Loss Reserve Developments and Public Scrutiny

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Loss Reserve Developmentsand Public Scrutiny

• Chuck Emma, FCAS, MAAA
• Pinnacle Actuarial Resources, Inc.
• 2005 MAF Fall Meeting
• September 22, 2005

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Background

• Failures/Impairments/Downgrades
• Public scrutiny
• Concerns over the professions image
• Nov. 2003 SP Article
• 2002-2004 Total industry reserve developments
  adverse to the tune of 45 Billion

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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
• Dont let the reserves disturb the earnings
  projections
• Explanations and caveats yeah, yeah, yeah

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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.

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The Questions

• Are reserve developments a cause of, a symptom
  of, or a lagging indicator of the industrys
  problems?
• Is the SAO serving the industry properly?
• What is the role of actuarial practice?

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Scrutiny and Criticism

• Professions 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

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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

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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 SAOs from representative company
• 2,661 companies in total

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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

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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

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More on the Top 30

• Wheres This Coming From?
• 35-40 Asbestos related
• 40 Reinsurance, Excess Casualty
• 30 WC, Med Mal, Mold, Construction Defects

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Top 30 The Opinion Letters

• RMAD disclosure slow to show
• 50 had RMADs in 2002
• 67 had RMADs in 2003
• 83 had RMADs in 2004
• More than 70 of appointed actuaries are
  employees
• AE represents approximately 10 of reserves as
  stated in the SAO

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Broad Themes

• What does this analysis tell us?
• Underlying factors coming from many areas
• Public perception
• Managements responsibility
• Actuaries responsibility

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Whats Next?

• Optimism
• U/W results are better
• More adequate?
• Pessimism
• Recent developments continue?
• Markets softening?
• EIL Reserves -- coming back?

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Whats 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

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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