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What are the main takeaways of the AICPA’s new guidance for auditors relying on the work product of actuaries?

The major change is that, going forward, management needs to understand and support why they’re selecting the reserves they are, particularly when held reserves or unpaid liabilities are different from the actual central estimate. That is the point in the process when the auditor will most likely ask questions. Management needs to know all the factors that go into the estimate. They must be able to explain the estimate and explain if and why they are deviating from the central estimate.

How will the new guidance further encourage management’s confidence in the reliability and credibility of actuarial estimates?

It should not directly affect how an actuary does their analysis. It may, however, it indirectly impacts our work as it will mean that actuaries get more open and direct communication from management. The hope, at least from my perspective, is that we will even more acutely understand the exposures and risks that we’re estimating.  It may mean that we will use different selections or methods based on the greater amount of information that we’re getting from management. That will need to communicate more because they also need to fully understand what’s going into an actuarial analysis. And, if there are structural changes or changes in how reserves are set, the actuary will have that information sooner in the process. Actuaries can then select methods accordingly. We can communicate more information to management to help them support the estimates on their balance sheet.

What if the benchmark data provided by the organization does not support the estimate?

That will cause an inaccurate assessment, or an inaccurate estimate. Good communication in this, and all instances, is so critical. Communication allows the actuary to fully understand risk and select the appropriate and correct benchmark correctly. . The hope, once again, is that the new guidance will encourage that type of communication and actuaries can better understand the organization’s risks and exposures so that these types of situations become more rare, and that the benchmarks correctly reflect risks and tour estimates will be more accurate. Even more accurate than they already and obviously are.

What are key considerations for auditors when evaluating management’s selected point estimate for unpaid claim liabilities, especially if they deviate from actuarial estimates?

The auditor should look for those things in the data that have changed, and that would lead management to diverge from the central estimate. As an actuary, we are looking for an organization’s estimate, and held unpaid liabilities to arrive within our range.  An auditor, obviously, wants to dig deeper to understand it’s not the central estimate. Many considerations can impact management’s selection of a figure higher in the range. If the organization has had a lot of adverse development in multiple years in a row, for example, an actuary may adjust estimates and selections and assumptions based on that development.  The actuary might not adjust it as fast as management might want. Actuaries tend to be more conservative and need lots of compelling data to completely change assumptions. If it is a change in the principle, management should be able to provide this ahead of time. An auditor will need that when they change their estimate from the central estimate and know to look for the change. Again, it is the flow of communication that is so important. It will be incumbent upon management to communicate any important change to an auditor and be fully ready to support the change when an estimate differs.

(published in Best's Review by AM Best)