Actuaries have both tremendous power and a humbling responsibility in regards to insurance company solvency. By virtue of the rigorous education required for achieving credentials from the Casualty Actuarial Society (CAS), an actuary attains a unique stature in the insurance community. With that stature comes the professional responsibility to provide opinions pertinent to the solvency of state-regulated insurance companies.

We act neither as agents of the domiciliary regulator nor as an advocate for the insurance entity when we render formal statements of actuarial opinion (SAO). Our responsibility is to provide an independent, unbiased opinion as to the reasonableness of the company’s held accrual for its unpaid loss and loss adjustment expense obligations.

Virtually every communication made by an actuary in a professional capacity is considered an SAO. However, formal, prescribed SAOs – ones required by statute, regulation or other legally binding authority – involve de facto certifications that held accruals are reasonable.

I have heard it said many times that, as actuaries, we do not “certify” reserves but rather render an opinion as to their reasonableness. However, consider that most prescribed SAOs involve at least three representations, including:

• Held reserves meet the requirements of the insurance laws of domicile;
• Held reserves are consistent with reserves computed in accordance with accepted loss reserving standards of practice promulgated by the Actuarial Standards Board (ASB); and,
• Held reserves make a reasonable[1] provision in the aggregate for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements.

Collectively, these three representations entail a “certification” that the Company’s held reserves are reasonably stated.

Given that SAOs are generally public information, such documents are often an actuary’s most public facing communication. Our opinions are not only given considerable weight by auditors and regulators, but also impose a immense responsibility on us as professionals. To the extent a Company has solvency difficulties, it is certain the SAOs rendered in prior years will be subject to scrutiny.

Actuaries sometimes deliver very unwelcome news regarding reserve adequacy … or inadequacy. Often, the Company will adjust its booked amounts to be within the actuary’s range of reasonable reserve indications... but not always.

Over the course of my 40-plus years in the consulting business, I have been involved – directly or indirectly - with at least two dozen insolvencies. In most situations, the slide towards insolvency was gradual. In other cases, poor decisions by company management or departments (e.g., marketing, underwriting or claims) contributed to adverse financial results.

In working with a company in precarious financial condition – especially in the consulting world - there is a natural human tendency to “go along to get along.” That is, preservation of the client relationship may influence one’s judgments. Moreover, if company management were to ask for consideration to allow more time to emerge from a difficult financial situation, there may be an inclination to soften a few assumptions here and there to achieve the desired result.

There is another human emotion that may manifest itself in that the actuary doesn’t want to be the individual responsible for putting people out of work. As professionals, we simply must not allow our human emotions to influence professional judgment when a company’s solvency is at stake. I would submit that any actuary that doesn’t have the stomach to make a hard call such as this should refrain from taking on the responsibility of rendering an SAO.

We must be mindful of both the intended and secondary users of our work products. Consider, the intended users of our reports are typically company management (and the company’s Board of Directors), auditors and regulators. Other intended users may include company shareholders, rating agencies, reinsurers, brokers, other actuaries and even the Actuarial Board for Counseling and Discipline (ABCD).

In situations where a company is facing solvency difficulties, there is a real danger for the actuary to be co-opted. That is, the actuary may convince himself the impact of operational changes at the company or in the jurisdiction in which business is written – as represented by company management – is greater than what might be deemed reasonable by a dispassionate observer. There are no flashing red lights indicating when a professional is wading into dangerous waters; however, an independent peer reviewer goes miles towards avoiding such perils. By virtue of being credentialed, actuaries have an affirmative obligation to render SAOs that will withstand scrutiny.

Actuaries have tremendous power as it relates to insurer company solvency. Our work product just may lead to an insurer shutting its doors and laying off staff. Given the function we serve, auditors and regulators rely on our opinions, and we should take the responsibilities associated with the credentials provided to us by the CAS seriously.

[1] In some jurisdictions, like Bermuda, the “reasonable” opinion is replaced by an “adequate” standard.