Through a series of blogs, SIGMA has begun to address some common questions, requirements and issues based on our previous experience with clients and auditors. The first blog in the series focused on actuarial qualifications and an actuarial qualification statement. The second focused on auditor inquiries related to actuarial independence. This blog will address the very important topic of how auditors interact with actuaries regarding the data used as input into an actuarial report.
There are several types of data normally provided to an actuary for use in an actuarial analysis. The most common are the loss data as of a specific loss evaluation date, the exposure information for each historical year and the projected years, and the program structure and parameters for each of the historical and projected periods. Additional qualitative information is sometimes provided, such as recent loss control initiatives, changes in claims administering philosophy or changes in company operations.
In an actuarial report, the actuary normally summarizes the data provided and in the narrative indicates the source of the various data. Actuaries also frequently include verbiage such as the following in the actuarial report regarding the data:
|The loss and exposure data used in this report is supplied by XYZ Company and ABC Group. It is our understanding we have been provided with all information which would materially affect this analysis. The historical data is assumed to be accurate and complete and should be reconciled with internal records. We have used XYZ's own loss and exposure data to the extent this data is credible and available. All supplementary data reflects the characteristics of XYZ's type of business, to the extent possible.
The dates regarding the data evaluation and years included should be carefully defined in the report with verbiage similar to the following:
|The estimates contained in this report are for a reserve valuation of years 6/1/05 through 9/30/12 using data evaluated as of 9/30/12. Additional information provided to SIGMA through 10/5/12 was considered.
When the auditor reviews an actuarial report, the questions related to data integrity and reconciliation come in many forms. Auditors sometimes request the original data files be sent to them from the actuary and they complete reconciliations. Some auditors provide a sample list of specific claims. The actuary then provides the incurred, paid and expense values used for those sample claims back to the auditor. The auditor then confirms that value for those claims match the audit loss runs. Some auditors also request a data reliance letter which summarizes the data files used in the actuarial report and the source of each data file.
An actuary should be able to provide a reconciliation of the data used in the actuarial report and the data files. Any special adjustments should be disclosed or documented in work papers. Reconciliation exhibits are specifically required in certain situations. For example, if the client files Schedule P information the actuary should reconcile the data used in the report to both the data files and recorded schedule P information.
The timing of the data reconciliation most often coincides to the time period when the draft version of the report is being reviewed. This prevents changes or problems from occurring after the report has been finalized. For some clients, a draft of the data summary is released prior to the draft report. This helps begin the data reconciliation earlier in the process.