An Actuarial Opinion has evolved to become the pillar for establishing reserves for life, annuities, and health insurance. The goal is to make sure that insurance companies are solvent and adequately funded to cover the promised liabilities.
It’s easy to think of an Actuarial Opinion as a single deliverable that is provided in anticipation of a valuation date, but the work occurs throughout the year, and it requires significant planning for the actuary to evaluate the business and prepare required documentation in a timely manner.
What’s involved in developing an Actuarial Opinion?
In the months before the close of the financial year, we compile an inventory of the Company’s insurance liabilities along with a listing of assets supporting those liabilities. In addition, company expenses and other assumptions are reviewed and analyzed. Finally, a projection model reflecting these pertinent items is built to project future cash flows and surplus of the company.
The most sensitive time frame for completing this critical work is between September 15th and March 15th of each year. However, some of the annual work can be done outside of this critical time frame. One example is the periodic experience studies needed to evaluate potential assumption changes. This work, along with some additional assumption analysis and model development, can be done prior to September. This preparation enables our actuarial team to focus on the impact of any assumption changes by testing our models in a vacuum prior to moving forward with current year inventory. Inevitably, emerging shifts in inforce also require special attention; and, early analysis with incorporation of assumption changes, allows the focus to remain on the most recently available information. Proper planning of steps, resources, and projects, makes the work during the critical period efficient enough to meet necessary deadlines. And, of course, poor planning can lead to inadequate time to fully understand and analyze the cash flow testing results.
What are the potential pitfalls?
The assumptions used to model assets and liabilities need to be appropriate and tested against actual experience. Where reliance is made on other experts - for example, asset assumptions that might be provided by an outside investment manager - this reliance needs to be documented with a reliance opinion.
Model validations need to be performed. More and more, the state insurance departments need to know why an assumption is conservative, and how adverse risk assumptions impact surplus.
An audit trail and a table of contents with page numbers are necessary. It is surprising, but not necessarily uncommon, to see these items missing from the documentation. The Actuarial Opinion is better when presented with great packaging.
What could lead to a bad result with an opinion?
The worst-case scenario occurs when a company goes into receivership, and the lack of surplus was not mentioned or presented in the Actuarial Opinion. The company relies on the integrity of the appointed actuary, and this work is too important for management to fail to understand the scenarios that the company is unable to withstand.
What can you do to avoid it?
The regulations requiring the Actuarial Opinion and the supporting work such as cash flow testing and experience studies are evolving, and they continue to become more challenging. It is a mistake to use the mindset of “we have always done it that way.” Old methods become outdated quickly. The auditors and regulators will expect companies to keep current and compliant.
Unforeseen problems can occur when companies believe they can do everything without any help. Reliance on other actuaries and outsourcing to consultants can help avoid problems if the work environment becomes less predictable. If there is a risk that “something came up,” then having a consultant for Actuarial Opinions and the supporting work avoids the risk of a bad result.