By Michelle Bradley, ACAS, MAAA, ERM, CERA and Enoch Starnes
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. In our third entry, we focused on the interaction between auditors and actuaries in regards to the data used in an actuarial analysis. This post will cover our fourth topic, the various dates used in the process of an actuarial analysis, their relationship to each other, and their importance to an analysis from an auditing perspective.
When reviewing an actuarial analysis, there are three important dates to consider:
- Accounting/Reserve Date
- Evaluation Date
- Review Date
In our previous blog entry, we touched briefly on dates and the verbiage used to define their significance to a report. First, let’s recall the example used previously:
|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.|
In this example, the end point of the range 6/1/05-9/30/12 is considered the accounting/reserve date. Ultimate values for all occurrences prior to 9/30/12, whether reported or not reported, are included and paid losses as of 9/30/12 are used to offset the ultimate value to determine the remaining liability. Following this occurrence range is the date 9/30/12, which is the evaluation date. This date is normally printed on the loss run provided to the actuary and is the cut-off point through which transactions regarding incurred and paid amounts are considered. Typically, the accounting/reserve date matches precisely with the evaluation date of the data. However, this is not always the case.
Imagine, for example, that an analysis containing the above sample verbiage was completed with data valued 10/15/12. In this case, even though the evaluation date is subsequent to the reserve date, ultimate values for claims occurring between 9/30/12 and 10/15/12 are not included and paid amounts that occurred between 9/30/12 and 10/15/12 are not considered in the analysis. (In other words, the payments are not subtracted from the ultimate losses when calculating required reserves.)
The example above illustrates an evaluation date that is slightly subsequent to the reserve date. Of course, other variants of this situation should also be considered. In certain instances, known as a “roll-forward”, an actuary can estimate the paid and unpaid claim amounts for a reserve date later than the evaluation date. Using various methods, an actuary can approximate both payments and increases in reserves that will occur between the evaluation date and the accounting/reserve date. The amount of time from the evaluation date to the reserve date is of significant importance from an auditing perspective. This is because longer periods of time between the two dates greatly decrease the accuracy of the roll-forward estimation. Though some auditors will allow for a roll-forward to extend to around 90 days past the evaluation date, it is becoming increasingly likely for an auditor to require an evaluation date that is within 60 days of the reserve date. When the actual data is available as of the roll-forward reserve date, auditors will often require validation of the roll-forward estimate.
The process of validating a roll-forward can be handled in multiple ways. One is to analyze actual incurred and paid emergence between the accounting/reserve date and the evaluation date in order to decide whether the original ultimate loss selections and estimated payments are reasonable. If the estimates remain reasonable, an addendum letter could then be submitted by the actuary stating the reasonability of the selections for the reserve date in question. If any adjustments were to be made to the selections based off of unforeseen changes in incurred or paid losses, an actuary would include them in the addendum letter itself. Another method for a roll-forward validation is to update the analysis in full using new data from the client. This, of course, is a lengthier and more costly process.
The final date, 10/5/12, from the above sample verbiage is the review date. In some cases, a client can provide additional information, such as changes to claim reserving philosophy or exposure clarification, not included in a loss run that will affect the reserve analysis. A large favorable or unfavorable claim settlement could also occur between the evaluation date and the report completion, which would possibly then impact multiple aspects of the analysis, including ultimate loss selections. When submitting a report, the actuary must provide the date after which no further information relevant to the analysis was submitted by the client.
The dates we have covered are very significant to an auditor, so it would be pertinent to make sure that all parties assisting with data collection and information understand how dates are being used in the actuarial analysis. Understanding the dates can facilitate timing and planning when tight timeframes are involved. For example, many companies need year-end results in early January and so they select a data valuation date of 10/31 or 11/30. The actuarial report is then completed in November or December with a roll-forward reserve estimate to 12/31. In early January, the one or two month emergence occurring in the data between the evaluation date and roll-forward reserve date is validated and the report can be finalized with an addendum letter. This type of planning may help alleviate tight timeframes and facilitate more time for discussion and review, as the process of validating a roll-forward is often less time consuming than a full analysis, and thus more accommodating to a shorter schedule. Knowledge of the dates used in an actuarial analysis and how to use them can therefore be crucial in efficient financial planning.
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