2005 Opinions & 2006 Regulatory Guidance

Nicole Elliott, ACAS

Texas Department of Insurance

Topics To Be Covered

Opinion statistics Results from Year 1 of the AOS Regulatory Guidance – 2006 Draft

Who is opining?

32% of Opinions are done by a company actuary

36% are done by the top five actuarial consulting firms

Top actuary signed > 50 opinions (a large pooled group)

In TX, 78% are Fellows In TX, 125 of companies had a change in

Appointed Actuary

Material Adverse Deviation Standards (TX)

Type Percentage

Surplus 61%

Loss & LAE Reserves

10%

Reinsurance 6%

Other 22%

MAD Possible Percentage

No 81%

Yes* 18%

Undeterminable 1%

*Nearly half of the ‘Yes’ companies used standard language

Material Adverse Deviation(TX) cont.

Companies using Surplus as the MAD standard:

Companies using ‘Other’ as the MAD standard: most used some combination of the minimum of some percentage each of surplus and LLAE reserves and the amount required to change RBC level

8%6%

17%

14% 38%

17% 5% 10%

15% 20%

25% Other

AOS – Year 1 (TX)

Type Percentage

Point 66%

Range 17%

Point and Range* 17%

*Most companies’ point estimate was within 5% of the midpoint of the range

AOS – Year 1 (TX and a few other states*)

Comparison of carried reserves to Actuary's point estimate or mid-point of range

  Net* % of Tot Cum % Gross# % of Tot Cum %

More than 10% below 6 1% 1% 10 2% 2%

More than 5% but less than 10% below 13 2% 3% 18 4% 6%

Less than 5 % below 79 13% 16% 72 15% 21%

Equal to but other than zero reserve 80 13% 29% 90 19% 40%

Less than 5 % above 183 30% 60% 167 35% 75%

> than 5% above but < than 10% above 67 11% 71% 41 9% 84%

More than 10% above 50 8% 79% 46 10% 93%

Carried reserves are zero 128 21% 100% 31 7% 100%

  606     475    

*Represents nearly 25% of opinions submitted#Represents < 20% of opinions submitted

Regulatory Guidance - History

Developed by the CATF for inclusion in the COPLFR Practice Note

First appeared in 2004 to coincide with the major changes made to the SAO Instructions (type of opinion issued and RMAD discussion)

Effort to convey regulatory issues in a timely responsive manner

Substantially revised in 2005 based on review of 2004 opinions

Regulatory Guidance – 2005 Highlights

Bright Line Indicator still maintained Substantial discussion on “cookie cutter” opinions Net zero companies and pooled companies Explicit statement of whether or not RMAD exists Reinsurance/Risk Transfer issues Better discussion of adverse results (IRIS ratios) Actuarial Report should contain a comparison of

actuary’s indicated amounts to carried reserves AOS required for the first time – no real guidance

provided

Regulatory Guidance – 2006 Draft

Currently presented to COPLFR for discussion/open comment period to coincide with CLRS

Will be included in 2006 Practice Note Minor changes to the Opinion guidance Includes a new document addressing the

AOS – based on comments & questions compiled by COPLFR

Regulatory Guidance – 2006 Opinion Changes

General clean-up Current issues addressed in Scope section:

Coverage for Service Contracts and Prepaid LAE Comment on risk factors encouraged even when no

RMAD is judged to exist Removed the Bright Line Indicator Consideration of RBC level when choosing MAD

standard Recognized better discussion in 2005

Regulatory Guidance – 2006 New AOS Guidance

Questions/comments from COPLFR Many questions regarding how to file – chose

to focus more on substance Wording is mostly unchanged from 2005 AOS instructions are now included in the

Supplement Filings section of the NAIC Instructions

It is advised that the AOS not have the Opinion attached to it

Regulatory Guidance – 2006 New AOS Guidance cont.

Required for all companies that submit an Opinion, even risk retention groups

AOS intended to be simple and concise – straightforward examples provided in the Practice Note

Loss & LAE exhibit presented at a minimum Other items (UEP and retroactive reinsurance) can

be shown, but should be separate Content should reflect the analysis performed by the

AA

Regulatory Guidance – 2006 New AOS Guidance cont.

Other discussions (such as percentiles) can be included as long as the basic exhibit is presented separately

Comment required if AD > 5% of surplus in at least 3 of the past 5 years

Based on historical data, < 14% of companies meet this criteria

Regulators’ view of “persistent adverse development”

Newly Appointed Actuaries should research this as part of their current reserve estimation