Property/Casualty Loss ReservesChuck Emma, FCAS, MAAA

Pinnacle Actuarial Resources, Inc.

CAS Annual MeetingNovember 15, 2005

Background

• Company Failures/Impairments/Downgrades

• Public Scrutiny

• Nov. 2003 S&P Article

• Continuing Reserve Developments

Framing the Scrutiny

Who is saying what and why do they care?

• “Actuaries are signing off on reserves that turn out to be wildly inaccurate.”

• “Whether by naiveté or knavery ... reserve additions have undermined confidence in estimates ...”

• What an outside analyst seems to want• Don’t let the reserves disturb the earnings projections• Explanations and caveats … “yeah, yeah, yeah”

Scrutiny and Criticism

Some of the points have merit, but ...

... there are problems with the reasoning

• Observation: “Reserves are developing adversely”

• Conclusion: “Actuaries are either stupid, are crooks, or are both.”

The Questions

• Are reserve developments a cause of, a symptom of, or a lagging indicator of the industry’s problems?

• Is the SAO serving the industry properly?

• What is the role of actuarial practice?

Scrutiny and Criticism

Profession’s Response

• Some heard this as a educational challenge

• Some saw it as a chance to advance reserving methodologies (and sell software)

• Some wondered if they should continue signing opinions

Development as % of Surplus

 

Missing less than -10%

-10% up to -5%

-5% up to 0%

0% up to 5%

5% up to 10%

10% and up

 

# of Co's # of Co's # of Co's # of Co's # of Co's # of Co's # of Co's

Year

30 448 330 754 506 114 2201998

1999 19 350 326 746 565 125 210

2000 19 296 269 799 556 142 210

2001 17 280 231 632 604 159 349

2002 31 208 178 593 636 207 369

2003 60 201 180 644 601 208 341

2004 64 200 260 710 603 140 238

Development as % of Reserves

 

Missing < -10% -10% to -5%

-5% to 0% 0% to 5% 5% to 10% 10% to up

  # of Co's # of Co's # of Co's # of Co's # of Co's # of Co's # of Co's

Year

143 761 335 427 297 128 3111998

1999 107 696 293 430 393 121 301

2000 130 647 252 442 350 151 319

2001 119 602 200 330 377 199 445

2002 138 520 192 258 409 212 493

2003 165 501 179 338 400 215 437

2004 167 547 229 387 395 185 305

Analysis of Company Developments

• $35BB over two years

• 30 Largest Developments

• 2003: Top 30 approximated total industry development

• 2004: Industry developments much better than Top 30

30 Companies

• Where’s This Coming From?

• 35-40% Asbestos related

• 40% “Reinsurance”, Excess Casualty

• 30% includes WC, MM, Mold

• Did anyone notice that industry surplus grew significantly over the past three years?

30 Companies

• SAO’s

• RMAD disclosure slow to show• 50% had RMAD’s in 2002• 67% had RMAD’s in 2003• 83% had RMAD’s in 2004

• 80% of appointed actuaries are employees

• A&E represents approximately 10% of reserves as stated in the SAO

Analysis of Company Developments

• What Does this Mean?

• Underlying factors can not be isolated to one or two factors

• Public Perception

• Management’s responsibility• Actuaries’ responsibility

What’s Next?

• Optimism:U/W results are better

More adequate?

• Pessimism:Recent developments continue?

Markets softening?

EIL Reserves -- coming back?

What’s Next?

• SarbOx Impact• Section 404 – CEO/CFO must come to know much

more about reserving process • SarbOx for all companies?

• More Disclosures• Risk / variability / uncertainty• Relationship of reserves beyond solvency to viability• CAS Task Force on Credibility – Six significant

recommendations

Future Considerations

Potential Major Changes ?

More Disclosures• Differences in estimates

• Changes in estimates

• Variability

Greater Visibility of Actuary

Mandatory calls to ABCD in more situations