Enhancing the Reputation
of Casualty Actuaries
Casualty Loss Reserve Seminar
Renaissance Waverly Hotel
Atlanta, GA
September 12, 2006
With you today….
Representatives from the Joint Task Force
for Enhancing the Reputation of Casualty
Actuaries
– Mary Miller
– Michael Toothman
– Pat Teufel
Is the Profession Living Up to Its
Responsibilities?
• Standard & Poors –
“Whether through knavery or naiveté….”
• Morris Review –
“Profession that has been too introspective, not
forward-looking enough and slow to modernize”
• Litigation Against Actuaries On Rise –
“Professional negligence and malpractice,
misrepresentation and aiding and abetting breaches of
fiduciary duties”
CAS Task Force on
Actuarial Credibility
Task Force on Actuarial Credibility
Charge of the CAS Board:
Identify, prioritize and investigate the feasibility
of possible strategies for enhancing the
perceived credibility of the casualty actuarial
profession and develop action plans for
implementation of those strategies considered
to have the greatest potential for high impact.
Recommendations
1. To enhance the transparency of the actuary’s
conclusions by clearly identifying within the
statement of actuarial opinion differences, if
any, that exist between management’s “best
estimate” of the loss and loss adjustment
expense reserves as of a valuation date and
the actuary’s “best estimate” of the reserve
need as of the valuation date.
Recommendations
2. To enhance the public’s understanding of
actuarial estimates, including the “best
estimate” and the range of reasonable reserve
outcomes, as well as estimates of the range of
all possible settlement outcomes.
To refine actuarial methodologies for
estimating the underlying probability
distributions for the range of loss and loss
adjustment expense reserves, facilitating
greater consistency in the approaches used by
actuaries and improved transparency of
financial reporting disclosures.
Recommendations
3. To improve the transparency of disclosures by
requiring that the actuarial report contain an
exhibit that summarizes changes in the
actuary’s estimates from one period to the
next, with extended discussion of significant
factors underlying the changes.
Recommendations
4. To enhance the quality of corporate
governance for property/casualty insurers by
educating audit committees or boards of
directors or both on the roles and
responsibilities of the appointed actuary. To
increase the visibility of the appointed
actuary within the corporate governance arena.
Recommendations
5. To enhance the self-governance of the actuarial
profession with respect to property/casualty loss
and loss adjustment expense reserve opinions
by requiring the appointed actuary to
provide an explanatory document with the
Actuarial Board for Counseling and
Discipline (ABCD) whenever the change in
the actuary’s reserve estimates over a
defined period exceeds certain
predetermined thresholds. The explanatory
document would discuss the changes in the
actuary’s estimates, as well as the significant
factors underlying the changes.
Recommendations
6. To elevate the unique role of the appointed
actuary within the statutory financial reporting
environment by incorporating an Actuarial
Statement within the Jurat Page of each
property/casualty insurance company’s Annual
Statement.
Joint Task Force for
Enhancing the Reputation
of Casualty Actuaries
Role & Responsibilities
• Oversee implementation of Task Force
recommendations by the various
organizations representing casualty
actuaries
• Communicate progress to each of the
actuarial organizations
• Work through “hurdles”, if any, encountered
during implementation
Progress to Date: General
• All US actuarial organizations agree on general direction
for the initiative
– American Academy formed Appointed Actuaries Task Force to consider
applicability of recommendations to other practice areas
• Supplementing the Members Advisory Survey
conducted initially, a survey of opinion writers was
conducted
– 561 responses
– 59% feel that casualty actuarial profession in US has a credibility issue,
particularly with rating agencies, regulators and company management
– Earnings pressure seen as key factor contributing to the industry’s
perceived reserve shortfall
– No agreement on what to do about it
• Media Relations Committee ready to act; needs content
Progress to Date: General
• Committees of both CAS and American
Academy engaged in research on company
failures and large reserve actions
– Each year, approximately 30 companies explain total
industry reserve development, although the
companies change from year to year
– High concentration of public companies and
companies that write long-tailed lines of business in
that group
– Initial mispricing of business a significant contributor
Key Survey Results
Does the casualty actuarial
profession in the US have a
“credibility” issue with our publics?
Response
%
Yes
Number of
Responses
329
No
154
28%
No Opinion /
Don’t Know
73
13%
59%
With which public(s) does the
casualty actuarial profession need
to enhance its reputation?
Response
Company Management
Company Audit
Committee and Board
Insurance Regulators
Rating Agencies
Accounting Regulators
Policyholders
Shareholders
Number of
Responses
276
192
%
297
340
162
101
232
57%
65%
31%
19%
44%
53%
37%
How significant is the need to enhance
the reputation of the casualty actuarial
profession for each of our publics?
Publics
% Responding
High (4 or 5)
Company Management
50%
Company Audit Committee and
Board
43%
Insurance Regulators
54%
Rating Agencies
63%
Accounting Regulators
33%
Policyholders
18%
Shareholders
42%
Rank these factors, in order of
their significance to the industry’s
perceived US reserve deficiency.
Factor
Rank
Vague Accounting Terms and Guidance
5
Corporate Governance Issues
(Dominance Risk)
4
Quality and/or Clarity of Actuarial Conclusions
3
Earnings Pressure
1
Unforeseeable events
2
Agree or Disagree?
Statement
% Agree
Clarifying the term “best estimate” and differentiating
the actuarial point estimate from management’s “best
estimate” will help to provide increased clarity with
respect to the actuary’s conclusions on reserves
73%
The Actuarial Standards Board should consider a
revision to ASOP 36, requiring that the carried reserve
be at least equal to the actuary’s estimate in order for
the reserves to be considered reasonable
31%
The actuarial profession should require actuaries who
are rendering opinions on companies that have
experienced significant adverse development to seek
counsel from ABCD
25%
Agree or Disagree?
Statement
% Agree
The public would be better served if it was required
that the appointed actuary be independent of the entity
for which the opinion is being rendered
44%
The appointed actuary should be required to present
his/her conclusions on the reserves in person to the
Audit Committee and/or Board at least annually. In
addition, the Audit Committee should meet with the
appointed actuary in executive session at least once a
year.
74%
The casualty actuarial profession should invest heavily
in advocating for and developing a technically sound
framework to support public disclosure of risks and
uncertainties associated with the loss and loss
adjustment expense reserve estimates
65%
An Interesting Fact: How Many
Opinions Do Actuaries Sign?
120
100
80
60
40
20
0
O
r
-2
ve
16
-1
5
10
11
6-
2-
1
25
5
5
Progress to Date: Publicly Disclose
Actuary’s Point Estimate
• By far, most debated recommendation of the task force
• Highly applauded in analyst community
• NAIC CATF
– For regulators, Actuarial Opinion Summary (AOS) provides point
estimate and/or range (confidential document)
– Deferred consideration of change to public disclosure, pending
review of AOSs
• Actuarial Standards Board
– Authorized consideration of change to ASOP 36, assigned to
Casualty Committee
– Decided to defer action, pending development of consensus
among actuaries
Progress to Date: Refine actuarial
methods; Educate public
• Educational sessions on modeling reserve variability
developed
– Prototype program (3 building, concurrent sessions) offered at
CAS Spring Meeting, Puerto Rico
– Special Interest Session to be developed and delivered in
October 2006
• Closely following progress of GRIT
– Increased attention to the actuary’s understanding of the
business
– Observations regarding the impact of economy/underwriting
cycle on development
• Proposed Standard on Property/Casualty Unpaid Claim
and Claim Adjustment Expense Estimates exposed;
comment period ended June 30, 2006.
Progress to Date: Discuss Changes
in the Actuarial Estimates
• Sporadic, voluntary implementation by individual
actuaries at this point
Progress to Date:
Increase visibility of Appointed
Actuary with Audit Committee
• Formal survey of actuarial opinion users under
consideration
• Incorporating views developed through interviews
conducted by Long Range Planning Committee
• NAIC CATF: discussed advisability of requiring that
appointed actuary’s report be made “in person”; no
consensus
Progress to Date: Referral to ABCD
• Actuaries’ knowledge of ABCD processes for
counseling, discipline and requests for guidance is
lacking
– Incorporate educational sessions at actuarial meetings
• Is ABCD the right resource?
– Intent of recommendation was to focus on COUNSELING; for
“at risk” situations, all actuaries would benefit from additional
independent discussion and review
– Confidentiality of ABCD process is valuable
– ABCD resources perceived insufficient for the need
– Possibly, consider forming another committee (within CAS?) to
review. That committee could then refer perceived “problem”
situations to ABCD
Progress to Date: Incorporate
Actuarial Opinion on Jurat Page
• NAIC CATF rejected recommendation to
change jurat page as unworkable
• NAIC CATF currently considering
recommendation that statement of
actuarial opinion be bound within the
Annual Statement
– Comments encouraged
– Identified impediment: Timing
In Summary
• No “Silver Bullet”
• Many actions already “in the works”
• All organizations representing casualty actuaries
involved in implementation effort