Institute of Actuaries of India
CASE STUDY – DATA QUALITY
Sipika Tandon
Supriyo Chaki
Adarsh Kishor Agarwal
A V Karthikeyan
Under the guidance of
Mr. Saket Singhal
India Fellowship Seminar - December 2014
Indian Actuarial Profession
Serving the Cause of Public Interest
Agenda
The case study – background and overview
Initial considerations
Our view of the case study
Issues surrounding the case study
Poor data quality
Reliance on other’s work
Suppression of case reserve
Delayed action
Possible course of action
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Case Study G5 – Data quality
1
Business objective
We are representing the consulting actuary to a medium sized insurance company that has grown rapidly in
recent years. Part of our engagement is to provide an actuarial certificate confirming the adequacy of the
claims reserves.
This certificate is included in the published Report & Accounts.
Background information
–
–
–
–
2
Have become concerned about the data quality over the past two to three years
Heard market rumors that the company is suppressing case reserves in order to improve results
Staff turnover in the claims department is abnormally high
Two months ago the company's founder resigned as CEO “to spend more time with his family”.
Task at hand – work requirement
 After raising concerns on data quality, Company and it’s Auditors have confirmed in writing about the
accuracy of the data
 The incurred claims projections give reserves consistent with those the company wishes to book
 The Finance Director has just phoned to remind that he needs the certificate by the end of the week.
 What would we do?
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Our view of the case study
What is the issue?
Clue in the case
1
 Inaccurate results
 Reduced confidence on
results/model
 Requires extra assumptions
1
Poor data quality
2
Reliance on other’s
work
3
Suppressing case
reserves
 Medium sized insurer- grown
rapidly in recent years.
 Data quality is a suspect over
last 2/3 years
 Claims staff leaving means
more new claim handlers
Relevant guidelines
a.
b.
c.
d.
PCS (3.4)
APS (8.3)
AA Regulation (7)
Draft regulation on claims
reserving
e. GN12 (4.2, 6.2)
f. GN18 (3.3)
g. TAS - D
2
4
3
Delayed action
 The line of responsibility
 Actuary checked with the
company and the auditors
a. PCS
b. GN12 (6.1)
c. GN18 (3.1, 4.1)
 Affects reserve – danger of
insolvency
 If it is a consistent issue,
then implicitly allowed for
 Concern if practice is new
 Very fast recent growth
 Incurred claim projection
gives reserves consistent to
the “wishes” of the company
a. APS (8.10.3)
b. AA Regulation ( 8.h.ii)
c. Draft regulation on
claims reserving
 Possible adverse impact on
various stakeholders
 Overstated profits
 Actuary became concerned
about the data over the last
two or three year
a. AA Regulation (8.i)
4
PCS : Professional Conduct Standards; APS : Actuarial Practice Standard (APS 21); AA Regulation: IRDA (Appointed Actuary) Regulations, 2000
4
GN : Guidance Notes issued by IFoA; TAS – D : Technical Actuarial Standard on Data produced by Board of Actuarial Standards, UK
Initial considerations
According to PCS
An actuary giving advice which is formulated in the interests of a particular client must ensure that the
client is aware that the advice is not of broader applicability than intended by the actuary, nor is it
necessarily the advice that would be given to another client or to third parties whose objectives and
requirements may be different.
An actuary shall, in communicating professional findings, identify the client for whom the findings are
made and in what capacity the actuary serves.
1
2
Scope
The consultant should set out the
scope and purpose of the certificate
 Actuarial certificate stating adequacy of
case reserves
 Included in published Report & Accounts
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Target The target audience needs to be
Audience identified
 Company, Policyholders, Shareholders,
Reinsurers, Regulator, Credit rating
agencies, Government
 A note of caution may be added for users
other than the target audience
5
Issue: Poor data quality
What is the issue?
Clue in the case
1
 Inaccurate results
 Reduced confidence on
results/model
 Requires extra assumptions
1
Poor data quality
2
Reliance on other’s
work
3
Suppressing case
reserves
 Medium sized insurer- grown
rapidly in recent years.
 Data quality is a suspect over
last 2/3 years
 Claims staff leaving means
more new claim handlers
Relevant guidelines
a.
b.
c.
d.
PCS (3.4)
APS (8.3)
AA Regulation (7)
Draft regulation on claims
reserving
e. GN12 (4.2, 6.2)
f. GN18 (3.3)
g. TAS - D
2
4
3
Delayed action
 The line of responsibility
 Actuary checked with the
company and the auditors
a. PCS
b. GN12 (6.1)
c. GN18 (3.1, 4.1)
 Affects reserve – danger of
insolvency
 If it is a consistent issue,
then implicitly allowed for
 Concern if practice is new
 Very fast recent growth
 Incurred claim projection
gives reserves consistent to
the “wishes” of the company
a. APS (8.10.3)
b. AA Regulation ( 8.h.ii)
c. Draft regulation on
claims reserving
 Possible adverse impact on
various stakeholders
 Overstated profits
 Actuary became concerned
about the data over the last
two or three year
a. AA Regulation (8.i)
4
PCS : Professional Conduct Standards; APS : Actuarial Practice Standard (APS 21); AA Regulation: IRDA (Appointed Actuary) Regulations, 2000
6
GN : Guidance Notes issued by IFoA; TAS – D : Technical Actuarial Standard on Data produced by Board of Actuarial Standards, UK
Data quality
Considerations
Concern about quality of data
 There is always some degree of imperfection in the data. Extent of imperfection and reasonability of
results needs to be considered
 Complete access to underwriters, claims department etc. and to all information and documents to
ensure the reliability of the data
 Adjustments could be made to improve reliability of data
 Reasonableness checks to be carried out on the data and documented
 Market rumors should not be completely relied upon, but should be tested against the facts
available
Other factors
 High staff turnover in claims department should have impacted the data quality
 CEO resigning can also be looked under suspicion which can potentially impact the management of
appropriate quality of data
 Such factors add to uncertainty and are potential concerns and hence must be clearly accounted for
and highlighted
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Data quality
Relevant Regulations
 PCS 3 (Standard for advice)
An actuary must consider the extent to which it is appropriate to carry out investigations to assess the accuracy and
reasonableness of any data being used. The advice should normally include an explanation or qualification if the actuary
has any reservations about the reliability of the data.
 APS 21 – Section 8 (Actuarial investigations)
Appointed Actuary should be satisfied as far as possible that the data are accurate, reliable and consistent. If there are
any doubts on the data, the Appointed Actuary is expected to seek assurance from the company as to their accuracy and
completeness. The Appointed Actuary should also be satisfied that the company is correctly adopting appropriate
statistical formats and procedures and that adequate documentation exists in respect of them.
 IRDA (Appointed Actuary) Regulations, 2000 (Powers of Appointed Actuary)
The AA is entitled to :
a. All meeting of the management including the director of the insurer.
b. To speak and discuss on any matter, at such meeting – that may affect the solvency of the insurer or on which
actuarial advice is necessary.
 TAS D (UK specific Technical Actuarial Standard)
When data that is required is materially incomplete or inadequate, an assessment shall be made to determine whether
the reliability of the data can be improved by adjusting or supplementing it. The treatment of, or action taken for,
incomplete or inaccurate data shall be documented.
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Data quality
Relevant Guidance Notes
Guidance Notes issued by the Institute and Faculty of Actuaries, UK
GN 12
GN 18
GN 12
The report should indicate the
sources of the data the actuary
has used and make clear what he
or she is taking responsibility for.
Many of the sources available for
use in general insurance, and
consequently the data also has
some degree of imperfection. This
does not prevent the use of data
from such sources (with
appropriate caveats in the report,
if necessary), provided the actuary
is satisfied that the results look
reasonable.
The actuary should make it clear at
the outset that he or she may
require frequent access to
underwriters and other members
of the company’s staff and that he
or she may wish to use the work
carried out by or for the company,
including the work of another
actuary who has worked for the
company as an employee or
consultant. However since the
actuary providing the statement
must take full responsibility for the
opinion stated, he or she must be
satisfied as to the validity of the
material used for that purpose.
If there are specific features of the
business that present potential
concerns or significantly increase
the uncertainty of the
recommendations, beyond that
which an informed reader of the
report may reasonably expect,
then this fact should be clearly
highlighted in the corresponding
reservations, or limitation of
scope, included in the report.
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Issue: Reliance on other’s work
What is the issue?
Clue in the case
1
 Inaccurate results
 Reduced confidence on
results/model
 Requires extra assumptions
1
Poor data quality
2
Reliance on
other’s work
3
Suppressing case
reserves
4
 Medium sized insurer- grown
rapidly in recent years.
 Data quality is a suspect over
last 2/3 years
 Claims staff leaving means
more new claim handlers
Relevant guidelines
a.
b.
c.
d.
PCS (3.4)
APS (8.3)
AA Regulation (7)
Draft regulation on claims
reserving
e. GN12 (4.2, 6.2)
f. GN18 (3.3)
g. TAS - D
2
3
Delayed action
 The line of responsibility
 Actuary checked with the
company and the auditors
a. PCS
b. GN12 (6.1)
c. GN18 (3.1, 4.1)
 Affects reserve – danger of
insolvency
 If it is a consistent issue,
then implicitly allowed for
 Concern if practice is new
 Very fast recent growth
 Incurred claim projection
gives reserves consistent to
the “wishes” of the company
a. APS (8.10.3)
b. AA Regulation ( 8.h.ii)
c. Draft regulation on
claims reserving
 Possible adverse impact on
various stakeholders
 Overstated profits
 Actuary became concerned
about the data over the last
two or three year
a. AA Regulation (8.i)
4
PCS : Professional Conduct Standards; APS : Actuarial Practice Standard (APS 21); AA Regulation: IRDA (Appointed Actuary) Regulations, 2000
10
GN : Guidance Notes issued by IFoA; TAS – D : Technical Actuarial Standard on Data produced by Board of Actuarial Standards, UK
Reliance on other’s work
Considerations
Confirmation on data accuracy
 Concerns have been raised with the company who have assured in writing that the data are
accurate.
 After speaking with auditors, they have also confirmed in writing that they are happy with the data.
 Extent of responsibility should be made clear
 Limited reliability on the confirmations unless specifically agreed upon
 Ideally, despite of the confirmations reasonable checks on the data should still be carried out
 Any deviations should be highlighted along with proper reasons and evidences
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Reliance on other’s work
Relevant Guidance Notes
Guidance Notes issued by the Institute and Faculty of Actuaries, UK
GN 12
The actuary may need to rely on or utilize work of other professionals. If there is a risk of confusion as
to the division of responsibilities between the actuary and the other persons or organizations, the
respective responsibilities should be made clear in the report.
GN 18
 The actuary should obtain assurances from the company as to the accuracy and completeness of the
data provided. The actuary should review all key data for reasonableness but may otherwise rely upon
the company in this respect. The actuary will need to amend the wording of the reference to data if he
or she encounters Anything during the course of the work that gives rise to any material concerns with
regard to accuracy of the data, and the company is unable to resolve these concerns satisfactorily.
 The relationship between management, underwriters, and auditors can be complex. The actuary
should make clear his or her relationship with each of these parties and the extent to which he or she
has used information obtained from them or relied on work undertaken by them. The actuary should
not rely on the auditor unless there is a specific agreement for such reliance.
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Reliance on other’s work
Relevant Guidance Notes and Professional Conduct Standards
GN 33
It is expected that, in most situations:
 Actuary calculates independent estimation of the reserves and compare with those established by
the syndicate.
 In other situations, the actuary’s work may not include independent estimation of reserves, but
rather constitute a review of the methodology and assumptions used by someone else (e.g. the
syndicate’s own actuarial or other staff) in estimating the reserves. This practice is acceptable,
provided the actuary signing the SAO is willing to accept personal responsibility for the opinion
stated, based on the work reviewed.
 In these situations the Report should include an explanation of the work performed by the actuary
signing the SAO and include details of the work performed by the other party.
PCS – Section 8
 Members must avoid any action that would unfairly injure the professional reputation of any other
member. Criticism of one member’s work by another member is acceptable, provided that the
criticism is properly reasoned and believed to be justified.
 Where criticism of another member’s work is made in the context of any form of publicity and
whether in relation to specific instances or in general, care must be taken to acknowledge that other
members may quite properly hold different professional opinions and that special circumstances may
exist in any particular case.
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Issue: Suppression of case reserves
What is the issue?
Clue in the case
1
 Inaccurate results
 Reduced confidence on
results/model
 Requires extra assumptions
1
Poor data quality
2
Reliance on other’s
work
3
Suppressing case
reserves
4
 Medium sized insurer- grown
rapidly in recent years.
 Data quality is a suspect over
last 2/3 years
 Claims staff leaving means
more new claim handlers
Relevant guidelines
a.
b.
c.
d.
PCS (3.4)
APS (8.3)
AA Regulation (7)
Draft regulation on claims
reserving
e. GN12 (4.2, 6.2)
f. GN18 (3.3)
g. TAS - D
2
3
Delayed action
 The line of responsibility
 Actuary checked with the
company and the auditors
a. PCS
b. GN12 (6.1)
c. GN18 (3.1, 4.1)
 Affects reserve – danger of
insolvency
 If it is a consistent issue,
then implicitly allowed for
 Concern if practice is new
 Very fast recent growth
 Incurred claim projection
gives reserves consistent to
the “wishes” of the company
a. APS (8.10.3)
b. AA Regulation ( 8.h.ii)
c. Draft regulation on
claims reserving
 Possible adverse impact on
various stakeholders
 Overstated profits
 Actuary became concerned
about the data over the last
two or three year
a. AA Regulation (8.i)
4
PCS : Professional Conduct Standards; APS : Actuarial Practice Standard (APS 21); AA Regulation: IRDA (Appointed Actuary) Regulations, 2000
14
GN : Guidance Notes issued by IFoA; TAS – D : Technical Actuarial Standard on Data produced by Board of Actuarial Standards, UK
Adequacy of claims reserve
Considerations
It is expected that in most situations, certification should/would include:
— Independent estimation of reserves by actuaries
— A review of methodology and assumptions used by someone else
Claim reserves comprises of: (APS 21):
— Reported claims - Where estimate of loss has been determined
— IBNER – Where estimate of loss has not been fully assessed
— Incurred but not reported claims (IBNR)
— Reopened claims
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Adequacy of claims reserve
Relevant regulations
General Insurance – Claims Reserving Regulation, 2013 (Draft)
Reserve for outstanding claims shall be determined in the following manner in consultation with the
claims department and certified by the auditor:
 Amount of outstanding is known, provide in full.
 Or ‘case by case’ method and allow for changes in the settlement pattern, average claims amount,
expenses & inflation etc., provided that standard reserving practices and methodologies are
recommended by the AA.
 Need to consider:
— nature of insured object
— claims made so far
— jurisdiction
— changes in policy limits/ excess
— coinsurance , the earlier history of lead co-insurer
IRDA (Appointed Actuary) Regulations, 2000
According to the IRDA (AA) regulations, the actuary should ensure that the actuarial principles have been
used in the calculation of reserves. In larger sense, the duties of appointed actuaries include:
a. Ensuring solvency of the insurer at all time.
b. Drawing the attention of the management on to avoid any contravention of the act or prejudice to the
interest of the policyholders.
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Adequacy of claims reserve
Different analyses (1/2)
1
Different
methods
 Experience based methods
— Chain ladder method (Incurred amounts/ Paid amounts) etc.
 Exposure based methods
— Loss Ratio Method
— Bornhuetter Ferguson Method etc.
 Paid to Incurred ratio or Case estimates to Incurred ratio
— Indicates the strength of the case estimates
 Average outstanding case estimate
— Highlights changes in the strength of case reserves
2
Diagnostic
Tests
 Ratio of IBNR to case estimates
— Gives a feel for the outstanding claims and the uncertainty
relating to them
 Paid/Incurred Claims Development Patterns
— Highlights changes in the strength of case reserves
 Settlement ratio
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Adequacy of claims reserve
Different analyses (2/2)
 Comparison of results with respect to benchmarks
— Industry or market sources
— Other classes of business that are closely related
— Similar portfolios within the actuary’s experience
 Utilization of IBNER & IBNR against earlier years
3
Other
Analyses
 Other methods to establish the reasonability of results are:
— Seek advice from an approved/experienced person for e.g. an
actuary responsible for preparing the report on FCR of the
company
— Comparison of estimated solvency ratio with the previous years
(According to the AA Regulations, AA should ensure solvency at
all times)
— Bootstrapping – stochastic reserving to calculate reserve
variability
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Issue: Delayed action
What is the issue?
Clue in the case
1
 Inaccurate results
 Reduced confidence on
results/model
 Requires extra assumptions
1
Poor data quality
2
Reliance on other’s
work
3
Suppressing case
reserves
4
 Medium sized insurer- grown
rapidly in recent years.
 Data quality is a suspect over
last 2/3 years
 Claims staff leaving means
more new claim handlers
Relevant guidelines
a.
b.
c.
d.
PCS (3.4)
APS (8.3)
AA Regulation (7)
Draft regulation on claims
reserving
e. GN12 (4.2, 6.2)
f. GN18 (3.3)
g. TAS - D
2
3
Delayed action
 The line of responsibility
 Actuary checked with the
company and the auditors
a. PCS
b. GN12 (6.1)
c. GN18 (3.1, 4.1)
 Affects reserve – danger of
insolvency
 If it is a consistent issue,
then implicitly allowed for
 Concern if practice is new
 Very fast recent growth
 Incurred claim projection
gives reserves consistent to
the “wishes” of the company
a. APS (8.10.3)
b. AA Regulation ( 8.h.ii)
c. Draft regulation on
claims reserving
 Possible adverse impact on
various stakeholders
 Overstated profits
 Actuary became concerned
about the data over the last
two or three year
a. AA Regulation (8.i)
4
PCS : Professional Conduct Standards; APS : Actuarial Practice Standard (APS 21); AA Regulation: IRDA (Appointed Actuary) Regulations, 2000
19
GN : Guidance Notes issued by IFoA; TAS – D : Technical Actuarial Standard on Data produced by Board of Actuarial Standards, UK
Delayed action
Regulatory guidelines
Appointed Actuary Regulation – Section 8
 Appointed Actuary has duty to draw the attention of the management and inform the IRDA in
writing his or her opinion, within a reasonable time, whether,  Insurer has contravened the Act or any other Acts;
 The contravention is of such a nature that it may significantly affect the interests of the
owners or beneficiaries of policies issued by the insurer.
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Possible course of action - A
Action
Provide certificate after
ensuring the reasonableness
of the data and methodology
Key pointers
When to be taken?
a. Data uncertainties are
satisfactorily cleared based on
data diagnostics and by preparing
reserves in alternative
methodology
b.Proved by past reserving
adequacy
c. If the data uncertainty is not
material or has very small impact
on the final reserves
d.When any alternative set of
assumption for sensitivity testing
did not prove to be significant
Consequence
a. For the client, the reserves
are certified and the
published account will be
more credible.
b.For the consulting company,
the relationship is retained.
c. Professional confidence will
increase on the actuary.
a. Methodology and assumptions used in the review, should be stated
b. Any change in circumstances from the data as at date to the certificate publishing date, which
might affect the reasonable estimation of reserves, should be indicated.
c. Professional misconduct guidelines of Actuaries Act 2006 to be followed.
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Possible course of action - B
Action
Certification of the adequacy
of reserves highlighting the
uncertainty in the data (with
evidence) or any other areas
of concern
When to be taken?
Consequence
a. When the data uncertainty is
a. Client may require more
proved based on the data
explanations and his interest
supplied.
is primarily affected.
b.When the explanation from the
client is not agreeable.
b.The consulting company’s
c. When such uncertainty is clearly
relationship is affected.
identified and the consequences
can be quantified with reasonable c. Actuary may need a lot of
surety.
convincing to do to both the
d.When there is no other issues like
consulting company & the
time pressure / data support from
client.
the client.
Key pointers
a. Clear disclosure of the data uncertainty and its consequence.
b. If quantifiable, the level of uncertainty and possible consequence on the final reserves calculated to
be stated.
c. Professional misconduct guidelines of Actuaries Act 2006 to be followed.
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Certification
Regulatory guidelines
The Actuaries Act, 2006
 Professional misconduct guidelines (as per Actuaries Act 2006) should be taken care of while
preparing the certificate
 Responsibility and scope of work should be specified
 Appropriate caveats with respect to data and reserves should be included
 Particular reference to circumstances that might add to uncertainty
 Should be noted that highlighting uncertainty does not constitute qualification
 Should not fail to disclose any material fact, or any material misstatement or any
material departure from the generally accepted procedure
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Possible course of action - C
Action
When to be taken?
Consequence
a. Failure of reasonableness checks on data a. Difficulty for client,
b. Information unavailable to verify facts
consulting company and for
c. Undue influence of the company’s
actuary.
management
b. Ensures that the professional
d. Non compliance with legal, regulatory or
standards are maintained.
professional requirements by the
c. In the long run, the
company or its employees
certification process gains
e. Even the peer reviewer (another
more credibility
experienced/qualified person referred
to) is in agreement with the issues
f. Time constraints do not allow necessary
methods or checks to be carried out
(one week in this case)~ PCS (2 –
Professional Standards)
Any regulatory/guidance
Denying to certify citing
data qualifications and
limitations (with
evidence)
impact
The consulting actuary should inform the Board of Directors of the company about the key issue in
order to sensitize them about the potential danger of ignoring it.
Professional misconduct guidelines of Actuaries Act 2006 to be followed.
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References
In preparing this, we have taken assistance from the following:
 Insurance Regulatory and Development Authority (Appointed Actuary) Regulations,
2000
 http://actuariesindia.org/regulation/Actuaries%20Act%202006.pdf
 Board For Actuarial Standards, Technical Actuarial Standard D: Data
 http://actuariesindia.org/downloads/PCS/PCSV_3.pdf
 http://actuariesindia.org/downloads/APS/IAI_APS21AppointedActuaryandGeneralInsuranceBusiness.pdf
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Q&A
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