Odomirok.Reporting

This reading is crazy long!! 475 pages??!! You can't possibly read and absorb this amount of material. Luckily you don't have to! The trick is realize that not all of it is equally important. For example, Parts I & II, which comprise the first 5 chapters, are basically nothing - just a few definitions that you can cover in about 30 minutes. Most of your time will be in chapters 7,8,9,14,15,18,19. Much of the rest is easy or unimportant or covered in other readings. I hope that makes you feel a little better! And Odomirok is a good writer. He ranks right up there with Feldblum.

Since I don't want this wiki article to get overly long, I'm putting as much information as is reasonably possible into the mini BattleQuizzes. Much of what you have to learn is the calculations - that means the practice templates are very important.

In Plain English!

PART III (Annual Statement) Ch 6-15

Chapter 9 (Capital & Surplus)

You have to memorize two things:

• formula for current year surplus
• layout of Statement of Income for the Capital/Surplus Account

PART IV (Filings to Accompany Annual Statement) Ch 16-20

Unfortunately, filing requirements for insurers don't end with the Annual Statement. There's a bunch more things that we'll cover in Part IV. It's a total pain to do all these filings, but it's all part of a well-developed regulatory system. Without a good regulatory system, we'd have periodic insolvencies and financial crises. (Wait, we DO have that! Maybe our regulatory systems need improvement! But let's save that discussion for a late-night bull session!)

Anyhoo...some of the more common documents that have to be filed with state insurance regulators are:

• SAO (Chapter 16: Statement of Actuarial Opinion)
• AOS (Chapter 17: Actuarial Opinion Summary Supplement)
• IEE (Chapter 18: Insurance Expense Exhibit)
• RBC (Chapter 19: Risk-Based Capital)
• IRIS Ratios (Chapter 20: Insurance Regulatory Information System)

Let's get started! Yippee!!

Chapter 16 (Statement of Actuarial Opinion)

Intro

If we're going to go to the trouble of providing an actuarial opinion, we must as well know why we're doing it.

Question: what is the purpose of the SAO (Statement of Actuarial Opinion)

There are 3 items: OIA

• Opinion: provide the appointed actuary's opinion on the reserves specified within the scope of the SAO (reasonable, inadequate, excessive...)
• Inform: inform readers/regulators of significant risk factors regarding the reserves
• Advise: advise if those risks may reasonably lead to MAD in the reserves (MAD = Material Adverse Deviation!!)

Alice the Actuary told me this very short story: If you advise that certain risks may lead to Material Adverse Deviation in the reserves, management might get MAD. (That's just another one of those dumb little memory tricks to make you laugh and help you remember all this boring s**t!)

Ok, moving right along...(tough audience!)

Question: describe the organization of the SAO

The SAO conists of 4 sections, and 2 exhibits: ISOR + (A,B)

1. Identification
2. Scope
3. Opinion
4. Relevant comments

• Exhibit A: recorded amounts for items mentioned in the scope (loss reserves, reinsurance...)
• Exhibit B: disclosure items regarding NET reserves in scope

(To me, ISOR sounds like eyesore. I had a really bad case of pinkeye about 20 years ago, so that's what the SAO always makes me think about! Not fun!)

And here is one last item for the intro to chapter 16...

Question: how might an insurer get an exemption from filing the SAO

Here are the possible reasons: SLuSH

• Size: the insurer is small (less then $1m annual GWP) & (less than $1m gross reserves @ year-end)
• LOB: certain lines of business are exempt
• u: doesn't stand for anything, but I needed a vowel to make the memory trick SLuSH into a word!
• Supervision: exempt if insurer is under supervision
• Hardship: if insurer is under financial hardship (cost of SAO is a burden)

I don't know how important this is, but it's a bullet-point list, and the CAS often asks that sort of thing.

mini BattleQuiz 1 You must be logged in or this will not work.

The Boring Details

When you read the source text, you should always be assessing the likelihood of that material being on the exam. That's hard to do on your first pass because you don't have a sense for what's important and what isn't. Let me help you out: The Statement of Actuarial Opinion is consistently and heavily tested. You have to know pretty much all the details. (For less important topics, you can skip large swaths of material, but that is not the case with the SAO.) With that said, let's get started...

Note that I haven't included all the details in the wiki - some of the details are only in the corresponding BattleCards. This avoids duplication and keeps the wiki articles short and sweet! (If I included all the details in the wiki articles, they would end up being as long as the source reading. That defeats the purpose of the wiki.)

From the previous section, we know how the SAO is organized: ISOR + (A,B). Here we delve into the details. I've taken the verbiage from the source reading and organized it into a nice, pretty table.

section	contents	comment
Identification	- actuary's name/credentials - intended purpose/users	this one is easy - there are no other details
Scope	must identify: - (reserve items in opinion ) & (accounting basis for reserves) - review date (also defined in ASOP 36) - data source	see BattleCards for further details: - examples of typical reserve items - defn of 'review date' - data reconciliation statement
Opinion	- type of opinion - laws & standards - work of others	see BattleCards for further details: - 5 types of opinion - required wording
Relevant Comments	- comments & disclosures to aid reader's understanding - items 1&2 (of 8): MAD (Material Adverse Deviation)   - materiality standard regarding MAD   - risks that may result in MAD - items 3-8: relate to Exhibit B disclosures	see BattleCards for further details: - items 3 thru 8
Exhibit A	recorded amounts for items mentioned in the scope	no other details, for now
Exhibit B	disclosure items regarding NET reserves in the scope	no other details, for now

mini BattleQuiz 2 Identification & Scope

mini BattleQuiz 3 Opinion

Miscellaneous

We'll close chapter 16 with a few words on items in the Relevant Comments section of the SAO

Question: identify common methods for selecting a materiality standard (item 1, relevant comments)

percentage-based standards:

•  % of loss & LAE reserves
•  % of surplus
•  % of net income

regulatory ratio based standards:

• reduction in surplus that would trigger the next RBC action level
• amount that would trigger an unusual IRIS ratio

There's a fun example from the text p196-197 involving the actuary Mr. Smith. (It's short and sweet!) To see it, click Mr. Smith's adventures in materiality.

Ok, now we have a materiality standard, based possibly on both quantitative and qualitative considerations. Next question...

Question: how is the materiality standard used within the SAO (item 2, relevant comments)

The idea is that Mr. Smith must examine risk factors that could lead to MAD. You can't do that until you've set a specific materiality level.

Pop Quiz!    :-o

Given:

• Mr. Smith has identified 2 major risk factors: mass tort claims, catastrophic weather events
• His range of reasonable reserves estimates is (95m, 105m), with a point-estimate of 100m.

What would he say about this in the relevant comments section of the SAO if...

1. materiality standard = 4m
2. materiality standard = 7m

Answer:

1. there are significant risks and uncertainties that could lead to MAD in the recorded reserves (because a reserve level of 105m is reasonable and the deviation would be 5m, which is greater than the materiality level of 4m)
2. there are not significant risks and uncertainties that could lead to MAD in the recorded reserves (because the worst reasonable scenario is 105m which is a deviation of 5m, but is less than the materiality level of 7m)

Final Question: what about the other disclosure items in Exhibit B

Unfortunately, Mr. Smith has to comment on those as well. Things like salvage & subrogation, reinsurance collectibility, claims-made or retrospective reinsurance, IRIS ratios etc...

There are a lot of details in the SAO, but this gives you the foundation. (And don't forget to sign the darn thing when you're finished!! Submit with Annual Statement by March 1, assuming a Dec 31 year-end, and put it in writing that you'll keep all supporting docs for 7 years.)

mini BattleQuiz 4 Relevant comments

Chapter 17 (Actuarial Opinion Summary Supplement)

Alice the Actuary has math a joke for you today: This chapter is easy as π.   :-)

The AOS, as it's called, is barely two pages long. Odomirok has provided Mr. Smith's AOS for a fictitious insurer. You can see it here: Mr. Smith's super-awesome AOS. (Since this link opens in the same browser tab as the wiki, you might want to right-click and duplicate this browser tab to make it easier to toggle between views.)

Question: how is the AOS organized (Hint: I like to think of it as consisting of 2 things.)

Thing 1: (comparison section, 4 items)

A: range of actuary's reserves

B: point estimate by actuary

C: carried reserves by company

D: difference (company – actuary)

Thing 2: (adverse development section, 1 item)

E: statement regarding whether there has been: 1-year adverse development greater than 5% in 3 of last 5 calendar years

• if there hasn't been → actuary must state this fact
• if there has been → actuary should provide sufficient detail so the regulator can determine whether additional regulatory review is required

Possible point of confusion: The SAO includes two exhibits called Exhibit A & Exhibit B, but they are different from items A & B in the AOS. (Alice the Actuary would have definitely used different letters for the AOS to make it less confusing.)

Pop Quiz!    :-o

Question: Where in the Annual Statement is the adverse development of reserves disclosed?

Answer:

• Five-Year Historical Data, line 74 (statutory basis Annual Statement)
• (the raw data comes from Schedule P, Part 2 - Summary)

Question: if there has been adverse development, how could item E in the AOS be worded

Odomirok has a great example of Mr. Smith did this. He organized his statement as follows:

• state that there has been adverse development and for which years
• summarize the reason for the adverse development (strengthened loss reserves)
• explain the reason in more detail (increased exposure – various specific reasons are given)
• mitigate the effects of this adverse development (purchase unaffiliated retroactive reinsurance)

Click here to see his wording and the regulator's possible response: Mr. Smith's well-written item E statement

mini BattleQuiz 1 You must be logged in or this will not work.

Chapter 19 (Risk-Based Capital)

RBC was developed by the NAIC in 1994 for solvency monitoring. It was a response to four huge P&C insolvencies in the 1980s/90s.

The RBC system has 2 main components: RBC formula and RBC Model Act for Insurers

• RBC formula: calculates minimum capital required to support a company's risks

• then the RBC ratio = (company's capital) / (minimum capital)

• RBC Model Act: gives state insurance regulator authority to take specific actions based on a company's RBC ratio

• note that each state must individually adopt this Act as law

BattleCodes

• Memorize:

• Conceptual:

• Calculational: