Ethical Issues Forum
Is It Really a "Clean" Opinion?
Editor's Note: This article is part of a series written by members of the CAS Committee on Professionalism Education (COPE) and the Actuarial Board of Counseling and Discipline (ABCD). The opinions expressed by readers and authors are for discussion purposes only and should not be used to prejudge the disposition of any actual case or modify published professional standards as they may apply in real-life situations.
Optimistic Insurance Company, Ltd. (OIC) is a captive insurance companywriting workers compensation coverage. OIC is domiciled on the Island of Little Regulation. Little Regulation allows captives to discount their loss reserves on their financial statement at a statutorily defined rate of four percent. Joe Actuary, FCAS, MAAA, has been retained to provide a loss and loss adjustment expense reserve opinion related to OIC.
Joe has completed his analysis and estimates the OIC loss reserve at $100 million on a nominal or undiscounted basis and $80 million on a discounted basis. In the scope of services, OIC has requested that a reasonable reserve range be provided. Joe has completed a sensitivity analysis and estimates a reasonable range of $95 million to $105 million on an undiscounted basis. Joe translates this into a range of $76 million to $84 million on a discounted basis.
OIC has a loss reserve of $76 million on their financial statement and has asked Joe for a "clean" loss reserve opinion since their figure is within his reasonable range. Should Joe issue such an opinion?
The Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves states: "The uncertainty inherent in the estimation of required provisions for unpaid losses or loss adjustment expenses implies that a range of reserves can be actuarially sound." The company's held loss reserve figure is within Joe's range and as a result, Joe should be comfortable issuing the requested opinion.
The Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves states: "If a reserve is to be stated on a present value, it may be appropriate to include an explicit provision for uncertainty in its discounted amount." Further, ASB Actuarial Standard of Practice No. 20 Discounting of Property and Casualty Loss and Loss Adjustment Expense Reserves states: "Discounting a reserve diminishes the risk margin implicit in a full-value reserve by the difference between the full-value and the discounted reserve. The discounting process itself introduces additional uncertainties. The actuary should be aware that a discounted reserve is an inadequate estimate of economic value unless appropriate risk margins are included." The $76 million figure does not include a risk margin and, as a result, a clean opinion can not be issued. Further, the $76 million is at the very bottom of Joe's range, suggesting the need for particular care in determining adequacy.