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MATH MattersHow Risk Managers Should Use an Actuarial Report • Norm Hainlen – Director, Alternative Risk Financing Wood Gutmann & Bogart (Coordinator) • Al Rhodes – President and Senior Actuary SIGMA Actuarial Consulting Group, Inc. • Tim East – Director, Risk Management The Walt Disney Company
MATH Matters • Question… • How do you use the actuarial report? • Do you review the summary? • Do you review the data?
MATH Matters • Question… • Do you review the calculations? • How do you use the actuarial report? • Do you grab the first number and close the report?
MATH Matters • Not a bad strategy if: • You need a number for a financial statement • You need the loss pick for a meeting • Your broker handles that stuff
MATH Matters • A bad strategy if: • Actually, that is always a bad strategy – there is a lot more there the MATH is telling you.
MATH Matters • Use the actuarial analysis as part of your stewardship report to the CFO, Board, … • Use the MATH to show what has happened and what is expected to happen. • The losses are x% of the program, so the MATH to get to that x% is important.
MATH Matters • - Assumption – You are getting a reserve analysis and a loss projection. • - You need at least two numbers – the estimated reserves and the loss pick. • - How many more are there?
MATH Matters • LOTS – let’s look at the MATH… • Look at the reserves first: • Reserves = Case Reserves + IBNR
MATH Matters • If the IBNR to case reserve ratio has been increasing, then the reserve position MAY be stronger. • If the ratio is decreasing, then the reserve position MAY be getting weaker.
MATH Matters • It is good to know the MATH so you can figure out if a potential problem is looming or if you are now in a stronger position. • A large claim can give an unusual ratio. Stronger reserving can give an unusual ratio.
MATH Matters • Still looking at reserves: • What is your range? • There is one whether it is shown or not! • It should not be large! • It will not give you every possible outcome.
MATH Matters • Reserve Range: • The range gives you an opportunity to fund something different, but within a reasonable range. • The MATH will let you know what is reasonable.
MATH Matters • Let’s look at the loss pick: • Do you get one number? OK • Do you get a range? Better • Do you get confidence intervals? Best - MAYBE
MATH Matters • Loss Pick (Simple Example): • Pure Loss Rate x Exposures • Exposures should be easy • MATHMatters when calculating the pure loss rate
MATH Matters • For each policy period: • Incurred/paid losses are developed to ultimate • Ultimate losses are trended to a common period • Exposures are trended to a common period • MATH Matters for each step
MATH Matters • Do you understand how the ultimate losses are calculated? • Are the exposures appropriate and correct? • Are the trend factors reasonable?
MATH Matters • Pure Loss Rate: • Trended Losses / Trended Exposures • A pure loss rate for each policy period. • How variable? You need this for TCOR! • Is selected rate reasonable?
MATH Matters • Loss Pick • How is the range calculated? • Does it seem reasonable?
MATH Matters • Loss Pick • MATH Matters – what is a confidence interval? • The confidence interval tells you the probability an amount will not be exceeded. • What is the “correct” percentile?
MATH Matters • What do you need to know? + Addition - Subtraction X Multiplication • Division
Take Aways… • TCOR – use projected losses and confidence intervals • Metrics – pure loss rate, frequency, severity • Confidence Interval – choice of program
MATH Matters – The Risk Manager’s View • How to receive and access an actuarial report • How to use it to drive results within your business
The Actuarial Process/Cycle • Advance – Meet and plan before you send the data • Scrub – Make sure the data is screened and vetted before the analysis begins • Draft – Review the draft before the final to understand the assumptions, selections and trends
Reviewing the Report • Methods – How many methods did the actuary use, and which ones did they rely on? • Changes in Triangles – Don’t rely on the tables alone; discuss the data
Reviewing the Report • Methods – How many methods did the actuary use, and which ones did they rely on? • Changes in Triangles – Don’t rely on the tables alone; discuss the data • Other Measures: • Case closure rate is a critical metric • Loss-cost per exposure trends • Loss development by reserve category
Using the Actuarial Report • Translate – Translate the actuarial results into terms that stakeholders can understand • Temper – Actuarial results can be misused or mis-understood; set realistic expectations
Using the Actuarial Report • Translate – Translate the actuarial results into terms that stakeholders can understand • Temper – Actuarial results can be misused or mis-understood; set realistic expectations • Transform – Select outcomes and adopt metrics that can be used to improve the business results
Take Aways… • Dig In – Work with your actuary and those who supply the underlying data to understand the inputs, assumptions and results • Sort Out – The key metrics that define the true direction of your losses • Present – The results in terms that your organization can understand and act upon
MATH MattersHow Risk Managers Should Use an Actuarial Report • Questions & Answers • Thank You!!