Actuaries, Insurers Balk At Regulation

In an industry where the pace of change is generally slow, itsunusual to hear anyone accuse insurance regulators of acting tooquickly, but an insurer group and the public policy organizationfor actuaries are doing just that.

“We are concerned about the prospect that important changes willbe made in haste without significant time to vent them by the usersand the doers,” said Andrea Sweeny, who chairs the Committee onProperty and Liability Financial Reporting (COPLFR) for theWashington-based American Academy of Actuaries.

Ms. Sweeny was referring to proposed changes to the AnnualStatement Blank instructions for property-casualty Statements ofActuarial Opinion on loss reserves being proposed by the CasualtyActuarial Task Force (CATF) of the National Association ofInsurance Commissioners.

She spoke to NU a week before the May 20 meeting of theCasualty Actuarial Society in San Diego, and a day after a CATFheld a conference call concerning the latest draft of recommendedchanges to the instructions. On the call, CATF decided to schedulea vote on the draft for next month's NAIC meeting in Philadelphia,allowing comments until June 3.

“We know why regulators are doing this [so quickly],” saidStephen Broadie, assistant vice president of the NationalAssociation of Independent Insurers in Des Plaines, Ill., notingthat July 1 is the deadline for getting items to the Blanks TaskForce. Then, changes dont get made until the 2004 statements areput together.

“We understand this, but there have been five drafts sinceMarch,” he said. “On a number of conference calls, we werediscussing prior drafts while the Working Group reworked newchanges. In some cases, language is being drafted on the fly,” headded, suggesting that a more deliberative process is needed sinceloss reserves–a key subject of the opinions–are the biggest item oninsurer balance sheets.

John Purple, who chairs the CATFs Actuarial Opinion InstructionsWorking Group (AOIWG) and is chief actuary of Connecticut'sinsurance department, believes the projects fast pace has “keptpeople really focused,” although he noted that the group hadactually been working on the project long before the first draftwas released for comment.

Roughly 10 or 11 months ago, regulators concluded that it wastime to step back to see if the opinion instructions, first put inplace 10 years ago, were still meeting their needs, he said.

For example, if a company sets its reserves at the low end of arange of estimates, “we want to know that. We dont see that in theopinion,” he said, explaining that the opinion letters currentlyonly tell regulators whether the reserves fall within a reasonablerange.

While the dollar ranges that actuaries come up with when theyreanalyzing reasonableness might show up in an actuarial report thatsupports an opinion, “we dont see that report until some time afterthe blank is filed,” he said.

Opinions are filed with insurer annual statements in March. Thedeadline for preparing supporting reports, which must be presentedto a companys board of directors and are available for regulatoryexamination, is May 1.

Both NAII and COPLFR voiced early concerns about initial AOIWGdrafts that would have put actuarial ranges and best estimates inthe opinion letters. The concerns arose because statements ofopinion are public documents.

“We are aware of no other instance where there are two sets ofnumbers in the public domain for items on an entitys balancesheet,” Ms. Sweeny wrote in an April 8 letter to Mr. Purple,referring to reserves actually booked by an insurer and a secondestimate (or range of estimates) developed by an actuary.

Having two sets of numbers in the public domain has significanttax and Securities and Exchange Commission disclosure implications,she said, suggesting that a model law would need to be developed toprotect the confidentiality of the estimates, which she said couldeven get into the hands of competitors in some states.

Mr. Purple understands the concern.

“The biggest argument [they had] was that to put out anotherestimate creates problems for the company and the actuary,” hesaid, noting that it puts the actuary in a position of opposingtheir client. The latest draft of the instructions reacts to thisconcern, requiring that a best estimate or range appear only in theactuarial report, not in the opinion itself.

But that compromise does not go far enough, according toNAII.

“We dont think its appropriate to require it in either place.Instead, its a matter for actuaries to individually determine,” Mr.Broadie said.

“We certainly think a report should include material to allowregulators to see how actuaries arrived at their conclusions,” hesaid. However, making the disclosure of estimates mandatory bestowsan “artificial precision” that elevates their status beyond meretests of reasonableness, he added.

Practically, however, both Ms. Sweeny and Mr. Purple said thatall the actuarial reports theyd seen (and authored) included bestestimates or ranges or both.

Mr. Purple noted that by giving in on the issue of disclosingestimates in the opinion, regulators have put back a timelinessissue. Regulators still wont know whether companies book within anactuarys range until reports become available.

As a possible fix, CATF is now considering a proposal raised bythe Texas insurance department that would allow for a summaryschedule of estimates to be made available to regulators prior tothe release of the report. While reports are confidential in moststates, a model law might be needed to keep the new schedulesconfidential, he said.

A second concern for actuaries relates to a proposed instructionthat would require them “to state whether or not there is asignificant risk of adverse material deviation” in the items theyopine on, according to Ms. Sweeny.

“As you sit and write, There is no risk of adverse materialdeviation, we think that comes close to an assurance that nothingbad will happen,” she said, suggesting that it was unrealistic tothink that actuaries could provide such a guarantee–or that theywould provide a guarantee without making their opinions much moredifficult to read.

“Actuaries will believe it behooves them to add more explanatorylanguage” about the limitations of that kind of guarantee, shesaid. “That just adds to the verbiage and makes it harder for thereader to find and understand whats important.”

“Youre going to get boilerplate language on the 80 percent ofcompanies that dont have problems,” according to Mr. Broadie,agreeing that actuaries will be “loathe to state that there is norisk of material deviation” for those companies–a situation thatobscures the need to focus on the 20 percent of insurers that dohave problems.

“We may get more boilerplate,” Mr. Purple conceded. “But were ofthe opinion, wed like to try and see what we get,” he added, notingthat the intent is to get a better understanding of the companiesthat “are in trouble or trending that way.”

A final proposed instruction that concerns actuaries andindustry representatives is a data certification requirement.

“The requirement asks for a lot of new language that would be asignificant waste of time and effort,” Mr. Broadie said. It asksthe officer of the insurance company who prepared the data that anactuary relied on for his or her analysis to sign a statementsaying that the data “contains no material inaccuracies.” Going onto quote a long-winded paragraph verbatim, he said, “this is notgoing to be terribly productive.”

Both Mr. Broadie and Mr. Purple noted that the instructionsalready require the actuary to state that he or she evaluated thedata provided for reasonableness and reconciled it to annualstatement loss schedules (Schedule P).

Many actuaries in their opinions already provide the name of theperson–usually the insurance company CFO–who provided the data, Mr.Purple noted. The new data certification by the company officer is“just taking that a little further and getting that person to takeresponsibility.”

“From our standpoint, it puts the company on notice that weexpect this to be complete and accurate,” he said. And, in somecases, he said, “it also takes the actuary off the hook,” notingthat actuaries who have signed opinions of companies that laterbecame insolvent have told regulators that they didnt realize thedata they relied on was inaccurate in the past.

Ms. Sweeny said the assurance being requested in the new datacertification “is not going to change anyone's behavior and justadds paperwork.”

“If regulators are concerned about the quality of data, thensuch issues can be addressed more directly” through auditprocesses, she said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, May 27 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.