Leveraging an Actuarial Consultant to Help Prepare an Actuarial Opinion

April signifies a fresh start for most of the world, Life & Health actuaries beginning to plan for next year’s annual Actuarial Statement of Opinion included. Having just submitted the 2022 calendar year report last month, planning for the 2023 statement begins now, making selecting an actuarial consultant and partner critically important and a time sensitive task.

An Actuarial Opinion is critical for carriers because it establishes reserves for life, annuities, and health insurance. The purpose is to ensure that carriers are solvent and adequately funded to cover promised liabilities, including unpaid claim liability, unpaid claims adjustment expenses, accrued medical incentives, aggregate policy reserves, claim reserves, and experience-rated refunds.

As a valuation date nears, the common belief is that actuaries are scrambling to put all the pieces together to form the bigger financial picture. However, the reality is that the work occurs throughout the year, and it requires meticulous planning for the actuary to effectively evaluate the business and prepare the required documentation in a timely manner.

Finding a knowledgeable actuarial partner makes all the difference. But to find the right consultant, it’s important to first understand all aspects of an actuarial Opinion.

Preparing an Actuarial Opinion

While it is true that the most sensitive time frame for working on an Opinion is between September 15th and March 15th of each year, some of the annual work should be done outside of this critical time frame. For example, the periodic experience studies needed to evaluate potential assumption changes can be done in advance as well as additional assumption analysis and model development.

This preparation enables the actuarial team to focus on the impact of any assumption changes by testing models before considering current year inventory. Early analysis incorporating assumption changes, allows actuaries to focus on the most recently available information. Proper planning of steps, resources, and projects is necessary to efficiently manage the work completed during the key six-month window. Poor planning can also lead to insufficient time to fully understand and analyze cash flow testing results.

Then, in the months immediately before the close of the financial year, the actuary compiles 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 elements is built to project future cash flows and company surplus.

Potential Pitfalls

There are some potential pitfalls when preparing the annual statement of Opinion. Assumptions used to model assets and liabilities need to be appropriate and tested against the actual experience. While relying on outside experts for information is unavoidable, like in the case of an outside investment manager, the source of this information needs to be vetted and well documented.

Additionally, model validations need to be performed. More and more, state insurance departments need to know why an assumption is conservative, and how adverse risk assumptions impact the company’s 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 final documentation. The Actuarial Opinion is more effective when presented with great packaging.

Negative Opinion Results

There are times when the Opinion isn’t a positive one for the company’s bottom line. But it’s critical that all facts are laid bare because the repercussions can be extremely damaging. 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. The picture painted by the Opinion must be all encompassing to see the complete scenario not just the positive aspects otherwise it’s not a useful document.

Avoiding Negative Results

It’s foolish to attempt to avoid negative results. It’s also ill advised to not adapt to the latest regulations and actuarial trends. 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.

Reaching out to find an actuarial consultant that has kept up with the latest approaches is the smart move. Unforeseen problems can occur when companies believe they can do everything themselves. 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 negative consequences.

Learn more about our actuarial services at our Life & Health Actuarial page.