During the financial reporting conversations, the major discussion points were liability ranges, gross and net liability reporting, discounting reserves, and Sarbanes-Oxley.Estimate ranges
We jump-started the conversation by taking a quick poll to see who got central estimate liability estimates in their actuarial reports and who got ranges or percentiles. Most companies were receiving (and booking) the best estimate reserves and next-year projections from their actuaries and a few got high and low range estimates of their reserves and projections. One risk manager noted that, while the central estimate will be too high half the time and too low half the time, a 50% chance of being too low was not good enough for him and he wanted to be "right" (that is, have adequate reserves) at least 75% of the time, therefore he asked his actuary for percentiles.
We discussed that a given range for liabilities or projections implies that all numbers within the range are equally probable whereas a percentile gives the probability of each possible outcome. Percentiles are useful for testing worst-case scenarios and stress testing capital.
Discounting
Only one risk manager reported receiving both undiscounted and discounted reserves. The majority of our healthcare clients discount their medical malpractice reserves but few corporations discount theirs. Discounting is allowed if 1) your liability is reliably determinable; 2) the amount and timing of the liability's payments are reliably determinable; and 3) the expected insurance recoveries are also discounted. And if your actuary just calculated your liability and can use your historical claims-based payment pattern, the liability and its payments are reliably determinable. At the current low levels of discount rates, this may not be as tempting as when clients were able to use 5% or 6%. Note that the amount of discount will change as the rates change. In the current climate, undiscounted liabilities that remain flat review after review will see their discounted liabilities "grow" as the discount rate decreases.
Gross liability
We also spoke to one risk manager whose auditor required her company to record both their net and gross liabilities. Again, this is explicitly required by our healthcare clients' auditors but we've yet to see it with many corporate clients. We wouldn't be surprised to see this become a more common practice. Showing the gross reserve liability and an insurance recoverable will net out to what most corporations are currently putting on their books. However, the insurance recoverable acknowledges the counterparty risk embedded in the insurance contracts. If a company's net reserve liabilities assumed reimbursements from insurance companies that subsequently failed to fully pay their claims, they would be understated. Looking at gross liabilities shows the total amount the company is liable for--some to be paid by the company, some to be paid by the insurer--and acknowledges that the amount to be paid by the insurer isn't a guarantee.
Sarbanes-Oxley
The Sarbanes-Oxley Act explicitly states that an audit firm cannot both estimate and audit claim reserves. Boards of directors, senior management, and many auditors have established a best practice of having an actuary who is independent of both the auditor and the broker. This ensures the objectivity of the actuarial estimates. While this was emphasized less for private companies and more for publicly traded companies (which also perform actuarial reviews more frequently), the movement to independent actuaries is growing.