Lights! Camera! Action!
A Sequel
MAF Spring Meeting
Committee On Professionalism Education
April 11, 2014
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CAS antitrust compliance policy.
Legal Disclosure
The views expressed by the panelists are their
own and may not necessarily reflect those of
their respective employers.
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Agenda
Professional Guidance
Skit
Small Group Discussion
Large Group Discussion
Takeaways
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Professionalism Skit: Price
Optimization
Professional Guidance
Precept 1 of the Code of Conduct: An
Actuary shall act honestly, with integrity
and competence, and in a manner to fulfill
the profession's responsibility to the public
and to uphold the reputation of the
actuarial profession.
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Professional Guidance
Precept 1 of the Code of Conduct
– Annotation 1-1 -- An Actuary shall perform
Actuarial Services with skill and care.
– Annotation 1-4 -- An Actuary shall not engage
in any professional conduct involving
dishonesty, fraud, deceit, or misrepresentation
or commit any act that reflects adversely on
the actuarial profession.
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Professional Guidance
CAS Statement of Principles Regarding
Property and Casualty Insurance
Ratemaking
Principle 1: A rate is an estimate of the expected value of
future costs.
Principle 2: A rate provides for all costs associated with the
transfer of risk.
Principle 3: A rate provides for the costs associated with
an individual risk transfer.
Principle 4: A rate is reasonable and not excessive,
inadequate, or unfairly discriminatory if it is an actuarially
sound estimate of the expected value of all future costs
associated with an individual risk transfer.”
Professional Guidance
ASOP 12: Risk Classification
“Risk Classification System—A system used to assign
risks to groups based upon the expected cost or benefit
of the coverage or services provided.” (2.10)
“Relationship of Risk Characteristics and Expected
Outcomes—The actuary should select risk characteristics
that are related to expected outcomes. A relationship
between a risk characteristic and an expected outcome,
such as cost, is demonstrated if it can be shown that the
variation in actual or reasonably anticipated experience
correlates to the risk characteristic.” (3.2.1)
Professional Guidance
ASOP 12: Risk Classification
Effect of Adverse Selection— … The actuary should
assess the potential effects of adverse selection that may
result or have resulted from the design or implementation
of the risk classification system. Whenever the effects of
adverse selection are expected to be material, the
actuary should, when practical, estimate the potential
impact and recommend appropriate measures to mitigate
the impact.” (3.4.1)
Skit Background
The Reputable Insurance Company is doing the
annual auto rate review for the state of New
Indianota.
Polly is the Product Manager. She is
responsible for achieving the growth and profit
objectives. She determines the rate strategy.
Jessie is the credentialed actuary that prepares
the rate indication.
Elliot is an economist researcher that also
analyzes the business.
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Lights, Camera, Action!
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General Questions
Would Jessie be in violation of Precept 1 of the Code
of Conduct by signing the affidavit when she has
concerns about the adherence to actuarial standards?
Does this represent a “material” violation of the Code,
if Jessie is the only one who feels this way?
Ratemaking Statement of Principles 3: "A rate
provides for the costs associated with an individual
risk transfer." Would filing Polly’s proposed rate
strategy be a violation of this principle?
Ratemaking Statement of Principles states that “Other
Business Considerations are also a part of
Ratemaking.” Is Elliot’s economic analysis an
appropriate “other business consideration?”
Does it allow for disregarding the loss
experience?
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Possible Courses of Action
Jessie’s Options
•
•
•
Alternative 1 -- Comply with Polly’s
request.
Alternative 2 – Elevate the issue (either to
the Chief Actuary or potentially Polly’s
boss)
Alternative 3 – Get guidance from the State
of New Indianota
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Professionalism Skit:
Actuaries in Non-Actuarial
Roles
Professional Guidance
Precept 1 of the Code of Conduct: “An
Actuary shall act honestly, with integrity
and competence, and in a manner to fulfill
the profession's responsibility to the public
and to uphold the reputation of the
actuarial profession.”
Professional Guidance
Precept 3 of the Code of Conduct: “An
Actuary shall ensure that Actuarial
Services performed by or under the
direction of the Actuary satisfy applicable
standards of practice”
Professional Guidance
Precept 10 of the Code of Conduct: “An
Actuary shall perform Actuarial Services
with courtesy and professional respect and
shall cooperate with others in the
Principal's interest.”
Professional Guidance
CAS Statement of Principles Regarding
Property and Casualty Insurance
Ratemaking
– Principle 1: A rate is an estimate of the
expected value of future costs.
– Principle 2: A rate provides for all costs
associated with the transfer of risk.
Professional Guidance
CAS Statement of Principles Regarding
Property and Casualty Insurance
Ratemaking
– Principle 4: A rate is reasonable and not
excessive, inadequate, or unfairly
discriminatory if it is an actuarially sound
estimate of the expected value of all future
costs associated with an individual risk
transfer.
Professional Guidance
CAS Statement of Principles Regarding
Property and Casualty Insurance
Ratemaking, Section III: Ratemaking
Considerations
– Credibility
– Trends
Professional Guidance
ASOP 13: Trending Procedures in
Property/Casualty Insurance
– Section 3.2 - Historical Insurance and NonInsurance Data. Must consider:
•
•
•
•
the credibility assigned to the data by the actuary;
the time period for which the data is available;
the relationship to the items being trended; and
the effect of known biases or distortions on the data relied
upon (for example, changes in claim practices).
Professional Guidance
ASOP 13: Trending Procedures in
Property/Casualty Insurance
– Section 3.3 - Economic and Social Influences. The
actuary should consider economic and social
influences that can have a significant impact on
trends in selecting the appropriate data to review, the
trending calculation, and the trending procedure. In
addition, the actuary should consider the timing of the
various influences.
Professional Guidance
ASOP 13: Trending Procedures in
Property/Casualty Insurance
– Section 3.4 - Selection of Trending Procedures.
The actuary may consider relevant information
such as the following:
• procedures established by precedent or common
usage in the actuarial profession;
• procedures used in previous analyses;
• procedures that predict insurance trends based on
insurance, econometric, and other non-insurance data;
and
• the context in which the trend estimate is used in the
overall analysis.
Professional Guidance
ASOP 25: Credibility Procedures
– Section 3.2 - Selection or Development of Credibility
Procedure. Consider if the procedure is expected :
• to produce reasonable results
• to be appropriate for the intended use and purpose; and
• to be practical to implement when taking into consideration
both the cost and benefit of employing a procedure.
– Also consider the predictive value of more recent
experience as compared to experience from earlier
time periods.
Professional Guidance
ASOP 25: Credibility Procedures
– Section 3.3 - Selection of Relevant
Experience
• exercise professional judgment and use care in selecting
and using relevant experience
• should have characteristics similar to the subject experience
(demographics, coverages, frequency, severity, etc.)
• if does not meet and cannot be adjusted to meet such
criteria, it should not be used
Professional Guidance
ASOP 25: Credibility Procedures
– Section 3.4 – Professional Judgment
• use professional judgment when selecting, developing, or
using a credibility procedure
• use of credibility procedures is not always a precise
mathematical process - blending the subject experience with
the relevant experience may be based on the actuary
assigning full, partial, or zero credibility to the subject
experience without using a rigorous mathematical model
Professional Guidance
ASOP 25: Credibility Procedures
– Section 3.5 – Homogeneity of Data
• consider the homogeneity of both the subject experience and
the relevant experience
• within each set of experience, there may be segments that
are not representative of the experience set as a whole
• predictive value can sometimes be enhanced by separate
treatment of these segments
• also consider the balance between the homogeneity of the
data and the size of the data set
Skit Background
Brie has been the VP of underwriting for the last
three years. Wayne, the actuary supporting
Brie’s product, along with the marketing
department, has developed a new product with
forms, rates and a 5-year pro-forma of the
expected results of this new product on the
market’s financial statements. Brie has
reviewed the work and believes there to be flaws
in the pricing assumptions. What should he do?
Lights, Camera, Action!
General Questions
Given her actuarial background, what level of
influence should Brie have on the pricing
indication?
Does Wayne have to incorporate Brie’s feedback
in his pricing pick, and if so, to what extent?
Who ultimately owns the final recommendation?
Small Group Discussion
Discussion of General Questions
Given her actuarial background, what level of
influence should Brie have on the pricing
indication?
Does Wayne have to incorporate Brie’s feedback
in his pricing pick, and if so, to what extent?
Who ultimately owns the final recommendation?
Potential Courses of Action
Brie should let the matter drop. It’s the Wayne’s call. It’s
not the call Brie would make, but it would be best just to
align with those chosen assumptions and make the most
of it going forward.
Brie should go over Wayne’s head to The Chief.
Leverage that existing relationship to get The Chief on
her side. Then have the Chief override Wayne.
Brie should do her own independent analysis. Scenario
test alternative assumptions. Have it peer reviewed by
another actuary to ensure your choices are reasonable.
Detail the impacts and go back to the Wayne. Try to
collaborate and arrive at consensus.
Other???
Key Takeaways
While the advantages to having actuaries in
non-actuarial roles are numerous, actuaries in
those roles must be mindful of the potential
drawbacks
Roles, responsibilities, and authority levels must
be clear and ultimately must be respected
Know the Standards that apply to the work
you are doing
SNAPPERS OVERVIEW
Snappers = Real Life Predicament
Structure of session
– Read the case together.
– Discuss opposing viewpoints
• Strict: Follow the rules regardless of the situation.
• Practical: Be practical in the application of rules.
– See if there is a common ground.
Disclaimers:
– Exercise is for education purposes only.
– Any opinion expressed by anyone does not represent the
opinion of their employer or of the CAS.
– No authoritative guidance should be expected of the
moderator.
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Triangle Error
Your systems vice president recently informed you that
there was an error in the loss triangles provided for your
loss reserve analysis as of March 31, 2014. You reestimate the March 31 reserves with the corrected data and
it produced reserve estimates that are 15% higher than
your previous best estimate. Because of recently passed
tort reform, you expect that your loss experience will
improve throughout 2014 and that the difference will
become immaterial by the end of 2014. Your CEO shares
your expectations about the improved experience. Further,
your company has already booked your original March 31
estimate and rebooking the new reserves would cause
a delay in the company’s earnings release.
What do you do?
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Close to the Edge
You are the chief actuary (an FCAS) for a large commercial
lines insurance company that writes mostly Work Comp
and Med Mal. The market has been soft for several years,
and thus your loss experience has been deteriorating, but
you expect the market to harden soon. Due to the slow
emergence pattern of the business, your reserve
indications have a +/- 10% range. However, due to the
reserve charge your company took the prior year, even a
+5% deviation from the point estimate will dangerously
deplete the company surplus.
What is your best course of action?
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Faulty Rating Plan
You are an actuarial manager and are attempting to gain
approval for a new rating plan, but are having difficulty. You
come across a competitor’s filing that implements a similar
rating plan and was approved, but you believe the rating
plan uses faulty logic. Your boss, who is not an actuary,
says “If the logic works, then use it” and orders you to do
so.
What do you do?
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