Management and the Actuary Involvement In Reserve Review Process

1. Management and the ActuaryInvolvement In Reserve Review Process Roger Atkinson, FCAS, MAAA Casualty Actuarial Society Spring Meeting May 2004

2. Introduction: Transparency of Process How The Process Evolved Changing Indications – Need To Explain Internal / External Increased Need For Transparency: Claim and Actuarial Processes Increased Need For Predictability Entire Process Reviewed With Leadership Team

3. Introduction: Transparency of Process Step 1: Ground Management in Process Step 2: Ground Management in Key Methods Step 3: Develop Monitoring Discipline Step 4: Develop Regular Reporting, With Consistent Language Desired Outcome: Transparency with Broad Functional Involvement

4. Grounding In Process – Process Map Segmentation Data Input Analysis Reporting

5. Grounding In Process – Process Map Segmentation Data Input Analysis Reporting Understanding of Basic Groupings Why do segments change? e.g., emergence of subgroup with different patterns Organization: AY, UY, PY Understanding of Segmentation Principles

6. Grounding In Process – Process Map Segmentation Data Input Analysis Reporting Data Sources How Reconciled With Financial Data Types of Data: Premium, Losses, Counts Data Security

7. Grounding In Process – Process Map Segmentation Data Input Analysis Reporting Methods Used Sources of Patterns Initial ELR Development Diagnostics How Selections / Recommendations Are Made

8. Grounding In Process – Process Map Segmentation Data Input Analysis Reporting Internal Timing of Analyses Depth of Analyses How Report External Regulators Auditors

9. The Analysis Process Rec. Data Define the Process…..

10. The Analysis Process - Stages Data Actual Loss Variance From Expected Method Response Actuarial Adjustment DEPARTURE FROM DEFAULT DEFAULT PROCESS Define the Process….. Rec.

11. The Analysis Process The Basic Loss Process

12. The Analysis Process LDF Ultimate . Born-Ferg Ultimate . Expected Data Point: .35 of Ultimate Actual Data Point: .5 of Ultimate Born-Ferg Response: Add difference to Ultimate (1.15) LDF Response: Multiply point by (1/.35) = 1.43

13. The Analysis Process – Actual vs Expected Creates Management Interest in Loss Flow Compared To Reserve Model Expectation / Benchmark - Measurable More Frequently and Quicker Than Reserve Reviews (assemble from basic financial data) - Creates Quicker Resolution of Data Issues - Interest in Results: Claims, Underwriting - More Communication With Claims Than Typical In Industry - Additional Monitors Developed To Assist Analysis .

14. The Analysis Process – Actual vs Expected But Beware: - When React to Variance? - Monitors Do Not Replace Reserve Review - Anticipate Question: “What Will This Do To The Numbers?” - Scrutiny of the Expected Losses: Changes Undermine Credibility - Will Consume Resources: Actuarial, Claims - Actuarial Resistance .

15. The Analysis Process – Actual vs Expected Level of Detail Build From Lowest Level (Segment By Year) Reports to Management: Paid Reported Accident / Policy / Underwriting Year Collapsed Segment Level Graphs Narrative With Explanations Be Complete! .

16. The Analysis Process – Actual vs Expected The Monthly Discipline Preliminary Numbers Assembled, Reviewed By Actuaries - Large variances immediately investigated Share Data With Business Leaders – Prepare For Questions General Communication to Senior Leadership, with Narrative Follow-Up On Additional Questions .

17. The Analysis Process – Actual vs Expected • Considerations • Inclusion of current AY • Ranges for Expected Loss / Control Charts • How Frequently Expected Losses Updated: (YE only, quarterly) • Analysis of Report: Prior to Communication? • Frequency of Report: Weekly, Monthly • Expected Loss Issues – seasonality, “claim days” • Methodology for Expected Calculation – not just emergence • Large vs. Flow vs. Cat Loss – helps explain variation .

18. The Analysis Process – A v E In Reserve Review . Consistent Discipline Throughout Process

19. The Analysis Process – A v E In Reserve Review . Analysis Lends Itself to Graphical Representation

20. Lessons Learned From Increased Transparency Once process is mapped and understood, natural monitors evolve Increased accountability of actuarial staff - Judgment more transparent - Accuracy more transparent - Consistency: Define default process The information needs are as granular as ultimate analysis: - Year - Segment - Sub-Segment Fewer surprises emerge, improving actuarial credibility .