& statement that they reflect the disclosures in Exh B )
    Evaluated the data for reasonableness and consistency
    Accounting basis of reserves
    Review date
    Intercompany pooling
    Reviewed the actuarial methodology and assumptions
    Reconciled to Schedule P section 1

  • I would agree with that.

    One final comment: (I hope this doesn't confuse the issue further.)

    I just reread the exam question and my answer to your post, and I noticed that the common error listed in the examiner's report was mistakenly saying that the following needs to be added:

    • "State the basis of reserves, such as Gross/Net/S&S"

    The above is item (c) in the list of disclosures under the category "Stated basis of presentation;" According to COPLFR, this item only needs to be included if appropriate, but they don't say what "appropriate" means. So I guess for the purposes of this exam question, you can't assume it was appropriate.

    So I think you do need to make some statement about "Stated basis of presentation", (which is the "A" in the DREARIRR hint) but regarding the sub-items "a" through "g", you only need to mention them if "appropriate".

  • Adding to this thread because I have a follow up w/ regards to the same question.

    The answer key mentions:

    "Missing statement that the SCOPE items included in the SAO reflected disclosures in Exhibit B."

    Where is an example of that?

  • Note that the first "R" in the DREARRIR hint mentions Exhibit B. Also, here is an excerpt from COPLFR showing illustrative language for the SCOPE section that mentions the disclosures in Exhibit B.

  • I may be missing something obvious, but which part of the mnemonic device would the Data Testing Requirement be captured in?

  • The data testing requirement is not part of the mnemonic device for what needs to be disclosed in the SCOPE section. This testing of data is done by the auditor and according to the top of page 36 in the COPLFR source text:

    • The Appointed Actuary is not required to follow up with the auditor as to what data has been tested, or to disclose such information in the opinion or report.

    (The appointed actuary does however provide the auditor with guidance regarding data source that are significant so the auditor knows what to test.)

  • If the AA is opining on all the company's reserves does that need to be stated or is that only when they are excluding some of the reserves does there need to be a disclosure? I did not see it in the answer or the common errors.

  • In actuarial practice, especially when it comes to Statements of Actuarial Opinion (SAO), transparency is important. Generally, if the Appointed Actuary (AA) is opining on all of the company's reserves, it's often assumed to be the case unless stated otherwise. Therefore, explicit disclosure may not be strictly necessary in that situation.

    However, if the AA is excluding some reserves from their opinion, then a disclosure is typically required to make this clear.

    All in all however, it's a good idea to be explicit even when opining on all reserves, just for the sake of clarity. (Even thought it isn't technically an error if the AA doesn't.)

  • One of the accepted answers states that the data provider should be an officer of the company. Does that mean switching Joe Doe's title to "Vice President and Chief Actuary at Company A" would satisfy the requirement of a data provider?

  • I'm not sure if "Vice President and Chief Actuary at Company A" would necessarily qualify as an officer:

    • An "officer" of a company is an individual who holds a formal, high-ranking position within the company and is granted specific legal, fiduciary, and managerial responsibilities. Officers are typically appointed by the company's board of directors and have the authority to make significant decisions on behalf of the company. Common officer titles include Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Operating Officer (COO), and Chief Technology Officer (CTO), among others. The roles and responsibilities of officers can vary depending on the company's size, industry, and organizational structure.

    So for the purposes of an exam question, I would want to see "officer" in their title, or have the question specifically say that the Vice President you reference is explicitly an officer (just to make it absolutely clear.)

  • Gotcha. Thanks for the clarification. In Mr. Smith's SAO from Odomirok's source, under the SCOPE section, it states the data provider as follow.

    The concept of "officer" didn't really ring a bell to me till I worked on this problem. Anyways, I agree with you that on the exam, I would like to be crystal clear on an "officer" title for this matter.

  • On a question like this, the safest option would be for you to say that the data provider has to be an officer of the company, and then specifically state whether you think the person’s title implies whether they are an officer or not. That way you would get full credit, even if your answer was different from the official answer.
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