Loss Reserve Opinions Mary D. Miller FCAS, MAAA Ohio Department of Insurance CASE 2006 Fall Meeting September 13, 2006

Actuarial Hat Trick Regulator and Vice-Chair of Casualty Actuarial Task Force of NAIC AAA Casualty Vice-President Newly Elected CAS Board Member I am happy to answer questions from any perspective

Regulatory Actuaries and the NCAA States with Regulatory Actuaries –Texas –Ohio –Pennsylvania –Florida –California –North Carolina –Illinois –West Virginia States with Teams in BCS or Final 4 –Texas –Ohio –Pennsylvania –Florida –California –North Carolina –Illinois –West Virginia

Potentially, 55 variations on the “ensure solvency” theme! Consequently domiciliary nuances usually apply! How Do Regulators Use Opinions?

Reserving Risk Generally largest risk for every company It’s where all the other risks eventually reside Regulator’s view of reserves depends on many variables –Solvency Position –Spread of Risk –Management competence

Consistency with the Instructions Consistency with other information about the company Clarity on risks, materiality and RMAD conclusions A report that clearly supports the opinion Unanswered questions raise eyebrows What Should a Regulator Want to See?

Actuarial Opinion Summary (AOS) Compromise position to public disclosure of information Regulators wanted information sooner Required to be sent only to domiciliary state –Other states may request if they can demonstrate they can protect confidentiality –Due March 15 –Will now be a supplemental filing with separate Instructions

Actuarial Opinions Carried Reserves are Management’s Best Estimate –Summary (new in 2006) shows Actuary’s Point Estimate and/or Range –Question Significant Differences Type of Opinion: –Reasonable, Deficient/Inadequate, Redundant/Excessive, Qualified, No Opinion. Relevant Comments –Risk of Material Adverse Deviation –Reinsurance: retroactive, financial, collectibility –IRIS Ratios exceptional values 8

Actuarial Opinion – What Can It Tell Me? “The Company’s carried reserves fall within the reasonable range of estimates developed by the Appointed Actuary, although near the low end of that range…” 9

Actuarial Opinion – What Can It Tell Me? “As noted in Schedule F, the Company’s ceded loss and LAE reserves totaled $xxx, or 223% of surplus. Of this amount, 27.7% reflects cessions to affiliates…” 10

Actuarial Opinion – What Can It Tell Me? “In my opinion there is a risk of material adverse deviation…including uncertainties associated with the company’s changing mix of business and operations,…liabilities relating to the Company’s discontinued operations, potential reinsurance collectibility issues and estimates of liability for the Company’s A&E exposure.” 11

Actuarial Opinion – What Can It Tell Me? “The Group has experienced significant changes in its operations…The nature of the business has also changed…The Company has experienced significant changes in its claim operations…” 12

Actuarial Opinion – What Can It Tell Me? “There are points within my reasonable range of reserve estimates that … would materially reduce the Company’s surplus…Certain points nearer the high end of my range would…change the Company’s RBC status to Company Action Level.” 13

Actuarial Opinion – Regulatory Guidance “Bright Line Indicator” to Discuss the Potential for Material Adverse Deviation If 10% of the insurer’s net reserves are greater than the difference between the Total Adjusted Capital and Company Action Level Capital 14

2005 AOS Results –4 State Totals OH, TX, PA, IL(Net Only) More than 10% below 61.0%1.3%102.1%2.3% More than 5% but less than 10% below 132.1%2.7%183.8%4.1% Less than 5% below %16.5%7215.2%16.2% Equal to but other than $0 reserve %16.7%9018.9%20.3% Less than 5% above %38.3% %37.6% More than 5% but less than 10% above %14.0%418.6%9.2% More than 10% above 508.3%10.5%469.7%10.4% Carried reserves are zero %316.5% Total # of Companies Carried reserves are: Net Gross

What’s the Development Trend? Development as a % of Reserves Missing < -10%-10% to – 5% -5% to 0%0% to 5%5% to 10% > 10% CY# of Companies NAIC, 2004

Other Hot Topics Risk Transfer/Bifurcation International Risk-focused Examinations Qualifications Standard Governance Initiatives

What’s Next October nd Opinion Writers Seminar AAA - Presentation for Boards – what to expect from your actuary Best Estimate White Paper Results of Survey by Task Force for Enhancing the Reputation of Casualty Actuaries CRUSAP Report