Math 479 / 568
Casualty Actuarial Mathematics
Fall 2014
University of Illinois at Urbana-Champaign
Professor Rick Gorvett
Session 1: Introduction and Overview
August 26, 2014
Agenda
• Syllabus
• Moi
• The actuarial profession
• The casualty actuarial profession
• The P/C insurance industry
Syllabus
• Course goals and context
• Class schedule
– Readings
– Exams
– Assignments
• Projects and “Engagement”
• Grading
Syllabus (cont.)
• “Engagement”
– This is a participatory course
• Elements
– Class participation
– Current events
– Case studies
– Small projects
– Social media (e.g., Twitter)
Me
• MBA and PhD in Finance
• FCAS, ASA, CERA
• Former practicing casualty
actuary
• CAS Board of Directors
• Editor-in-Chief, Variance
(I wish…)
What is an Actuary?
The Technical Definition
• Someone with an actuarial designation
• Property / Casualty:
– FCAS: Fellow of the Casualty Actuarial Society
– ACAS: Associate of the Casualty Actuarial Society
• Life:
– FSA: Fellow of the Society of Actuaries
– ASA: Associate of the Society of Actuaries
• Other:
– EA: Enrolled Actuary
– MAAA: Member, American Academy of Actuaries
What is an Actuary?
Better Definitions
• “One who analyzes the current financial
implications of future contingent events”
- p.1, Foundations of Casualty Actuarial Science
• “Actuaries put a price tag on future risks.
They have been called financial architects
and social mathematicians, because their
unique combination of analytical and
business skills is helping to solve a growing
variety of financial and social problems.”
- p.1, Actuaries Make a Difference
Membership Statistics (Nov., 2012)
• Casualty Actuarial Society:
– Fellows:
– Associates:
– Total:
4,015
1,614
5,629
• Society of Actuaries:
– Fellows:
– Associates:
– Total:
14,187
9,111
23,298
Casualty Actuaries
by Type of Employment
•
•
•
•
•
•
•
•
•
Insurance companies:
Reinsurers:
Consultants:
Organizations serving insurance:
Brokers and agents:
Government:
Academic:
Other:
Retired:
2,550
546
890
318
120
93
24
738
350
CAS Exams – Advanced Topics
•
•
•
•
•
•
•
•
•
Ratemaking
Loss reserving
Regulation
Financial reporting
Estimation of liabilities
Enterprise risk management
Insurance company valuation
Advanced ratemaking
Financial risk and rate of return
Exam 5
Exam 6
Exam 7
Exam 8
Exam 9
History of the CAS
• Founded in 1914
– (Big plans for the centennial in NY, Nov. 2014!)
– Initial concern: workers compensation (introduced
in 1911)
• Functions:
– Membership standards (e.g., exams, code of
conduct)
– Communications with public
– Seminars, research
• In academia, still the minority presence
Traditional Actuarial Functions
• Loss reserving
– Co.’s policyholders have had “occurrences” (or
“incidents” or “claims”)
– Actuary determines the aggregate dollars that will
ultimately be paid out on those occurrences
• Ratemaking
– A “risk” (or “insured” or “policyholder”) has an
exposure to loss
– Actuary determines the “rate” (cost per unit of
exposure)
– “Premium” = exposure × rate
Recent Developments in
Actuarial Practice
• Risk & return, and other financial
applications
– E.g., ROE, ALM, insurance securitization
• Dynamic financial analysis
– An approach to modeling the interaction between
insurance and financial operations
• Enterprise risk management
– Holistic approach to identifying, quantifying, and
managing risk
Other Emerging Developments
• Statistics
– Predictive modeling
– Big data
• Modeling
– Catastrophe
– Behavioral
• Financial reporting and regulation
How Well Do We Do All This?
• “Insurance Actuaries – A Crisis of Credibility”
– Issued by Standard & Poor’s, November, 2003
• Some quotes:
– “Perpetual additions to reserves are an indication that all is
not well with insurers’ assessments of their future payouts,
but it is time to examine how actuaries contribute to the
problem, according to Standard & Poor’s analysts.”
– “ ‘Actuaries are signing off on reserves that turn out to be
wildly inaccurate,’…”
– “ ‘ …reserve shortfalls don’t just happen overnight. What
happened to all the reserving opinions signed by actuaries in
prior periods?’ ”
The Actuarial Profession’s Response
• CAS – Memorandum summarizing visit with S&P:
“S&P acknowledged that they deliberately used
flamboyant language in the article in order to get the
attention of the reader. As strange as it seems, they
say they did not want to impugn actuaries. In fact,
their concern is that the voice of the actuary (internal
or external) is not being heard by company
managements.”
• AAA news release: S&P report is “fundamentally
flawed.”
The Property / Casualty
Insurance Industry
• Industry facts and numbers
• Companies
• Lines of business
• Very nice resource: Insurance Information
Institute (iii) website – www.iii.org
Next Time
• Risks and Risk Theory
• Risks and risk management
– Description of “risk”
– Management of risk
– Control and financing of risk
• Risk theory
– Utility theory
– Ruin theory
– Solvency issues