Fall 2018 #22 b

Owarnock

When looking at risk of material adverse deviation, do we focus solely on net reserves? Or do we also apply the materiality standard of 50% * 7000 = 3,500 to the direct and assumed reserves (e.g. does 3,500 + 16,000 result in RMAD on a gross basis)? It doesn’t change the answer here but thinking through other potential questions.

graham

Well, the materiality standard given the statement of the problem refers to net reserves, so I don't think you can assume the 50% value would apply to direct and assumed reserves. Issues related to reinsurance are dealt with separately within the Relevant Comments section of the SAO.

lkto22

Hi if point est is also given and there is no specific statement to use carried reserves, then should we use that to calculate MS? Thank you.

graham

There is no single correct answer for selecting the materiality standard. In general, you can select anything you want provided it can be justified. It should be fine to use carried reserves in selecting the MS.

arch1892

If the materiality standard was calculated based on % of reserves or any other methods, do we compare both gross/net reserves to the materiality standard to check if RMAD exists?

graham

According to section 5.2.2 of the COPLFR reading:

• "...the materiality standard in Exhibit B, Item 5 and the RMAD conclusion in Exhibit B, Item 6 should pertain to the net reserves

It goes on to say:

• If the Appointed Actuary reaches a different conclusion on the risk of material adverse deviation in the net versus the direct and assumed reserves, the Appointed Actuary should include a Relevant Comments paragraph to address the differences. Regulators understand that a net versus a direct and assumed RMAD will have different meanings and, potentially, different materiality
  standards"

arch1892

Thanks!