ASOP No. 39's Second Exposure Draft Adds Cat Model Adjustment Documentation Rules

The Actuarial Standards Board's April 1, 2026 second exposure draft of ASOP No. 39 creates the first formal actuarial standard specifically governing how P&C pricing actuaries must document adjustments to catastrophe model output when raw vendor results diverge from historical experience or professional judgment. Three substantive changes from the December 2024 first exposure draft, which drew 10 comment letters, carry direct implications for rate filing workflows; the comment deadline is July 1, 2026 (ASB, April 2026). Every actuary who blends modeled and historical catastrophe estimates in a filing needs to understand where the new standard draws the compliance boundary.

A 25-Year-Old Standard and a Changed Modeling Landscape

ASOP No. 39 was first adopted in 2000, when catastrophe simulation models were still proving themselves against Hurricane Andrew (1992) and the Northridge earthquake (1994), and most rate filings relied primarily on historical company or ISO data for the cat provision (ASB, 2000). The standard's original title, "Treatment of Catastrophe Losses in Property/Casualty Insurance Ratemaking," anchored it to ratemaking alone. In the intervening quarter century, stochastic vendor models from Verisk, RMS, and CoreLogic became the default tool for cat loading in homeowners and commercial property, while deterministic scenario analyses proliferated as regulators and reinsurers began requesting scenario-specific outputs alongside exceedance probability curves. The standard did not keep pace with either shift.

The December 2024 first exposure draft made a first pass at modernization, drawing 10 comment letters from actuarial organizations and state regulators (ASB, 2024). The April 2026 second exposure draft incorporates those responses and makes three changes with direct pricing workflow consequences.

Three Substantive Changes in the April 2026 Draft

Unified catastrophe definition. The second exposure draft eliminates the separate "extreme event" definition that existed alongside "catastrophe" in both the original standard and the first exposure draft. All low-frequency, high-severity events now fall under a single "catastrophe" definition. Multi-state severe convective storm outbreaks, wildfire series, and correlated inland flood events are catastrophes under this standard, not a separate category requiring parallel treatment (ASOP No. 39 Second Exposure Draft, ASB, April 2026). For most pricing actuaries, the practical effect is streamlined classification: the question of whether a peril is a "catastrophe" or an "extreme event" for ASOP 39 purposes disappears. Actuaries who have maintained distinct provisions for events classified as extreme-but-not-catastrophic must revisit that classification and determine whether the unified definition changes their approach or their disclosure language.

Deterministic scenarios inside the cat model definition. This is the provision with the widest immediate operational impact. The second exposure draft adds "deterministic scenario analyses" to the definition of a "catastrophe model" (ASOP No. 39 Second Exposure Draft, ASB, April 2026). A wildfire smoke ingress scenario, a hurricane coastal inundation analysis built in-house, or an inland flood scenario developed for a specific county-level concentration now falls within ASOP 39's documentation requirements alongside stochastic Verisk or RMS outputs. The documentation and disclosure requirements that previously applied to vendor model runs now apply equally to deterministic scenarios. An actuary who develops a Gulf Coast Category 4 landfall scenario to supplement or validate a stochastic output must document the source data, the parameter assumptions underlying the scenario, and the basis for the frequency assigned to it with the same rigor as the vendor model. Scenarios constructed informally in spreadsheets and applied to pricing without structured documentation no longer meet the standard.

Formal guidance on adjusting cat model output. New Section 3.11 codifies what was previously informal practice. When an actuary adjusts raw vendor model output, the standard now requires documentation of the rationale for the adjustment, a comparison of the adjusted distribution to historical loss experience, and a demonstration that the resulting frequency and severity distribution is reasonable (ASOP No. 39 Second Exposure Draft, Section 3.11, ASB, April 2026). This section carries the most direct workflow impact for specialty lines where model calibration to carrier data is routine but rarely formally documented.

Section 3.4.4: The Basic and Excess Framework and Its Credibility Implications

Section 3.4.4 of the second exposure draft permits blending historical experience with cat model output when "in the actuary's judgment, it is reasonable to do so," specifying that the blending "may include approaches comparable to a basic and excess actuarial methodology" (ASOP No. 39 Second Exposure Draft, Section 3.4.4, ASB, April 2026). The explicit reference to the basic/excess framework gives formal grounding to a technique pricing actuaries have applied informally for years, particularly in lines where vendor model coverage is incomplete or where the model's default assumptions diverge materially from a carrier's book: inland marine, small commercial property, excess and surplus lines, and agricultural.

The framework works as follows. The actuary defines a threshold annual cat loss level, analogous to a basic limit in per-occurrence severity analysis. The "basic" layer covers the portion of expected annual catastrophe losses below this threshold, where the carrier may have enough historical event data to develop a credible frequency estimate. The "excess" layer covers tail events above the threshold, where carrier-specific historical data is sparse by construction and vendor model output carries the majority of the weight.

The critical actuarial judgment is the credibility weight Z assigned to the carrier's historical data in each layer. For catastrophe perils, the coefficient of variation of annual cat losses far exceeds the CV of non-cat loss components, which severely compresses the credibility achievable from any carrier's historical record. A carrier writing approximately $400 million in Gulf Coast coastal residential homeowners premium with 15 years of continuous hurricane experience faces an annual cat loss distribution with a CV well above 2.0. Under standard credibility procedures, achieving Z above 0.20 in the basic layer would require substantially more years of stable, peril-specific data than most carriers possess. In this illustrative example, an actuary might reasonably assign Z = 0.12 to the carrier's historical hurricane estimate. The blended expected annual cat load is:

Blended Load = Z × Historical + (1 − Z) × Model Output = 0.12 × H + 0.88 × M

If the carrier's historical estimate is $8 million in annual expected hurricane losses and the Verisk model output is $24 million, the blended load is $22.2 million, with 88% of the weight on vendor model output and 12% on observed experience. The one-standard-deviation band around that blended estimate, reflecting the high CV of the cat distribution, informs the filing's Section 4 disclosure and feeds directly into the reinsurance purchase analysis.

The practical consequence for rate filings is explicit documentation requirements. The actuary must now show the Z value, the threshold separating the basic and excess layers, and the rationale for why the carrier's historical data in the basic layer warrants that credibility weight. Regulators reviewing filings under ASOP 39's disclosure requirements can expect this as a standard deliverable rather than a supplemental exhibit prepared on request.

Small regional carriers filing in NCCI or individual-state jurisdictions often rely on carrier-specific historical cat experience with minimal formal model support, particularly in inland marine and small commercial property where vendor models have limited geographic granularity. ASOP 39's new documentation requirements raise the compliance bar for these filings. The standard does not prohibit a primarily historical approach where model output is genuinely unavailable or lacks credibility, but it does require the actuary to document why that historical basis alone constitutes a reasonable foundation for the cat provision and to compare the resulting load to any available model output.

Section 3.11: What Adjustment Documentation Now Requires

The new Section 3.11 guidance addresses a common but previously underdocumented practice: reducing or increasing raw model output to account for portfolio characteristics that differ from the vendor model's default assumptions.

A representative case illustrates the new compliance burden. A carrier running Verisk Touchstone for a Gulf Coast homeowners book determines that raw model output overstates expected losses because its portfolio skews toward homes built between 1995 and 2010. These structures benefit from post-Andrew building code enforcement in Florida and Louisiana but predate the more stringent 2010-era updates following Hurricanes Ike and Irma. The carrier's engineering team estimates the vintage composition warrants a 20% downward adjustment to the stochastic output for this book.

Under ASOP No. 39 as previously written, that adjustment was typically supported by a brief paragraph in the filing noting the actuary's professional judgment. Section 3.11 raises that standard in three ways: the actuary must document the actuarial basis for the 20% factor, including any engineering methodology and data relied upon; compare the adjusted loss distribution to the carrier's historical hurricane experience to confirm the adjusted result is consistent with observed losses; and disclose the adjustment explicitly in the actuarial communication accompanying the filing.

For specialty lines where model calibration to carrier data is routine, this is not a trivial administrative expansion. Actuaries running customized RMS modules, applying carrier-specific vulnerability functions that diverge from model defaults, or incorporating surplus lines factors into Verisk output should build systematic adjustment documentation workflows now. The filing practice that satisfied the existing standard will not satisfy Section 3.11 once the revised standard takes effect. The documentation template should capture, for each adjustment: the adjustment factor or function, the data source and methodology used to derive it, the comparison of adjusted versus unadjusted output against historical loss experience, and the actuary's reasonableness conclusion.

Scope Beyond Ratemaking: Capital, Stress Testing, and Captives

The second exposure draft extends ASOP 39's reach from ratemaking to "capital adequacy, stress testing, risk metrics estimation, and risk retention arrangements including captives and large deductible programs" (ASOP No. 39 Second Exposure Draft, ASB, April 2026). Any actuary whose cat model outputs flow into an ORSA filing, an enterprise risk model, a reinsurance evaluation, or a captive feasibility study is now within scope.

The captive application is direct. Corporate risk managers operating single-parent captives for property catastrophe risk typically rely on an actuarial opinion incorporating vendor cat model output to set funding levels. Under the revised standard, the actuarial opinion supporting captive pricing must meet the same cat model documentation and output-adjustment standards as a state-regulated rate filing. Actuaries who have applied informal standards in captive work because it sits outside the regulatory filing context should review current practices against the revised requirements.

The stress testing implication is consequential for insurers subject to NAIC ORSA requirements. Cat scenario outputs used in ORSA capital stress tests are now within ASOP 39's scope, meaning the documentation requirements for those scenarios, deterministic ones included, apply whether or not the outputs ever reach a state rate filing. An actuary who develops a 1-in-250-year hurricane scenario for an ORSA submission using a vendor model, then adjusts the output for portfolio vintage, must now document that adjustment under Section 3.11, not just the ORSA narrative.

Comment Deadline and the Adoption Outlook

The comment period closes July 1, 2026. The ASB accepts comments electronically through its standard portal. The 10 comment letters received on the December 2024 first exposure draft produced three substantive revisions in this second version, including the elimination of the extreme event definition and the new output-adjustment guidance in Section 3.11. The record suggests the ASB incorporates technical actuarial input into the final text. Pricing actuaries and enterprise risk teams with practical concerns about the deterministic scenario classification, the Section 3.11 adjustment burden in specialty lines, or the scope expansion to capital analyses have five days to put those concerns on the record.

Adoption timing is not specified in the draft, but the pattern from recent ASOP revisions suggests a final standard 12 to 18 months after the second exposure draft comment period, with a four-month effective date after adoption. Pricing departments that begin building the documentation infrastructure now, before the final standard is in place, will have a compliance advantage. The basic/excess credibility structure, the output-adjustment documentation template, and the deterministic scenario documentation workflow are all practical additions to a filing toolkit that the standard will require. Waiting until adoption is announced compresses the preparation window considerably.