What is Material Adverse Deviation?
Erich Brandt

What is Material Adverse Deviation?

Let’s Start Exploring

Erich Brandt September 15, 2015 Posted in: Blog Posts, Apex Webinar
This past January, Pinnacle presented an Apex webinar on the “Statements of Actuarial Opinion – Year End 2014” which discussed considerations when creating or reviewing a Statement of Actuarial Opinion (SAO) focusing on changes in the National Association of Insurance Commissioners (NAIC) guidance memo. Feedback from this presentation indicated that future discussions of the Risk of Material Adverse Deviation (RMAD) section of the SAO, as well as how to interpret the role of the Chief Risk Officer (CRO) in assessing a company’s risk profile may be useful expansions of this general topic.

Pinnacle teamed up with Illinois State University’s Associate Professor of Finance, Dr. Kevin Ahlgrim to explore the RMAD and its use by regulators, company officers and other users of the SAO. This research began with a review of hundreds of SAOs filed at year-end 2013 and 2014 and identifying companies that had One Year Development in excess of the RMAD threshold documented in the prior year-end SAO. Several data elements were collected including the RMAD standard and threshold used, RMAD standards and thresholds considered but not used and risk factors. The 2013 SAOs were examined to see whether the opining actuary stated affirmatively that there was a significant risk of material adverse deviation.

One of the changes in the 2014 SAO was heightened emphasis in the disclosures of the specific risk factors a company may face when assessing its potential for material adverse deviation. The actuary is instructed to consider combinations of risk factors, such as premium growth and the potential for loss ratio deterioration that could cause material adverse deviation.

Disclosures involving the RMAD in the SAO have been developing since year-end 2000 and are being emphasized more by regulators over time. Pinnacle’s research team is researching several areas including:
  • Does the RMAD paragraph give the regulators and company management enough information to assess the risk?
  • How are actuaries using the RMAD paragraph? How does the structure of this section differ between actuaries?
  • What information would be useful to the intended users of the SAO in the determination of the RMAD threshold?
  • What lines and/or company characteristics generally have a risk of material adverse deviation?
  • Do the companies who have one-year development on prior year’s reserves in excess of the stated RMAD threshold have characteristics in common?
Erich Brandt, Greg Fears and Kevin Ahlgrim led Pinnacle’s August Apex webinar on the topic of RMAD. Click to download a PDF of the slides used for this webinar.

ebrandt@pinnacleactuaries.com

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