How (and Why) to Read a Statement of Actuarial Opinion (Property/Casualty)

As a board member, you may have been given a “Statement of Actuarial Opinion” with respect to the year-end financial results. But what is this document, and should you even read it?

The National Association of Insurance Commissioners (“NAIC”) requires that a qualified actuary issue a statement of opinion on certain reserves included in the annual financial statement of an insurance company.

The NAIC also requires that the Appointed Actuary’s report, discussing his findings, be made available to the Board of Directors.

Why should you read it, and how do you navigate through it?

Loss Reserves are generally the largest liability listed on an insurance company’s balance sheet. These reserves are the amounts set aside to pay for claims that have already occurred and for which the company is obligated to pay, whether they have been reported to the company or not.

The underlined portion of the prior paragraph is what emphasizes the importance of the actuarial analysis. The loss reserves on the books of an insurance company are not just an accounting exercise; they also involve the estimation of the final costs of claims in process and claims not yet reported to the company.

In the past, a high percentage of property/casualty insurance company insolvencies have been due to the inadequacy of these reserves. In order to verify the reasonableness of these reserves, each state now requires that there be an attestation, formally called the “Statement of Actuarial Opinion,” (SAO) and frequently referred to as an “opinion,” by a qualified professional actuary.

Is it a clean opinion?

One of the first questions asked of the opining actuary is whether the opinion is “unqualified” or “clean” or not. A clean opinion states that the loss reserves:

  1. Meet the requirements of the domiciliary state,
  2. Are consistent with reserves computed with accepted loss reserving standards and principles, and,
  3. Make a reasonable provision in the aggregate for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements.

The first two items are rarely an issue; it is the third point that usually prompts the question. In a sense, a “clean” opinion is saying that in the actuary’s opinion, the booked loss and loss expense reserves are reasonably sufficient.

The alternatives to a “clean” opinion are generally not good, and are outlined below:

A Qualified opinion happens when the reserves for a certain item or items are in question; either they cannot be reasonably estimated, or the actuary is unable to render an opinion on those specific items. (Note: if there is a loss for which the actuary has no means of determining the ultimate value, but the perceived value is not material, the opinion can still be “clean.”)

A Deficient or Inadequate Opinion This is the one you do not want to see. When the carried reserve amount is less than the minimum amount believed to be reasonable, the actuary will issue a Statement of Actuarial Opinion specifying that the carried reserve amount does not make a reasonable provision for the liabilities associated with the specified reserves. 

A Redundant or Excessive Opinion is very rare and occurs when the carried reserve amount is greater than the maximum amount believed by the actuary to be reasonable. In this situation, the actuary issues a redundant opinion.

A No Opinion is another rare rendering. The actuary’s ability to give an opinion is dependent upon data, analyses, assumptions, and related information deemed sufficient to support a conclusion. If the actuary cannot reach a conclusion due to deficiencies or limitations with this information, he/she may issue a statement of “No Opinion” which should include a statement as to why no opinion could be given.

Subsequent and Significant Sections of the SAO:

If the opining actuary thinks there may be an impact on the loss and loss expense reserves due to COVID-19 or any other specific item, they should say so.  Lack of such a comment does not mean there is no impact, just that the impact is not material to the loss and loss expense reserves.

The “Relevant Comments” section starts with “Risk of Material Adverse Deviation” and answers three important questions:

  1. Is there a risk of a material deviation (i.e., change) from the loss and loss expense reserves booked?
  2. How large does a possible deviation need to be to be considered “material?”
  3. What is/are the source(s) of such a deviation(s)?

An indication that there are one or more items that are a potential source of risk of material deviation may or may not be a cause for concern. The absence of a risk of material adverse deviation does not imply that additional factors will not be identified in the future as having a significant influence on the company’s reserves; it is a statement concerning a point in time.

While the interest in Asbestos Exposures and Environmental Exposures has waned in recent years, these can still represent a significant exposure to the company. These are addressed in the section bearing that as a title.

Most companies do not write policies with durations over thirteen months, but the section titled Disclosure of Unearned Premium Reserves for Long Duration Contracts will provide information to that effect.

The Reinsurance Collectability section provides information pertaining to the likelihood of the company’s ability to collect on its reinsurance. While the actuary’s comments do not imply an opinion as to the financial stability of any of the reinsurers, it should include information from management regarding any collectability problems the company has encountered with its reinsurers. Publicly available information, as well as the reinsurers’ ratings provided by a rating agency, are used by the actuary to reach his/her conclusion.

The National Association of Insurance Commissioners (NAIC) has a series of mathematical formulae, or “NAIC IRIS Tests,” that are applied to various Annual Statement entries. Of the thirteen formulae, the last three, Tests 11, 12 and 13, concern the booked loss and loss expense reserves. The actuary is required to look at these tests and comment on any that fall outside the range of acceptance: i.e., they “fail” the test.

If the company fails any of these tests, the actuary will provide a narrative as the level of importance of this failure.

More detailed information is available at:

The final pages of the opinion include the signature page and any supporting exhibits providing selected values.

In summary, the SAO should answer the following:

  • Is the opinion qualified or unqualified (i.e., “Clean”)?
  • How financially large does a deviation need to be to be a material risk to the finances of the company, and are there any such risks?
  • Did the company fail any IRIS Tests? And if so, why?

If you have any questions on this topic, please contact your Huggins Actuarial Services consulting actuary.

Authored by:


Consulting Actuary

Huggins Actuarial Services, Inc.