Ranges & Actuarial Opinions: A Regulatory Perspective

Nicole Elliott, ACAS, MAAATexas Dept of Insurance

Scope of Discussion Focus on statutory entities that

require an SAO Consider the AOS and Report also Focus on Ranges and how they

relate to the Carried reserves Stats based on six states, about

900 companies Regulatory Review Sequence

Regulatory Review Sequence Review SAO – solvency focus What is the SAO category? Review AOS – is there a Point,

Range or both? Where are Carried reserves in

relation to info in AOS? Review Actuarial Report for

further details

Opinion Category

Five choices – Reasonable, Redundant, Excessive, Qualified, No Opinion

98% of SAOs are Reasonable, < 1% Excessive

What does it mean to be Reasonable?

What is the Regulator’s opinion of the Opinion?

AOS Review (Point, Range, or Both – Net basis)

Point 467 54%

Range 145 17%

Point & Range 248 29%

Total 859

AOS Review cont. What is driving Ranges? Consultants vs. Company Officers Consultant practice across the

board? Dependent on company

characteristics? Dependent on reserving methods

or line of business? Did the client request it?

Where are the Carried reserves? Carried reserves in relation to

actuarial indications helps prioritize the Regulatory review

If only Range given, are Carried reserves at or near midpoint?

If only a Point given or both, are Carried reserves at or near the Point?

If both given, how does the Point compare to midpoint of the Range?

Carried Reserves cont.Carried Net Reserves compared to Point or Midpoint Tot Cum %

> 10% Above 164 25%

B/W 5 & 10% Above 87 38%

< 5% Above 223 71%

Equal to 0 90 85%

< 5% Below 71 95%

B/W 5 % 10% Below 14 97%

> 10% Below 17 100%

666

Focus on Ranges Narrow discussion to situations

where a Range is provided Assume where Point only given,

Carried reserves are at or near Point Per ASOP 36 and A/S Instructions,

Carried reserves anywhere in Range is Reasonable

Begs the question: Is the Range Reasonable?

What types of Ranges are Regulators seeing?

Not discussed in Report Methods considered proprietary Used actuarial judgment -

common % +/- a point estimate -

common Scenario testing Statistical distributions - rare

Are these methods Reasonable?

What does the Actuarial Report say?

Is the calculation of the Range discussed and supported by exhibits?

Is the documentation sufficient to appreciate the conclusions?

What was your thought process?

Range vs. the Carried Reserve Are they independent? Relationship: SAO supports carried

reserves, AOS supports SAO AOS could include a Range which

supports determination of a Reasonable provision

SSAP 55: The Carried reserve is Management’s responsibility

Management’s Responsibility? Actuary should discuss the meaning of

the Range with Management Actuary should understand

Management’s choice of Carried reserve within the Range

If not based on a distribution, and all points within the Range are equally likely, is it Reasonable for Management to carry at other than the Midpoint?

Professional Responsibility Document how the Range was

determined Understand how the Range will be

used Prevent its misuse Discuss any limitations of the

Range Talk with Management

Case Study Long tail business with history of

severe reserve development PY -> no Range, only a Point;

Carried = Point CY ->Range by client request,

width of Range was 67% of surplus; Point = Midpoint

All other AOSes issued by actuarial firm were Point only for CY

Case Study cont

What else is happening in CY? Where were Carried Reserves?

Case Study – Actuarial Report No support for Low and High

selections Inquiry response – where

indications did not provide a reasonable spread, used 10% or 20% for endpoints

Upon request, Management provided reasons for carrying at the end point

Case Study lessons Degree of ‘actuarial rigor’ used to

develop the Range Reasonable to carry anywhere

within the Range, but was the Range itself Reasonable?

How will Management use the Range?

Transparency: documentation of assumptions and calculations