Property/Casualty
Loss Reserves
Chuck Emma, FCAS, MAAA
Pinnacle Actuarial Resources, Inc.
CAS Annual Meeting
November 15, 2005
Background
• Company Failures/Impairments/Downgrades
• Public Scrutiny
• Nov. 2003 S&P Article
• Continuing Reserve Developments
Framing the Scrutiny
Who is saying what and why do they care?
• “Actuaries are signing off on reserves that turn out to be
wildly inaccurate.”
• “Whether by naiveté or knavery ... reserve additions have
undermined confidence in estimates ...”
• What an outside analyst seems to want
• Don’t let the reserves disturb the earnings projections
• Explanations and caveats … “yeah, yeah, yeah”
Scrutiny and Criticism
Some of the points have merit, but ...
... there are problems with the reasoning
• Observation: “Reserves are developing adversely”
• Conclusion: “Actuaries are either stupid, are crooks, or
are both.”
The Questions
• Are reserve developments a cause of, a
symptom of, or a lagging indicator of the
industry’s problems?
• Is the SAO serving the industry properly?
• What is the role of actuarial practice?
Scrutiny and Criticism
Profession’s Response
• Some heard this as a educational challenge
• Some saw it as a chance to advance reserving
methodologies (and sell software)
• Some wondered if they should continue signing opinions
Development as % of Surplus
Missing
less than 10%
-10% up to 5%
-5% up to 0%
0% up to 5%
5% up to 10%
10% and up
# of Co's
# of Co's
# of Co's
# of Co's
# of Co's
# of Co's
# of Co's
1998
30
448
330
754
506
114
220
1999
19
350
326
746
565
125
210
2000
19
296
269
799
556
142
210
2001
17
280
231
632
604
159
349
2002
31
208
178
593
636
207
369
2003
60
201
180
644
601
208
341
2004
64
200
260
710
603
140
238
Year
Development as % of Reserves
Missing
< -10%
-10% to -5%
-5% to 0%
0% to 5%
5% to 10%
10% to up
# of Co's
# of Co's
# of Co's
# of Co's
# of Co's
# of Co's
# of Co's
143
761
335
427
297
128
311
107
696
293
430
393
121
301
130
647
252
442
350
151
319
119
602
200
330
377
199
445
138
520
192
258
409
212
493
165
501
179
338
400
215
437
167
547
229
387
395
185
305
Year
1998
1999
2000
2001
2002
2003
2004
Analysis of Company Developments
• $35BB over two years
• 30 Largest Developments
• 2003: Top 30 approximated total industry development
• 2004: Industry developments much better than Top 30
30 Companies
• Where’s This Coming From?
• 35-40% Asbestos related
• 40% “Reinsurance”, Excess Casualty
• 30% includes WC, MM, Mold
• Did anyone notice that industry surplus grew
significantly over the past three years?
30 Companies
• SAO’s
• RMAD disclosure slow to show
• 50% had RMAD’s in 2002
• 67% had RMAD’s in 2003
• 83% had RMAD’s in 2004
• 80% of appointed actuaries are employees
• A&E represents approximately 10% of reserves as
stated in the SAO
Analysis of Company Developments
• What Does this Mean?
• Underlying factors can not be isolated to one or
two factors
• Public Perception
• Management’s responsibility
• Actuaries’ responsibility
What’s Next?
• Optimism:
U/W results are better
More adequate?
• Pessimism:
Recent developments continue?
Markets softening?
EIL Reserves -- coming back?
What’s Next?
• SarbOx Impact
• Section 404 – CEO/CFO must come to know much
more about reserving process
• SarbOx for all companies?
• More Disclosures
• Risk / variability / uncertainty
• Relationship of reserves beyond solvency to viability
• CAS Task Force on Credibility – Six significant
recommendations
Future Considerations
Potential Major Changes ?
More Disclosures
• Differences in estimates
• Changes in estimates
• Variability
Greater Visibility of Actuary
Mandatory calls to ABCD in more situations