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Property/Casualty Loss Reserves Chuck Emma, FCAS, MAAA Pinnacle Actuarial Resources, Inc. Casualty Loss Reserve Seminar September 13, 2005
Background • Company Failures/Impairments/Downgrades • Public Scrutiny • Nov. 2003 S&P Article • Continuing Reserve Developments
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 ... ... there are problems with the reasoning • 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 a educational challenge • Some saw it as a chance to advance reserving methodologies (and sell software) • Some wondered if they should continue signing opinions
Analysis of Company Developments • $35BB over two years • 30 Largest Developments • 2003: Top 30 approximated total industry development • 2004: Industry developments much better than Top 30
30 Companies • Where’s This Coming From? • 35-40% Asbestos related • 40% “Reinsurance”, Excess Casualty • 30% includes WC, MM, Mold • Did anyone notice that industry surplus grew significantly over the past three years?
30 Companies • SAO’s • RMAD disclosure slow to show • 50% had RMAD’s in 2002 • 67% had RMAD’s in 2003 • 83% had RMAD’s in 2004 • 80% of appointed actuaries are employees • A&E represents approximately 10% of reserves as stated in the SAO
Analysis of Company Developments • What Does this Mean? • Underlying factors can not be isolated to one or two factors • 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 • CAS Task Force on Credibility – Six significant recommendations
Future Considerations Potential Major Changes ? More Disclosures • Differences in estimates • Changes in estimates • Variability Greater Visibility of Actuary Mandatory calls to ABCD in more situations