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Understanding the Actuarial World
Outline What Is An Actuary?
What Do Actuaries Do?
Statements of Actuarial Opinion
Reserving
Pricing
What Makes a “Good” Actuary
Summary
Questions
2
What is an Actuary?
“Math geeks” -- attracted to actuarial work because of the numbers
Stuck in the back rooms
3
Once Upon a Time…
NOW… Consulting has grown, actuarial roles have expanded
Dweebs still around but more “normal,” well-rounded people are working as actuaries and interacting with non-finance personnel
Definition of Actuary
4
Actuaries put a price tag on risk. We are leading professionals in finding ways to manage risk, and are experts in:
• Evaluating the likelihood of future events • Reducing the impact of undesirable events • Designing creative ways to reduce the likelihood of undesirable
events Actuaries apply our mathematical expertise, statistical knowledge, economic and financial analyses, and problem-solving skills to a wide range of business problems. Actuaries help companies evaluate the long-term financial implications of their decisions, we develop new ways to manage risk, and we estimate the costs of uncertain future events ranging from tornadoes and hurricanes to changes in life expectancy
We prefer this one!
Professional Organizations
American Academy of Actuaries (AAA)
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Casualty Actuarial Society (CAS)
Society of Actuaries (SOA)
Historical Number of Credentialed Actuaries
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1978 1988 1998 2008 Current
FCAS/ACAS 784 1,437 3,059 4,818 6,100
FCAS = Fellow Casualty Actuarial Society ACAS = Associate Casualty Actuarial Society
1969 1989 1995 Current
FSA/ASA 3,544 11,784 16,942 24,000
FSA = Fellow Society of Actuaries ASA = Associate Society of Actuaries
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What Do Actuaries Do?
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Pricing Rate Level Adequacy Reviews / Rating Plan Analyses / Funding for Self-Insureds / Regulatory Rate Filings / Reinsurance Negotiations
Statements of Actuarial Opinion / Annual and Interim Reserve Analyses / Profitability Analyses / Assistance with Regulatory Examinations / Commutations
Reserving
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Miscellaneous Feasibility Studies & Pro Formas / Reinsurance Advice / Expert Testimony & Litigation Support / RBC Analyses / Pension and Retiree Medical Valuations
GOVERNMENT / PUBLIC POLICY WORK:
Medical Malpractice “Crisis” / Credit Scoring / PPACA /
Social Security and Medicare
SOFTWARE:
Rating / Reserving
Insurers
Reinsurers
Agencies/Brokers
Regulators
Lawyers
Government
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Who Uses Actuaries? Self Insureds
Captives
Start-ups
Health Entities
Life / Pension Entities
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Statements of Actuarial Opinions (and other stuff)
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Actuarial Opinion Requirement Statement of Actuarial Opinion
Actuarial Opinion Summary
Actuarial Report
ITEMS REQUIRED IN STATEMENT OF ACTUARIAL OPINION
Identification
Scope
Opinion
Relevant Comments
Exhibit A: Items and amounts on which the actuary is expressing an opinion
Exhibit B: Disclosures of items affecting the opinion
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Opinions Must State That The Amounts… Meet the requirements of the insurance laws of the
state of domicile
Are computed in accordance with, or are consistent with reserves computed with, accepted actuarial standards and principals
Make a reasonable provision for all unpaid loss and loss expense obligations of the company under terms of its contracts and agreements
Companies that, for example, have $100K of property reserves and $5M of surplus
Opinions are more compliance, will not impact solvency or financial strength
Materiality threshold is high
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The Spectrum: Compliance or Value Added Analysis? COMPLIANCE
Clients look to actuaries for strategic input based on reserve analyses
Very complicated
Material changes in conclusions can impact the financial statements significantly
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The Spectrum: Compliance or Value Added Analysis?
VALUE ADDED
Reserving
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What Exposures Can Be Projected to Ultimate? Loss and/or Expense (ALAE) Paid and/or Reported Claim Counts Severities Premium ALAE / Loss Ratio Active Life Reserves Disabled Life Reserves
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Paid Loss Development Method Paid Loss Months of Development
Accident Year 12 24 36 48
2005 464,200 582,880 592,820 592,820
2006 485,270 520,935 523,874
2007 202,840 319,380
2008 175,236
Development Factors
Accident Year 12-24 24-36 36-48 48-ult
2005 1.256 1.017 1.000
2006 1.073 1.006
2007 1.575
2008
Average 1.301 1.011 1.000
Weighted Avg. 1.235 1.012 1.000
Prior LDF Sel. 1.250 1.010 1.000 1.000
Selected 1.250 1.015 1.000
Cumulative 1.269 1.015 1.000 1.000
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Paid LDF Method IBNR Calculation
Accident Year Paid Loss &
DCCE Development
Factors Indicated Ultimate
Loss & DCCE Case Reserves IBNR
(1) (2) (3) (4) (5)
2005 592,820 1.000 592,820 - -
2006 523,874 1.000 523,874 - -
2007 319,380 1.015 324,171 2,000 2,791
2008 175,236 1.269 222,374 35,000 12,138
Total 1,611,310 1,663,239 37,000 14,929
FOOTNOTE: (1),(2) From prior slide (3) = (1) x (2) (4) = From company (5) = (3) – (4) – (1)
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Case Reserve Development Method
Valuation Date 12/31 Case Reserves as of End of
Year
Total Paid after End of Year on Case Reserves at End of
Year Implied IBNR
Implied Development
Factor
(1) (2) (3) (4)
2005 31,300 41,500 10,200 1.33
2006 7,600 8,140 540 1.07
2007 22,500 27,852 5,352 1.24
2008 37,000
Total (through 2007) 61,400 16,092 1.26
(5) Selected case reserve development factor 1.25
(6) Indicated future development on case 9,250
May be appropriate for smaller, property-driven exposures
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Reported Loss Development Method
Maturity (in years)
Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
1991 142 176 222 259 292 334 374 411 445 494 567 613 658 703 708 734 762
1992 634 749 853 953 1,079 1,200 1,304 1,399 1,509 1,591 1,684 1,738 1,834 1,884 1,919 1,936
1993 668 772 899 1,025 1,173 1,299 1,382 1,511 1,627 1,761 1,865 2,001 2,114 2,174 2,239
1994 510 629 831 830 940 1,074 1,167 1,281 1,408 1,505 1,595 1,703 1,763 1,783
1995 223 272 297 336 380 397 446 487 515 541 546 559 573
1996 287 349 427 502 574 663 779 886 996 1,096 1,142 1,192
1997 515 582 663 753 833 883 954 992 1,023 1,045 1,070
Development Factors
Year 1-2 2-3 3-4 4-5 5-6 6-7 7-8 8-9 9-10 10-11 11-12 12-13 13-14 14-15 15-16 16-17
1991 1.239 1.261 1.167 1.127 1.144 1.120 1.099 1.083 1.110 1.148 1.081 1.073 1.068 1.007 1.037 1.038
1992 1.181 1.139 1.117 1.132 1.112 1.087 1.073 1.079 1.054 1.058 1.032 1.055 1.027 1.019 1.009
1993 1.156 1.165 1.140 1.144 1.107 1.064 1.093 1.077 1.082 1.059 1.073 1.056 1.028 1.030
1994 1.233 1.321 0.999 1.133 1.143 1.087 1.098 1.099 1.069 1.060 1.068 1.035 1.011
1995 1.220 1.092 1.131 1.131 1.045 1.123 1.092 1.057 1.050 1.009 1.024 1.025
1996 1.216 1.223 1.176 1.143 1.155 1.175 1.137 1.124 1.100 1.042 1.044
1997 1.130 1.139 1.136 1.106 1.060 1.080 1.040 1.031 1.022 1.024
Weighted Avg. 1.239 1.261 1.166 1.127 1.143 1.119 1.098 1.082 1.110 1.147 1.055 1.049 1.027 1.022 1.016 1.038
Selected 1.239 1.261 1.166 1.127 1.143 1.119 1.098 1.082 1.110 1.147 1.055 1.049 1.027 1.022 1.016 1.038
Cumulative 4.899 3.952 3.133 2.686 2.382 2.082 1.860 1.692 1.563 1.408 1.227 1.163 1.108 1.078 1.055 1.038
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Reported LDF Method IBNR Calculation
Accident Year Reported Loss Development
Factors Indicated Ultimate
Loss & DCCE IBNR
(1) (2) (3) (4)
1993 509 1.055 537 28
1994 630 1.078 679 49
1995 564 1.108 625 61
1996 409 1.163 476 67
1997 546 1.227 670 124
2000 583 1.692 987 404
2002 388 2.082 808 420
Total 3,629 4,782 1,153
FOOTNOTE: (1),(2) From prior slide (3) = (1) x (2) (4) = (3) – (1)
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Reasonability Checks Loss Ratios Frequencies Severities Average Case Reserves
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Changes That Impact Actuaries’ Analyses Rate & Rating Plans Underwriting Guidelines TPAs Personnel Reserving Philosophy Territory Business Profile Agencies Premium Growth Government Regulations (e.g. PPACA)
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Baseball and Actuaries Sabermetrics is the analysis of baseball
through objective evidence, especially baseball statistics
The term is derived from the acronym SABR – Society for American Baseball Research – coined by Bill James
John Dewan, FSA, worked with Bill James, and formed STATS, Inc., in his basement sold it to Fox News for $45M in 1999
Formed Baseball Info Solutions in 2002
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Reported Loss Development Method
Age
Year 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43
Bonds 142 176 222 259 292 334 374 411 445 494 567 613 658 703 708 734 762
Aaron Mays McCovey
634 749 853 953 1,079 1,200 1,304 1,399 1,509 1,591 1,684 1,738 1,834 1,884 1,919 1,936
Robinson Palmeiro Jackson Williams
668 772 899 1,025 1,173 1,299 1,382 1,511 1,627 1,761 1,865 2,001 2,114 2,174 2,239
Ruth Schmidt Thomas
510 629 831 830 940 1,074 1,167 1,281 1,408 1,505 1,595 1,703 1,763 1,783
Killebrew 223 272 297 336 380 397 446 487 515 541 546 559 573
Sosa McGwire
287 349 427 502 574 663 779 886 996 1,096 1,142 1,192
Mantle Foxx
515 582 663 753 833 883 954 992 1,023 1,045 1,070
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Reported LDF Method Home Run Calculation
Player Number of HR’s Development
Factors Projected Career HR
Total
Projected Remaining
HR’s
(1) (2) (3) (4)
Gary Sheffield 509 1.055 537 28
Ken Griffey, Jr. 630 1.078 679 49
Jim Thome 564 1.108 625 61
Jason Giambi 409 1.163 476 67
Manny Ramirez 546 1.227 670 124
Alex Rodriguez 583 1.692 987 404
Andruw Jones 388 2.082 808 420
Total 3,629 4,782 1,153
FOOTNOTE: (1),(2) From prior slide (3) = (1) x (2) (4) = (3) – (1)
Pricing
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Rate Work Rate work often done by rating bureaus They file on behalf of member companies
Insurance Services Office
National Council on Compensation Insurance
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Rate Indications: A High-Level View of Loss Ratio Method An insurer wants to set rates for policies to be written
in CY 2014 The insurer’s actuary estimates that during the past
three years there were: Losses and Allocated Loss Adjustment Expense (ALAE) =
$700K Premium (assuming current rates) = $1M
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Are Current Rates Adequate? Historical Loss and ALAE (L&ALAE) Ratio $700K / $1M = 70% of premium
After insurer pays budgeted expenses and profit, it only has 100% - 40% - 5% = 55% of premium to pay losses This is the Permissible Loss Ratio
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Are Current Rates Adequate? To compensate for this shortfall, the insurer
needs to raise rates to the extent that the Historical L&ALAE Ratio exceeds the Permissible Loss Ratio 70% / 55% - 1 = 27.3% Indicated Change
Check that raising rates 27.3% is adequate: Revised Historical L&ALAE Ratio = $700K / ($1M x
1.273) = 55% so the Historical Loss Ratio matches the Permissible Loss Ratio
No one has the ability to know the future, or to estimate historical losses perfectly
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Can It Be That Easy?
Trend Changes in business profile Competitive influences All the issues with reserving Price optimization software
behind the scenes And more
THIS SIMPLE ANALYSIS IGNORES: WHY?
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Macro vs. Micro
Macroeconomic Ratework Microeconomic Ratework
A change in base rate that impacts all insureds the same.
A change to rating factors that fine tunes the rating plan and impacts insureds differently.
New Rates
Old Rates
New Rates
Old Rates
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What Makes a Good Actuary??
Listen to management or clients
Understand the business of insurance
Good communication
skills Not stupid
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Summary
Actuaries bring an important set of tools to insurance problems
Actuaries are the accepted experts in loss reserving and rate filings
Actuaries provide services to all areas in and around the insurance industry
Basic actuarial reserving and ratemaking methodologies are straightforward
Good actuaries understand the underlying characteristics of the business and adjust their actuarial methodologies and assumptions accordingly
Any questions?