Enhancing the Reputation of Casualty Actuaries

Casualty Loss Reserve SeminarRenaissance Waverly Hotel

Atlanta, GA

September 12, 2006

With you today….

Representatives from the Joint Task Force for Enhancing the Reputation of Casualty Actuaries

– Mary Miller– Michael Toothman– Pat Teufel

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”

CAS Task Force on Actuarial Credibility

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.

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.

Recommendations

2. 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.

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.

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.

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.

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.

Joint Task Force for Enhancing the Reputation

of Casualty Actuaries

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

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

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

Key Survey Results

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

Response Number of Responses

%

Yes 329 59%

No 154 28%

No Opinion / Don’t Know

73 13%

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

Response Number of Responses

%

Company Management 276 53%

Company Audit Committee and Board

192 37%

Insurance Regulators 297 57%

Rating Agencies 340 65%

Accounting Regulators 162 31%

Policyholders 101 19%

Shareholders 232 44%

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

Publics% Responding High (4 or 5)

Company Management 50%

Company Audit Committee and Board

43%

Insurance Regulators 54%

Rating Agencies 63%

Accounting Regulators 33%

Policyholders 18%

Shareholders 42%

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

Factor Rank

Vague Accounting Terms and Guidance 5

Corporate Governance Issues

(Dominance Risk)4

Quality and/or Clarity of Actuarial Conclusions 3

Earnings Pressure 1

Unforeseeable events 2

Agree or Disagree?

Statement % Agree

Clarifying the term “best estimate” and differentiating the actuarial point estimate from management’s “best estimate” will help to provide increased clarity with respect to the actuary’s conclusions on reserves

73%

The Actuarial Standards Board should consider a revision to ASOP 36, requiring that the carried reserve be at least equal to the actuary’s estimate in order for the reserves to be considered reasonable

31%

The actuarial profession should require actuaries who are rendering opinions on companies that have experienced significant adverse development to seek counsel from ABCD

25%

Agree or Disagree?

Statement % Agree

The public would be better served if it was required that the appointed actuary be independent of the entity for which the opinion is being rendered

44%

The appointed actuary should be required to present his/her conclusions on the reserves in person to the Audit Committee and/or Board at least annually. In addition, the Audit Committee should meet with the appointed actuary in executive session at least once a year.

74%

The casualty actuarial profession should invest heavily in advocating for and developing a technically sound framework to support public disclosure of risks and uncertainties associated with the loss and loss adjustment expense reserve estimates

65%

An Interesting Fact: How Many Opinions Do Actuaries Sign?

0

20

40

60

80

100

120

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

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.

Progress to Date: Discuss Changes in the Actuarial Estimates

• Sporadic, voluntary implementation by individual actuaries at this point

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

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

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

In Summary

• No “Silver Bullet”

• Many actions already “in the works”

• All organizations representing casualty actuaries involved in implementation effort