Actuaries Complain NAIC Moves Too Fast

Actuaries Complain NAIC Moves Too Fast

By Susanne Sclafane

NU Online News Service, May 20, 11:51 a.m. EST? An actuaries organization and an insurers trade group are complaining that insurance regulators are moving too quickly in crafting new rules for loss reserve statements.

"We are concerned about the prospect that important changes will be made in haste without significant time to vet them by the users and the doers," said Andrea Sweeny, chairperson for the Committee on Property and Liability Financial Reporting (COPLFR) for the Washington-based American Academy of Actuaries.

The changes that Ms. Sweeny referred to are proposed changes to the Annual Statement Blank instructions for property-casualty Statements of Actuarial Opinion on loss reserves being proposed by the Casualty Actuarial Task Force (CATF) of the NAIC.

She spoke to NU a week before the Spring Meeting of the Casualty Actuarial Society in San Diego and a day after the task force held a conference call concerning the latest draft of recommended changes to the instructions. On the call, the group decided to schedule a vote on the draft for the next NAIC meeting, allowing comments until June 3.

"We know why regulators are doing this" so quickly, said Stephen Broadie, assistant vice president of the National Association of Independent Insurers in Des Plaines, Ill. He noted that July 1 is the deadline for getting items to the Blanks Task Force; changes don't get made until 2004 statements are put together.

"We understand this, but there have been five drafts since March," he said. "On a number of conference calls, we were discussing prior drafts, while the Working Group reworked new changes. In some cases, language is being drafted on the fly," he said, suggesting that a more deliberative process is needed since loss reserves, a key subject of the opinions, are the biggest item on insurer balance sheets.

John Purple, the chairperson of the CATF's Actuarial Opinion Instructions Working Group and chief actuary of the Connecticut Insurance Department believes the project's fast pace has "kept people really focused," although he noted that the group had actually been working on the project long before the first draft was released for comment.

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

For example, if a company sets its reserves at the low end of a range of estimates, "we want to know that. We don't see that in the opinion," he said, explaining that the opinion letters currently only tell regulators whether the reserves fall within a reasonable range.

While the dollar ranges that actuaries come up with when they're analyzing reasonableness may show up in an actuarial report that supports an opinion, "we don't see that report until some time after the blank is filed," he said.

Opinions are filed with insurer annual statements in March. The deadline for preparing supporting reports, which must be presented to a company's board of directors and are available for regulatory examination, is May 1.

Both NAII and COPLFR voiced early concerns about initial working group drafts that would have put actuarial ranges and best estimates in the opinion letters. The concerns arose because statements of opinion are public documents.

"We are aware of no other instance where there are two sets of numbers in the public domain for items on an entity's balance sheet," Ms. Sweeny wrote in an April 8 letter to Mr. Purple. She referred to reserves actually booked by an insurer and a second estimate (or range of estimates) developed by an actuary.

Having two sets of numbers in the public domain has significant tax and SEC disclosure implications, she said, suggesting that a model law would need to be developed to protect the confidentiality of the estimates, which she said could even get into the hands of competitors in some states.

Mr. Purple understands the concern. "The biggest argument [they had] was that to put out another estimate creates problems for company and actuary, he said, noting that it puts the actuary in the position of opposing his or her client. The latest draft of the instructions reacts to this concern and requires that a best estimate or range appear only in the actuarial report, not in the opinion itself.

"We don't think it's appropriate to require it in either place. Instead, it's a matter for actuaries to individually determine," Mr. Broadie said. "We certainly think a report should include material to allow regulators to see how actuaries arrived at their conclusions," he said. Making the disclosure of estimates mandatory, however, bestows an "artificial precision" that elevates their status beyond mere tests of reasonableness.

Practically, however, both Ms. Sweeny and Mr. Purple said all the actuarial reports they'd seen (and authored) included best estimates or ranges or both.

Mr. Purple noted that by giving in on the issue of disclosing estimates in the opinion, regulators have put back a timeliness issue. Regulators still won't know where companies book within an actuary's range until reports become available.

As a possible fix, the task force is now considering a proposal raised by the Texas department that would allow for a summary schedule of estimates to be made available to regulators prior to the release of the report.

While reports are confidential examination reports in most states, a model law may be needed to keep the new schedules confidential, he said.

A second concern for actuaries relates to a proposed instruction that would require them "to state whether or not there is a significant risk of adverse material deviation" in the items they opine on, according to Ms. Sweeny.

"As you sit and write, ?There is no risk of adverse material deviation,' we think that comes close to an assurance that nothing bad will happen," she said.

It is unrealistic, she suggested, to think that actuaries could provide such a guarantee--or that they would without making their opinions much more difficult to read.

"Actuaries will believe it behooves them to add more explanatory language" about the limitations of that kind of guarantee. "That just adds to the verbiage and makes it harder for the reader to find and understand what's important, she said.

"You're going to get boilerplate language on the 80 percent of companies that don't have problems," Mr. Broadie said

"We may get more boilerplate," Mr. Purple conceded. But, he said, "the intent is to get a better understanding of the companies that "are in trouble or trending that way."

A final proposed instruction that concerns actuaries and industry representatives is a data certification requirement that there are no material inaccuracies.

Mr. Purple said, "From our standpoint, it puts the company on notice that we expect this to be complete and accurate," he said.

Ms. Sweeny said the assurance being requested in the new data certification "is not going to change anyone's behavior and just adds paperwork."