Actuarial Opinion, Reserve Deficiency, and Disputed Reinsurance

The actuary's opinion must state whether the reserves make reasonable provision for unpaid claims and claim adjustment expenses. A reserve within the actuary's range of reasonable estimates can be reasonable, but the actuary must not select a point solely to achieve a management objective. Here the range is $212.0M to $235.0M and the central estimate is $222.0M. The low end is within the range, so $212.0M is not automatically unreasonable. However, the actuary must evaluate whether the low end is reasonable for this company's mix, trends, and risk factors, not just mathematically within the range. The fact that management wants to avoid a surplus reduction is not a valid reason to select the low end; the actuary should challenge that rationale.

Before signing an unqualified opinion, the actuary should:

• Confirm the range is properly developed and documented.
• Consider whether the low end reflects plausible favorable development and whether recent data support it.
• Assess the materiality of the $10M difference between $212M and $222M; $10M is about 10.5% of $95M surplus, which is likely material.
• Evaluate the disputed $5M reinsurance recovery separately; it should not be used to justify a lower gross reserve.
• Document the analysis and be prepared to issue a qualified opinion if the recorded amount is not reasonable.

If the actuary concludes the $212M reserve is not reasonable, the actuary should not sign an unqualified opinion; the actuary should issue a qualified or adverse opinion, depending on the severity.

If the actuary concludes the reserves are materially deficient, the statutory annual statement cannot be filed with an unqualified opinion. The actuary should issue a qualified opinion stating that the reserves do not make reasonable provision, or an adverse opinion if the deficiency is so severe that the reserves are not reasonable. The company must disclose the situation in the annual statement, and the domiciliary commissioner will receive the opinion and may examine the company or require corrective action.

Materiality: The gross deficiency is $12.0M, or 12.6% of statutory surplus ($12.0M / $95.0M). The difference between management's $212.0M and the central estimate is $10.0M, or 10.5% of surplus. These are material by most standards, often 5% to 10% of surplus. On a net basis, ceded reinsurance recoverable is $40.0M from authorized reinsurers, so the net deficiency may be less than $12.0M if the ceded reserves are also deficient, but the gross deficiency alone is large enough to require attention. Total adjusted capital is $90.0M; a $12.0M reduction would be 13.3% of TAC and could push the RBC ratio down materially. The company should consider whether the deficiency triggers an RBC action level or a trend test. Management should record the best estimate, not the low end to protect the ratio, and should update its RBC plan and disclosures.

The disputed $5.0M reinsurance recovery should not be treated as a certain offset to the deficiency. Reinsurance recoverables are recognized only if the reinsurance contract provides coverage and collection is probable. Because the reinsurer disputes coverage and has not acknowledged the claim, the company and actuary should evaluate the contract language, the facts of the claim, and the likelihood of collection. Under statutory accounting, a recoverable that is not probable or collectible may be nonadmitted or may require a valuation allowance.

In the reserve analysis, the actuary should not reduce the gross deficiency by $5.0M unless coverage is probable. If the coverage is uncertain, the actuary should disclose the uncertainty and possibly show the deficiency both gross and net of the disputed recoverable. The actuary's opinion should not rely on an uncollectible reinsurance recovery to make an otherwise deficient reserve look reasonable. If the $5.0M is ultimately collected, it may reduce the net deficiency; until then, it is not a basis for an unqualified opinion.