Loss Reserve Developments
and Public Scrutiny
Chuck Emma, FCAS, MAAA
Pinnacle Actuarial Resources, Inc.
2005 MAF Fall Meeting
September 22, 2005
Background
• Failures/Impairments/Downgrades
• Public scrutiny
• Concerns over the profession’s image
• Nov. 2003 S&P Article
• 2002-2004: Total industry reserve developments adverse to
the tune of $45 Billion
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 ...
... the reasoning appears flawed
• 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 an educational challenge
• Some saw it as a call to advance reserving
methodologies (and some to sell their software)
• Some wondered whether they should continue to
sign 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 Industry Developments
2002: $22.8 Billion
2003: $14.1 Billion
2004: $ 9.9 Billion *
$47 Billion in total
* - Improved by approximate $10B in reserve reductions in AY 2003
Opinion Database
• We constructed a database consisting of
• Five-year financials of Annual Statement data
• Accompanying SAO letters
• 1,196 insurance groups, some comprised of many
companies
• Five-year financials of Annual Statement data
• Reviewed SAO’s from “representative company”
• 2,661 companies in total
Largest 30 Developments
• We selected the Top 30 groups in terms of one-year reserve
test (largest dollars of development) for review
• At 2002
• At 2003
• At 2004
• Data reviewed
• Financial data
• SAO data
• Other supporting info
Top 30 Over the Years
Concentration of Top 30 to Industry
• 2002: $23.9 B / $22.8 B
• 2003: $16.7 B / $14.1 B
• 2004: $14.5 B / $9.9 B
More on the Top 30
• Where’s This Coming From?
• 35-40% Asbestos related
• 40% “Reinsurance”, Excess Casualty
• 30%: WC, Med Mal, Mold, Construction Defects
Top 30 – The Opinion Letters
RMAD disclosure slow to show
• 50% had RMAD’s in 2002
• 67% had RMAD’s in 2003
• 83% had RMAD’s in 2004
More than 70% of appointed actuaries are employees
A&E represents approximately 10% of reserves as stated
in the SAO
Broad Themes
What does this analysis tell us?
• Underlying factors coming from many areas
• 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
Future Considerations
CAS Task Force on Credibility – Six significant
recommendations
• More Disclosures
• Differences in estimates
• Changes in estimates
• Variability
• Greater Visibility of Actuary and Transparency as to Who
Owns Which Estimate
• Mandatory calls to ABCD in more situations