When captives require multiple actuaries: key considerations

Jason Luckett of SIGMA Actuarial Consulting Group and Ben Brandon of Risk Strategies Consulting look at what happens when a captive sees the need to employ another actuary.

Captive insurance companies often rely on actuarial expertise during the feasibility process, as well as on an annual basis, to meet regulatory requirements. Items that actuaries may assist captives with include pricing of premiums and ensuring the reasonableness of the captive’s loss and expense reserves. 

Actuaries are able to do this based on their high levels of education and experience related to quantifying the financial cost of risk and uncertainty. Typically, an actuary’s expertise falls into one of two broad groups of risk categorisation:

1. Property and casualty

2. Life, health, and pension

Within the US, the credentialling processes related to each of these groups is primarily carried out by separate organisations: the Casualty Actuarial Society (CAS) for property and casualty actuaries, and the Society of Actuaries for life, health, and pension actuaries. An actuarial credential (eg, Fellow of the CAS, Fellow of the Society of Actuaries, etc), relevant education and experience with the risks included in the captive, and membership in a professional actuarial association (eg, Member of the American Academy of Actuaries, etc) commonly satisfy the regulatory requirements for actuarial work on a captive insurance company.

Because captives are often utilised as tools to meet the unique insurance needs of the parent company, situations can arise in which risks from each of the two groups outlined above are included within the captive. In a situation like this, the appointed actuary may need to make use of the work of another actuary with relevant qualifications related to coverages outside the scope of their own expertise.

Best practices 

A captive’s appointed actuary who is relying on the work of another actuary as part of its services must be aware of and in compliance with several best practices promulgated through various Actuarial Standards of Practice (ASOPs). These can range from quantitative considerations that may impact the actuary’s assessment of the captive’s viability or the risk of material adverse deviation to professional courtesy items. Two key areas of these best practices include considerations regarding the use and review of another actuary’s work and communications with both the client and the other actuary.

If an appointed actuary believes it is necessary to incorporate additional actuarial expertise, they must first determine if it is reasonable to do so. The actuary should understand the intended purpose of the work performed by the other actuary and assess whether it is consistent with the scope of their own analysis and aligns with the expectations of the end-users. They should discuss any concepts with the other actuary that may be outside the scope of their own expertise so that they can comment on such concepts, as necessary.

When reviewing the work of the other actuary, the appointed actuary should take several items into consideration, such as:

• The nature and characteristics of the risk(s) the other actuary is analysing;

• The amount of the liabilities covered by the work of the other actuary in relation to the scope of the appointed actuary’s opinion;

• The impact that reasonable variations in the other actuary’s estimates may have on the total liabilities within the scope of the appointed actuary’s opinion; and

• The reasonableness of the data, methodologies, and assumptions utilised within the analysis of the other actuary.

Each of these items may influence the appointed actuary’s assessment of the captive’s risks and could impact the disclosures included within the actuarial analysis, so it is important that each be given sufficient consideration.

In these situations, the appointed actuary should also comply with communications standards outlined by ASOP 41. This practice involves clear communication with the captive regarding such items as:

• The use of and extent of reliance on the work of another actuary;

• The reason for requiring the other actuary’s work; and

• How the use of the work of the other actuary will be addressed and documented within the analysis.

When communicating with another actuary regarding the use of their work, in addition to complying with ASOP 41, the appointed actuary should adhere to professional courtesy practices, such as clearly communicating necessary timelines for completion, specifying of the exact type of deliverables expected, and providing any feedback related to the other actuary’s analysis within a timely manner.

“The appointed actuary should adhere to professional courtesy practices, such as clearly communicating necessary timelines for completion.”

Required disclosures

A captive’s appointed actuary who is relying on additional actuarial expertise should make sure that they have appropriately disclosed the use and considerations of such work within their actuarial report and Statement of Actuarial Opinion (SAO) letter. These disclosures should comply with ASOP 28 and ASOP 36. Required disclosures may include such items as:

• The extent of reliance on the work of the other actuary and items for which the appointed actuary does not assume responsibility;

• The extent of the appointed actuary’s review of the outside work;

• The name, credential, and affiliation of the other actuary; and

• Whether the appointed actuary believes the assumptions and methods selected by the other actuary are reasonable for the purposes of the analysis based on the actuary’s professional judgement, or if they feel they are unable to judge the reasonableness of these items either based on their own qualification or without performing a substantial amount of additional work beyond the scope of the analysis.

Captive insurance companies can be a great tool, as they are uniquely capable of meeting the specific insurance needs of the parent company. However, their use may involve risks that fall outside the captive’s appointed actuary’s qualifications and experience. In these cases, it is important for the appointed actuary to be able to utilise the expertise of another actuary so that the captive understands the financial impact of its entire risk portfolio. 

It is also important that the captive is in communication with the appointed actuary regarding appropriate ways to handle and disclose this within the annual actuarial analysis and SAO letter.

Jason Luckett is an actuarial consultant at SIGMA Actuarial Consulting Group. He can be contacted at: jason@sigmaactuary.com

Ben Brandon is a senior consulting actuary at Risk Strategies Consulting.

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