What does an Actuary Really Do?

1
What does an Actuary Really Do?

• An Actuarys primary job is to calculate expected
  Insurance Losses.
• Examples
• What is the average Physical Damage to a Vehicle
  registered in Connecticut? (SEVERITY)
• What is the probability of having a car accident
  in Connecticut? (FREQUENCY)

2
How does an Actuary Project Insurance Losses?

• An Actuary uses history to try and project the
  future.
• For Example The Connecticut Population has
  been growing 1 per year on average for the last
  10 years. An actuary would then project that
  next year it will grow another 1.

3
How Does an Actuary Begin?

• DATA
• In order to use history to project the future,
  the actuary must have historical data from which
  to project.
• Example A hospital is looking for Medical
  Malpractice Insurance. The hospital must provide
  the insurance company a loss history of at least
  10 years of data.
• The data is provided based on insurance policy
  years. An insurance policy covers losses from
  accidents that occur during the year.
• Frequently the data is provided in hard copy
  paper print outs. The actuary must then manually
  enter the loss data into a spreadsheet or
  computer program in order to work with it.

4
Once the Data is Available, what kind of analysis
does the actuary do?

• Step 1 Identify any loss cost trends.
• Loss cost trends are made up of changes in
  severity of claim as well as changes in frequency
  of claim.
• If the data isnt sufficient to calculate trends
  directly, the actuary may use industry default
  trends such as those promulgated by ISO
  (Insurance Services Office).

5
LOSS DEVELOPMENT

• Step 2 The concept of Loss Development is the
  Key to a casualty actuarys work.
• Insurance losses are not necessarily reported to
  the insurance company when they occur. For
  example, in hospital malpractice a baby who is
  born with a defect due to malpractice is allowed
  to sue the hospital directly when he or she
  reaches the age of 18. So the insurance company
  may have to wait 18 years to know if there will
  be a claim.
• Question Is 10 years of data sufficient to
  project Hospital Malpractice losses?

6
Loss Development Triangle

• Data is formatted into what is called a Loss
  development triangle.
• If you are trying to project the losses that are
  going to OCCUR next year, which is the trigger
  for the insurance policy, then the data is sorted
  by accident year.

7
Development

• Next the data is shown at Annual Evaluations.
  This shows what the losses for a single accident
  year are at the end of each subsequent calendar
  year.
• Why do the losses change each year?
• When a claim is reported, the insurance company
  claims department puts up a claim reserve. The
  reserve is the claims adjusters best estimate of
  what they think the claim is worth.
• If the claim settles for something different than
  what the adjuster thought, then the claim
  develops either up or down.

8
SPREADSHEET TIME!

• Loss Development Factors
• Factors to Ultimate
• Ultimate Losses