A Guide to Actuarial Reports
Robert J. Walling III | December 11, 2023
Actuarial reports can be as different as the actuaries who author them and the users who rely on them. Some are quite Spartan and offer limited narrative and numbers; others are excessively long, giving the impression that the actuary is being compensated by page. Some actuarial reports are full of color charts and graphs—others harken back to a black-and-white era. When attempting to navigate actuarial reports, it can be worthwhile to know which elements are required and which are simply elements of style.
There are numerous types of actuarial reports that a nonactuary may be reviewing. The most common are ratemaking or funding analyses and loss reserve analyses, including statements of actuarial opinion (SAOs) or similar regulatory documents. However, actuaries also author reports involving enterprise risk management (ERM), retention or limits studies, dividend and capital recommendations, company valuations, legislative costing analysis, and expert reports for litigation support. For most of these reports, the required elements remain largely the same.
While many of the actuarial standards promulgated by the Actuarial Standards Board (ASB) address aspects of specific types of actuarial communications, the primary standard applicable to all actuarial reports is Actuarial Standard of Practice No. 41, Actuarial Communications (ASOP 41). Section 3.1.1 of this standard states:
The actuary should take appropriate steps to ensure that the form and content of each actuarial communication are appropriate to the particular circumstances, taking into account the intended users.
Section 3.2 of this standard states:
The actuary should complete an actuarial report if the actuary intends the actuarial findings to be relied upon by any intended user. The actuary should consider the needs of the intended user in communicating the actuarial findings in the actuarial report.
It goes further to state:
In the actuarial report, the actuary should state the actuarial findings, and identify the methods, procedures, assumptions, and data used with sufficient clarity that another actuary qualified in the same practice area could make an objective appraisal of the reasonableness of the actuary's work.
In other words, the report needs to be understandable from the perspective of the intended user(s) and also capable of being evaluated by another qualified actuary for reasonableness.
Section 4.1.3 of ASOP 41 provides substantial guidance on the required disclosures in any actuarial report. These include:
- Intended users
- Scope and intended purpose of the engagement
- Qualifications of the responsible actuary
- Cautions about risk and uncertainty
- Limits or constraints on the use or applicability of the actuarial findings in the report
- Conflict of interest
- Information relied upon by the actuary that has a material impact on the findings
- Relevant information dates
As a result of this and other professional guidance, there are many sections that can reasonably be expected in nearly every actuarial report. While the titles and the orders of the sections may vary, the following sections are typically required by professional standards.
The Actuary—Section 3.1.4 of ASOP 41 states that "An actuarial communication should clearly identify the actuary responsible for it." So, the individual actuary (or in some limited cases, two or more actuaries) ultimately responsible for the actuarial report and their qualifications must be identified in the report to meet professional standards.
Purpose and Scope—This section typically names the intended user of the report, the report's purpose (i.e., how it is intended to be used) and the specific scope of the assignment. For captives, this can be particularly important if certain operating units, coverages, or years are specifically outside of scope. In addition, the results of a funding study may not necessarily be appropriate for loss reserving or valuation work.
Distribution and Use—Closely related to Purpose and Scope, this section typically adds other intended users beyond the principal, such as captive managers, auditors, and/or captive insurance regulators. It is also common for limitations to be placed on additional distribution and use of the report to avoid creating unintended consequences and applications of the report. This is important, as actuaries are required by the Precept 8 of the CAS Code of Professional Conduct to "take reasonable steps to ensure that such services are not used to mislead other parties."
Background—This section may seem pretty simple but is important for documentation purposes. Remember, ASOP 41 says it has to be clear enough for another actuary who presumably knows nothing about the program under review to make an objective appraisal. That means some basics, like the insureds, coverages, coverage terms (e.g., limits), and geographic, industry, and domicile details need to be clearly stated.
Data—This section addresses what data was provided by whom and in what detail. Another important disclosure in this section is what benchmarks (if any) upon which the actuary relied. The appropriateness of these benchmarks is often an important component of another actuary's review in an audit support or regulatory role. Any material data limitations the actuary faced are also usually disclosed here.
Methods and Assumptions—One of the key sections of any actuarial report, the Methods and Assumptions section documents how the actuary arrived at their findings and conclusions. This usually involves a step-by-step description of how specific metrics were computed. Typically, a variety of methods should be used and their strengths and weaknesses laid out for the reader. In some cases, it is particularly important to identify how sensitive certain methods, or indeed the whole analysis, are to key assumptions. This could include inflation or discount rates, industry loss development patterns, or an expected loss ratio or loss cost.
Findings—This critical element of the report is where the actuary summarizes their findings as outlined in the Purpose and Scope section. Additionally, there is often a direct tie from the Findings in the report to the supporting exhibits attached to the report. This is an area where there are varied elements of style by actuary and type of report. Many complex actuarial reports add a Discussion and Analysis section to provide more in-depth review of some of the actuarial analysis. In other cases, such as legislative costing studies, an Executive Summary is commonly used to provide an even more succinct summary of the findings.
Reliances and Limitations—This section typically addresses any limitations the actuary faced, reliance they placed on company and/or industry data, and the uncertainty or risks that create potential for results to vary from the actuarial estimates.
Elements of Style
Once the required elements are addressed, the actuary is free to utilize elements of style that they feel are best suited to the intended users and their individual communication style. A growing number of actuaries are using graphs and charts to effectively communicate their findings. Glossaries of terms are also becoming more common to help nontechnical readers get their arms around the actuarial jargon.
The layout of actuarial exhibits is also very dependent on an actuary's individual style and the intended users' needs. Whether a great many pages or just a few, the exhibits should document the methodologies and support the findings of the report. In addition, exhibits should be footnoted to allow the reader to follow the computations and the flow of data between the exhibits. Many actuarial exhibits and reports are also adding new diagnostics, more in-depth comparisons to prior results, and other types of stress or scenario testing to further support the reasonableness of the findings.
Know Your Rights
Professional standards suggest that you have certain rights as the intended user of actuarial reports. The intended user has the right to an actuarial report that identifies the responsible actuary and their qualifications and to know the report's purpose and scope and any reliances, limitations, and restrictions in its use. The actuary must also make clear the data and methods that were used and that they relied upon to support the findings.
As important as all of the aforementioned is, you also have a right to ask questions. For example, if you have been experiencing significant operational changes, you deserve an actuary who listens. Your actuary is required to "consider" the impact of things like operational changes. If you don't understand how a method is computed or what a section of a report is saying, it is in the actuary's professional best interest to explain it more clearly to you. Most actuarial reports specifically state that the responsible actuary is available to answer any questions intended users may have, but this is rarely done. Finally, you deserve an actuarial report that has been professionally peer-reviewed to ensure all data, methods, and assumptions are reasonable and appropriate; that the report is understandable; and that the work product meets all applicable professional standards.
The actuarial professional standards hold actuarial reports to an extremely high standard of excellence, and so should you.
Robert J. Walling III | December 11, 2023