Effective Report Writing: Tools

for the Appointed Actuary

Mary D Miller FCAS, MAAA
Assistant Director, Product Regulation & Actuarial Services
Ohio Department of Insurance
2011 CAS Spring Meeting

Actuarial Report and Workpapers:

Just the Facts
The appointed actuary must give assurance that the
actuarial report and underlying actuarial workpapers will
be maintained at the company for seven years in the
Statement of Actuarial Opinion.
The Actuarial Report must be available to the regulator
no later than May 1 or within two weeks after a request
from an individual state commissioner.
Must be consistent with ASOP No. 9 (repeal pending),
ASOP No. 41 (revision pending), ASOP No. 36 (revision
pending), ASOP No. 43, and the CAS Statement of
Principles Regarding Loss Reserves.

Actuarial Report and Workpapers:

Just the Facts (cont.)
The Report and workpapers are usually
requested by the state as part of a
financial exam or analysis.
All are usually considered confidential
depending on individual state laws and
regulations.
Ask your friendly regulator for details.
Must contain both narrative and technical
components.
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Actuarial Report and Workpapers:

Just the Facts (cont.)
From the NAIC Instructions:
The narrative component should provide sufficient detail to

clearly explain to company management, the regulator, or

other authority the findings, recommendations and
conclusions, as well as their significance.
The technical component should provide sufficient
documentation and disclosure for another actuary practicing
in the same field to evaluate the work. This technical
component must show the analysis from the basic data, e.g.,
loss triangles, to the conclusions.

Actuarial Report and Workpapers:

Just the Facts (cont.)
The Report must also include:
An exhibit which ties to the Annual Statement and compares
the Actuarys conclusions to the carried amounts;
Summary exhibit(s) of either the actuarys best estimate, range
of reasonable estimates, or both, that led to the conclusion in
the OPINION paragraph regarding the reasonableness ;
Documentation of the required reconciliation from the data
used for analysis to the Annual Statement Schedule P;
Extended comments on trends that indicate the presence or
absence of risks and uncertainties that could result in material
adverse deviation; and
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Actuarial Report and Workpapers:

Just the Facts
Extended comments on factors that led to unusual IRIS ratios
and how these factors were addressed in prior and current
analyses.
The CASTF, through the Regulatory Guidance Brief, also
encourages the actuary to include in the actuarial report an
exhibit that summarizes changes in the Appointed Actuarys
estimates from the prior analysis, with extended discussion of
significant factors underlying the changes.
The Actuary is also encouraged to present their findings in
person whenever possible.

Documentation Your Responsibilities

Code of Professional Conduct Precept 4
An Actuary who issues an Actuarial Communication shall
take appropriate steps to ensure that the Actuarial
Communication is clear and appropriate to the
circumstances and its intended audience, and satisfies
applicable standards of practice.

Applicable Standards of Practice

ASOP 9
ASOP 21
ASOP 23

ASOP 41
ASOP 43
ASOP 36

Where Does a Good Report Begin?

Data
ASOP No. 23 Data Quality
Reconciliation

ASOP No. 21 Assisting Auditors

Coordination with Independent Auditor

Documentation and Disclosure

ASOP No. 9 Documentation and Disclosure
(repeal still pending!)
ASOP No. 41 (revision pending) Actuarial Communications
ASOP No. 43 Property/Casualty Unpaid Claim Estimates
Documentation of the Opinion
Actuarial Report and Workpapers
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Whats the Quality of YOUR Data?

Even the best actuarial analysis cant compensate
for poor quality data

Actuarial
Analysis
Invest in understanding, reconciling and improving
the quality of the data that is used for your actuarial
analysis

ASOP No. 23 Data Quality

Selection of Data Considerations
Appropriateness, reasonableness,
comprehensiveness, limitations,
methodologies
Disclose data source and reliance on data
supplied by others
Professional judgment needed when you have
problems with data

10

Reconciliation: Required
Exclusive,
Exhaustive

But also Good Practice

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What Data Needs To Be Reconciled?

Loss?

By LOB?

Incurred?
Premium?

12

ASOP No. 21 Responding to or Assisting

Auditors or Examiners in Connection with
Financial Statements

Responding actuary
Be prepared to discuss with auditor/examiner:
Data
Environmental considerations
Changes in operations, trends, or products
A well written report can save you time and your
company/client money during an audit or examination
Consider how you would react if you picked up your
report for the first time in order to learn about the
company and its reserves.

13

DOCUMENTATION

Documentation should be sufficient

for another actuary practicing in
the same field to evaluate the
work.
- ASOP No. 9 (repeal pending)

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ASOP No. 9 Documentation

Clearly describe sources of data, material
assumptions, and methods, as well as any
material changes in these items from prior
analysis.
Documentation includes worksheets and
reports.
Documentation should be retained for a
reasonable period of time.

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ASOP No. 9 Disclosure

Disclosures
Conflict with professional judgment, and of
advocacy
Deviation from standard
Reliance on others
Means using that persons [material] work
without assuming responsibility
Reliance on the SAO for pool reserves
Documentation should define the extent of any
such reliance and identify the person relied
upon.
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ASOP No. 41 Requirements

Identify principal and scope of assignment.
Form and content should be clear and appropriate for the
intended audience.
Actuary should issue actuarial communication in a timely
manner.
Identify work of responsible actuary and reliance on others.
Significant findings should be in written or electronic form,
unless otherwise agreed-upon by the principal and the actuary.
Actuarial report should identify data, assumptions, and
methods used such that another actuary could make an
objective appraisal of the work.

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ASOP No. 43 Property/Casualty

Unpaid Claim Estimates
ASOP No. 43 applies to the actuary only with respect
to unpaid claim estimates that are communicated as
an actuarial finding (as described in ASOP No. 41
[revision pending]) in written or electronic form.
The terms best estimate and actuarial estimate
are not sufficient identification of the intended
measure, as they describe the source or the quality
of the estimate but not the objective of the
estimate.
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ASOP No. 43 Disclosures

consistent with the intended purpose or use, the
actuary should disclose the following in an appropriate
actuarial communication:
the intended purpose(s) or use(s) of the unpaid
claim estimate
significant limitations, if any, which constrained the
actuarys unpaid claim estimate analysis, such that
there is a significant risk that a more in-depth analysis
would produce a materially different result
the scope of the unpaid claim estimate
Three key dates (accounting, valuation, and review)
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 consistent with the intended purpose or use, the

actuary should disclose the following in an appropriate

actuarial communication:
specific significant risks and uncertainties with
respect to whether actual results may vary from the
unpaid claim estimate
significant events, assumptions, or reliances [that]
have a material effect on the unpaid claim estimate

if the actuary specifies a range of estimates, the

actuary should disclose the basis of the range
provided
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Some Final Facts

About 2,600 statutory opinions were issued by

about 500 actuaries in 2009
Top 19 opiners (4 percent):
579 opinions (22 percent)
Signed between 21 and 52 opinions each
37 actuaries provided 1/3rd of opinions
879 opinions
Signed 15 or more
27% signed only one opinion (137 opinions)
Question: How many is too many?
21

In Conclusion
From the Regulatory Guidance Appendix of the Practice
Note:
The CASTF believes that regulators should be able to rely
on the Report as an alternative to developing their own
independent estimates. A well-prepared and documented
Actuarial Report that is consistent with the spirit of ASOP
No. 9 can provide a foundation for efficient reserve
evaluation within a statutory examination. This provides
benefits to the examination process and potential costsavings to the company.
22

Writing a Good Actuarial Report:

Best Practices & Considerations
A Texas Regulators Viewpoint
per Nicole Elliott, TX DOI

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Your Mission
Tell the story
Include background, historical information, details
What, where, why, when, how,and how much?
Provide a road map
Help the reader navigate through the narrative and
exhibits
Describe the process and the steps along the way

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Who wants to hear the story?

Management, Regulators, Auditors
Actuaries and non-actuaries
need to strike a balance between technical details
and summarized information for different
audiences
Assume a knowledgeable reader
Knowledgeable about what? Actuarial analysis or
insurer background?
Put yourself in the reviewers shoes
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Who tells a good story?

Appointed actuaries who are Company employees
Reports tend to follow the internal management
reporting system
Formalized Report lacks the glue that ties everything
together for the external audience
Maybe two reports are needed (gasp!) to satisfy both
internal and external audiences
May be easier to provide a Report with aggregated
analysis using combined segments for external
audience; the detail is available if needed

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Who tells a good story?

Appointed actuaries who are consultants
Reports tend to be fairly well organized
Reports tend to look the same (not necessarily a
bad thing)
Sometimes there is difficulty incorporating
analysis and verbiage that differs from the
standard
Template language and footnotes often not
updated

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Chapter 1: Executive Summary

Main audience: Management
Overall conclusions in the aggregate and
maybe by segment (Schedule P line of
business or other)
Discussion regarding uncertainty, range
estimates
Exhibit comparing current estimate with prior
years
Table of Contents to direct reader to further
detail and illustrate organization of report
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Chapter 2: Company Background

Main audience: Regulator
History of the Company
Lines and types of business written
Discussion of overall reinsurance program by
line and year, including commutations or
retroactive arrangements
Overview of claims handling and claims
characteristics
Highlight significant changes in the
organization in the current year or historically

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Chapter 3: Technical Narrative

Describe the process used to get your estimates
What data was used
How was it segmented
How was it analyzed methods used
How was reinsurance handled (different methods
for net and gross data?)
How were the loss adjustment expenses analyzed

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Technical Narrative cont.

Use the presentation of your exhibits to help you
write and organize your narrative
Should your narrative be by segment or by type of
loss or reinsurance program?
Discuss how the ultimates were selected by segment
If diagnostic exhibits are provided, explain why they
are meaningful to your analysis

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Chapter 4: Technical Exhibits

How technical should you get?
Probably depends on volume and complexity
If a small company, probably could include
everything
If a large company, aggregated exhibits probably ok;
indicate in the narrative or via a list what other
information is available or include it in an appendix
Organization trumps detail!
More informative to discuss what, why, and how in an
organized manner than to present triangles and data
at every possible level of detail with no explanation
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Further Considerations

Support assumptions & judgment

Support selections
Support Ranges
Address catastrophe analysis
Include a proper Reconciliation
Coordinate with the Auditor
Have a peer review
Misc
33

Assumptions & Judgment

Dont just state WHAT was done; say WHY

How did you apply actuarial judgment?
If another reasonable alternative assumption would
cause a material difference in estimates, the
assumption requires further explanation.
What considerations helped form your judgment?
Not asking for you to give away your secrets, just be
more informative
If you used external data or benchmark data, cite where
it came from and why it is applicable to your analysis.

34

Support Selections

Expected loss ratios used in Born-Ferg

methods
LDFs that are not reasonably supported by the
historical data
Tail factors
Ultimates
Application of selections help the reader get
from point A to point B
Merely stating Selected in footnotes or
based on actuarial judgment is not sufficient
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Selection of Ultimates
(1)

(2)

(3)

Paid LDM

Incurred LDM

Selected

2003

11,244

11,250

11,250

2004

12,985

12,738

12,738

2005

15,215

14,471

14,471

2006

17,588

16,308

16,308

2007

19,109

17,539

17,539

2008

21,435

20,119

20,119

Total

97,576

92,425

92,425

Accident Yr

(1) From exhibit 3, sheet 2, column (8)

(2) From exhibit 3, sheet 4, column (8)
(3) Selected
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Selection of Ultimates
What was wrong with the paid method or paid data?
Why wasnt the average used?
Where is the support for the selection?
Would use of the average, if material, constitute a
material change in methods or assumptions worthy of
opinion disclosure?
If the paid method or the average were used, is the
difference in estimates material for this company?

37

Support Ranges

A Range is often provided in Reports with no

explanation of how it was derived
ASOP 43 4.2a: In the case when the actuary
specifies a range of estimates, the actuary should
disclose the basis of the range provided, for
example, a range of estimates of the intended
measure (each of such estimates considered to
be a reasonable estimate on a stand-alone basis);
a range representing a confidence interval within
the range of outcomes produced by a particular
model or models; or a range representing a
confidence interval reflecting certain risks, such
as process risk and parameter risk
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Catastrophe analysis
The CAT reserve should not merely be an
amount added to the final reserve estimates
with no explanation
Did you use a model or historical data?
Did you rely on the Claims Dept or the Reins
Dept? If so, how did you become comfortable
with their estimates?
How does the reinsurance apply?

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Proper Reconciliation
All significant data should be reconciled earned premium,
paid amounts, case reserves, claim counts, etc.
By Schedule P line of business and by accident year
Net and gross data
The analysis data should be shown in columns in the
Reconciliation and summed to get the Total and then
compared to Schedule P data
Often the actuarial data column can not be replicated
Material differences by accident year require explanation

40

Coordinate with the Auditor

May need to document your reserving
process, especially if you are a Company
actuary, including risk assessment and key
controls over risks, in accordance with Model
Audit Rule
Expect to provide the auditor with a letter
regarding significant data elements used in
your analysis

41

Have a Peer Review

Reviewer to look at your work with informed
skepticism
Scrutinize assumptions and methods
Pre-ponderence of optimistic or pessimistic
assumptions?
Re-perform some calculations
Identify missing narrative or exhibits
Use a review checklist
42

Misc
Support roll-forwards
Make sure the amounts in your Report match
your Opinion, your Summary, and the financial
statement
Contact your friendly regulatory actuary with
any questions

43

What Makes a Good Actuarial

Report?
CAS Spring Meeting
May 2011
By:
Joseph A. Herbers
Pinnacle Actuarial Resources, Inc.

44

OUTLINE OF PRESENTATION
Background on Herbers
General Observations & NAIC CATF Guidance
Essential Elements of Report
General Comments

45

Background on Herbers
COPLFR Member for 13 years, Current Chair
Faculty for AAA Seminar on Effective P/C Loss
Reserve Opinions
Practice Note, Law Manual and Model Audit Rule
Subcommittees

Member of CPC & FRC of AAA

Write over 100 reserve analysis reports every
year
Reports are reviewed by internal peer reviewer,
auditors, regulators, reinsurers, brokers, etc.
Involved in audit support work reviewing other
actuaries reports
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General Observations
Focus of my comments are on actuarial
reports not on SAOs or AOS
AAA Code of Conduct Precept 4
take appropriate steps to ensure that the Actuarial
Communication is clear and appropriate to the
circumstances and its intended audience

ASOP 9, Section 5.2

Documentation should be sufficient for another
actuary practicing in the same field to evaluate
the work
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Observations ASOP 41
Section 3.3.3 - Actuarial Report
an actuarial report should identify the data, assumptions, and methods
used by the actuary with sufficient clarity that another actuary qualified in
the same practice area could make an objective appraisal of the
reasonableness of the actuarys work as presented in the actuarys
report.

Section 3.6 - Documentation

Such documentation should identify the data, assumptions, and methods
used by the actuary with sufficient clarity that another actuary qualified in
the same practice area could evaluate the reasonableness of the actuarys
work.

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Observations CASTF Guidance

NAIC CASTF Regulatory Guidance Memo on
Actuarial Report noted three notable
weaknesses in documentation of many
actuarial reports:
-

Expected Loss Ratio

Actuarial Judgment
Entity
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Observations CASTF Guidance

Report should contain exhibit summarizing
changes in estimates from prior analysis, with
extended discussion of significant factors
underlying the changes in order to improve
transparency of disclosures
Exhibit comparing held reserve amounts with
actuarial indications
Reconciliation exhibit between financial
statement and data provided to actuary
Added disclosures for roll forward type
analyses
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Report Components
Sections of Report
Title Page
Transmittal Letter
Table of Contents
Purpose & Scope
Limitations
Distribution & Use
Background
Data Used

Methodology
Discussion & Analysis
Findings
Reliances &
Index of Exhibits
Exhibits
Index of Appendices
Appendices
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Format / Flow of Report

The flow of a report adds considerably to a
reviewers ability to follow the work
Most well written reports have at least 3 sections:

Narrative poorly written reports have scant narrative;

some treat it as an afterthought
Exhibits poorly written reports have difficult to
understand numbering schemes, illogical flow of exhibits
themselves (e.g., Part A, Section B, Appendix B, Exhibit
12.6)
Appendices similar comments as for Exhibits
52

Format / Flow of Report

Highest level of detail towards back of report
Appendices
source data
loss development triangles
Copies of reinsurance agreements

Summarization of detail in Exhibits

Footnotes should help guide the reviewer, not provide a confusing maze
for cross checking information
Footnotes should guide, not provide rationale for assumptions (see
report narrative)

Summary or Exhibit 1 should show held v. indicated

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Summary of Reserve Deficiency/Redundancy

Reserve
Category
(1)

Line of
Business
(2)

Required
Reserves

PPAL
CAL
APD
GL + PL
HMP
TOTAL
PPAL
CAL
APD
GL + PL
HMP
TOTAL

Held
Reserves

Indicated
Reserve
Deficiency(-)/
Redundancy(+)

Notes

PPAL
CAL
APD
GL + PL
HMP
TOTAL

Loss Adjustment Expense Reserves

DCC
Total
Case
IBNR
A&O
LAE
(7)
(8)
(9)
(10)

Loss Reserves
IBNR
S/S Rec
(4)
(5)

Total
(6)

$1,927
247
469
127
459
3,229

$2,451
86
250
501
352
3,641

$4,379
333
58
628
811
6,210

$299
39
(15)
24
33
380

$452
49
349
384
251
1,485

$468
42
33
418
153
1,114

$1,219
130
367
826
437
2,979

$5,597
463
425
1,455
1,249
9,189

1,927
247
469
127
459
3,229

2,452
86
250
502
353
3,643

4,379
333
59
629
812
6,212

299
39
(15)
24
33
380

452
44
349
387
250
1,482

468
42
33
420
153
1,116

1,219
125
367
831
436
2,978

5,598
458
425
1,460
1,249
9,190

Case
(3)

1
(0)
0
1
1
$2

(660)

(660)

(660)

(660)

(0)

($0)

1
(0)
0
1
1
$2

0
(5)
(0)
3
(1)
($3)

0
(0)
0
2
(0)
$2

0
(5)
(0)
5
(1)
($1)

Total
Loss+LAE
(11)

1
(5)
0
5
0
$1

- Held reserves as of 12/31/2009 provided by Client

- Required IBNR reserves from Pages 1-4 of Exhibit 2, Col (11) for losses, Col (12) for Defense & Cost Containment
- Indicated salvage/subrogation recoveries for APD from Page 6 of Exhibit 2, Col (11)
- Indicated reserve deficiency/redundancy calculated as [Held - Required].
- Required A&O reserves from Exhibit 5

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General Comments
Documentation of assumptions is often sparse
- Background section of report with info on retentions,
deductibles, unique program features is invaluable
- Are LAE included in losses? Was A&O LAE considered?

Footnotes to exhibits leave something to be

desired
Data limitations are often significant and need
discussion
Tables, charts and graphs can add immeasurably
to understanding of report
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Background

Runoff (actual v expected) can be helpful

Description of changes in volume
Changes in average rates
Changes to companys net retention
Operational changes

Management
Claims Handling
Underwriting
Markets served
Systems / data sources
56

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58

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Circumstances
Large rate reductions in late 2006
New business discount of 10% implemented at
same time
Surge of new business activity in 2007
In mid 2008, rate increases implemented,
commissions scaled back, agencies cancelled
In light of these facts, are the higher LRs in 200708 reasonable? Can the reviewer follow the
work?
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Actuarial Judgment
Per Section 4.5.3 of the Introduction to the ASOPs (Oct. 2008)
Professional judgment - Actuaries bring to their assignments not only highly

specialized training, but also the broader knowledge and understanding that
come from experience. The ASOPs frequently call upon actuaries to thoughtfully
apply both training and experience to their professional assignments, recognizing
that reasonable differences of opinion are appropriate, if not inevitable, when
professionals undertake to project the effect of contingent future events. The ASB
anticipates that the actuarys use of professional judgment will be presented in
such a way that another qualified actuary would recognize when and where
judgment has been applied, even if the other qualified actuary might disagree with
the resulting conclusions.

62

Report Content
Are all assumptions and methods specified?
Are the assumptions and methods reasonable for this assignment?
Are the data sources identified and appropriate for their use in the
analysis?
Are the resulting calculations correct?
Are the results, findings and recommendations reasonable and adequately
supported by the analysis?
Does the work product meet actuarial standards of practice or other
professional standards?
Are any reliances and limitations appropriate and clearly delineated?
Is the potential variability of results adequately discussed?

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Discussion & Analysis

Why are the assumptions reasonable? Are other assumptions not
reasonable?
What has changed since last year? What are the drivers of those changes?
Are they random or systematic?
What tests of reasonableness were considered?
Are conclusions significantly different than those from last year?
Which segments of the book of business should be more closely
scrutinized than others?
What are circumstances affecting your actuarial judgment?

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Discussion & Analysis Flow of Report

General description of each block of business reviewed
More detailed description of analysis for each block of business
Changes since last evaluation
Important assumptions
Impact of factor A, factor B,
Results
Tests of reasonableness
Block 2, 3,
Indicated reserves for all programs combined / covariance
DCC LAE
Time Value of Money
Risk Margins
A&O Expense
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