CASUALTY LOSS RESERVE SEMINAR l AUDITOR S GUIDE TO LOSS by guy22

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									  1991 CASUALTY LOSS RESERVE SEMINAR




5F-l: AUDITOR'S GUIDE TO LOSS RESERVING




                 Moderator

               Stephen P. Lowe
          Tillinghast/Towers Perrin


                    Panel

                Ruben Nava
             Deloitte & Touche




                    723
MR. LOWE: This is one of the mini-sessions. The                   forty minute session so we'll have to move quickly.
topic is the new AICPA proposed statement of                      Ruben.
position entitled "Auditing Insurance Entities Loss
Reserves." I guess we are the mini-panel and you are              MR. NAVA: Thanks Steve. You've already heard
the mini-audience for this mini-session. Because it               the topic is the new exposure draft on auditing loss
involves auditors and actuaries talking together, the             reserves. There is one thing that I'm not going to
time allowed has been limited to forty minutes, in the            talk about today and that's catastrophes. I witnessed
interest of not boring anyone to death. Actually, I               two of them last night. One when the Jets missed the
hope we can have a interesting presentation. This                 field goal and another one when the Bears scored the
document has just come out from the AICPA and I                   overtime touchdown. Those of you from Chicago
think it's worthy of attention from both actuaries and            might see it differently.
auditors and all parties who are interested in loss
reserves. While it has a lot of boiler plate in it, quite         As Steve mentioned, this exposure draft was just
candidly, inter-spruced in the boiler plate is some               issued last week and has gone out to interested
pretty hot stuff. (Laughter)                                      parties. I don't know if you would have received this
                                                                  as part of a regular distribution, but there are copies
Okay, the session...I'm really not very good first thing          in the back if you need them. It was prepared by an
in the moming. It was a long night last night. You'll             AICPA task force, which included representatives
have to bear with me.                                             from the big six firms, from one non-big six firm and
                                                                  we accountants, being smart enough not to do
A couple of housekeeping items. A first I am to                   anything like a paper on loss reserves without
announce that the session is being recorded and that              including the actuaries, we did contact the American
tapes will be available shortly following the session at          Academy of Actuaries and the Casualty Actuarial
the cassette sales booth, which is a new innovation I             Society for a representative and Steve Lowe was the
believe.                                                          representative of both organizations to this task force.

Our panel this moming is a small panel. It consists               It was formed in January 1990 and completed a
of Ruben Nava. Ruben is a Partner with Deloitte &                 working draft last December, which is fairly fast for
Touche and he is the National Director of Insurance               most of these task forces and cleared through the
Industry Practice there. He has spent over twenty                 AICPA earlier this year and through an editorial
years serving insurance companies in the areas of                 process this summer. There is a mistake. It says the
accounting, auditing, mergers and acquisitions,                   draft was issued in August. That was what I was
restructurings and other areas. He is a CPA, CPCU                 hoping for when these slides were made up.
and a CLU. He has served on numerous committees                   Unfortunately, it didn't get out until last week. And
of the American Institute of CPAs, including the                  the comment deadline is November 15th. Technically
AICPA Insurance Companies Committee, the AICPA                    this will not be in force for this year end. It will be
Relations with Actuaries Committee, which meets                   effective for 1992, although the mere fact that it's in
regularly with the Academy's counterpart committee                an exposure draft stage, many auditors would begin to
and he has also chaired the Property/Liability Audit              adopt the provisions.
Guide Task Force and other committees. I'm sorry
he's chaired the task force which recently developed              (Slide)
and has issued this exposure draft entitled "Auditing
Insurance Entities Loss Reserves." And he has some                This is designed as a statement of position, which is
prepared material which we'll go over and then I will             a supplement to the property/casualty or property and
make a few comments after his presentation and then               liability audit guide. Replies to property/liability
I hope we'll have time left for questions. It's only a            companies, reciprocal exchanges, pools, captives and
                                                                  public entity risk pools, which if you go back to the


                                                            724
rifle, which is why we don't call it insurance                    (Slide)
companies, we call it insurance entities. And every
word, believe me, is very carefully reviewed by the               It goes through estimating methods, extrapolation of
American Institute.                                               loss dollars, frequency severity data, use of loss ratios
                                                                  and the like. And goes through illustrations of
(Slide)                                                           projection data on occurred loss and paid loss basis
                                                                  to, again, to show how some of the differences are
Some of the things it does not cover. It does not                 created. Again, it's not a book on loss reserving.
cover some of the tangible issues such as premium                 And we'll go through LAE reserve approaches and
deficiencies, transfer of risk, credit risk, discounting,         ULE reserve approaches, calendar year, paid-to-paid
contingent commissions and the like. And some of                  and timing of payments.
this I will go through fairly quickly. Some of this is
for auditors rather than actuaries, but the paper itself          What's more appropriate from the audit standpoint is
does discuss use of specialists and the overall reserve           looking at things like changes in environment,
process.                                                          identification of the variables as they might affect loss
                                                                  reserves, and how that might affect selection of
(Slide)                                                           methods, adjustment of data, etc.

So it begins by discussing loss reserve process, policy           As Steve said there are a few issues that are a little
durations, types of coverages, kinds of insurance                 more than mundane in the paper and this is one of
written, which we all call lines of business or types of          them, use of specialists by management. The paper
risks, but when you put it through an editorial process           stated definitively that termination of loss reserves
is becomes kinds of insurance, so we'll have some                 should involve a specialist and that the absence of
new terms that come up. It discusses long duration                involvement would consfltute a reportable condition
and short duration, policies, although the paper is               or possibly a material weakness in controls. Now this
really dealing with short duration. It goes through               goes far beyond any current accounting or auditing
types of coverages occurrence bases, claims-made,                 literature in the AICPA, but the Auditing Standards
pure claims-made and variations. And the kinds of                 Board is aware of this. We pointed it out to them
insurance, the different lines of business and starts             and they agree with the position as of now.
into a discussion of the loss reserve process or the
components of loss reserves and the like. Some of                 (Slide)
this, obviously, is designed as a primer for an auditor
who is not familiar with property/liability companies.            You probably noticed I didn't use the word actuary
It's kind of, as Steve said, it's really down to basics,          on this slide. I used the word specialist. So let's get
but it's something that we have to put into the paper.            into, for a moment, defmiflon of a loss reserve
It goes through estimating methods, how you group                 specialist. The paper states that a specialist is an
loss data, how you group types of data.                           individual with a sufficient level of competence and
                                                                  experience in loss reserving, including knowledge
What the paper is not, it is not a critique or an                 about the kinds of insurance for which a reserve is
evaluation of different loss reserve methods. It does             being established and an understanding of the
goes through a few different methods, but it is not               appropriate methods available for calculating reserve
designed to tell the reader or the auditor what is the            estimates. We did not go as far as saying that an
best method in all cases or what is the best method in            actuary must be used or that a casualty actuary must
a particular case. It is simply a paper to describe               be used. We used the word specialist for several
what some of the risks are when the auditor is                    different reasons. One is specialist is a fairly defined
looking at loss reserves.                                         term in accounting literature and there are all kinds of
                                                                  specialists, medical specialists and oil and gas


                                                            725
specialists and the like. We went a long way to even               In going through managements' process, the audit
do this. Apparently any time you require something                 process so to speak, includes identifying the controls,
like the use of a specialist, the AICPA goes up in                 review of the data, evaluation of assumptions and
arms because the auditor up in North Dakota is said                analyzing the data, etc.
to not have a loss reserve specialist available to him
when auditing the property/liability company in North              (Slide)
Dakota. And I apologize for using North Dakota if
anybody is from there. Our reaction to that is fly him             Use of specialists by auditors. Use of specialist is
in. That it is necessary and, again, the paper does                covered in another auditing standard called, SAS11,
require use of a specialist.                                       which states that...and 11 does not preclude the
                                                                   auditor from using the work of a specialist who is
(Slide)                                                            related to a client. This SOP states that the order of
                                                                   loss reserves requires the use of an outside specialist.
The paper then goes on through a number of, what I                 So this, again, is an extension of current literature. If
would call, the audit issues, audit planning,                      an auditor were auditing an oil and gas company
objectives. And audit risk goes through, what is                   where he has to estimate oil reserves that are in the
called, inherent risk in the process, discussing product           ground, technically if you read the auditing literature,
mix, new products, etc., backlogs, managements                     he could use a specialist inside the company to...a
attitude, conservatism, new policy forms and how                   specialist who might be part of internal audit or
they might affect the loss reserve process. Then it                another area to help evaluate those oil and gas
goes into what is called control risk, which is the                reserves. In this case, because of the significance of
quality of personnel, internal control, reliability of the         the loss reserves to the financial statements of the
database, loss payment practices, volume of claims,                company we took the position that the auditor must
changes in systems and how all of those might affect               use a specialist who is an outside specialist. And, by
the process. And it gets into auditing the claims                  the way, it doesn't say independent specialist, it says
database itself.                                                   outside or unrelated specialist. One of the reasons for
                                                                   that is that the definition of independent is different
(Slide)                                                            between the accounting profession and the actuarial
                                                                   profession, so we didn't want to get into
Then we get into evaluating the reasonableness of the              misinterpretations of what independent meant versus
estimate. And I want to just give you a little bit of              unrelated. Yes?
background on how this was developed. There is a
Statement of Auditing Standards, Number 57, called                 QUESTION: (Not at microphone) Yesterday they
the "Auditing Accounting Estimates", which really                  were talking about...
served as the basis, so to speak, of some of the
positions in this paper. And that paper, SAS57 states              MR. NAVA: Excuse me. Excuse me. Could you do
that an auditor should use or a combination of the                 us a favor and speak into the microphone with the
following: review and test managements process,                    question? That way we'll end up on the...
develop an independent expectation or review
subsequent events. In the case of insurance loss                   QUESTION: Yesterday, in one of the sessions, they
reserves this paper states that the last approach,                 were talking about the actuary didn't have to be
approach C is insufficient for auditing loss reserves.             independent or outside.       Are you saying, if I
So you basically...the auditor will have a choice of               understand correctly, from the auditor's point of view
either using managements' process or developing their              if you are having an audit you need to have an
own estimate.                                                      outside specialist come in as opposed to if...maybe if
                                                                   you're not having an audit, although most companies
                                                                   probably do?


                                                             726
MR. NAVA: Yes. I'm not sure which session you're                 Went through four situations. First was where a
referring to. It might have been the session on...               company has no loss reserve specialist involved in the
                                                                 determination of loss reserves. And these are quotes
QUESTION: It was on...                                           out of the paper, that this situation might constitute a
                                                                 reportable condition, which is an auditors term and
MR. NAVA: .... actuarial opinions...                             possibly a material weakness in intemal control,
                                                                 which is not only an auditor's term, but also a legal
QUESTION: Yes.                                                   term because if you have a material weakness then
                                                                 the company is violating the foreign corrupt practices
MR. NAVA: ...for the yellow blank, for the NAIC                  act if you are federally regulated. So this does
blank. That's an NAIC rule as to whether the actuary             become significant to management or pofentially
giving the opinion has to be inside or outside.                  significant.

QUESTION: Okay. But here if a company is having                  In this case, the paper states that the auditor should
an audit, then they have to have an outside specialist.          use an outside specialist to determine an independent
                                                                 expectation. If you recall, again, the other standard
MR. NAVA: Right.                                                 that I mentioned gave you two choices. You could
                                                                 either review management's estimate or develop an
MR. LOWE:          I think to clarify, there are two             independent expectation. And what we are saying is
specialists that we are referring to here. One is a              that in this case you would have to develop an
specialist that is either employed by or engaged by              independent expectation, because there was no
the company, by management, to set the loss reserves.            specialist involved inside the company.
And the auditor's responsibility is to test and evaluate
managements' loss reserves. And what we're saying                (Slide)
is that the audit also must have a specialist to
participate in that evaluation and testing.          So          Second situation is where the company has an in-
essentially what we are saying is there have to be two           house loss reserve specialist who is involved in the
specialists. I guess there are circumstances where               determination and the company does not use an
they could be the same person.             Management            outside specialist. And, Judy, I guess this is the
specialist can be an employee or could be a                      situation that you are talking about where the in-
consulting actuary. The auditor's specialist must be             house specialist would have been rendering the
outside the company. In other words, the auditor in              opinion on the loss reserves. The auditor's response
evaluating the reserves can't go to the company                  here would be, again, to use an outside specialist to
employed actuary and rely on him in evaluating the               evaluate the reasonableness of the estimate. And this
reserves.                                                        is what Steve was talking about about having two
                                                                 people involved. The first being the specialist who
MR. NAVA: Yes. It's basically an evaluation of,                  determines the reserve.      The second being the
what are the risks in a particular company? And,                 specialist that reviews or audits or evaluates that
obviously, the size of the loss reserves to the overall          determination.
f'mancial statements is very, very significant and the
judgement of this task force is that you can not rely            (Slide)
on insiders to form an independent opinion.
                                                                 The third situation, and these are not easy to write by
(Slide)                                                          the way as Steve could tell you. We spent many days
                                                                 in the words of these four slides. And, again, these
So what the paper then did was go through some of                are quotes out of the paper. The third situation, a
these scenarios to try to clear up this precise issue.           company has no in-house specialist but does use an


                                                           727
outside specialist in the determination of the loss                literature says that if the company's recorded loss
reserves. This is probably the one we had the most                 reserve is within a reasonable range then there is no
difficulty with. It stated and I'll read it first, "This           "error" in those financial statements. If it is outside
auditor should evaluate the relationship.          If the          of a reasonable range then this is an error that the
specialist is related the auditor should perform                   auditor has to either evaluate or have corrected.
additional procedures, with respect to some or all of
the assumptions, methods or findings to determine if               In reviewing those ranges, the auditor should consider
the findings are no outside unreasonable or not                    frequencies, policy characteristics, retention levels,
unreasonable or engage an outside specialist for that              mix of business and other factors. And, as I stated,
purpose." The reason this one was a little more                    if the recorded reserve is outside of a realistic range
difficult was because of what Steve was mentioning.                then it is considered an error.
We were looking at this concept of one person sets
the reserves and another one reviews that                          There is one instance, which is mentioned in the
determination. In this case, you may not have two                  property/liability audit guide, where an auditor can
people. You do have an outsider, however, so the                   qualify an opinion on the financial statements
auditor has the responsibility to evaluate that                    regarding the uncertainties involved in loss reserves.
relationship, look to see how close that outside                   And that's where there is insufficient historical data
specialist might be to the company and we discuss                  that may create an uncertainty. And this is typically
things such as is this that actuary's or that specialist's         a new company that doesn't have base historical data
only client or is it his major client and we really look           or a company moving into a major new line of
at that as an unrelated or independent estimate, so to             business for which it does not have historical data.
speak.                                                             Those are fairly restrictive instances where the auditor
                                                                   can now use what used to be called the subject-to-
(Slide)                                                            opinion, subject to the adequacy of loss reserves.
                                                                   Those opinions will be few and far between in the
Fourth situation, which is probably the best one from              future.
the audit standpoint, would be where the company
involves an in-house specialist and involves an                    And lastly, the other areas addressed involve
outside specialist to separately review the reserves.              evaluating loss adjustment reserves and evaluating
And in this case the auditor could use the outside                 reinsurance ceded effects on the loss reserve estimate.
specialist as his specialist, so to speak. If you're
dealing with some of the big, one or more of the big               That concludes m y comments. As I mentioned, the
six accounting firms, all of the big six have in-house             comment period is about 60 days. November 15th is
actuaries, but there are locations around the country              the deadline for comments. We don't know how
where even the big six will use outside specialists in             much opposition this will get from either the
some audits. So, again, this is the situation where the            professions or the industry, but this by the way was
company has an inside specialist and there is an                   an outgrowth of the new property/liability audit guide,
outsider independent specialist reviewing that                     which was completed about a year and a half, two
estimate.                                                          years ago and there was considerable comment at that
                                                                   time that there was not enough discussion within the
The paper then gets into areas such as loss reserve                audit guide regarding auditor guidance on auditing
ranges, that the audit should address the variability of           loss reserves. That it should have several separate
loss reserves and that no single loss projection                   chapter or separate discussion. We didn't want to
addresses the concept of variability and that the audit            hold up the issuance of that audit guide, so that was
should consider those ranges and now necessarily the               issued and then this task force was formed to
absolute best and worst case, but actually a range of              basically supplement that audit guide with a separate
reasonable estimates. And basically the auditing                   discussion on loss reserves.


                                                             728
And we'd be happy to take any question you may                     think about what it would be like to be on the wimess
have. If somebody could tum up the lights so that we               stand saying, well, I don't have any of those exams
could... Thank you.                                                and I haven't read any of those materials and I only
                                                                   have two or three years of experience. You have to
MR. LOWE: Thank you, Ruben. As I said at the                       be prepared if you're going to accept this role as a
outset, I think this is an excellent document that's               non-actuary you have to be prepared to stand a
worthy of review both by actuaries and auditors. It                withering attack on whether or not you are in fact
takes a number of positions that strengthen and clarify            qualified to do this. I think there definitely are some
the auditors responsibilities relating to loss reserves.           people who fit that bill and, therefore, I think the
And when you read it I would encourage you to                      language that is chosen here is appropriate. I don't
recognize that perhaps it's stronger than it may                   think you must necessarily be a card carrying triple-
appear. It was an education for me working with the                A/CAS member in order to be qualified in this area,
AICPA, participating with this task force because they             so I think we've struck the right balance there,
really have a very carefully defined funicular that they           although others may disagree.
work through and I leamed that when the document
says shall, that means must. (Laughter) Okay? And                  And then the document goes on to say that the
the way to recognize those terms, and the words are                absence of a specialist may constitute a reportable
carefully chosen, is when you read it think of how it              condition, presumably reportable to the audit
would be used against you in a trial if you were on                committee, which I think is very significant. It really
the witness stand. As a layman, it is my view that                 puts the auditors feet to the fire on what he must do
the, in m y own words I guess, it's the auditors                   in situations where he does not feel that the reserves
responsibility to review and test the process and                  are set for reserve process involves people who are
results of managements preparation of the financial                qualified to do that job within the company. And I
statements including the loss reserves. The auditor                suspect that particular section of the report may
must develop sufficient evidence to support                        receive a lot of comment from, particularly smaller
management's assertions as to the financial condition              companies, and I would be disappointed if there will
and eamings of the company. The key part of the                    be change.
document is on pages 25 and 26, where as Ruben
says, it essentially says management should use a                  The second area, which I think actuaries will find
specialist. And you would read that as management                  very interesting, is that the guide takes the position
must use a specialist, I think. Because if management              that in order for the auditor to test the reserve, he
does than management has to have a good reason why                 must develop or a range must be developed. It
it chooses not to.          Well, given the auditors               doesn't say directly, those words, but it says in order
responsibility, I think it is therefore safe to say that           to evaluate the reserve you must perform altemative
part of the auditor process will probably entail the               calculations and develop some sense of the inherent
auditor evaluating whether the person who set the                  variation in the estimate. This is an area where I
reserves is actually a specialist or not. How will they            think actuaries may in 1992, when this becomes
do that? Well, the document does go on and say that                effective, be asked to do a little more than what has
the Casualty Actuarial Society trains people and the               normally been done in the past. I think we should
Academy qualifies them and sets standards for                      expect some questions from auditors as to where we
actuaries who practice in this area. As Ruben says, it             are within a range and what we think the range is and
does not say you have to have an actuary. On the                   we better have some procedures and protocols set up
other hand, it does lay out, right after it introduces the         to respond to that inquiry, as I think it is an
fact that you must have a specialist, that an actuary is           appropriate line of inquiry for them given their
probably such a person. It does allow others to be                 responsibility.
qualified but if I were a non-actuary and I were trying
to decide whether or not I was qualified, I would


                                                             729
Well, we have about ten minutes left for questions.              MR. NAVA: Let me just give you an example,
And I hope there are some. Mike? Would you?                      because this is a difficult area in the paper. If you
Thanks.                                                          have a recorded loss reserve of ten million dollars in
                                                                 two different companies, one where the range is from
QUESTION: I was very interested in the concept of                nine million to eleven million and the second
a range. Does that mean that a company actuary                   company where the range is five million to fifteen
should provide a range to his auditor?      Does                 million, what we are trying to get at...and let's say
that...how do you see that working in practice?                  management and the auditor agree on those ranges in
We've always given them a number, because my                     those two examples, what we are trying to get at in
experience has been that accountants often aren't                the second example, that being where the range is
happy with more than one number. (Laughter)                      five to fifteen, is has either management or the
                                                                 auditor done enough work to determine that ten
MR. NAVA: We're happy with one number as long                    million is the right number. Or maybe you have to
as it's the right number.                                        do more work. Maybe you have to break it down
                                                                 further into different lines of business or further
If my discussion and Steve's discussion on ranges                analysis to try to reduce that range or that variability.
was not clear, it is because it is a difficult area. We          That's not to say that ten was not the reasonable
did not come to agreement that the auditor must have             number, because the paper will say that as long as it's
a range to evaluate. He can evaluate a point estimate,           a reasonable range then it is a reasonable estimate.
that being the company's estimate, but he has to                 But that might get you to the point of, is there enough
consider the variability of the number. You didn't get           disclosure in the financial statements regarding the
to a point of saying you have to have some where in              variability of that estimate.
your work papers, a range and determine that the
company's estimate is within it, but you have...at               MR. LOWE: Do you have a follow-up?
minimum should evaluate the variability of that
number if you can conclude that there is not a                   QUESTION:          I have people talk about using a
significant variation from that point estimate, that's           number around 10% as a range...if you are a
free. But believe me, it is carefully worded. We                 consulting     actuary reviewing a company's
didn't get as far as saying you must have a range.               estimate...that if that company's estimate is within 5%
                                                                 either way of your estimate, which are a total swing
MR. LOWE:          It's more carefully worded than               of around 10% of the total reserves, that could be
apparently I read it. As Ruben says, it puts the onus            regarded as an acceptable range of variability. But
on the auditor and presumably the auditor specialist             10% of the reserve level might well correspond to 25
to evaluate management's estimate. Management                    or 30% or more of equity.         Is that a reasonable
estimate is a point. It is what the number that                  concept for auditors to certify that...or give their
management has determined is the reserve that ought              opinion on the adequacy of the financial statements?
to be put into the financial statements. That's
managements job. Now management may have its                     MR. NAVA: It's a good point. It does not discuss
own actuaries...just make a recommendation and book              whether the...the paper does not discuss whether 5%
it or may ask the company actuary for a range. But               is okay or 10% is okay. It does say you have to look
the sense of the language in the document is that for            at the reserves and determine your materiality and
the auditor to assess the risk he has to have some               look at variability in comparison to the financial
sense as to what the inherent variability is. Part of            position of the company. So, yes, you definitely have
that, I think, relates to a materiality issue, if the            to look at what the affects are on the equity of the
reserve is so uncertain as to be material to the overall         company.
financial position then I presume some kind of
qualification to the opinion might be appropriate.


                                                           730
MR. LOWE: In m y view this is a challenge that's                they really don't. They all use outside specialists. As
been laid at the actuaries doorstep. The audit material         an auditor and maybe this exposure draft addresses it
simply says, well, gee, you've got an estimate in the           a little more than it was previously...if an outside
financial statement. It's not a quantity that's capable         specialist, essentially, is making recommendations as
of definitive evaluation.        It's material to the           to what the reserves should be and the client records,
company's overall financial position. We think as               according to the specialist. As long as I work and
part of the audit process, the auditor ought to have            talk with the specialist and understand their
some perception and some clear understanding as to              assumptions, how much further, as an auditor, do we
what the inherent uncertainty is of that estimate. I            have to go?
mean, that is their responsibility. In my view, the
actuary's responsibility and as a profession, our               (End of Side One)
responsibility is whether we are company actuaries or
whether we're consulting actuaries, whether we're               ...compares to the company's reports and things like
specialists working for the auditor or specialists              that. That's always been a problem. I mean, how
working for the company. Our job is to come up                  much further do we have to go or can we just rely on
with techniques and some sensible way for                       the actuary?
characterizing that uncertainty and perhaps having our
own standards as to what is a reasonable level of               MR. NAVA: Well, I think you're referring to what
uncertainty associated with an estimate and even how            we call the situation three, where the company uses
we would qualify our own opinion in situations, for             an outside specialist or outside actuary. As long as
example, where the data is inadequate and therefore             the auditor follows the guidance of the...SASll on
the estimate is subject to a great deal of uncertainty.         use of specialists, which is review that specialists
It seems to me that we ought to think about that                qualifications in relationship to the company, that is
ourselves. I think the auditors will look to us to give         enough as long as you have an understanding of
them some guidance as to that level of uncertainty              his...reasonable understanding of his procedures. You
and I think their request is fair and we should be              obviously...you can get into a great circle of, do you
prepared to respond to it by year end 1992. We have             have to be a specialist to evaluate the qualifications of
fifteen months.                                                 a specialist? We obviously can't go that far. But,
                                                                yes, you can use the work of that outside specialist
MR. NAVA: There's nothing, as an auditor, I would               even though he or she is the one setting the reserves.
like better than to have the actuaries in bed with me
when we issue that opinion on the financial                     QUESTION: I was wondering, is it necessary that
statements. There's only one company that I know of             there be agreement between the specialist and the
where the actuarial opinion is actually published in            auditor as to the final number? In other words, in
the company's annual report. It happens to be                   your example, the specialist comes up with a range of
Steve's firm that issues that opinion. I think we               five million to fifteen million and does the auditor
might see more of that. I think there's going to be a           just go along and pick and say, well, eight million
lot more involvement between the auditors and the               looks like a good number? Or does he require the
actuaries and probably see more opinions being                  specialist the concurrence in the reasonableness of the
published.                                                      Vmal number?

MR. LOWE: Other questions?          Anyone have any             MR. NAVA: The final number ultimately is set by
other last words?                                               management. The specialist technically, and this is
                                                                m y opinion, I don't think it's actually stated in the
QUESTION: I do a lot of work for the smaller                    paper...technically the specialist would not...excuse
companies and I don't have in-house people.                     me, the auditor would not have to ask the specialist
Sometimes they think they do, but from our viewpoint


                                                          731
for concurrence on the final number as long as the             MR. LOWE: Well, there the auditor is evaluating
specialist gave the auditor the reasonable range.              management's process.

QUESTION: Alright.                                             MR. NAVA: Right.

MR. NAVA: ...would not have to actually concur on              MR. LOWE: And if management's process to say to
the number selected within the range, although many            the actuary, Well, give me your best estimate and a
times we, as we all know, many times they would                range about that estimate and m y process is to book
have a recommended reserve level would not be                  the bottom of the range, then I think the auditor has
necessary.                                                     to question management's process as to whether or
                                                               not that's a valid process for management to use in
MR. LOWE: I believe that the document suggests                 determining what the reserves should be in the
that essentially if the auditor believes that                  financial statements. And I would hope to see in
management's estimate is within a range that is                more cases the auditor rejecting that and saying, no,
reasonable then the auditor would not take issue with          management has to have a process in place that
that number and with management's number or                    involves taking the work of the specialist. And if
suggest that it needed an audit adjustment.                    management brings in input from other areas and
                                                               says, well, the specialist has not reflected thus or so
MR. NAVA: There are one or two nuances in that.                and can make a cogent argument, then I think the
If the person...if there is a range and the specialist         auditor might very well be satisfied, but I think in too
setting or determining that range or setting the               many instances there is a brazen situation where the
reserves has recommended a most reasonable or best             bottom of the range is simply the number. And I
estimate within that range, then I don't believe that          think that is not acceptable.       And I think this
management can simply pick another number if the               document goes a long way toward trying to say, you
specialist is saying that's the best estimate or if            can't have it that way anymore guys.
management is saying this is the best estimate, but
since I have this range I can select anything in the           Well, we're out of time, so I'm going to have to cut
range. My answer to that is no. Once management                this off. I want to thank Ruben for coming and
has decided that one number within that range is the           filling us in on this document. And thank you for
best estimate then that's the number that has to be            attending.
recorded in the financial statements.




                                                         732
          1991 CASUALTY LOSS RESERVE SEMINAR




5F-2: NEW DEVELOPMENTS IN FASB'S POSITION ON DISCOUNTING




                           Moderator

                      Bertram A. Horowitz
                     Bertram Horowitz, Inc.


                             Panel

                       Allan M. Kaufman
                   Milliman & Robertson, Inc.

                          Wayne Upton
              Financial Accounting Standards Board




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