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© 2016 National Association of Insurance Commissioners 1

Date: 2/29/16

Conference Call

CASUALTY ACTUARIAL AND STATISTICAL (C) TASK FORCE Tuesday, March 8, 2016 1:00 p.m. – 2:00 p.m. CT

ROLL CALL

Michael McKenney, Chair Pennsylvania Kevin Dyke Michigan Judy Mottar, Vice Chair Illinois Phillip Vigliaturo Minnesota Charles Angell Alabama David Browning Mississippi Mike Ricker Alaska Carl Sornson New Jersey Ronald Dahlquist California Kevin Conley North Carolina George Bradner Connecticut Thomas Botsko Ohio Philip Barlow District of Columbia Frank Stone Oklahoma Howard Eagelfeld Florida David Dahl Oregon Nicole Boyd Kansas Jennifer Wu Texas Richard Piazza Louisiana Lee Barclay Washington Lynn Dickerson Maryland

AGENDA 1. Receive Reports from its Working Groups— Michael McKenney (PA)

• Actuarial Opinion (C) Working Group—Melissa L. Greiner (PA) • Statistical Data (C) Working Group—Carl Sornson (NJ)

2. Discuss Comments on the Actuarial Standards Board’s Property/Casualty Ratemaking Attachment One

draft—Michael McKenney (PA)

3. Discuss 2016 Goals and Work Plan—Michael McKenney (PA) Attachment Two

• Best Practices for Reviewing Generalized Linear Modeling (GLM)-Based Rate Filings—Michael McKenney (PA) • Any Other Suggests to Add to the 2016 Goals and Work Plan— Michael McKenney (PA)

4. Discuss NAIC Activities Relating to Casualty Actuarial Issues —Michael McKenney (PA)

5. Discuss Any Other Matters Brought Before the Task Force—Michael McKenney (PA) 6. Adjournment W:\National Meetings\2016\Spring\TF\CasAct\Conference Calls\03-08 CASTF\03-08 CASTF Agenda.docx

● SECOND EXPOSURE DRAFT ●

Proposed Actuarial Standard

of Practice

Property/Casualty Ratemaking

Comment Deadline:

April 30, 2016

Developed by the Ratemaking Task Force of the

Casualty Committee of the Actuarial Standards Board

Approved for Exposure by the Actuarial Standards Board

December 2015

Attachment One

SECOND EXPOSURE DRAFT—December 2015

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T A B L E O F C O N T E N T S Transmittal Memorandum iv

STANDARD OF PRACTICE

Section 1. Purpose, Scope, Cross References, and Effective Date 1

1.1 Purpose 1 1.2 Scope 1 1.3 Cross References 1 1.4 Effective Date 1

Section 2. Definitions 2

2.1 Coverage 2 2.2 Experience Rating 2 2.3 Exposure Base 2 2.4 Method 2 2.5 Model 2 2.6 Premium 2 2.7 Rate 2 2.8 Ratemaking 2 2.9 Retrospective Rating 2 2.10 Schedule Rating 2

Section 3. Analysis of Issues and Recommended Practices 2

3.1 Introduction 2 3.2 Organization of Data 2 3.3 Data Quality 3 3.4 Methods, Models, and Assumptions 3 3.5 Exposure Base 3 3.6 Risk Classification System 3 3.7 Use of Historical Data 3

3.7.1 Use of Historical Exposure and Premium Data 4 3.7.2 Use of Historical Loss and Loss Adjustment Expenses 4 3.7.3 Additional Adjustments to Historical Data 4 3.7.4 Trends 5

3.8 Expense Provisions 5 3.9 Ratemaking for New Coverages or Exposures 5 3.10 Credibility 5 3.11 Modeling 5 3.12 Catastrophe Provisions 5 3.13 Treatment of Unusual Events 5 3.14 Reinsurance Provisions 6 3.15 Profit and Contingency Provisions and the Cost of the Capital 6 3.16 Additional Funding Sources 6 3.17 Impact of Individual Risk Rating 6

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Section 4. Communications and Disclosures 6

4.1 Actuarial Communications 6 4.2 Disclosures 6

APPENDIXES

Appendix 1—Background and Current Practices 7 Appendix 2—Comments on the Exposure Draft and Responses 9

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December 2015 TO: Members of Actuarial Organizations Governed by the Standards of Practice of the

Actuarial Standards Board and Other Persons Interested in Property/Casualty Ratemaking

FROM: Actuarial Standards Board (ASB) SUBJ: Proposed Actuarial Standard of Practice (ASOP), Property/Casualty Ratemaking This document contains the second exposure draft of proposed ASOP, Property/Casualty Ratemaking. Please review this second exposure draft and give the ASB the benefit of your comments and suggestions. Each written response and each response sent by e-mail to the address below will be acknowledged, and all responses will receive appropriate consideration by the drafting committee in preparing the final document for approval by the ASB. The ASB accepts comments by either electronic or conventional mail. The preferred form is e-mail, as it eases the task of grouping comments by section. However, please feel free to use either form. If you wish to use e-mail, please send a message to [email protected]. You may include your comments either in the body of the message or as an attachment prepared in any commonly used word processing format. Please do not password protect any attachments. If the attachment is in the form of a PDF, please do not “copy protect” the PDF. Include the phrase “ASB COMMENTS” in the subject line of your message, as any message not containing this exact phrase in the subject line will be deleted by our system’s spam filter. Also please indicate in the body of the e-mail if your comments are being submitted on your own behalf or on behalf of a company or organization. If you wish to use conventional mail, please send comments to the following address: Ratemaking (Second Exposure) Actuarial Standards Board 1850 M Street, NW, Suite 300 Washington, DC 20036 The ASB posts all signed comments received to its website to encourage transparency and dialogue. Unsigned or anonymous comments will not be considered by the ASB nor posted to the website. The comments will not be edited, amended, or truncated in any way. Comments will be posted in the order that they are received. Comments will be removed when final action on a proposed standard is taken. The ASB website is a public website, and all comments will be available to the general public. The ASB disclaims any responsibility for the content of the comments, which are solely the responsibility of those who submit them. Deadline for receipt of responses in the ASB office: April 30, 2016

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Background Ratemaking has been a fundamental part of actuarial practice since the beginning of the profession. Establishing rates based on sound actuarial practice is essential to the integrity of the insurance system and is a key to fulfilling the promise embodied in the insurance contract. The Board of Directors of the Casualty Actuarial Society (CAS) adopted the Statement of Principles Regarding Property and Casualty Ratemaking in May 1988 (before the ASB was established). This document featured four fundamental principles of ratemaking and discussed additional considerations. The CAS requested that the ASB develop an encompassing actuarial standard of practice in the area of property/casualty rate development (ratemaking). In its request to the ASB, the CAS further noted that the Statement of Principles contained considerations that might be expanded to become the basis of an ASOP. In developing the proposed ASOP, the task force sought to develop an encompassing standard of practice. This draft ASOP addresses items in the Considerations section of the Statement of Principles Regarding Property/Casualty Ratemaking, as well as ratemaking items not currently addressed in existing ASOPs. To provide a complete standard on ratemaking, this second exposure draft references existing ASOPs that include relevant considerations. First Exposure Draft In September 2014, the ASB approved a first exposure draft with a comment deadline of January 31, 2015. Twenty-two comment letters were received and considered in making changes that are reflected in this second exposure draft. For a summary of issues contained in these comment letters, please see appendix 2. Changes made to the second exposure draft in response to comment letters received include the following: 1. revising the scope of the ASOP to clarify the practice areas for which it is applicable and

the actuarial activities to which it is applicable; 2. revising the reference to estimating “expected value of all future costs” to refer to

“estimating all future costs”; and 3. revising the guidance provided in this proposed ASOP regarding the estimating of future

costs in total as well as by underlying levels that comprise the estimate of future cost. Key Issues In redrafting the proposed standard, the reviewers focused on the following key issues:

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1. reaffirming that the proposed ASOP is limited to the estimation of future costs. While the actuary may play a key role in the company’s decisions in determining the price after taking into account other considerations, such as marketing goals, competition, and legal restrictions, this standard does not address those other considerations;

2. clarifying that the proposed ASOP applies broadly to all activities related to the estimation of future costs associated with the transfer of risk in insurance or other risk-transfer mechanism;

3. clarifying that the proposed ASOP would apply to actuaries when performing

professional services that may relate to the total rate as well as to a subset of the elements of the rate; and

4. confirming that this proposed ASOP provides guidance for the estimation of future costs

for insurance, reinsurance, self-insurance, risk-funding or retention mechanisms, loss portfolio transfers, or any other risk-transfer mechanism, and not just for instances where there is a regulatory requirement to file rates determined by the ratemaking activity.

Request for Comments The ASB appreciates comments on all areas of this proposed ASOP and would like to draw the reader’s attention to the following questions: 1. Are there any conflicts between the proposed ASOP and existing practice?

2. This standard is proposed to be effective for work “performed on or after” four months

following the adoption of the standard. Does this language appear to create any undue burden?

3. Is it clear that this ASOP does not provide any guidance on the use of what is generally

referred to as “price optimization,” which relates to the company’s decisions in determining price?

4. The task force eliminated the reference to “expected” value of all future costs to eliminate

the possible confusion that the only appropriate estimate of all future costs was a mean value without any consideration of potential variability. Is this change appropriate? Does this change lead to confusion about what is being estimated?

5. Is it clear within the definition of ratemaking, section 2.8, that the ASOP provides

guidance regarding the estimation of future costs at more refined levels than the aggregate?

6. Is it clear that this ASOP applies to elements of the rate, such as loss costs developed by

advisory organizations such as ISO, NCCI, and AAIS?

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The ASB voted in December 2015 to approve this second exposure draft.

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Ratemaking Task Force

Patrick B. Woods, Chairperson J’ne E. Byckovski Claudine Modlin Gregory L. Hayward Christopher Westermeyer

Casualty Committee of the ASB

David J. Otto, Chairperson Caryn C. Carmean Mary Frances Miller Thomas J. De Falco Marc B. Pearl

Larry A. Haefner Robert J. Walling III Kenneth R. Kasner

Actuarial Standards Board

Patricia E. Matson, Chairperson Christopher S. Carlson Thomas D. Levy Maryellen J. Coggins Barbara L. Snyder Beth E. Fitzgerald Frank Todisco Darrell D. Knapp Ross A. Winkelman The Actuarial Standards Board (ASB) sets standards for appropriate actuarial practice in the United States through the development and promulgation of Actuarial Standards of Practice (ASOPs). These

ASOPs describe the procedures an actuary should follow when performing actuarial services and identify what the actuary should disclose when communicating the results of those services.

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PROPOSED ACTUARIAL STANDARD OF PRACTICE

PROPERTY/CASUALTY RATEMAKING

STANDARD OF PRACTICE

Section 1. Purpose, Scope, Cross References, and Effective Date 1.1 Purpose—This actuarial standard of practice (ASOP) provides guidance to actuaries

when performing professional services with respect to property/casualty ratemaking. 1.2 Scope—This standard applies to all actuaries when performing professional services with

respect to developing or reviewing property/casualty insurance rates, or elements thereof. If the actuary’s role relates to a subset of the elements of the rate, the guidance in this standard applies only to the professional services related to that subset. If the actuary’s role involves reviewing rates developed by another party, the actuary should use the guidance in section 3 as is practicable.

The scope includes the evaluation of future costs for insurance, reinsurance, self-insurance, risk-funding or retention mechanisms, loss portfolio transfers, or any other risk-transfer mechanism. Such professional services may consist of expert testimony, regulatory activities, legislative activities, or statements concerning public policy to the extent these activities involve providing an opinion on property/casualty insurance rates. This standard is limited to the estimation of future costs. While the actuary may play a key role in the company’s decisions in determining the price charged after taking into account other considerations, such as marketing goals, competition, and legal restrictions, this standard does not address the other considerations.

If the actuary departs from the guidance set forth in this standard in order to comply with applicable law (statutes, regulations, and other legally binding authority), or for any other reason the actuary deems appropriate, the actuary should refer to section 4.

1.3 Cross References—When this standard refers to the provisions of other documents, the

reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. If any amended or restated document differs materially from the originally referenced document, the actuary should consider the guidance in the referenced standard as amended or restated to the extent it is applicable and appropriate.

1.4 Effective Date—This standard is effective for work performed on or after four months

following adoption by the Actuarial Standards Board.

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Section 2. Definitions The terms below are defined for use in this standard. 2.1 Coverage—The terms and conditions of a plan or contract, or the requirements of

applicable law, that create an obligation for claim payment associated with contingent events.

2.2 Experience Rating—A rate modification technique that involves evaluating the

individual or entity’s actual experience relative to the average experience of similarly classified entities to derive a rate unique to that individual or entity.

2.3 Exposure Base—The basic unit that is used to measure the future risk-transfer cost. 2.4 Method—A systematic procedure for developing, reviewing, or changing rates or

elements thereof. 2.5 Model—A mathematical or empirical representation of a specified phenomenon. 2.6 Premium—The final price charged for the transfer of risk. 2.7 Rate—An estimate of all future costs per exposure unit associated with an individual risk

transfer. 2.8 Ratemaking—The process of estimating future costs associated with the transfer of risk

in insurance or other risk-transfer mechanisms. This includes estimation of future costs in total as well as by the underlying levels that comprise the estimate of future cost.

2.9 Retrospective Rating—A rating technique that adjusts the insured’s premium for a

policy period based on the insured’s loss experience during that same period. 2.10 Schedule Rating—A rate modification technique that considers the individual risk

characteristics that are expected to affect the future loss and expense experience but are not otherwise reflected in the rating process.

Section 3. Analysis of Issues and Recommended Practices 3.1 Introduction— The actuary should identify and consider the costs associated with the

elements that make up the rate. Such elements should include, but are not limited to, loss and loss adjustment expenses, operational and administrative expenses, and the cost of capital.

3.2 Organization of Data—The actuary should determine how data will be organized to

estimate the rate or portion of the rate.

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There are several acceptable aggregation methods including, but not limited to, aggregating by accident period, calendar period, policy period, and report period. The nature of the insurance coverage and the type of ratemaking analysis will influence the selection of the data aggregation method. For each element, the actuary should select the type of aggregation that is appropriate for the type of ratemaking analysis being performed.

The actuary also should consider the level of granularity of data needed for the type of ratemaking analysis being performed. For example, one level of aggregated data may be appropriate for estimating the overall rate, whereas more refined data may be appropriate for estimating the underlying levels that comprise the overall rate within a risk classification system.

3.3 Data Quality—The actuary should refer to ASOP No. 23, Data Quality, for guidance in

the consideration of the choice and use of data for ratemaking. 3.4 Methods, Models, and Assumptions—The actuary should select appropriate methods and

models for estimating the rate or portion of the rate. The actuary should use reasonable assumptions (including parameters) appropriate to each method and model. Assumptions may be implicit or explicit and may involve interpreting past data or projecting future trends. The actuary should use methods, models, and assumptions that, in the actuary’s professional judgment, have no known significant bias to underestimation or overestimation and are not internally inconsistent.

3.5 Exposure Base—If selecting a new exposure base or changing the existing exposure

base, the actuary should take into account various practical requirements, such that the exposure base bears a strong relationship to the risk-transfer cost, as well as being objectively measurable and easily verifiable. To the extent these criteria are in conflict, the actuary should use professional judgment to select an appropriate exposure base for the ratemaking exercise.

Some complex risks have multiple exposure bases for each aspect of coverage provided (for example, sales revenue for general liability, property value for commercial property). In undertaking ratemaking analyses for these risks, it may be appropriate to designate one exposure base, referred to as the composite exposure base, to act as a proxy for the more refined coverage-by-coverage exposure bases.

3.6 Risk Classification System—Risk classification systems are an integral part of the

development of rates. The actuary should refer to ASOP No. 12, Risk Classification (for All Practice Areas), for guidance in the design, review, or change of the classification plan for ratemaking.

3.7 Use of Historical Data—The actuary should determine the extent to which historical data

are available and applicable for estimating future costs. For example, the data should be consistent with insurance policy provisions or risk-management provisions of the applicable self-insurance, risk-funding or retention mechanisms, or any other risk-transfer

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mechanism.

3.7.1 Use of Historical Exposure and Premium Data—The actuary should adjust the historical exposure and premium data to reflect a consistent rate and exposure level. This adjustment should consider exposure changes and the effective dates of the various rate changes during and after the historical period. The actuary should consider any modifications applied to rate changes that affect the premium charged. The adjustment can be completed at an aggregate level (for example, on-level factors) or at an individual risk level (for example, extension of exposure). The method of adjustment is often dictated by the nature of the data collected and the purpose of the analysis.

3.7.2 Use of Historical Loss and Loss Adjustment Expenses—The actuary should

determine the extent to which historical loss and loss adjustment expenses are available and applicable as a basis for estimating future costs. In determining the future costs related to loss and loss adjustment expenses, the actuary should consider adjusting historical data using methods or models that, in the actuary’s professional judgment, reflect the potential for future development of loss and loss adjustment expense, the coverage being evaluated, the intended application (such as overall rate level analysis or risk classification analysis), the historical period and conditions in which the claims occurred, and the underlying claims adjustment process.

The actuary should consider whether the analysis of loss data requires different methods or models than the analysis of loss adjustment expense data. Additionally, different coverages within a line of business may require different methods or models.

3.7.3 Additional Adjustments to Historical Data—The actuary should consider

additional adjustments to the historical data needed to reflect the environment expected to exist in the future period when the rates will be in effect. These adjustments include, but are not limited to, the following:

a. judicial, legislative, or regulatory changes;

b. mix of business changes;

c. policy contract changes;

d. claim practice or reserving changes;

e. operational changes that impact expenses; f. accounting changes; and g. reinsurance changes.

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3.7.4 Trends—The actuary should consider past and prospective changes in claim costs,

claim frequencies, exposures, and premiums. The actuary should refer to ASOP No. 13, Trending Procedures in Property/Casualty Insurance, for guidance in the selection of trends for estimating future values of costs associated with the components that make up the rate.

3.8 Expense Provisions—The actuary should refer to ASOP No. 29, Expense Provisions in Property/Casualty Insurance Ratemaking, and ASOP No. 13 for guidance in the consideration of the expense provisions for ratemaking.

3.9 Ratemaking for New Coverages or Exposures—If the actuary is estimating the future cost

for a coverage or exposure and the historical loss and loss adjustment expenses are either unavailable, limited, or not fully representative of the coverage or exposure, the actuary should consider the following:

a. data from coverages or exposures that are similar to the new coverage or

exposure;

b. data on the phenomenon or events that are contemplated by the new coverage or exposure;

c. differences between coverages or exposures with available relevant data and the new coverage or exposure; and

d. appropriate adjustments to the available relevant data to reflect expected differences identified in section 3.9(c).

3.10 Credibility—The actuary should refer to ASOP No. 25, Credibility Procedures, for

guidance in considering the credibility given to a particular set of data for ratemaking. 3.11 Modeling—The actuary should refer to [proposed ASOP on modeling,] for guidance in

the consideration of models used for ratemaking. (Note: May need revision depending on final version of proposed modeling ASOP.)

3.12 Catastrophe Provisions—The actuary should refer to ASOP No. 38, Using Models

Outside the Actuary’s Area of Expertise (Property and Casualty) [Note: revision pending] and ASOP No. 39, Treatment of Catastrophe Losses in Property/Casualty Insurance Ratemaking, for guidance in the consideration of the catastrophe provisions for ratemaking.

3.13 Treatment of Unusual Events—The actuary should refer to ASOP No. 23 and ASOP No.

39 for guidance in the consideration of other unusual events, such as large individual losses.

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3.14 Reinsurance Provisions—When reinsurance provisions are reflected in ratemaking, the actuary should select appropriate methods or models for estimating the cost associated with reinsurance arrangements expected to exist during the future period when the rates will be in effect. If the cost of reinsurance is treated as an expense, the actuary should refer to ASOP No. 29 for additional guidance.

3.15 Profit and Contingency Provisions and the Cost of Capital—The actuary should refer to

ASOP No. 30, Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance, for guidance in the consideration of the profit and contingency provisions and the cost of capital for ratemaking.

3.16 Additional Funding Sources—In some risk-transfer systems, income may come from

other sources, such as assessments to policyholders or other parties including insurers, a larger group of insurance purchasers, or taxpayers. The actuary should take into account additional sources of funding and their allocation and timing when establishing rates.

3.17 Impact of Individual Risk Rating—An individual or entity may have sufficiently credible

experience so that its historical experience or risk characteristics can be used in whole or in part to derive a rate unique to that individual or entity, using techniques such as experience rating, retrospective rating, or schedule rating. The actuary should reflect the impact of individual risk-rating plans on the overall rate level.

Section 4. Communications and Disclosures 4.1 Actuarial Communications—When issuing actuarial communications under this standard,

the actuary should refer to ASOP No. 41, Actuarial Communications. 4.2 Disclosures—The actuary should also include the following, as applicable, in an actuarial

communication:

a. the disclosure in ASOP No. 41, section 4.2, if any material assumption or method was prescribed by applicable law;

b. the disclosure in ASOP No. 41, section 4.3, if the actuary states reliance on other

sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; and

c. the disclosure in ASOP No. 41, section 4.4, if, in the actuary’s professional

judgment, the actuary has otherwise deviated materially from the guidance of this ASOP.

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Appendix 1

Background and Current Practices Note: This appendix is provided for informational purposes and is not part of the standard of practice.

Background

Ratemaking has been a fundamental part of actuarial practice since the beginning of the profession. Ratemaking principles and standards of practice are important to protect the soundness of the system, permit economic incentives to operate, and thereby encourage widespread availability of coverage. The Board of Directors of the Casualty Actuarial Society (CAS) adopted the Statement of Principles Regarding Property and Casualty Ratemaking in May 1988. The Statement of Principles has served as a source of information regarding ratemaking, providing both principles and considerations. Several actuarial standards of practice (ASOPs) issued by the Actuarial Standards Board also pertain to ratemaking, including the following:

ASOP No. 12, Risk Classification (for All Practice Areas); ASOP No. 13, Trending Procedures in Property/Casualty Insurance; ASOP No. 23, Data Quality; ASOP No. 25, Credibility Procedures; ASOP No. 29, Expense Provisions in Property/Casualty Insurance Ratemaking; ASOP No. 30, Treatment of Profit and Contingency Provisions and the Cost of Capital in

Property/Casualty Insurance Ratemaking; ASOP No. 38, Using Models Outside the Actuary’s Area of Expertise (Property and

Casualty) (Note: Revision pending); ASOP No. 39, Treatment of Catastrophe Losses in Property/Casualty Insurance

Ratemaking; ASOP No. 41, Actuarial Communications; and ASOP No. XX, Modeling (Note: Pending final approval).

Current Practices Over the years, a multitude of ratemaking methods and models have been designed, put into use, and modified as a result of experience. Materials and publications of the CAS such as the Syllabus of Basic Education (formerly the Syllabus of Examinations), Variance, Proceedings (discontinued in 2014), Foundations of Casualty Actuarial Science, Ratemaking and Ratemaking/Product Management Seminar archives, and others provide discussions of current ratemaking practices. While these may provide useful educational guidance to practicing actuaries, none is an actuarial standard of practice.

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Each of the 50 states and the District of Columbia has executive departments established to regulate the business of insurance, including insurance rates. Each of the 50 states and the District of Columbia also has statutory and regulatory requirements for property/casualty rates. Contested rate cases have resulted in a large number of judicial and regulatory decisions. Actuarial principles and standards of practice have been very helpful to actuaries, legislators, regulators, and the courts when disputes about rates occur. Advances in availability of data, technology, tools, techniques, and learnings from other disciplines have resulted in continued evolution of ratemaking methods and models. Innovation and use of new data and technologies will continue.

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Appendix 2

Comments on the Exposure Draft and Responses The exposure draft of this proposed ASOP, Property/Casualty Ratemaking, was issued in September 2014 with a comment deadline of January 31, 2015. Twenty-two comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. For purposes of this appendix, the term “commentator” may refer to more than one person associated with a particular comment letter. The Ratemaking Task Force carefully considered all comments received, reviewed the exposure draft, and proposed changes. The Casualty Committee and the ASB reviewed the proposed changes and made modifications where appropriate. Summarized below are the significant issues and questions contained in the comment letters and responses. The term “reviewers” in appendix 2 includes the Ratemaking Task Force, the Casualty Committee, and the ASB. Also, unless otherwise noted, the section numbers and titles used in appendix 2 refer to those in the exposure draft.

GENERAL COMMENTS

Comment Response

Several commentators noted that there was no specific mention of income taxes or investment income/time value of money. The reviewers believe that the guidance provided in ASOP No. 30, Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking, referenced in section 3.15 of this ASOP, is sufficient to address this issue.

Comment Response

Two commentators said that this ASOP should apply to loss costs, as some actuaries and organizations (for example, ISO, NCCI, AAIS) develop loss costs and not rates. One commentator said that a definition was needed and that various sections need to address the application of the ASOP to loss costs. The reviewers agree and clarified the scope to include the actuary’s role when it relates only to a subset of the elements of the rate, such as services provided by ISO, NCCI, and AAIS.

Comment Response

Several commentators suggested adding language that limited the applicability of the ASOP to regulatory filings. The reviewers note that the intended scope of this ASOP is the broad topic of ratemaking and not specifically regulatory filings, and therefore made no change.

Comment Response

One commentator noted that ASOP No. 8, Regulatory Filings for Health Benefits, Accident and Health Insurance, and Entities Providing Health Benefits, includes a distinction between the role of a filing actuary and the role of a reviewing actuary with respect to rate filings. This is a valuable distinction and should also apply to actuarial services for ratemaking for property/casualty coverage. The reviewers note that the scope of the ASOP is ratemaking and not rate filings, however, to clarify the role of the reviewing actuary the following sentence was added: “If the actuary’s role involves reviewing rates developed by another party, the actuary should use the guidance in section 3 as is practicable.”

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Comment Response

One commentator suggested that the concept of an intended measure should be used instead of expected value in the ASOP. The reviewers have eliminated any reference to expected value and believe that using the phrase “estimation of future costs” provides sufficient guidance in the context of ratemaking.

TRANSMITTAL MEMORANDUM QUESTIONS

Question 1: Are there any conflicts between the proposed ASOP and existing practice?

Comment Response

Three commentators did not find any conflict. One commentator said that section 4.2(b) may be in conflict with the newer ASB convention of stating “made use of” in lieu of “relied upon” in Statements of Actuarial Opinion. The reviewers note that many ASOPs use “relied upon,” and therefore made no change.

Question 2: Is it sufficiently clear in section 1.2, Scope, that this proposed ASOP will apply to all activities regarding the estimation of future costs for property/casualty insurance, applications of self-insurance, risk-funding or retention mechanisms, or other risk-transfer mechanisms for policies not yet written?

Comment Response

One commentator noted that the proposed ASOP refers to “policies not yet written,” which does not necessarily apply to situations involving risk-funding or retention mechanisms or other risk-transfer mechanisms. The commentator suggested that the task force consider replacing “policies not yet written” with a phrase that more generally speaks to future exposure. The reviewers removed “policies not yet written,” as the scope of the ASOP was broadened to include loss portfolio transfers.

Comment Response

One commentator suggested removing “or changing” when referencing rate activities addressed by this ASOP, as this language could be misinterpreted as referring to a revision in the price charged to a policyholder, which the scope makes clear is not addressed by this ASOP. The reviewers agree and replaced “changing” with “developing or reviewing.”

Question 3: Are there any considerations from the current Statement of Principles Regarding Property/Casualty Ratemaking that are not sufficiently covered in this proposed ASOP? Are there any other issues not mentioned that need to be addressed in this proposed ASOP?

Comment Response

Two commentators said that the use of actuarial judgment throughout the ratemaking process should be highlighted more. The reviewers believe that the use of the phrase “professional judgment” in the context used in the ASOP is sufficiently broad to encompass the extent of actuarial judgment used in ratemaking, and therefore made no change.

Question 4: This proposed ASOP references other ASOPs. This does not mean that other ASOPs not specifically mentioned do not apply; it means that the specific ASOPs cited were incorporated to provide a complete set of issues and recommended practice for ratemaking without repeating extensive guidance that already exists in other ASOPs. Is this appropriate and sufficiently clear?

Comment Response

Most commentators said it was appropriate and clear. One commentator noted that while some of the existing cross-referenced ASOPs provide guidance specifically for property/casualty insurance, others are broader. This commentator suggested that any revisions to a cross-referenced ASOP should generate a review of this ASOP to ensure items specific to property/casualty insurance ratemaking are retained as appropriate and that this review process could be noted in section 1.3. In view of the comments received, the reviewers believe that the treatment of cross-referenced ASOPs in section 1.3 is appropriate and, therefore, made no change.

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Comment Response

One commentator said it was appropriate and clear that the purpose for the cross references was to avoid repetitive guidance but that inconsistencies exist in the recommendations throughout the exposure draft. For example, section 4.2 identifies specific sections within ASOP No. 41, Actuarial Communications, that are applicable to property/casualty ratemaking. The commentator asked whether this means that other sections within ASOP No. 41 are not applicable. The reviewers note that the language in section 4.2 is standard in all ASOPs and that ASOP No. 41 applies to all actuarial communications, and made no change in response to this comment.

Question 5: Do you think that this proposed ASOP provides adequate guidance for actuaries performing property/casualty ratemaking services? If not, what changes would you suggest?

Comment Response

One commentator noted that although the ASOP states that it includes the evaluation of future costs for other risk retention/transfer mechanisms, it is written as if it pertains only to ratemaking for property/casualty insurance companies (i.e., the use of terms such as policy, policyholder, premium, coverage, contract, etc.). The reviewers agree, removed the definition of policyholder, and included self-insurance, risk-funding or retention mechanisms, loss portfolio transfers, or any other risk-transfer mechanism in the scope.

Comment Response

One commentator noted that since the ASOP is limited to the estimation of future costs, it inherently may not provide guidance for all property/casualty ratemaking services. The reviewers note that, as stated in the scope, this standard is intended to be limited to the estimation of future costs and does not address other considerations that may affect the price charged, such as marketing goals, competition, and legal restrictions. Therefore, the reviewers made no change in response to this comment.

Question 6: In section 3.2, Organization of Data, the proposed ASOP refers to several methods for the aggregation of data (Accident Period, Calendar Period, Report Period, and Policy Period). These methods are presumed to be well understood and are not defined. Are these methods sufficiently understood or do you think these methods need to be defined?

Comment Response

Most commentators agreed that the definitions are well understood within the industry. One commentator noted, however, that actuaries are not the only users/beneficiaries of ASOPs and that if definitions of those aggregations of data are not yet defined in an existing ASOP, it would be valuable to include definitions in this ASOP. In line with the majority of responses, the reviewers believe that these concepts are basic insurance terminology and that their definitions can be found in generic sources for insurance definitions. Therefore, the reviewers did not add these definitions.

Comment Response

One commentator noted that data may be aggregated in other ways to estimate rate components, such as by geography, gross vs. net, size of claim, etc. The reviewers added language to convey the fact that aggregation of data by calendar period, accident period, report period, or policy period are not the only methods of aggregation. The section notes that the level of granularity is also a consideration in the organization of the data.

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Question 7: Section 4, Communications and Disclosures, of this proposed standard does not require disclosures beyond those required by ASOP No. 41. Do you think any additional disclosures are needed?

Comment Response

Several commentators thought the disclosures required by ASOP No. 41 were sufficient. One commentator noted that the existing Statement of Principles Regarding Property and Casualty Insurance Ratemaking contains a section for the consideration of actuarial judgment throughout the ratemaking process and includes guidance that such judgment “should be documented and available for disclosure.” The commentator noted that this guidance is not included in this proposed ASOP, nor is it sufficiently covered within ASOP No. 41. The commentator recommended a general section regarding actuarial judgment, with this guidance incorporated in it. The reviewers believe that ASOP No. 41 provides sufficient guidance to the actuary regarding actuarial communications. ASOP No. 41 states “…the actuary should state the actuarial findings, and identify the methods, procedures, assumptions, and data used by the actuary 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….” Therefore, no change was made.

SECTION 1. PURPOSE, SCOPE, CROSS REFERENCES, AND EFFECTIVE DATE

Section 1.1, Purpose

Comment Response

In sections 1.1 and 1.2, one commentator was concerned about the term “professional services related to P/C ratemaking” and the reference to “services with respect to developing, reviewing, or changing P/C insurance rates,” suspecting that the term “ratemaking services” referred solely to the projection of costs, even though the “ratemaking” is not defined until section 2.9 (now 2.8). The commentator thought that some users of the ASOP may attempt to expand the definition of ratemaking services to include every consideration by an insurer when it establishes its insurance prices. In other words, they will attempt to extend actuarial principles and standards of practice to the insurers’ pricing manager. The reviewers note that terms defined in the ASOP are bolded and that the definitions contained in the ASOP apply throughout. Therefore, no change was made.

Section 1.2, Scope

Comment Response

One commentator suggested making it clear that the purpose and scope of this ASOP is to provide guidance to actuaries when providing an actuarial opinion regarding the consistency of the rates with actuarial and statutory rate standards. To the extent that the term “rates” in the comment is consistent with how it is defined in this ASOP, the reviewers agree and added the sentence, “If the actuary’s role involves reviewing rates developed by another party, the actuary should use the guidance in section 3 as is practicable,” to more clearly define the scope.

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Comment Response

Two commentators said it was not clear how this ASOP would apply to regulatory actuaries in their review of rate filings. The standard “applies to all actuaries when performing professional services with respect to . . . reviewing . . . property/casualty insurance rates. . . . Such professional services may include . . . regulatory activities . . .” On the other hand, “This standard is limited to the estimation of future costs and does not address other considerations that may affect the price charged to the policyholder, such as marketing goals, competition, and legal restrictions.” The rate filings that regulators review are almost always affected by marketing goals, competition, and legal restrictions. The commentator asked whether the ASOP applies to rate filing reviews, and if so, whether it applies only to the review of rate filing components that pertain to the estimation of future costs. The reviewers note that this standard applies to all actuaries, including regulatory actuaries, when performing professional services with respect to developing or reviewing property/casualty insurance rates. This standard is limited to the estimation of future costs and does not address other considerations that may affect the price charged to the policyholder, such as marketing goals, competition, and legal restrictions, which are outside the scope of this ASOP. For additional clarity, the following sentence was added: “If the actuary’s role involves reviewing rates developed by another party, the actuary should use the guidance in section 3 as is practicable.”

Comment Response

Two commentators said that the statement “This standard is limited to the estimation of future costs…” could be interpreted to limit application of the standard to the overall rate indication and not all the base rates, factors, discounts, etc. The reviewers agree and clarified the definition of ratemaking to include the estimation of future costs in total as well as by the underlying levels that comprise the estimate of future cost.

Comment Response

Several commentators said that “for policies not yet written” suggests the standard applies only to pure new business and should be removed. In addition, “policies not yet written” implies that retrospective rating would not be covered. The reviewers agree and removed the phrase “policies not yet written” from the ASOP.

Comment Response

One commentator asked whether price optimization was considered out of scope, and if not, what judgment this standard makes about price optimization in light of the discrepancy between price optimization and setting rates to be the expected value of future costs. The commentator also asked about non-expected value pricing (for example, setting rates as the VaR at some percentile). The reviewers note that price optimization is outside the scope of this ASOP, as the ASOP provides guidance regarding the estimation of future costs. The reviewers have eliminated any reference to expected value and believe that using the phrase “estimation of future costs” provides sufficient guidance in the selection of the intended measure for ratemaking.

Comment Response

One commentator noted that in the last sentence of the first paragraph, the ASOP is limited to the estimation of future costs and does not address other considerations that may affect the price charged to the policyholder, such as marketing goals, competition, and legal restrictions, and therefore would allow the unfettered use of price optimization and other models that would move the prices away from the cost/risk-based levels toward whatever the market will bear. The commentator opposed including the above language in the scope, but said that if it was included, the ASOP should require disclosure of any actions taken to move a price away from being cost/risk-based. The reviewers note that the ASOP provides guidance on the estimation of future costs, not the price charged, and therefore made no change in response to this comment.

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Comment Response

One commentator said that it was unclear whether “other considerations” are considered “actuarial services,” but from the definition in ASOP No. 1, Introductory Actuarial Standard of Practice, it would seem that these (marketing goals, competition, and legal restrictions) are not “actuarial considerations” and, therefore, lie outside the definition of “actuarial services” to which any ASOP would apply. ASOP No. 1 states, “ASOPs are binding on members of the U.S.-based actuarial organizations when rendering actuarial services in the U.S.” As such, it is unclear why this paragraph is needed to limit the scope of the proposed ASOP to exclude something that is not an “actuarial service.” The reviewers agree but felt it appropriate to state the scope of the standard explicitly. Therefore, no change was made in response to this comment.

Comment Response

One commentator said that, as presently written, the ASOP does not sufficiently address or give adequate guidance for the many other types of insurance and alternative risk-transfer mechanisms to which it would apply, and suggested changes to sections 1.2, 2.7, and 2.9 of the exposure draft. The reviewers believe that the guidance adequately addresses these other types of insurance and risk-transfer mechanisms and, therefore, made no change in response to this comment.

Comment Response

Another commentator said that actuarial involvement in pricing activities can be more complex and involve considerations other than purely actuarial, and recommended that the ASOP be limited to ratemaking. The reviewers note that the ASOP provides guidance on the estimation of future costs as it pertains to ratemaking. This standard is limited to the estimation of future costs and does not address other considerations that may affect the price charged, such as marketing goals, competition, and legal restrictions. Therefore, no change was made.

Comment Response

Two commentators said that the ASOP lacks an explicit statement that, when the ASOP’s guidance conflicts with the law, the law must prevail, and recommended adding such a statement. Another commentator said that the concept of “legal restrictions” should be a given in any actuary’s ratemaking work and recognized from the start. The reviewers note that section 3.15 of ASOP No. 1 states, “Where the requirements of law conflict with the guidance of an ASOP, the requirements of law shall govern.” The reviewers therefore made no change.

SECTION 2. DEFINITIONS

Section 2.1, Composite Rating

Comment Response

Several commentators suggested deleting section 2.1, Composite Rating, because the term was not used in the ASOP. The reviewers agree and deleted the section.

Section 2.3, Experience Rating (now section 2.2)

Comment Response

One commentator noted that retrospective rating plans were not mentioned in the ASOP and questioned if an actuary working on a retrospective plan is engaged in a ratemaking activity. The reviewers agree and have added a definition of retrospective rating and added references to retrospective rating in the ASOP.

Comment Response

One commentator suggested broadening the definition of “experience rating” to include additional items such as merit rating, no claims bonus, and adjustments to deductible amounts based on experience. The reviewers believe that broadening the definition of experience rating is not appropriate within the context of how experience rating is considered in the ASOP.

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Section 2.4, Exposure Base (now section 2.3)

Comment Response

One commentator suggested that the definition of “exposure base” be made more consistent with the language used in section 3.5 of the ASOP. The reviewers believe that the definition is appropriate, and therefore made no change in response to this comment.

Comment Response

One commentator suggested that the definition of “exposure base” be revised to reference the estimating of future risk-transfer costs. The reviewers agree and have revised the definition accordingly.

Section 2.5, Method (now section 2.4)

Comment Response

One commentator suggested the following definition for “method”: A systematic procedure for estimating, computing, compiling, adjusting, or reviewing data or quantitative values. The reviewers believe that the definition is sufficiently descriptive for defining “method” in the context of this ASOP, and therefore did not make this change.

Section 2.6, Model (now section 2.5)

Comment Response

One commentator suggested using the definition for “model” that appears in ASOP No. 38, Using Models Outside the Actuary’s Area of Expertise (Property and Casualty). The reviewers believe that the definition is sufficiently descriptive for defining “model” in the context of this ASOP, and therefore did not make this change.

Section 2.7, Policyholder (now deleted)

Comment Response

Several commentators offered additional editorial clarifications on the definition of policyholder. After further review, the reviewers decided that a generic definition of policyholder added more confusion than clarity, and therefore removed the definition of policyholder and most references to policyholder within the ASOP.

Section 2.8, Rate (now section 2.7)

Comment Response

One commentator suggested replacing “risk transfer” with “policyholder coverage,” as self-insurance does not involve risk transfer and the existing definitions of “policyholder” and “coverage” can combine to produce a more inclusive definition of what is intended. The reviewers believe that “risk transfer” is appropriate and, therefore, made no change.

Comment Response

One commentator said that the definition of “rate” did not acknowledge the uncertainty underlying the ratemaking estimations and suggested adding language similar to that in ASOP No. 43, Property/Casualty Unpaid Claim Estimates, section 3.6.8. The commentator also suggested incorporating terms analogous to “actuarial central estimate” and “range of reasonable estimates,” borrowing from ASOP No. 43, section 2.1, and ASOP No. 36, Statements of Actuarial Opinion Regarding Property/Casualty Loss and Loss Adjustment Expense Reserves, section 3.7, respectively. The reviewers disagree, as the ASOP does not preclude the actuary from offering a range of outcomes as part of the work product. Therefore, the reviewers made no change.

Comment Response

One commentator wrote that the definition of “rate” should be expressed on a per-exposure basis. The reviewers agree and added the phrase “per exposure” to the definition as suggested.

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Comment Response

Several commentators suggested deleting “the expected value.” One suggested adding “risk-transfer costs” and “intended measure.” The reviewers deleted “expected value” as suggested. The reviewers believe the revised definition is clear with respect to “risk-transfer costs” and the inclusion of “intended measure” in this definition is not necessary.

Section 2.9, Ratemaking (now 2.8)

Comment Response

One commentator suggested adding “or policyholder coverage” prior to “mechanisms” to provide a more inclusive definition of what is intended. The reviewers believe that the definition is appropriate, and therefore did not make this change.

Comment Response

One commentator suggested the following definition for “ratemaking”: The process of developing rates or rating modifications based on estimates of future risk-transfer costs associated with insurance or other risk-transfer mechanisms. The reviewers believe that the existing definition is appropriate for the intended scope of the ASOP, and therefore did not make this change.

Section 2.10, Schedule Rating

Comment Response

One commentator suggested adding “classification” before the last word of the definition. The reviewers believe that the addition of the word “classification” as suggested would be confusing, and therefore did not make this change.

Comment Response

One commentator noted that retrospective rating is not mentioned in the definitions and asked whether the draft means to imply that an actuary developing the algorithm and parameters of a retrospective rating plan is engaged in a “ratemaking activity.” The reviewers added a definition of “retrospective rating” and included retrospective rating in section 3.17, Impact of Individual Risk Rating.

Comment Response

Several commentators addressed the issue of expenses to be considered in a schedule rating plan. Of those, two commentators suggested broadening the definition of Schedule Rating, noting that individual risk characteristics can relate to future expenses, not only to future loss and loss adjustment expense experience. One commentator suggested deleting “allocated” in “allocated loss adjustment expense” or revising to more current NAIC language. The reviewers agree that the expenses considered in schedule rating plans may be broader than allocated loss adjustment expense and therefore replaced the phrase “allocated loss adjustment expense” with “expense” in the definition.

Comment Response

Several commentators noted that schedule rating should exclude not only what’s reflected in the experience rating process but also what’s already reflected anywhere else in the rating plan. The reviewers agree and replaced the wording “not yet reflected in the experience rating process” with “not otherwise reflected in the rating process.”

SECTION 3. ANALYSIS OF ISSUES AND RECOMMENDED PRACTICES

Section 3.1, Introduction

Comment

One commentator said “profit and contingency provisions” was redundant with “cost of capital.” Another commentator said that the term “profit and contingencies” is adequately described in ASOP No. 30 and should not be further explained in this ASOP. This commentator recommended eliminating the reference to this term in the ASOP and including the cost of capital in the list of costs to consider in ratemaking. A third commentator noted

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Response

that the language in section 3.1 differed from a similar statement in the CAS Statement of Principles Regarding Property and Casualty Insurance Ratemaking draft and that it would be helpful if the two were coordinated. The reviewers eliminated reference to profit and contingency provision.

Comment Response

One commentator said that there is enough difference between a policyholder dividend and an administrative expense to warrant a separate listing of policyholder dividends. A separate listing would be consistent with how policyholder dividends are treated in the Ratemaking Principles. The reviewers believe that the treatment of policyholders’ dividends as a cost is addressed in ASOP No. 29, Expense Provisions in Property/Casualty Insurance Ratemaking, and did not make a change in response to this comment.

Section 3.2, Organization of Data

Comment Response

One commentator said there were very few situations in which calendar year loss data is appropriate for ratemaking and recommended excluding that as an option, allowing actuaries to explain why they departed from the standard in situations in which it is appropriate. The reviewers believe that the approach to organizing data will be dictated by the specific facts and circumstances of the work, and therefore made no change.

Comment Response

One commentator suggested changing “premium collected” to “premium written and collected” and “losses” to “losses and expenses,” since the timing of certain expenses may vary from losses and may be related to written premium as opposed to collected premium. The reviewers removed the example that included this language.

Comment Response

One commentator noted that there are more aggregation methods, such as underwriting year and treaty year, than are listed in this section and suggested adding “but not limited to” prior to the listed examples. The reviewers agree and added language to make it clear that there are other options for aggregating data.

Section 3.4 Method, Models, and Assumptions

Comment Response

One commentator noted that the end of the last sentence states “are not internally inconsistent” and suggested “are internally consistent” instead. The reviewers note that the language “not internally inconsistent” is also in ASOP No. 43, Property/Casualty Unpaid Claim Estimates, section 3.6.2. The reviewers believe it is best to keep the language consistent across the ASOPs when appropriate, and therefore made no change.

Comment Response

One commentator suggested that “the expected cost” be changed to “the future cost” i) for consistency with other sections and ii) to remove any implication of expected value. The phrase is preceded by the term “estimating,” removing the need for the adjective “expected.” The reviewers agree and made this change throughout the ASOP for consistency and to remove any confusion regarding the use of the term “expected value.”

Comment Response

One commentator suggested adding the phrase, “consistent with the intended measure” after the word “components” in the first sentence, noting that the CAS Principles Task Force is considering adding this language to each of the Principles. The commentator also suggested considering adding this language to the definition of “rate” and “ratemaking.” While this language is used in ASOP No. 43, the reviewers do not believe a section similar to 3.3(a) in ASOP No. 43 is needed for ratemaking, and therefore made no change.

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Comment Response

One commentator suggested adding the sentence, “The actuary should consider that prior history may or may not be predictive of future losses, rates, or trends and should modify models accordingly.” The reviewers believe this comment better pertains to section 3.7. The first sentence of section 3.7 reads, “The actuary should determine the extent to which historical data are available and applicable ….” The reviewers believe the language in section 3.7 provides guidance for the actuary in using historical data. Therefore, the reviewers made no change.

Section 3.5, Exposure Base

Comment Response

Several commentators suggested changing “it is often appropriate” to “it may be appropriate” or “it is sometimes appropriate.” The reviewers agree and changed the language to “may be appropriate.”

Comment Response

One commentator suggested adding language that often, or in many cases, the exposure base is the result of usual and customary practices, making an alternate selection unnecessary or impractical. The reviewers agree and revised this section so that it applies only when selecting a new exposure base or changing the existing exposure base.

Comment Response

One commentator recommended including the terms apply, modify, or adjust in addition to select, when discussing the use of professional judgment to select the most appropriate exposure base. The reviewers believe that the language in this section encompasses these additional terms. Therefore, the reviewers made no change.

Comment Response

Several commentators suggested deleting the term “proportional,” saying it was too restrictive. The reviewers agree that the term “proportional” is too restrictive and that “a strong relationship” is a better description, and made the change.

Comment Response

Two commentators suggested deleting the second paragraph. One commentator noted that the first paragraph says that the actuary should use judgment in selecting the exposure base, and that more detail is unnecessary. The other commentator suggested deleting the second paragraph and adding exposure examples in the definitions section. The reviewers note that other items in section 3 provide more detail and examples for the issue or practice discussed and therefore made no change in response to these comments.

Section 3.6, Risk Classification System

Comment Response

One commentator said that it was unclear whether the proposed ASOP would apply to overall rate levels, or also to rating factors as applied to an individual insured, and suggested it should be clearer whether the risk classification factors (as opposed to the actual risk classifications) should be governed by this ASOP; ASOP No. 12, Risk Classification (for All Practice Areas); or both. The reviewers agree and expanded the definition of ratemaking in section 2.9 (now 2.8) to reflect that suggestion.

Section 3.7.1, Use of Historical Exposure and Premium Data

Comment Response

One commentator suggested defining “extension of exposure” and “on-level factors.” The reviewers believe these terms are well known and made no change.

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Comment Response

One commentator suggested using the word “trend” in this section. The reviewers point out that trend is covered in section 3.9 (now covered in section 3.7.4) and, therefore, did not make this change.

Comment Response

Several commentators noted that the use of “either” “or” seems to imply there are only two ways to adjust premium and exposure data. The reviewers made revisions to better incorporate additional methods.

Comment Response

Two commentators wrote that, in today’s ratemaking environment, section 3.7.1 is oversimplified. Insurers frequently use rate stability rules (i.e. transition rules or premium-capping rules) with the result that the effects of a rate change on a particular date are essentially spread out over a period of years. In adjusting premiums to a consistent level, it is essential to account for the remaining effects of previous rate changes to which rate stability rules were applied. The reviewers agree and added language stating that the actuary should consider any modifications applied to rate changes that affect the premium charged.

Comment Response

Two commentators noted that this section focuses on adjusting data for past rate changes, but that premium also can be subject to development. The commentators also noted that section 3.7.2, which addresses development, does so for losses and loss adjustment expenses only, and that more insurers are “capping” rate changes to minimize premium dislocation. The commentators suggested that premium development and the capping of rate changes be identified as a consideration in adjusting premium. The reviewers agree and added language regarding changes in exposure level.

Section 3.7.2, Use of Historical Loss and Loss Adjustment Expenses

Comment Response

One commentator wrote that it is unclear why “developed” is included in line three of the second paragraph. The reviewers agree and deleted the word “developed.”

Comment Response

One commentator suggested deleting the word “expected” before “future costs” in lines four and five. The reviewers agree and deleted “expected.”

Comment Response

One commentator said that this section reads as though losses and loss adjustment expenses need to be considered together and suggested adding a sentence that states that losses and loss adjustment expenses (particularly unallocated loss adjustment expenses) may require different methods. The reviewers agree and changed the language to clarify that loss and loss adjustment expenses may be considered separately.

Comment Response

One commentator suggested replacing “consider adjusting historical data using” in the fifth line by “consider addressing changes in circumstances using.” The reviewers believe the original language is appropriate and did not make that change.

Comment Response

One commentator suggested that “intended application” (such as overall rate level analyses vs. risk classification analyses) be added to the considerations used to determine the appropriate methods or models. The reviewers agree and added “intended application.”

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Section 3.7.3, Additional Adjustments to Historical Data

Comment Response

Two commentators noted that, while section 3.7.3 includes the words “not limited to,” underwriting and marketing changes are omitted from the list. The commentators suggested mentioning these items, since these types of changes may affect the mix of business. A third commentator wrote that, while they understood that the listing of adjustments to historical data is not intended to be exhaustive, they recommend adding operational changes to the list, as this is specifically included in the “Considerations” section of the current CAS Statement of Principles. The commentator recommended adding the following to the list: “operational changes, including how the coverages are marketed, distributed, underwritten, and managed.” The reviewers believe that the items listed sufficiently address the types of additional adjustments and that specific examples such as underwriting and marketing are not necessary. Therefore, the reviewers did not make this change. The reviewers agree with the third commentator about including operational changes and added “operational changes impacting expenses.”

Comment Response

One commentator recommended providing an example of “accounting changes,” as one does not immediately come to mind. The reviewers disagree that adding an example would be appropriate and believe that, for consistency with the rest of the section, it is better not to add an example in this one area and therefore made no change. However, the reviewers note that a potential example would be when a statutory accounting change was made from “Allocated Loss Adjustment Expense” and “Unallocated Loss Adjustment Expense” to “Defense and Cost Containment Expense” and “Adjusting and Other Expense.”

Comment Response

One commentator suggested adding “g. economic changes.” The reviewers believe economic changes are covered in section 3.9 (now section 3.7.4), Trends, and therefore did not make this change.

Comment Response

One commentator suggested replacing “adjustments to historical data” with “changes in circumstances,” noting that addressing such changes in circumstances might well be done by appropriate modelling rather than making physical adjustments to the historical data. The reviewers believe the original language is appropriate and, therefore, made no change.

Comment Response

One commentator suggested adding underwriting practice, underwriting cycle, distribution system, data processing, infrastructure, climate, economy, and social conditions to the list of examples. The reviewers note that the list is not meant to be exhaustive but added “operational expense changes.”

Comment Response

One commentator noted that that the consideration of policy provisions in ratemaking currently exists in the Statement of Principles Regarding Property and Casualty Insurance Ratemaking, but is not sufficiently covered in this proposed ASOP. The commentator said that section 3.7.3(c) lists policy contract changes as a consideration for additional adjustments to historical data, but that, even when not changing, the effect of policy provisions should be considered in the ratemaking process. The reviewers believe that the consideration of policy provisions is already recognized in section 3.7, where “the actuary should determine the extent to which historical data are available and applicable for estimating future costs. For, example the data should be consistent with policy provisions or risk-management provisions of the applicable self-insurance, risk-funding or retention mechanisms, or any other risk-transfer mechanism.”

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Comment Response

One commentator suggested that “claim practice changes” should be “claim practice or reserving changes.” The reviewers agree and made the change.

Section 3.9, Trends (now section 3.7.4)

Comment Response

One commentator found the statement confusing and asked whether it refers to a type of “additional” trend not contemplated in section 3.7.1. The reviewers note that the adjustments mentioned in section 3.7.1 refer to the need to adjust the premium and exposure data for each year to a consistent level. Section 3.9 (now section 3.7.4) contemplates any additional adjustments for changes from that consistent level to the level anticipated to prevail in the future period. Therefore, the reviewers made no change.

Section 3.10, Ratemaking for New Coverages or Exposures (now section 3.9)

Comment Response

One commentator said that the title of the section refers to “New Coverages or Exposures,” but the rest of the section refers to “new coverages or risks.” The commentator suggested changing “Exposures” in the title to “Risks.” The reviewers agree that the wording should be consistent and changed “risk” to “exposure” throughout the section.

Comment Response

One commentator noted that there is no explicit mention of referencing other company rates in developing rates for a new program, and asked whether that should be added. The commentator noted that some insurance departments frequently ask for other company rates when a new program is being introduced without hard data. The reviewers agree that other company published rates may be a valid consideration and clarified the language in sections 3.9 (a) and (b) to reflect this as a possible data source.

Comment Response

Several commentators suggested deleting the word “expected” before “future costs” wherever it appears. The reviewers agree and made that change throughout the document.

Comment Response

One commentator noted that considerations listed here are also applicable to ratemaking where limited data is available and recommended that this be noted in section 3.10 (now section 3.9) to the extent that section 3.11 (now section 3.10), Credibility, and its reference to ASOP No. 25, Credibility Procedures, does not provide enough guidance. The reviewers agree that credibility applies to new coverages or exposures but believe that section 3.11 (now 3.10) already applies to all data being considered for ratemaking, and therefore made no change in response to this comment.

Section 3.13, Catastrophe Provisions (now 3.12)

Comment Response

One commentator noted that while ASOP No. 39 should always be used as guidance for catastrophe provisions, ASOP No. 38 is only referenced as applicable. Therefore, the commentator recommended that the reference to ASOP No. 39 within this section appear before the reference to ASOP No. 38, and “as applicable” be added to describe the need to reference ASOP No. 38. The reviewers believe it is appropriate that the ASOP direct the actuary to both ASOP No. 38 and ASOP No. 39 when considering a catastrophe provision in ratemaking. Only by considering the full range of issues can the actuary determine whether ASOP No. 38 is applicable.

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Comment Response

One commentator said that this section and ASOP No. 39 adequately address catastrophic events, but that they do not seem to adequately cover other unusual events, such as large individual losses. The commentator asked whether the task force finds that such events are addressed under 3.1(b) of ASOP No. 39 or under 3.5(b) of ASOP No. 23, Data Quality. The reviewers agree and added section 3.13, Treatment of Unusual Events, to address the concern.

Section 3.14, Reinsurance Provisions

Comment Response

One commentator said that many actuaries determine total rate needs without considering reinsurance costs, by just determining the total cost of insurance, say, in primary business. In many cases, consideration of reinsurance is separate from the primary rate. The commentator asked whether the ASOP means that reinsurance costs must be included in the rate and whether is this raising the bar as far as current practice is concerned. To clarify the intent of this section, the reviewers added language directing the actuary to refer to ASOP No. 29, which in section 3.7 states, “The actuary may elect whether to include the cost of reinsurance as an expense provision.”

Comment Response

One commentator wrote that the wording should make clear that that the present value of the expected net cost (ceded premium minus ceded losses minus ceding commissions) should be estimated. Many people consider the ceded premium to be the “cost” of reinsurance. The reviewers added language directing the actuary to refer to ASOP No. 29, which provides guidance in this area.

Comment Response

One commentator suggested adding a sentence that addresses the fact that some states do not allow inclusion of reinsurance provisions in ratemaking. The reviewers disagree. There are many such regulatory requirements, and it is not the intent of the ASOPs to alert the actuary to specific regulatory requirements.

Section 3.16, Additional Funding Sources

Comment Response

One commentator recommended adding “premium” before “income” and changing “come” to “be derived.” The reviewers believe that it is inappropriate to include the word “premium” before income in this case. The ASOP states that “income may come from other sources, such as assessments to policyholders or other parties including insurers, a larger group of insurance purchasers, or taxpayers.”

Section 3.17, Impact of Individual Risk Rating

Comment Response

One commentator suggested adding retrospective rating. The reviewers agree and added the term.

SECTION 4. COMMUNICATIONS AND DISCLOSURES

Comment Response

One commentator suggested renaming section 4 “Communications, Disclosures, and Deviations from Estimation of Future Cost.” The reviewers note that the section titles are standard across ASOPs, and therefore did not make this change.

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Section 4.2, Disclosures

Comment Response

One commentator suggested that actuarial communications be clear with respect to which parts of the communication are subject to the scope of this ASOP versus those that are outside the scope, such as marketing goals. The reviewers note that the scope of this ASOP is the estimation of future costs and that the disclosures specified pertain only to the scope of this ASOP.

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From: DAHL David F * DCBS [mailto:[email protected]] Sent: Monday, February 22, 2016 12:52 PM To: Fosgate, Tiffany Cc: DeFrain, Kris; Cali, Laura; Cutler, Eric Subject: RE: CASTF Feb. 9 call follow-up - ASB Ratemaking & Work Comp Large Ded. I was reviewing the standard of practice section 3.8 on expenses and noticed that policy fees, which are used for extended warranty and some non standard auto products, do not appear to be addressed in ASOP 29. This also can affect section 2.7 if someone reads this literally. I don’t have a suggested change for section 2.7 but I do believe section 3.8 should be revised. I have suggested language below. 3.8 Expense Provisions—The actuary should refer to ASOP No. 29, Expense Provisions in Property/Casualty Insurance Ratemaking, and ASOP No. 13 for guidance in the consideration of the expense provisions for ratemaking. The actuary should consider the effect of any policy fees or other charges that may have a material effect on the expense provisions contemplated in the rate. 2.7 Rate—An estimate of all future costs per exposure unit associated with an individual risk transfer.

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From: McKenney, Michael [mailto:[email protected]] Sent: Monday, February 29, 2016 8:16 AM To: DeFrain, Kris Cc: Fosgate, Tiffany; Mottar, Judy; Greiner, Melissa L. Subject: ASB P&C Ratemaking ASOP - Comments

Kris, Attached are my comments on the draft ASOP to be incorporated into our March 8th meeting/discussion. Generally speaking, I am not very concerned about the ASOP, however. Michael McKenney | Actuarial Supervisor Insurance Department | Property & Casualty Bureau 1311 Strawberry Square | Hbg PA 17120 Phone: 717.705.0166 | Fax: 717.787.8555 www.insurance.pa.gov | www.chipcoverspakids.com Comments:

1. Suggest removing “such as market goals, competition, and legal restrictions” from the final paragraph of 1.2 “Scope” as it its inclusion is not necessary and could be construed to mean an endorsement that marketing goals and competition should be part of the price charged. Reasonable insurance professionals have different opinions on this and it would be best to be silent on it.

2. In the first paragraph of 3.4 “Methods, Models, and Assumptions”, suggest changing “past data

or projecting future trends” to “past data and projecting future trends” as both are always necessary.

3. Suggest changing 3.7.1 “Use of Historical Exposure and Premium Data” to include reference to the need to consider changes in coverage. For example, to negate large premium increases many insurers renew their policyholders with higher deductibles, forcing the need to adjust historical premium data for such changes in “coverage” (per Section 2. “Definitions”). But 3.7.1 does not reference any need to consider “coverage” changes. Note that 3.7.2 specifically references the need to consider “the coverage being evaluated” when using historical loss and loss adjustment expenses. If it is appropriate for specific reference in 3.7.2, then it is also appropriate to be specifically mentioned in 3.7.1 regarding the use of historical exposure and premium data.

4. Suggest adding a specific item/paragraph under Section 3 for consideration of the time period for which the rate or portion of the rate being developed is expected to be in effect. This includes both the start and end dates. While this is referenced in 3.7.3 “Additional Adjustments to Historical Data”, it is important enough to be separately emphasized as its own issue. Further, its impact extends beyond the considerations enumerated in 3.7.3. For example, a set of historical loss and loss adjustment expense data may be appropriate for estimating future costs but not for the (entirety of the) time period in which the rate being determined will be in effect.

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From: Barclay, Lee (OIC) [mailto:[email protected]] Sent: Monday, February 29, 2016 3:50 PM To: DeFrain, Kris Cc: Slavich, Eric; Forsman, Dan; Mizushima, Manabu (OIC) Subject: Comments on Second Exposure Draft of ASOP on P&C Ratemaking Kris, When CASTF members were reviewing the first exposure draft of this ASOP last year, we also had a new draft of the CAS Statement of Principles on Ratemaking to consider alongside the ASOP. And CASTF commented on both documents. We could see how the draft Statement of Principles and the draft ASOP did or did not fit together. This time I believe we do not have any revised Statement of Principles to consider, which makes it much more difficult to comment on the appropriateness and adequacy of the draft ASOP. How do we know whether both documents combined will meet regulators’ needs? For example, now that the concept of “expected value of all future costs” has been removed from the ASOP, how do we know that this concept will be preserved in the CAS Statement of Principles? My other concern about this second exposure draft is an issue that was also present to some extent in the first exposure draft. But the issue is much more striking to me in this second exposure draft. The problem is with the definition of the term rate. When rate is defined as “an estimate of all future costs per exposure unit associated with an individual risk transfer,” it is defined to mean something other than what it means in most other contexts, including the insurance industry and the legal environment. This will be an endless source of confusion for actuaries and others who seek to apply this ASOP. In those other contexts, rates are the numbers that are used to calculate the premiums that policyholders are actually charged. But in this ASOP they are not. The second exposure draft itself demonstrates the confusion in several places. For example:

· In 3.2 and 3.4 the ASOP speaks of estimating the rate. When you plug in the definition of rate, you find that this means estimating an estimate, which is nonsense in English.

· In 3.7.1 the ASOP speaks of adjusting premium data to reflect a consistent rate level. But premium data is not directly related to the rate level, because the rates are only estimates, not what was actually charged. This paragraph also refers to rate changes, in a context where it is meaningless to refer to changes in cost estimates.

· In 3.7.3 and 3.14 the ASOP refers to a period in which rates will be “in effect.” In what sense are estimates of future costs “in effect”?

Thus this draft ASOP seems to have great difficulty living with its own definition of rate. It keeps wanting to use the term rate in another sense. In addition, Appendix 2, though technically not part of the standard of practice, clearly uses the term rates in a different (i.e., its ordinary) sense. States don’t regulate estimates of future costs; they regulate what policyholders are actually charged.

D. Lee Barclay, FCAS, MAAA, ARM Senior Actuary Washington State Office of the Insurance Commissioner 360.725.7115 [email protected]

Protecting Insurance Consumers www.insurance.wa.gov | twitter.com/WA_OIC | wainsurance.blogspot.com | email/text alerts

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mailto:[email protected]

http://www.insurance.wa.gov/

http://www.twitter.com/WA_OIC

http://www.wainsurance.blogspot.com/

https://public.govdelivery.com/accounts/WAOIC/subscriber/new

http://www.insurance.wa.gov/

COMMENTS OF J. ROBERT HUNTER, FCAS. MAAA,

DIRECTOR OF INSURANCE TO THE

NAIC CASUALTY ACTUARIAL AND STASTICAL TASK FORCE REGARDING THE

ACTUARIAL STANDARDS BOARD (ASB) SECOND EXPOSURE DRAFT OF ASOP, PROPERTY/CASUALTY RATEMAKING

When the ASB entitled the second exposure draft as “Actuarial Standards of Practice – Property Casualty Ratemaking,” they made two fundamental errors. The so-called “Standards” are not standards at all and the draft has nothing to do with “Ratemaking.” First, by failing to address the critical contemporary attack on the actuarial process by such “innovations” as price optimization (now banned in 18 states), the document might be better described as “Generic Overview of Some Actuarial Terms, None of Which Are Binding” or, put more simply, “Who Needs Actuaries Anyway?” Second, the Draft ASOP does not provide substantive parameters for setting rates charged to consumers, so it can hardly be termed a “Ratemaking Standard” Principle 4 of the extant CAS Principles of Ratemaking states:

Principle 4: A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer.

Clearly, the term “rate” in this legal context in place in virtually every state means the rate charged to the policyholder, not some part of that rate. But under this Draft ASOP, Article 1.2, “Scope,” states that “This standard is limited to the estimation of future costs. While the actuary may play a key role in the company’s decisions in determining the price charged after taking into account other considerations, such as marketing goals, competition, and legal restrictions, this standard does not address these other considerations.” In response to comments on this point, the reviewers from ASB state clearly: “the ASOP provides guidance on the estimation of future costs, not the price charged,” making the ASOP useless for regulation of insurance rates as traditionally defined and, as we will see below, pretty much useless for any purpose.

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In other words, these so-called “Standards” do not apply to “rates” as understood in the laws of the states1. Instead it applies only to an undefined new term, “future costs.” It achieves this, in part, by redefining two terms: “rate” to mean “An estimate of all future costs per exposure unit associated with an individual risk transfer” and “premium” as “The final price charged for the transfer of risk.”2 Previous to this new definition of rate, a definition obviously forced to allow this Draft to appear to cover “Ratemaking,” everyone understood rate in the classic sense of the price charged to an insurance consumer, per exposure unit. “Premium” has always been defined as the rate times the exposure units. The ASOP struggles internally with this changed definition of “rate.” For example, in 3.7.1 the ASOP states that “the actuary should adjust the historical exposure and premium data to reflect a consistent rate and exposure level.” (emphasis in original) Rate level is always based on the price charged to the consumer, not “future costs” levels (which no one tracks). Also, at 3.7.3, the ASOP says that “the actuary should consider additional adjustments to the historical data needed to reflect the environment expected to exist in the future period when the rates will be in effect.” (emphasis in original) Obviously, the only thing “in effect” will be the rates actually charged to the consumer, the “future costs” are hardly put into effect by themselves. Clearly, in both of these examples, ASB uses the word “rate” using its traditional meaning, the price charged to the consumer, per exposure unit. Even the development of the undefined “future costs” are not determined by these so-called “Standards” In CAS Principle of Ratemaking #4, shown above, the rate meets state legal standards if it is an “actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer.” Note that, in the ASB Draft, the term “expected value” is gone. “Expected value” has always been understood to be the point estimate of the rate charged to the consumer that is derived by the actuarial calculations. In fact, these point estimates serve as the basis regulators use to determine if prices meet the legal standards of state law (not excessive, not inadequate and not unfairly 1 For example, in the Texas Insurance Code Chapter 2251.002(4) “Rate” is defined as “the cost of insurance per exposure unit, whether expressed as a single number or as a prospective loss cost, adjusted to account for the treatment of expenses, profit, and individual insurer variation in loss experience, before applying individual risk variations based on loss or expense considerations.” Of course, the generally understood definition of “rate” is the price the consumer pays to insure her car or her home (e.g., $500 a year for a car). “Premium” is generally understood to be the number of exposure units times the rate (2 cars times $500 equals a premium of $1,000) 2 We will not spend much time here on premium, but do point out that International Risk Management Institute (IMRI) defines “rate” as “A unit of cost that is multiplied by an exposure base to determine an insurance premium.” So the rate cannot be the premium as this ASOP struggles to create for the first time in the history of mankind.

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discriminatory). A regulator's responsibility is to ask: what is the indicated rate (i.e., the point estimate or “expected value”) and how does the selected rate compare with that? Selected rates that depart too much from that level are, or should be, disapproved. But this ASOP removes “expected value” from the Standards. A commentator asked “what judgment (does) this Standard make about price optimization in light of the discrepancy between price optimization and setting rates to be the expected value of future costs.” While we address price optimization more directly below, here we are interested in the discrepancy between rates that have been adjusted from the cost-based level (for instance via price optimization) and the “expected value” or the point estimate, which is the test of legality of the price. The ASB reviewers state, in response to the question that, “The reviewers have eliminated any reference to expected value and believe that using the phrase “estimation of future costs” provides sufficient guidance in the selection of the intended measure for ratemaking.” In other words, even the new “future costs” determined under the draft ASOP are not clearly a result of the statistical analysis; it is pick and choose, hardly a “Standard” at all. Question 4 of ASB’s “Request for comments makes the intent clear: “The task force eliminated the reference to ‘expected’ value of all future costs to eliminate the possible confusion that the only appropriate estimate of all future costs was a mean value without any consideration of potential variability, Is this change appropriate? Does this change lead to confusion about what was being estimated?” This question makes clear that the intent of ASB is to remove the point estimate (or mean value), the very basis of regulation of prices used to test if rates meet the legal requirements of being not excessive, not inadequate and not unfairly discriminatory. This creates a fundamental disconnect from the regulatory process that cannot be resolved, as ASB attempts, with the caveat in Section 1.2 stating: " If the actuary’s role involves reviewing rates developed by another party, the actuary should use the guidance in section 3 as is practicable." Under this draft the point estimate is gone and the actuarial equivalent of the Wild West has arrived where not only do we no longer derive actual rates to be charged to actual consumers, we don't even adhere to statistics. CFA answers the question “Is this change appropriate?” with a resounding NO! Price Optimization and other questionable insurer practices used to move rates away from cost-based are allowed, if not encouraged, under these so-called “Standards” The scope of the ASOP makes clear that price optimization and any other adjustments to the selected “future costs” (there is no more point estimate of the

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indicated rate so who knows where the starting point is?) are fine with the ASB and, to make sure there is no control over this outrageous practice now banned in 18 states, is placed outside the four corners of this so-called “Standard.” To make sure these standard-less Standards crafted by ASB went far enough and did not let a modicum of control of price optimization slip through by mistake, the ASB “Request for Comments” section of the Draft asks, in Question 3, “Is it clear that this ASOP does not provide any guidance on the use of what is generally referred to as ‘price optimization,’ which relates to the company’s decisions in determining price?” CFA’s answer to that is: It sure is and that is an abdication of ASB’s Standard-setting role! Astonishingly, this draft, which was created by actuaries, undermines the actuarial profession by making actuaries far less important in the ratemaking process In addition to the scope saying clearly that the “actuary may play a key role” in establishing prices, the ASOP clearly diminishes the role of the actuary in the ratemaking process3. The actuary no longer produces an indicated rate. She produces an estimate of “future costs” which does not have to be even close to the heretofore important point estimates. Who needs actuaries if estimates need not be close to the real number? She may have a role in establishing the final rate, but likely not since the modelers need not be actuaries. For instance, economists are much better at elasticity of demand than are actuaries, according to the people involved in price optimization. Can lower actuarial salaries be far away? We wonder if the savings the insurers will achieve by diminishing the role of the actuaries will be passed through to consumers. Conclusion Since proper regulation is impossible under the terms of the Draft ASOP, this Draft puts consumers at great risk of being charged unfair and excessive rates (and by “rates” I mean the rates that they will be charged). Consumer Federation of America requests that CASTF oppose adoption of this misguided Draft ASOP.

3 Emphasis added.

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Attachment Two Casualty Actuarial and Statistical (C) Task Force

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Draft: 2/17/16

Casualty Actuarial and Statistical (C) Task Force Conference Call February 9, 2016

The Casualty Actuarial and Statistical (C) Task Force met via conference call Feb. 9, 2016. The following Task Force members participated: Teresa D. Miller, Chair, represented by Michael McKenney and Melissa L. Greiner (PA); Anne Melissa Dowling, Vice Chair, represented by Judy Mottar (IL); Lori K. Wing-Heier represented by Mike Ricker (AK); Jim L. Ridling represented by Charles Angell (AL); Stephen C. Taylor represented by David Christhilf (DC); Kevin M. McCarty represented by Cyndi Cooper (FL); Ken Selzer represented by Nicole Boyd (KS); James J. Donelon represented by Richard Piazza (LA); Al Redmer Jr. represented by Lynn Dickerson and Walter Dabrowski (MD); Mike Rothman represented by Phillip Vigliaturo (MN); Mike Chaney represented by David Browning (MS); Richard J. Badolato represented by Carl Sornson (NJ); John D. Doak represented by Frank Stone (OK); Laura N. Cali represented by David Dahl (OR); David Mattax represented by Nicole Elliott (TX); and Mike Kreidler represented by Lee Barclay (WA). 1. Adopted its 2015 Fall National Meeting Minutes Mr. Angell made a motion, seconded by Mr. Vigliaturo, to adopt the Task Force’s Nov. 19, 2015, minutes (see NAIC Proceedings – Fall 2015, Casualty Actuarial and Statistical (C) Task Force). The motion passed unanimously.

2. Received Reports from its Working Groups Ms. Greiner said the Actuarial Opinion (C) Working Group agreed to co-sponsor a blanks proposal with the Title Insurance Financial Reporting (C) Working Group on some changes to title instructions regarding adverse reserve development trends. The Working Group is also discussing potential changes to the P/C annual statement instructions for 2016. Mr. Sornson said the Statistical Data (C) Working Group adopted reports in December and recently adopted the Dwelling, Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance: Data for 2013. Mr. McKenney reported the Task Force adopted statistical reports via e-vote. On Dec. 14, 2015, the Task Force adopted the Profitability by Line by State for 2014 report. On Dec. 17, 2015, the Task Force adopted the 2014 Competition Database Report. On Dec. 21, 2015, the Task Force adopted the 2012/2013 Auto Insurance Database Report. He said the Task Force is currently considering adoption of the homeowners report. 3. Discussed NAIC Activities Relating to Casualty Actuarial Issues

Mr. McKenney said the Task Force is charged with monitoring NAIC activities relating to casualty actuarial issues. He said a few NAIC groups to monitor are listed in the charges and relate to work involving the financial statement blanks and instructions, statutory accounting, RBC, financial analysis and examination, operational efficiencies, and the auto insurance study group work. Mr. McKenney said a Big Data (D) Working Group is being created. He said the Task Force will closely monitor this Working Group’s activities and engage as needed. Ms. Mottar said the Workers’ Compensation (C) Task Force is drafting a large deductible paper. Lisa Slotznick (American Academy of Actuaries’ Committee on Property and Liability Financial Reporting—Academy’s COPFLR) said the Academy submitted a comment letter noting that actuaries are involved in this work in the industry and could assist with drafting the paper. Ralph Blanchard (Travelers) said the Group Solvency Issues (E) Working Group is discussing the need to form an Own Risk and Solvency Assessment (ORSA) Subgroup on a Feb. 10 call. He suggested the Task Force might want to monitor that call. Mr. McKenney said the Task Force and the Property and Casualty Insurance (C) Committee adopted the Price Optimization White Paper at the 2015 Fall National Meeting. He said the next step is for the white paper to be considered for adoption by the Executive (EX) Committee and Plenary at the 2016 Spring National Meeting.

Attachment Two Casualty Actuarial and Statistical (C) Task Force

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4. Discussed 2016 Goals and Work Plan The Task Force discussed potential work products and 2016 activities. Mr. McKenney said any initial ideas will be compiled to be discussed on the Task Force’s next conference call. Birny Birnbaum (Center for Economic Justice—CEJ) asked whether the Task Force was going to continue work on price optimization. He said the Price Optimization White Paper left some hanging issues, including whether recommendations should apply to commercial lines subject to an unfairly discriminatory standard. Regarding the appendices about data collection or information to be reported, he asked whether the Task Force would be monitoring state actions. He asked whether the Task Force would monitor price optimization activity over time, evaluating states’ experiences and company feedback, and adjust the white paper if needed. Kris DeFrain (NAIC) said the Task Force is tracking the state activities and posting links to state bulletins on the Task Force’s website. She added that any future activity of the Task Force will likely depend on what activities are undertaken by the Big Data (D) Working Group. Mr. Vigliaturo suggested a need to provide guidance in the regulators’ Product Filing Handbook regarding generalized linear modeling (GLM)-based rate filings. He said he finds the Casualty Actuarial Society’s (CAS) online training helpful and believes there would be value in developing regulatory best practices to aid regulatory rate reviews. Mr. McKenney said without access to the computer models and with limited time for review, best practices would be helpful. He said the models are developed over numerous years by a company, but then results are reviewed by regulators in a very short period of time. Ms. Mottar said the regulators are starting to receive the ORSAs and should consider developing some best practices for when regulatory actuaries are requested to review. She said the Academy produced an ORSA and the Regulator paper drafted by its ERM/ORSA Committee of the Risk Management Financial Reporting Council. Ms. Greiner said the authors who wrote the paper have significant experience writing and reviewing ORSAs, so she encouraged the regulators to read the paper. Craig Hanna (Academy) said there will be a regulator-only webinar in mid-March. He will forward information about the webinar when available. Mary Miller (Academy) said the Academy’s online attestation tool is online now. More than 1000 actuaries have started an attestation. She is interested in Task Force feedback on the attestation. 5. Discussed Other Matters The second exposure draft of the proposed Actuarial Standard of Practice (ASOP) Property/Casualty Ratemaking was released by the Actuarial Standards Board (ASB). Mr. McKenney asked regulators to submit potential comments to NAIC staff by the end of the month. Mr. Barclay suggested adoption of comments at the Spring National Meeting to meet the comment deadline of April 30. Having no further business, the Casualty Actuarial and Statistical (C) Task Force adjourned. W:\National Meetings\2016\Spring\TF\CasAct\2-9 CASTF min.docx

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