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Enhancing the Reputation of Casualty Actuaries

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  1. Enhancing the Reputation of Casualty Actuaries Casualty Loss Reserve Seminar Renaissance Waverly Hotel Atlanta, GA September 12, 2006

  2. With you today…. Representatives from the Joint Task Force for Enhancing the Reputation of Casualty Actuaries • Mary Miller • Michael Toothman • Pat Teufel

  3. Is the Profession Living Up to Its Responsibilities? • Standard & Poors – “Whether through knavery or naiveté….” • Morris Review – “Profession that has been too introspective, not forward-looking enough and slow to modernize” • Litigation Against Actuaries On Rise – “Professional negligence and malpractice, misrepresentation and aiding and abetting breaches of fiduciary duties”

  4. CAS Task Force on Actuarial Credibility

  5. Task Force on Actuarial Credibility Charge of the CAS Board: Identify, prioritize and investigate the feasibility of possible strategies for enhancing the perceived credibility of the casualty actuarial profession and develop action plans for implementation of those strategies considered to have the greatest potential for high impact.

  6. Recommendations 1. To enhance the transparency of the actuary’s conclusions by clearly identifying within the statement of actuarial opinion differences, if any, that exist between management’s “best estimate” of the loss and loss adjustment expense reserves as of a valuation date and the actuary’s “best estimate” of the reserve need as of the valuation date.

  7. Recommendations • To enhance the public’s understanding of actuarial estimates, including the “best estimate” and the range of reasonable reserve outcomes, as well as estimates of the range of all possible settlement outcomes. To refine actuarial methodologies for estimating the underlying probability distributions for the range of loss and loss adjustment expense reserves, facilitating greater consistency in the approaches used by actuaries and improved transparency of financial reporting disclosures.

  8. Recommendations 3. To improve the transparency of disclosures by requiring that the actuarial report contain an exhibit that summarizes changes in the actuary’s estimates from one period to the next, with extended discussion of significant factors underlying the changes.

  9. Recommendations 4. To enhance the quality of corporate governance for property/casualty insurers by educating audit committees or boards of directors or both on the roles and responsibilities of the appointed actuary. To increase the visibility of the appointed actuary within the corporate governance arena.

  10. Recommendations 5. To enhance the self-governance of the actuarial profession with respect to property/casualty loss and loss adjustment expense reserve opinions by requiring the appointed actuary to provide an explanatory document with the Actuarial Board for Counseling and Discipline (ABCD) whenever the change in the actuary’s reserve estimates over a defined period exceeds certain predetermined thresholds. The explanatory document would discuss the changes in the actuary’s estimates, as well as the significant factors underlying the changes.

  11. Recommendations 6. To elevate the unique role of the appointed actuary within the statutory financial reporting environment by incorporating an Actuarial Statement within the Jurat Page of each property/casualty insurance company’s Annual Statement.

  12. Joint Task Force for Enhancing the Reputation of Casualty Actuaries

  13. Role & Responsibilities • Oversee implementation of Task Force recommendations by the various organizations representing casualty actuaries • Communicate progress to each of the actuarial organizations • Work through “hurdles”, if any, encountered during implementation

  14. Progress to Date: General • All US actuarial organizations agree on general direction for the initiative • American Academy formed Appointed Actuaries Task Force to consider applicability of recommendations to other practice areas • Supplementing the Members Advisory Survey conducted initially, a survey of opinion writers was conducted • 561 responses • 59% feel that casualty actuarial profession in US has a credibility issue, particularly with rating agencies, regulators and company management • Earnings pressure seen as key factor contributing to the industry’s perceived reserve shortfall • No agreement on what to do about it • Media Relations Committee ready to act; needs content

  15. Progress to Date: General • Committees of both CAS and American Academy engaged in research on company failures and large reserve actions • Each year, approximately 30 companies explain total industry reserve development, although the companies change from year to year • High concentration of public companies and companies that write long-tailed lines of business in that group • Initial mispricing of business a significant contributor

  16. Key Survey Results

  17. Does the casualty actuarial profession in the US have a “credibility” issue with our publics?

  18. With which public(s) does the casualty actuarial profession need to enhance its reputation?

  19. How significant is the need to enhance the reputation of the casualty actuarial profession for each of our publics?

  20. Rank these factors, in order of their significance to the industry’s perceived US reserve deficiency.

  21. Agree or Disagree?

  22. Agree or Disagree?

  23. An Interesting Fact: How Many Opinions Do Actuaries Sign?

  24. Progress to Date: Publicly Disclose Actuary’s Point Estimate • By far, most debated recommendation of the task force • Highly applauded in analyst community • NAIC CATF • For regulators, Actuarial Opinion Summary (AOS) provides point estimate and/or range (confidential document) • Deferred consideration of change to public disclosure, pending review of AOSs • Actuarial Standards Board • Authorized consideration of change to ASOP 36, assigned to Casualty Committee • Decided to defer action, pending development of consensus among actuaries

  25. Progress to Date: Refine actuarial methods; Educate public • Educational sessions on modeling reserve variability developed • Prototype program (3 building, concurrent sessions) offered at CAS Spring Meeting, Puerto Rico • Special Interest Session to be developed and delivered in October 2006 • Closely following progress of GRIT • Increased attention to the actuary’s understanding of the business • Observations regarding the impact of economy/underwriting cycle on development • Proposed Standard on Property/Casualty Unpaid Claim and Claim Adjustment Expense Estimates exposed; comment period ended June 30, 2006.

  26. Progress to Date: Discuss Changes in the Actuarial Estimates • Sporadic, voluntary implementation by individual actuaries at this point

  27. Progress to Date: Increase visibility of Appointed Actuary with Audit Committee • Formal survey of actuarial opinion users under consideration • Incorporating views developed through interviews conducted by Long Range Planning Committee • NAIC CATF: discussed advisability of requiring that appointed actuary’s report be made “in person”; no consensus

  28. Progress to Date: Referral to ABCD • Actuaries’ knowledge of ABCD processes for counseling, discipline and requests for guidance is lacking • Incorporate educational sessions at actuarial meetings • Is ABCD the right resource? • Intent of recommendation was to focus on COUNSELING; for “at risk” situations, all actuaries would benefit from additional independent discussion and review • Confidentiality of ABCD process is valuable • ABCD resources perceived insufficient for the need • Possibly, consider forming another committee (within CAS?) to review. That committee could then refer perceived “problem” situations to ABCD

  29. Progress to Date: Incorporate Actuarial Opinion on Jurat Page • NAIC CATF rejected recommendation to change jurat page as unworkable • NAIC CATF currently considering recommendation that statement of actuarial opinion be bound within the Annual Statement • Comments encouraged • Identified impediment: Timing

  30. In Summary • No “Silver Bullet” • Many actions already “in the works” • All organizations representing casualty actuaries involved in implementation effort