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Opinion Changes Coming

by Mary D. Miller

The Annual Statement Instructions for the Property Casualty Actuarial Opinion have been significantly revised for year-end 2004. In August 2001 the NAIC's Casualty Actuarial Task Force (CATF) formed the Actuarial Opinion Instructions Working Group, led by Richard Marcks. Its purpose was to review the Instructions, consider the history and intent of the Opinion, and recommend changes, if any, to the CATF.

As a result, the 2004 Instructions reflect both structural and substantive changes. Substantive changes generally involve additional disclosures, as well as formally acknowledging regulatory reliance on Actuarial Standards of Practice of the Academy and Statements of Principles of the CAS.

The major structural change in the Instructions is the addition of two required exhibits at the end. They consolidate the Scope and Disclosure amounts in one place, allowing the reader to quickly identify all items, recognizing $0 values in one place, and enabling quick comparisons with the prior year.

The notable added disclosure for 2004 is the "Materiality Standard expressed in $US." This is to be the materiality standard used to evaluate the Risk of Material Adverse Deviation as described in Section 3.3.3 of ASOP #36. While ASOP #36 only requires disclosure of this standard IF the actuary reasonably believes that a risk of Material Adverse Deviation exists, the statutory opinion requires the appointed actuary to identify the standard in all opinions.

The Scope paragraph also requires a new substantive disclosure of the name, affiliation, and relation to the Company of the individual upon whom the appointed actuary relied for preparation of the data. This replaces the reference to reliance on "responsible officers and employees of the company."

Considered to be the most valuable information in the opinion, the revised Relevant Comments section provides the context for interpretation by the regulator, and understanding of the actuary's reasoning, judgment, and opinion. The most important relevant comment relates to the Risk of Material Adverse Deviation (RMAD). The actuary must explicitly state whether he or she reasonably believes there are significant risks and uncertainties that could result in material adverse deviation. This provides perspective for the regulator to interpret the actuary's judgment. The actuary is also required to comment on the basis for choosing this standard.

The final substantive change is the addition of requirements for the Actuarial Report's content. Both narrative and technical components are now required. The narrative section must provide clearly worded information so readers are able to appreciate the significance of the actuary's findings and conclusions, the uncertainty in the estimates, and differences between the actuary's estimates and the carried reserves. The Actuarial Report must also include an exhibit that ties to the Annual Statement and compares the Actuary's conclusions to the carried amounts. The technical section must show the analysis from the basic data, e.g., loss triangles, to the conclusions. The Report is considered a confidential document.

[The COPLFR Practice Note is being revised to provide actuaries with guidance as they prepare their first Opinions under the new format. Included with the Practice Note is a Guidance Note written by regulators, which we hope will be an annual feature of the Practice Note for years to come.]

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