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BROADENING THE AUDIENCE

BROADENING THE AUDIENCE. Actuarial Interaction with Chief Financial Officers Casualty Loss Reserve Seminar Arlington, VA - September 23, 2002. Howard Dempster, FCAS, MAAA Chief Financial Officer Prudential Property and Casualty Insurance Company. 1.

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BROADENING THE AUDIENCE

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  1. BROADENING THE AUDIENCE Actuarial Interaction with Chief Financial Officers Casualty Loss Reserve Seminar Arlington, VA - September 23, 2002 Howard Dempster, FCAS, MAAA Chief Financial Officer Prudential Property and Casualty Insurance Company 1

  2. Up Until the Mid-80s, Actuarial FunctionsWere Generally Consolidated Intoa Single Department • Principally ratemaking, reserving and research • Little interaction between actuarial functions • Actuaries role was often to be seen but not heard • CFO dealt with accounting, treasury and investments • Chief Actuary generally reported to CEO and peer of CFO • Little interaction between Chief Actuary and CFO 2

  3. Passage of Time Saw ActuarialResources Deployed or Dedicated to Many Parts of the Company • Underwriting Department - pricing, business analysis, research • Claims Department - claim analysis, claim performance monitors/measures • Corporate Actuarial - actuarial reserves • Corporate Finance - strategic planning, investment support/analysis, business control 3

  4. Passage Of Time Also BroughtHeightened Visibility To Loss Reserves • More liability coverages • More litigious society • Emergence of toxic torts • Increased volatility and variability in estimate of ultimate liabilities 4

  5. Current Environment One ofContinuous Scrutiny by Wall Street • Short-term focus • Earnings vs. analysts’ expectations/forecasts • Earnings vs. Company forecasts • Company strategy 5

  6. CFO Generally Responsible for: • Reporting results • Explaining variances • Determining and communicating company earnings expectation/forecasts • Primary Wall Street interface 6

  7. Why Do CFOs Need Actuaries? To help determine: • Why reported earnings are off-target • How recent events affect projections • What corrective actions need to be executed • Does earnings forecast need to change? If so, to what? 7

  8. Why Were Reported Earnings Off Expectations? • Revenue - pricing actuaries/investment actuaries • Investment Income • Yields • Invested assets • Cash flow • Earned Premium • Number of new policies • Average premium • Retention 8

  9. Why Were Reported Earnings Off Expectations? • Losses - claim department actuaries/reserving actuaries • Prior accident year development • Current accident year • Possible issues: • True IBNR • Development on known claims • Changes to claim processing/claim policy • Frequency • Severity • Catastrophic loss • Change in expected distribution (e.g., coverage/state), underwriting policy • Other (e.g., mold) 9

  10. Need Actuaries to Help Determine the “Whys” Behind the “What Happened.” • Explore and monitor • Search for underlying causes of deviations from expectations • Implement any additional measures required to monitor • New • More frequent • Different cuts 10

  11. Need Actuaries to Help Determine the “Whys” Behind the “What Happened.” • Effect on current projections • One-time (e.g., catastrophic, claim process) • Systemic change affecting future • Provide informed judgement for operational change • Higher rates • Agency management • Distribution changes 10

  12. What Are Actuaries’ Value to the CFO? • Provide the best opinion based on facts and informed judgment • CFO needs to know “truth” before deciding how to proceed • Provide the “why” as well as the “what” • CFO needs to have actuaries from different disciplines function as members of the team • Each needs to consider the input and knowledge of others • Critical role of the actuaries is to provide a quantitative link between planned activities and financial forecasts 11

  13. Challenges For The Actuary • Constantly interface with actuarial colleagues in other parts of the Company • Accept that the messenger (Actuary) usually delivers bad news • Bad news is generally not received favorably • Actuary must develop presentation skills • Provide information in understandable form - “graphs are worth 1000 words” • Provide clear, concise support for recommendation 12

  14. Questions BROADENING THE AUDIENCE

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