Bill Burns — Vice President & Actuary
CLRS
September 11, 2006

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Actuarial profession is lacking in management literature
Hundreds of papers on quantitative techniques but only a handful (if that) on managing the loss reserving projects
Gregory Alff — 1993
This session will focus on managing the loss reserving process not the people
1 September 11, 2006

The Big Day arrives and you find yourself in charge of the Loss Reserving Department…
Where do you start?
2 September 11, 2006

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Do I have the right staff?
How often do reserve reviews have to be done?
How much time does it take to do a review (in man-hours)?
What are the responsibilities of the individual staff members?
Do I have enough staff?
3 September 11, 2006

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Technical skills
Knowledge of company operations
Verbal and written communication skills
Inter-personal skills
Management experience
Professional credentials
4 September 11, 2006

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Depends on company
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Size
Public vs private
Management’s needs/wishes
All lines — 2x year
“Major” lines — 4x year
Roll-forward at year-end (especially if a large complex company)
5 September 11, 2006

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Depends on
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Staff (size, abilities, etc.)
Quality of data
Depth of analysis
Complexity of book of business
Reinsurance program
Goal: Streamline the process as much as possible so you devote your resources to analysis and not data issues
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Don’t make every time the first time
6 September 11, 2006

Chief
Actuary
Assistant
Actuaries
Reserving Pricing
Actuarial
Assistants
7
Corporate
September 11, 2006

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Students (< 4 exams, 3 – 5 years experience)
“Ground Level”
Gather, scrub and balance data
Generate initial indications
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Reserving package
In-house spreadsheets
Produce reports for management
Form and maintain relationships with peers in other departments
8 September 11, 2006

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Seasoned students to new ACAS, FCAS
“5,000 Foot View”
Check work of actuarial assistants
Challenge assumptions and conclusions (“Smell Test”)
Propose alternative methods
Present results to chief actuary
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Bring along your staff!
9 September 11, 2006

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Seasoned ACAS, FCAS
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Thick skin a must
Scar tissue optional
“10,000 Foot View”
Final word on reserve estimates (point and range)
Communicates results to senior management and B of D
Might write and sign opinions
10 September 11, 2006

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Analysis is done and Chief Actuary has blessed the numbers
A formal report has been produced
The chief actuary now has to talk to a C-level executive (CEO,
COO, CFO)
11 September 11, 2006

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Not a mystery novel
Conclusions upfront and in plain sight
If the reader wants to go further tell him/her where to find the information
12 September 11, 2006

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Executive summary with conclusions
Breakdown by business segment reviewed, e.g.
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Core business by line
Assumed business
ULAE
Methods and key assumptions
Data reconciliation
Tie in with prior analyses
13 September 11, 2006

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But formal reports can be hundreds of pages long
Do you really plan to give the entire report to a
C-level executive?
What about reports you might have to give to:
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Board of Directors
Department heads
Reinsurers
Regulators
Rating agencies
Each will have their own hot buttons as to what is important
14 September 11, 2006

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Know your audience
K.I.S.S.
Avoid “Information Pollution”
As Pat Tures so eloquently put it:
“For actuaries a complex exhibit is a work of art. For everyone else it is a thorny tangle you wouldn’t want to touch even with gloves on.”
15 September 11, 2006

XYZ Insurance Company
Profit Center - Core Business
LOB: All
Loss Reserve Position as of 12/31/XX ($000)
Ult Loss & LAE
Paid Loss & LAE
Req'd Reserves
Carried Reserves
Red/(Def)
% Red/(Def)
Gross
150,000
110,000
40,000
36,000
(4,000)
-11.1%
16
Net
125,500
91,000
34,500
29,000
(5,500)
-19.0%
September 11, 2006

XYZ Insurance Company
Profit Center - Core Business
LOB: Commercial Auto
Loss Reserve Position as of 12/31/XX ($000)
Ult Loss & LAE
Paid Loss & LAE
Req'd Reserves
Carried Reserves
Red/(Def)
% Red/(Def)
Gross
30,000
22,500
7,500
7,200
(300)
-4.2%
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Net
27,500
20,800
6,700
6,300
(400)
-6.3%
September 11, 2006

XYZ Insurance Company
Profit Center - Core Business
LOB: Personal Auto
Loss Reserve Position as of 12/31/XX ($000)
Ult Loss & LAE
Paid Loss & LAE
Req'd Reserves
Carried Reserves
Red/(Def)
% Red/(Def)
Gross
35,000
19,500
15,500
16,800
1,300
7.7%
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Net
19,500
5,700
13,800
12,700
(1,100)
-8.7%
September 11, 2006

XYZ Insurance Company
Profit Center - Core Business
LOB: Workers' Compensation
Loss Reserve Position as of 12/31/XX ($000)
Ult Loss & LAE
Paid Loss & LAE
Req'd Reserves
Carried Reserves
Red/(Def)
% Red/(Def)
Gross
85,000
68,000
17,000
12,000
(5,000)
-41.7%
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Net
78,500
64,500
14,000
10,000
(4,000)
-40.0%
September 11, 2006

Company XYZ - Workers' Compensation Frequency Trend
7.00
6.50
6.00
5.50
5.00
4.50
4.00
'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06
20 September 11, 2006

Company XYZ - Workers' Compensation Severity Trend
6,000
5,500
5,000
4,500
4,000
3,500
3,000
2,500
'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06
21 September 11, 2006

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Loss reserving process is vital to the proper management of insurance companies
A properly and adequately staffed actuarial department is the most critical component in the process
Your success will depend upon:
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The value of the information you provide
How you present this information
Your track record
Communicate effectively and document your work
22 September 11, 2006