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Important Notice Jerome P. Dublan, CPA Among the many changes made by the NAIC to the Annual Statement Instructions for 2004, I want to highlight one particular change at this time because it establishes new audit requirements for loss reserve estimates and will also impact the Statement of Actuarial Opinion and required communications between your company, the Auditor and the Appointed Actuary. I believe it is important for all of us to be aware of the new requirements now so that we can take timely action to address and resolve potential procedural questions and be prepared to comply with the new instructions. An excerpt of the relevant Annual Statement Instructions appears later, however the following summary is presented to assist in your review of the actual requirements.
If I may further summarize the above outline, the Auditor now has to fully document the methods and data used by management whether or not that data is the basis for the Auditor’s evaluation of loss reserve estimates, and the Auditor now has to directly communicate with the Appointed Actuary and test the data used by the Appointed Actuary whether or not it is material to the Auditor. Note also, that the new instructions refer specifically to losses and D&CC. There is no mention of reserves for loss adjustment expenses or questions that may be raised when considering the effects of reinsurance. Excerpt from 2004 Annual Statement Instructions The insurer shall also require the independent certified public accountant subject the data used by the appointed actuary to testing procedures. The auditor is required to determine what historical data and methods have been used by management in developing the loss reserve estimate and whether the auditor will rely on the same data or other statistical data in evaluating the reasonableness of the loss reserve estimate. After identifying the relevant data, the auditor should obtain an understanding of the controls related to the completeness, accuracy, and classification of loss data and perform testing as the auditor deems appropriate. Through inquiry of the appointed actuary, the auditor should obtain an understanding of the data identified by the appointed actuary as significant. It is recognized that there will be instances when data identified by the appointed actuary as significant to his or her reserve projections would not otherwise have been tested as part of the audit, and separate testing would be required. Unless, otherwise agreed among the appointed actuary, management and the auditor, the scope of the work performed by the auditor in testing the claims data in the course of the audit would be sufficient to determine whether the data tested is fairly stated in all material respects in relation to the statutory financial statements taken as a whole. The auditing procedures should be applied to the claim loss and cost containment expense data used by the appointed actuary and would be applied to current activity that occurred in the current calendar year (e.g. tests of payments on claims paid during the current calendar year.) _______________________ The purpose of this IIAC, Ltd. IMPORTANT NOTICE is to heighten your awareness to new statutory audit requirements implemented by a change to the NAIC Annual Statement Instructions. I would like to acknowledge the help and input I received from Mr. Joe Herbers of Pinnacle Actuarial Resources, Inc. and his work with the Committee on Property and Liability Financial Reporting. Based on information currently available, there will most likely be further information and clarification from the NAIC upcoming. Please feel free to contact Jerry Dublan with any questions or comments at 630.971.1200 or email Jerry.
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