Discussion thread for Exam 2005: Question 38

[Avi]

Question Posted Below, please discuss, I must be missing something regarding calculations:

a) No. The actuaries range of reasonableness is 3.8M—4.2M dollars. Even if the actuary believes that the risk places the reserve need at the high end, the highest point is only $200,000 more than the booked reserve, or around 5%. Furthermore, that amount is less than 4% of surplus, so the risk is not material.

b) Being that the risk is not material, it does not need to be specifically discussed.

[Morrison]

I think it is material because if reserves develop an additional $200K from the $4 million posted it triggers a change in RBC category. The amount of change by itself isn't material, but since the change causes a certain threshold to be crossed, then it is material.

[Avi]

I think it is material because if reserves develop an additional $200K from the $4 million posted it triggers a change in RBC category. The amount of change by itself isn't material, but since the change causes a certain threshold to be crossed, then it is material.

Unless specifically requested by management, why is it the Appointed Actuary's responsibility to monitor RBC? His or her job is simply to opine on the adequacy of the reserves. These reserves, as indicated, are not subject to material adverse development.

Reductio ad absurdum, why doesn't the actuary have to describe the materiality of the potential downgrading of the insurer, increasing the cost of financing their debt due to liquidating portions of the stock portfolio to bolster the reserves which lowers which offsets R4 that tossed the dog, that worried the cat that killed the rat that ate the malt that lay in the house that Jack built. ;)

Maybe you are correct, but ASOP 36 Section 3.4 is rather vague, and being that the question did not inform us that management was concerned about RBC levels, I still think it immaterial.

Unless, of course, I am not remembering something from the readings. :(

[Morrison]

One of the readings (I can't remember which) discussed specifically the criteria for what was "material". It specifically mentioned items that caused certain thresholds to be crossed regardless of the magnatude of the change..

Your point seems to be that what is "material" in some cases (in this case RBC), isn't material for the Statement of Opinion, which may in fact be true.

[Avi]

Of course, I did not mention the RBC change at all in my answer, and so will undoubtedly lose points :wall:

[carenthir_dm]

I noted the crossing of the RBC threshold, and it was a total shot in the dark; my statement of opinion studying consisted of a skim through the All10 summary in the 20 min. prior to the start of the exam. I'll take it, though...

[statzman]

So, a few days before the exam, our Opining Actuary held a staff meeting to talk about schedule P and his Actuarial Opinion that he recently submitted for 2004. One of the things he talked about was that one of the definitions of materiality is changing RBC level. So, if you are close to 200% ACL, materiality could be a very small number.

I figure the extra point I got for that is a gift.

[slinger]

I cited the change in RBC level, but noted all the other issues, and decided that any change was not material. My understanding is that there are many considerations regarding materiality, but no stated rules. It is largely up to the actuary to decide what is material based on all those considerations.

Be careful statzman. There were many changes and additions to the 2004 opinion. I had to make a concious effort to try to forget those in the past few weeks and regress to the 2003 opinion rules, which were on the syllabus.

[Colymbosathon ecplecticos]

You would never in a million years miss a question because you used the current rules (correctly) instead of the rules in the readings.