Insurance auditors and actuaries of North America--2007.

North American insurers increasingly are seeking the services of external or unaffiliated actuarial firms to provide actuarial opinions for annual statutory filings. This is perhaps the most striking change in the data gathered as part of A.M. Best's 2007 annual review of the North American (United States and Canada) accounting and actuarial markets as they relate to the insurance industry.

At work here appears to be some spirit of the Sarbanes-Oxley Act of 2002, with not only companies moving away from the use of internal or affiliated actuarial opinions to the use of independent actuarial firms, but also the survey results show some insurers moving away from using the same firm in both auditing and actuarial functions.

Although the movement to outside actuarial firms involved a number of companies, one particularly notable circumstance involved the use of Milliman by American International Group to evaluate the reserves of all its property/casualty subsidiaries. Previously, AIG had used just internal or affiliated auditors for its annual statutory filings.

As in the 2006 study, both the auditor and actuarial markets remained dominated by a handful of firms servicing the larger, group-affiliated insurers, with a significant number of smaller accounting and actuarial firms filling the needs of small independent insurers and those with less standard ownership or profit structures.

Among the larger auditing and actuarial firms, however, there has been some shift in market concentration, in addition to the increasing insurer use of outside actuarial services. Based just on the count of insurance company clients, as shown in Exhibit 1, the market share of the "Big Four" accounting firms declined to 74.6% as of the 2005 statutory filings, from 78.3% in 2004, against a 2.2% increase in the universe of audited insurers.

For the top six actuarial firms, overall market share increased slightly to 54.5% from 53.1%, but that was in a universe that increased 12.2% year-to-year. As shown in Exhibit 2, the overall portion of insurers using external actuarial firms for their statutory filings increased to 57.9% in 2005, from 53.6% in 2004.

Methodology

By examining the year-end 2005 statutory filings for 4,231 North American insurance companies,A.M. Best identified accounting and actuarial individuals and firms used by insurers. The surveyed universe of insurers wrote more than 98% of industry net premiums, but it did not include companies designated "NR-1" (Insufficient Data) by A.M. Best, where data were obtained from the National Association of Insurance Commissioners, or restricted-information companies that often were new insurers. Also, the client counts and related financial data used in this study reflect only the statutory data, and do not account for other business relationships that may exist between insurers and the various auditing and actuarial entities.

John Williams and Carole Ann King are members of the A.M. Best Analytical Services Group.

Exhibit 1

Auditing Firms
Ranked by Count of Insurance Company Clients

                                   2005                   2004

                         Total # of       % of   Total # of   % of
Rank   Auditing Firm        Clients   Universe      Clients   Universe

1      Pricewaterhouse          998      23.8%        1,064      26.0%
       Coopers
2      Ernst & Young            797      19.0%          789      19.3%
3      KPMG                     704      16.8%          734      17.9%
4      Deloitte                 624      14.9%          617      15.1%

       Total Top Four         3,123      74.6%        3,204      78.3%

Actuarial Firms

Ranked by Count of Insurance Company Clients

                                   2005                    2004

                         Total # of       % of   Total # of       % of
Rank   Actuarial Firm       Clients   Universe      Clients   Universe

1      Milliman                 345     15.3%           258      12.8%
2      Pricewaterhouse          256     11.3%           220      10.9%
       Coopers
3      Towers Perrin            229     10.1%           210      10.4%
4      KPMG                     160      7.1%           150       7.4%
5      Ernst & Young            131      5.8%           131       6.5%
6      Deloitte                 111      4.9%           101       5.0%

       Total Top Six          1,232     54.5%         1,070      53.1%

Note: The auditors and actuaries ranked are those firms with total
insurance company client counts greater than 100.

The universe of counted insurers includes only those with indicated
auditors or external actuaries.

Exhibit 2

Insurance Company Use
Of External vs. Internal Statutory
Actuarial Opinions, 2005 vs. 2004

             2004    2005

Internal    46.4%   42.1%
External    53.6%   57.9%

Source: A.M. Best Co.

Note: Table made from bar graph.