Statement of Actuarial Opinion Changes for 2007- A Regulatory Actuary’s Perspective

1. Statement of Actuarial Opinion Changes for 2007- A Regulatory Actuary’s Perspective Casualty Loss Reserve Seminar September 2007 Ron Dahlquist, Senior Casualty Actuary State of California Department of Insurance

2. Personal Background • FCAS 1980 • Former Chief Actuary for 2 companies • Nine years with CDI • Serve on several NAIC committees, including Casualty Actuarial Task Force • Much of my experience is with workers compensation

3. Overview of Presentation • Comments on Specific Changes to Opinion Requirements • Discussion of California Workers Compensation Opinion Requirement (2004) • Brief Discussion of Large Deductible Regulation Proposal

4. Changes to Opinion Requirements for 2007 • New Disclosures in Exhibit B: • Name of Appointed Actuary • Relationship of Appointed Actuary to Company • Qualifications of Appointed Actuary • Specific Identification of Type of Opinion • Definitive Statement on Risk of Material Adverse Deviation (RMAD)- does one exist or not? • Items in Exhibit B to be Net unless otherwise indicated • Exhibits A and B to be submitted electronically

5. Overall View • None of these changes is major • Overall idea is to make it easier for regulators to view key elements of the Opinion “at a glance” • There is no new substantive requirement here- just new requirements to make main conclusions obvious

6. Purpose of Opinion Exhibits A and B • A new requirement for 2004 Annual Statements • Originally conceived as a way to take all of the numbers spread throughout the body of the Opinion and to “collect” them all in one place • Exhibit A contains all of the individual reserve amounts the Appointed Actuary is opining on • Exhibit B contains amounts of key items that Appointed Actuary is not opining on separately but that are significant if present- e.g. • Anticipated salvage & subrogation • discounting of reserves • Asbestos and environmental • Exhibit B also requires disclosure of Appointed Actuary’s materiality standard, compared to Policyholders’ Surplus

7. New Disclosures in Exhibit B for 2007 • New disclosures are of a different type than previously existing disclosures • Identification of Appointed Actuary, relationship to company, and qualifications • Statement of Type of Opinion- • Reasonable • Deficient or Inadequate • Excessive or Redundant • Qualified • No Opinion • Risk of Material Adverse Deviation- does it exist or not?

8. New Disclosures in Exhibit B for 2007- page 2 • None are new requirements- • Identification of Appointed Actuary, relationship to company, and qualifications- • Existing requirement in “Identification” paragraph • Statement of Type of Opinion- • Existing requirement in “Opinion” paragraph • Statement on existence of Risk of Material Adverse Deviation- • Existing requirement in “Relevant Comments” paragraph

9. New Disclosures in Exhibit B for 2007- page 3 • What is new is placement in Exhibit B • This is for ease of review- these items belong in any basic summary

10. Other Changes • Items in Exhibit B to be Net unless otherwise indicated • Focus of regulatory review is primarily on the net basis • If direct basis is significantly different, expect to see discussion in the “Relevant Comments” paragraphs: for example, • If type of opinion is different on direct basis than on net • If RMAD exists on a direct basis but not on net basis • If A&E reserves are heavily reinsured

11. Other Changes- page 2 • Exhibits A and B to be submitted electronically • This is to facilitate ease of review by regulatory actuaries • Also allows NAIC to compile and analyze statistics on Opinions • Exact format of NAIC requirements must be followed

12. California Workers Comp Opinion Requirement (2004) • CA is one of several states that require deposits equal to insurer’s liability for unpaid claims • This is a requirement of state law • Purpose is to guarantee payment of claims to injured workers

13. California Workers Comp Opinion Requirement- page 2 • CA requires annual submission of Special California Schedule P • Includes company’s direct and net loss and LAE reserves by accident year • Provides calculation of deposit requirement • Deposit is net of reinsurance • CA still uses old 65% minimum loss ratio (written into law) • Deposit requirement can be based on discounted reserves • Allowable discount rate is company’s average yield on invested assets or 6%, whichever is smaller

14. California Workers Comp Opinion Requirement- page 3 • CA WC insurer insolvencies 2000-2002 proved that deposits were inadequate because reserves were inadequate • Financial Analysis Division wanted actuarial certification that reserves were adequate- in order to improve likelihood that deposits would be sufficient in the future • We settled on a requirement that reserves be “reasonable”, using Opinion language • Result- a new Opinion required for 2004- CA WC specific

15. California Workers Comp Opinion Requirement- page 4 • CA WC Opinion is free-form- we are only asking for statement that CA WC reserves are reasonable • This is the only situation I am aware of in which an opinion is required for a single state-line combination • Questions regarding credibility and ability to segregate CA WC data • CA is the largest state • WC laws different by state • CA WC has performed differently than any other state, probably should be analyzed separately anyway • Credibility issues can occur for small companies even when viewed in total- so this issue is not new to Opinion writers • Bottom line- we need this Opinion for a specific regulatory purpose

16. CA WC Large Deductible Regulation Proposal • Issue- Large Deductibles a large proportion of total CA WC market- approx. $5 billion in premium credits in 2006 • CA law requires insurer to pay WC deductible claims on first dollar basis, seek reimbursement from insured employer • This creates potential credit risk issue • NAIC accounting principles require reserves to be established net of collectible deductible amounts- doesn’t require reporting of the deductible amounts to be collected, hence doesn’t provide regulators with the ability to assess the credit risk • Existing deposits are for insured losses only- net of deductible • CA law allows Commissioner to establish deposit requirements for deductible amounts

17. CA WC Large Deductible Regulation Proposal- page 2 • Regulations drafted to require deposits for deductible amounts- offset by suitable collateral • This would require modification to our Opinion requirements • Current status- • Recent legislation affecting deposit requirements for deductible losses has been enacted • Draft regulations are being reevaluated and will be reworked