Casualty Actuarial Society

Professional Education

2005 Annual Meeting Handouts

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2005 CAS Annual Meeting

Our Credibility at Risk? Loss Reserves-Facts and Perceptions
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The National Association of Insurance Commissioners (NAIC) established the role of "appointed actuary" in the early 1980s. The NAIC annual statement instructions require that the board of directors of each insurer appoint a qualified actuary and that a statement of actuarial opinion (SAO) on the loss and loss adjustment expense reserves filed in the Annual Statement be included or attached to Page 1 of the Annual Statement. It is widely acknowledged that the loss and loss adjustment expense reserves are the most significant estimate of property/casualty insurers. The SAO on these reserves represents a significant component of the overall controls governing property/casualty insurance company statutory financial reporting.

Over the past several years, many property/casualty insurers have taken significant reserve strengthening action in response to observed adverse development. Despite these actions there is still widespread belief that the carried reserves of property/casualty insurers are still inadequate. The property/casualty actuarial profession has been criticized recently for failure to fulfill its perceived role in assuring that adequate loss and loss adjustment expense reserves are being carried by property/casualty insurers on their published financial statements.

As a result of these criticisms, the CAS Board of Directors undertook a critical examination of current practice. The board examined potential underlying causes for the perceived credibility gap and considered what steps might be taken to address these. A Task Force on Actuarial Credibility was charged with refining and developing the initial analysis into a detailed work plan.

Similar issues and concerns have also affected actuaries working in general (property/casualty) insurance in the United Kingdom. The General Insurance Board created the General Insurance Reserving Issues Task Force (GRIT) to look at how reserving practices and techniques could be improved to reduce the chances of material runoff deficiencies in the future. In addition, GRIT is focusing on the effects of a soft market on reserve estimation and determining how to measure and communicate the uncertainties of reserve estimates.

This session will focus on the similarities and differences of the issues, as well as the conclusions reached and action steps taken by each organization.

    Moderator:
    Allan M. Kaufman, Actuary and Consultant, AMK Consulting
    Panelists:
    Steve Dreyer, Practice Leader, North America Insurance Ratings, Standard & Poor's
    Mary D. Miller, Actuary, Ohio Department of Insurance
    Patrica A. Teufel, Principal, KPMG LLP

Risk Transfer
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With all the recent press and scrutiny of finite reinsurance, many insurers are taking a second look at their accounting treatment of borderline contracts. According to publicly filed statements, some companies have actually restated financials to reflect that some contracts were accounted for incorrectly. As a result, for the first time, many of our members are being asked by their employers to determine whether particular contracts have adequate risk transfer for reinsurance accounting. This can be a risky project and there is no clear actuarial literature regarding the procedures to employ. In this session, actuaries and accountants familiar with risk transfer requirements will discuss the current state of practice and the challenges facing the industry and the actuarial profession.

    Moderator:
    Peter M. Licht, Managing Director, PricewaterhouseCoopers LLP
    Panelists:
    Donald Doran, Partner, PricewaterhouseCoopers LLP
    John M. Purple, Chief Actuary, State of Connecticut Insurance Department
    Michael G. Wacek, President, Odyssey America Reinsurance Company, Chairman of the CAS working party on risk transfer testing

Rating Agencies
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Because the rating itself has become a major factor in the ability of a company to execute a business strategy, rating agency opinions on capital levels and financial strength have become even more important to property/casualty insurers over the past several years. The impact on these models, due to issues such as adverse loss reserve development, adequacy of asbestos reserves, target business plans, and changing market conditions, have put pressure many insurers' capitalization level/financial strength ratings. Major rating agencies such as AM Best, S&P, Fitch, and Moody's have risk-based capital models, which they use to assess the capitalization needs of insurers. There is an increasing interest in providing independent quantitative indications to insurers on necessary capitalization levels relative to the risks they assume.

This session will present members of the various rating agencies discussing the issues and factors that influence their models, as well as the issues that they feel have defied precise quantification to date and how they attempt to deal with them.

    Moderator:
    Thomas Conway, Partner, Ernst & Young LLP
    Panelists:
    Keith M. Buckley, Group Managing Director - Insurance/Financial Guarantors Fitch Ratings
    Matthew Mosher, Group Vice President - P/C A.M. Best Company

Developments in Regulatory Capital Models Around the World
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LLed by the banks supervisors and their proposed new capital standard based on internal models (Basel II), the international insurance regulators are pressing forward with new capital requirement models that focus on the use of company-specific data and a company's own internal models. These concepts have already been implemented to some extent in the U.K.

This presentation will focus on the genesis for these developments, namely the Basel II capital framework developed for banks, and the application of these and other concepts in the European Union (with their Solvency II project), in the U.K. specifically, and their potential application in the U.S. This session will discuss how different regulators determine whether an insurer's (or reinsurer's) capital is sufficient for regulatory purposes and how they should determine this.

    Moderator:
    Elise C. Liebers, Insurance Specialist, Federal Reserve Bank of New York
    Panelist:
    Lou Felice, Assistant Chief Examiner, New York Insurance Department
    Mary Frances Monroe, Manager, Supervisory & Risk Policy - Division of Banking Supervision and Regulation, Federal Reserve Board
    Gary Wells, Principal, Milliman, Inc.

2005 CAS Annual Meeting

Accounting Implications of Actuarial Decisions
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How do accountants respond to language that sounds conservative? If we take directions in assumptions, are we risking being complicit in smoothing earnings? How do we reduce the chance of misrepresentation of financial information to investors? This session will review the accounting implications of choosing certain assumptions and their descriptions in our reports. Sessions panelists will discuss various actuarial approaches to dealing with high-risk issues. Professionals familiar with SEC definitions of fraud and their sentencing guidelines will also provide their insight.

    Moderator/Panelist:
    Kevin L. Wick, Principal Consultant, PricewaterhouseCoopers LLP
    Panelist:
    Alison T. Spivey, Associate Chief Accountant and Office of the Chief Accountant, US Securities and Exchange Commission

Actuarial Credibility Task Force and the Impact to ASOP 36
As a result of the CAS Board Task Force Report on Actuarial Credibility, a key recommendation was made to revise ASOP 36 to incorporate required disclosure of the difference between management's recorded reserves and the actuary's best estimate. Members of the Task Force Committee will present the key components of the proposed revisions to the standard. The goal of this session is to receive comments and input from a broad group of actuaries on the suggested revisions.

    Moderator:
    Christopher Carlson, Pinnacle Actuarial Resources, Chair Casualty Committee of the Actuarial Standards Board
    Panelist:
    Pat Teufel, KPMG, Chair, CAS Board Task Force on Actuarial Credibility

Actuarial Opinions and Risk of Material Adverse Deviation
In issuing an Actuarial Statement of Opinion, the actuary is being asked to assess and quantify the risk of material adverse deviation (RMAD). This session will discuss several issues related to determining whether the RMAD exists, including:

  • appropriate disclosures,
  • materiality,
  • point estimates and ranges, and
  • sources of risk.
A must for all Appointed Actuaries, this session will be an informative discussion for all actuaries involved in the reserving process.
    Moderator:
    Robert F. Wolf, Principal, Mercer Oliver Wyman
    Panelists:
    Charles F. Cook, Consulting Actuary, MBA Inc.
    James Votta, Partner, Ernst & Young LLP

Actuarial Techniques in Banking Operational Risk
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Operational risk is perhaps the most significant risk financial institutions face in today's complex business environment. Many large financial institutions have begun using actuarial techniques to measure operational risk as a first step in the process towards managing their risks. But there are many theoretical and practical issues which must be addressed: data issues (what data do you need and where do you find it), modeling issues (what statistical distributions best fit the data) and managerial issues (how can you transform the data into useful managerial information).

This session will describe the latest techniques being used in the banking industry to resolve this problem.

    Moderator/Panelist:
    Ali Samad-Khan, President, OpRisk Advisory LLC

Actuaries Embrace Operational Risk
Operational Risk has been defined as "the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events." This has long been acknowledged as a risk that should be included in any enterprise risk management model; however, it has not always been embraced as a measurable, quantifiable risk by actuaries. This is ironic, since commercial multi-peril could arguably be renamed "insured operational risk" coverage.

Because of the Basel II Accord, banks are very interested in operational risk management. Best practice in this area has evolved (with limited actuarial involvement) to resemble actuarial science in general, and casualty actuarial practices more specifically. Leading banks are establishing what amounts to internal insurance programs, developing exposure bases, compiling claim databases, and estimating frequency and severity. They are also struggling with exposure scaling, ongoing monitoring, aggregation, and collation of industry data.

This session will (i) provide an overview of operational risk, (ii) discuss state-of-the-art in banking operational risk management, and (iii) chart a course for actuarial thought leadership in the broader operational risk world.

    Moderator:
    Mark Alan Verheyen, Vice President, ReAdvisory
    Panelist:
    Ali Samad-Khan, President, OpRisk Advisory LLC
    Samir Shah, Principal, Towers Perrin

Advancements in Hurricane Risk Management
In 2004 we experienced the "rare statistical event" of having four hurricanes hit Florida within six weeks of each other - two of which followed nearly identical paths. In 2005 our Gulf Coast suffered even greater losses from hurricane Katrina. In the pre-Andrew years, these events would have been financially devastating to the insurance industry. What did we learn from Andrew and the 9/11 terrorist attacks that better prepared us to recover financially from these catastrophic events?

This panel will offer some insight into the regulatory fixes, reinsurance and other risk financing changes, catastrophe modeling improvements, and other changes that occurred in the decade preceding the 2004 & 2005 hurricane seasons. These topics will be presented in a roundtable format, offering attendees the opportunity to join in the discussion and share their own experiences with the group.

    Moderator:
    Michael A. Walters, Consulting Actuary, Towers Perrin
    Panelists:
    Richard R. Anderson, Chief Actuary, Risk Management Solutions, Inc.
    Sean R. Devlin, Chief Pricing Actuary - P&C Reinsurance, GE Insurance Solutions
    Alice H. Gannon. Senior Vice President, United Services Automobile Association

ARIA Bonus Malus
In many countries insurers use a particular form of experience rating known as Bonus-Malus systems (BMS) in order to relate premium amounts to individual past experience in automobile insurance. BMS systems are combined with the usual pricing strategy based on observable characteristics such as age, driving area, type of car and so on. BMS penalize insured's responsible for one or more accidents by premium surcharges (or maluses) and reward claim-free policyholders by awarding those discounts (or bonuses). BMS are aimed at creating incentives for road safety, since claiming is deterred. As a consequence, one can also argue that BMS reduce fraud.

This article proposes a computer-intensive methodology to build bonus-malus scales in automobile insurance. The claim frequency model is taken from Pinquet, Guillen, and Bolance (2001). It accounts for overdispersion, heteroskedasticity, and dependence among repeated observations. Explanatory variables are taken into account in the determination of the relativities, yielding an integrated automobile ratemaking scheme. In that respect, it complements the study of Taylor (1997).

    Moderator:
    Jean Pinquet, Professor, University of Paris

CAS Examination Process
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The examination process continues to be one of the hottest topics for Casualty Actuarial Society members and candidates. In the past few years, the CAS has made material changes in order to improve the examination process. The changes are intended to better prepare candidates and more appropriately identify the truly qualified candidates. This panel will address some of these changes, including learning objectives, question-writing training, and setting pass scores. Time will be allowed for questions.

    Moderator:
    Daniel G. Roth, Vice President & Actuary, CNA Insurance Companies
    Panelists:
    Steven D. Armstrong, Senior Actuary, Allstate Insurance Company
    Manalur S. Sandilya, Corporate Actuary, Max RE Europe Ltd.
    Thomas Struppeck, Director, CIFG

CAS Myth Busters, Demystifying Volunteering
So you're a New Fellow? Great! Your hundreds of hours of effort a year have paid off. But now they're going to expect you to ... volunteer!

Be careful or they'll corner you at the Fall Meeting and force you into an exam committee ... on a part you hated ...requiring hundreds of hours of effort a year!

Our crack team of experts (we're new fellows too) will examine several myths and urban legends surrounding CAS volunteerism. Maybe we'll even find some opportunities that are right for you?!

(Please don't try this at home, we're professionals.)

    Panelists:
    Rob Walling, Pinnacle Actuarial Resources
    Jeremy Brigham, Towers-Perrin

COTOR Challenge: Round 3
Last year the Committee on the Theory of Risk (COTOR) ratemaking estimation challenge generated a great deal of interest. In this session, the winners of round three of the COTOR Challenge will present their solutions.

The most challenging round yet, round three features claims drawn at random from a heavy-tailed distribution, split equally amongst seven years. Each year's "true" severity is affected by inflation. Winning respondents will present their estimates of the mean severity and a 95 percent confidence interval for the $500,000 excess of $500,000 layer for the eighth year.

    Moderator:
    Steven M. Visner, Principal, Deloitte Consulting LLP
    Panelist:
    Stephen Charles Fiete, Actuary, Allstate Insurance Company
    Glenn G. Meyers, Chief Actuary, ISO Innovative Analytics
    Thomas S. Wright, Deloitte & Touche LLP

Current Loss Reserving Developments
Download Audio MP3 File Part 1 (75 MB)
Download Audio MP3 File Part 2 (19 MB)
Download Audio MP3 File Part 3 (23 MB)
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Focusing on loss reserving practices and ways to improve them, several different entities are currently reviewing loss reserve methods and results and their presentation by actuaries. This session will present the results of analyses currently being conducted by subcommittees of the American Academy of Actuaries, the CAS Committee on Reserves, and ISO. The panelists will discuss the results of their studies, examining to what extent reserve developments caused or contributed to financial failures and what role actuarial practice may have played. Panelists will also explore what lessons these reviews have given our profession, how we can educate industry observers, and other recent initiatives.

    Moderator/Panelist:
    John J. Kollar, Vice President, ISO
    Panelists:
    Charles C. Emma, Principal, Pinnacle Actuarial Resources Inc.
    Thomas A. Ryan, Consulting Actuary, Milliman USA

Discussion of the Claim Liability Estimation Proposed Standard
The Subcommittee on Reserving of the Casualty Committee of the Actuarial Standards Board has been working on a standard for estimating claim liabilities. Members of the subcommittee will present the key components of the standard including a discussion on scope, analysis of issues, and recommended practices. One of the goals of this session is to receive input from a broad group of actuaries to incorporate into the proposed standard. The standard is expected to be subject to the normal exposure process in the fall and winter of 2005.

    Moderator:
    Raji Bhagavatula, Principal, Milliman USA, Chair Subcommittee on Reserving of the Casualty Committee of the Actuarial Standards Board
    Panelists:
    Christopher S. Carlson, Consultant, Pinnacle Actuarial Resources
    Jason L. Russ, Consulting Actuary, Milliman, Inc.

Enterprise Risk Management --the Present and the Future CAS
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Download Audio MP3 File Part 2 (10 MB)
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Our centennial goal states that "CAS members will be recognized as the leading experts in the evaluation of hazard risk and the integration of hazard risk with strategic, financial, and operational risk." Said another way, casualty actuaries will be recognized as experts in enterprise risk management (ERM) quantification. But actuaries are not alone in their interest in ERM. There are many professional organizations around making moves in this dynamic, emerging space.

The CAS is taking steps to position ourselves. During its March 2005 meeting, the CAS Board approved joint sponsorship of a Risk Management Section with the SOA. The Joint Risk Management Section is similar to the existing CAS special interest sections Casualty Actuaries in Reinsurance (CARe) and Actuaries in Regulation (AIR) in that it brings together a group of interested members to study and discuss common professional interests and to contribute information on those interests to the profession through seminars and research projects. The Risk Management Section will focus on developing solutions to unsolved problems, communicating the value of actuaries in providing solutions, and educating actuaries to meet market demands.

This session will (i) provide an update on many ERM-related activities and organizations, including the COSO framework, PRMIA, GARP, ERMII, IAA and AAA task forces; (ii) explain the Joint Section in more detail: mission, scope, plans; and (iii) challenge the audience for their feedback, opinions and interest in volunteering for Joint Section committees.

    Moderator/Panelist:
    James E. Rech, Actuary, GPW & Associates
    Panelists:
    Christopher David Bohn, Assistant Director & Actuary, Aon Risk Consultants, Inc.
    Gary G. Venter, Managing Director, Guy Carpenter & Company, Inc.

General Business Skills: Strategic Thinking Presentation
Learn the essential skills for thinking strategically and tactically, skills any successful executive needs. This session will teach participants to make clear distinctions between reaction and response, identify old paradigms and adopt new ones, recognize problems and define stakeholders, and be creative in formulating strategy and carrying it out. The program includes a variety of hands-on exercises that will help participants use this acquired knowledge in their daily tasks.

    Moderator/Panelist:
    Eli Harari, The Thinking Coach

General Trends in Tort Litigation
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The U.S. liability costs have increased significantly over the past several years and this trend is expected to continue.

The panelists will discuss the historical and prospective loss cost trends by liability line of business in terms of:

  • total cost and frequency of large loss awards
  • their impact on the insurance & reinsurance industry.
They will also mention potential tort reforms with their implications
    Moderator:
    Cynthia L. Rice, Associate Actuary, GE Insurance
    Panelists:
    Claire M. Louis, Director, PricewaterhouseCoopers LLP
    Stephen P. Lowe, Managing Director, Towers Perrin

International Actuarial Practice Guidelines: The Impact on the U.S. Actuary
The International Accounting Standards Board (IASB) has officially adopted a new International Financial Reporting Standard (IFRS 4) for insurance contracts which is effective for 2005. While many actuaries may have overlooked these developments, they do affect casualty actuaries, even some who only practice in the U.S. This session will highlight the international financial reporting standards relevant to insurance and discuss the actuarial guidance that has been developed, or is being developed, by the International Actuarial Association (IAA) to assist actuaries who will be affected by the new standards.

    Moderator:
    Amy Bouska, Consulting Actuary, Towers Perrin
    Panelists:
    Robert Miccolis, Drafting Member, International Actuarial Association Subcommittee on Actuarial Standards and CAS Representative, Director, Deloitte Consulting LLP


Predictive Modeling-Pitfalls and Potentials
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Download Audio MP3 File Part 2 (85 MB)
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Predictive modeling has been used very effectively in other countries for years. Until recently, only a few leading US personal lines companies have been utilizing these advanced ratemaking techniques. That has been changing and predictive modeling techniques are now being employed by a wide variety of insurance companies from the largest to the smallest and within the broad spectrum of lines of business.

As with anything, new techniques bring both opportunities and issues. The panel will discuss some of the benefits the industry has realized by using these techniques as well as some of the issues that have already arisen.

    Moderator/Panelist:
    Jeffrey L. Kucera, Senior Consultant, EMB America, LLC
    Panelist:
    Michael R. Larsen, Property Consultant, The Hartford
    John R. Pedrick, Assistant Director, Ohio Department of Insurance

Predictive Modeling-What Is Out There?
Now that predictive modeling is gaining some steam in the U.S., actuaries are being faced with a variety of options regarding predictive modeling. The panel will give a brief introduction to some of the predictive modeling techniques that exist along with some pros and cons of each.

    Moderator/Panelist:
    Serhat Guven, Consultant, EMB America LLC
    Panelists:
    Louise A. Francis, Consulting Principal, Francis Analytics & Actuarial Data Mining In

Presidents' Forum
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The presidents of several international actuarial organizations will be attending our annual meeting. During this session, they will provide an overview of their organizations and some of the current hot industry topics in their countries. These presentations will offer an opportunity for our members to learn about actuarial issues from different perspectives and to see how other organizations are coping with many of the same issues that face the CAS. This session will also provide an opportunity for audience members to initiate discussion on topics of mutual interest.

    Moderator:
    Stephen P. D'Arcy, President, Casualty Actuarial Society
    Panelists:
    Charles C. McLeod, President, Canadian Institute of Actuaries
    Ana Maria Ramirez, President, Asociacion Mexicana de Actuarios

Profit Sharing Plans-What Now?
Over the past years, investigators have looked into how contingent commissions were paid on a number of contracts. Since these investigations, a few questions remain:

  • Does this mean the end of profit sharing plans of any kind?
  • Will agents and brokers and the like be required to disclose the amount of their total commissions?
  • What guidelines, if any, are there for the financial calculation of profit sharing plans going forward?
This session provides a brief summary of these and other topics that have been clarified through the Spitzer investigations and the resulting disclosure and transparency guidelines. The panelists will make brief presentations, allowing for a majority of time to be spent answering questions.
    Moderator:
    TO BE ANNOUNCED
    Panelist:
    TO BE ANNOUNCED

Progress Report: Elicitation and Elucidation of Risk Preferences Working Party
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Enterprise risk management (ERM) projects often begin with the implicit premise that senior management has a clear, well-understood decision framework regarding risk tradeoffs. The ERM process would then use this decision framework, and place the focus on modeling and analysis of results. Unfortunately, this premise is not always true in practice since a company may not have a well-defined, consistent statement of risk preferences. This WP will describe methods that can be used to develop (elicitation) and refine (elucidation) a consistent set of risk preferences, as well as some experimental results from behavioral finance that pertain to the elicitation/elucidation process.

    Moderator/Panelists:
    David L. Ruhm, Portfolio Risk Manager, Hartford Investment Management
    Parr T. Schoolman, Manager, Ernst & Young LLP

Progress Report: The Dynamic Risk Modeling Handbook Working Party and the Public-Access DFA Model Working Party
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Tasked with rewriting the Dynamic Financial Analysis Handbook, the DRM Handbook WP is producing a book on the basic understanding and practical guidelines for developing and implementing dynamic risk models common to the property/casualty insurance industry. The Handbook will serve both as a basic reference source for the educational needs of future modelers and the practical day-to-day application needs of experienced practitioners.

The Public-Access DFA Model WP is working on short-term updates and enhancements to the public access DFA model. The working party is also developing a plan for possibly evolving this model into an open-source framework. In this format, it is envisioned that the model would be posted on the CAS Web Site and CAS members or others could propose independent updates and enhancements to the model.

    Moderator: Mark R. Shapland, Actuary, Milliman, Inc.
    Panelists:
    James E. Rech, Vice President, GPW and Associates, Inc
    Patrick J. Crowe, VP and Actuary, Market Research, Kentucky Farm Bureau

Progress Report: The Tail Factor Working Party and the Bornhuetter-Ferguson-Initial Expected Losses Working Party
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In late 2004, the CAS Committee on Reserves formed two research working parties dealing with specific areas not widely addressed in the literature.

The Tail Factor Working Party focused on identifying all tail factor methods contained within CAS literature, as well as identifying methods currently being used, but not contained within the literature. The WP tested various methods with real data in order to judge which were feasible to use under what circumstances.

The Bornhuetter-Ferguson-Initial Expected Losses WP surveyed actuaries for current methods used in their workplaces that establish initial expected losses. The WP also identified methods on the topic in actuarial literature and investigated the expected performance of various methods under a variety of circumstances.

Members of both WPs will present results of their work during this session.

    Moderator:
    Thomas A. Ryan, Consulting Actuary, Milliman, Inc. Chair of the Committee on Reserves
    Panelist:
    Mark R. Shapland, Actuary, Milliman, Inc.
    F. Douglas Ryan, Consulting Actuary, MBA Actuaries, Inc.
    Nancy L. Arico, Manager, KPMG LLP

Sarbanes 404-Risks and Controls for Actuarial Processes
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Section 404 of the Sarbanes-Oxley Act requires company management to assess and report on the company's internal controls over its significant financial statement accounts. The company's outside auditors are required to review the company's controls and issue an "attestation" of management's assessment. Most public insurance companies were required to have this completed as of December 31, 2004. However, recently, the NAIC has been discussing the merits of requiring all insurance companies and their auditors to assess internal controls and report deficiencies to the insurance department.

Unlike other financial accounts, the process to establish insurance loss reserves has numerous inputs and requires a significant amount of subjective judgments. As a result, the risks are high and developing effective controls over the process is challenging. The first year of Sarbanes 404, compliance for public companies brought with it a significant learning curve for actuaries who were required to identify the risks of the loss reserving process and controls that were in place to mitigate these risks. Many company actuaries were unaware of the Committee of Sponsoring Organizations (COSO) of the Treadway Commission or the Internal Control-Integrated Framework that was published to assess controls.

Throughout the process many lessons were learned and some best practices controls have seemed to emerge. Some common weaknesses of internal control were also identified for a number of companies. Companies that started the assessment process early in the year were able to mitigate these weaknesses, while others were required to disclose their control weaknesses.

This session will discuss the process public companies and their auditors used to assess internal controls, will highlight the lessons learned, and will identify some of the best-practice controls. Panelists will share control weaknesses that companies found during year one.

    Moderator:
    Alan M. Hines, Director, PricewaterhouseCoopers LLP
    Panelists:
    Kevin Burns, Actuary, Allmerica Financial
    Heidi M. Hoeller, Senior Manager, PricewaterhouseCoopers LLP

The Road to 2014: The Centennial Goal/Long Range Planning Committee Report
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In recent years the CAS Centennial Goal has been a significant influence guiding CAS activities and strategies. As with any long-term goal, progress needs to be monitored on an ongoing basis to identify barriers or risks to successfully achieving the goal. The Long Range Planning Committee (LRPC) has performed several "environmental scans" and has uncovered a number of such risk factors relative to the Centennial Goal. LRPC members will discuss these issues and the recommended strategies to mitigate these risks.

    Moderator:
    Aaron M. Halpert, Principal, KPMG LLP
    Panelist:
    Lawrence A. Haefner, Vice President & Actuary, St. Paul Travelers Inc.

Town Hall Meeting: Statements of Actuarial Opinions - Today and in the year 2014:
This session is intended to provide a forum for appointed actuaries and their users on preparations in meeting 2005 Statement of Actuarial Opinion requirements. What are the requirements if there has been a continued pattern of adverse development at a company? What is a reasonable estimated range? How may the Statement of Actuarial Opinions continue to evolve in subsequent years? The panel will have a question and answer period and give the audience members an opportunity to express their opinions on the subject, including making a case for what the Statement of Actuarial Opinion in 2014 should look like to be consistent with the CAS Centennial Goal.

    Moderator:
    Robert F. Wolf, Principal, Mercer Oliver Wyman
    Panelists:
    Chester John Szczepanski, Vice President & Chief Actuary, Donegal Insurance Group
    Patrica A. Teufel, Principal, KPMG LLP
    Mary D. Miller, Actuary, Ohio Department of Insurance

What's Happening in the Reinsurance Market?
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The reinsurance market has gone through many changes in the past 20 years. In this session, reinsurance executives will discuss how the competitive landscape, distribution channel, and reinsurance needs have changed over the years as well as provide insight on current trends and how these trends will affect the reinsurance and insurance industry in the future. Following the presentation, audience members will have the opportunity to express their opinions on the subject during a question and answer period.

    Moderator:
    Richard A. Lino, Consulting Actuary, Pinnacle Actuarial Resources Inc.
    Panelists:
    Yves Provencher, Senior Vice President, Willis Re Inc.
    Joy Y. Takahashi, Senior Vice President - Corporate, American Re-Insurance Company

What's The Future of Asbestos Legislation?
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The Senate Judiciary Committee approved the Asbestos Trust Fund legislation in May by a vote of 13 - 5. Although the Committee approved the legislation, it is unlikely to see full Senate floor consideration until this autumn, at the earliest.

In voting the legislation out of Committee, many of the Republicans expressed significant reservations with the legislation and stated that they could not support the bill if it were to move to the Senate floor in its current format. The bill's chief author, Senator Arlen Specter (R-PA), chairman of the Judiciary Committee, has been meeting throughout June and July with many of these Republicans to try to address their concerns. Thus far, he has been unsuccessful.

The legislation also faces opposition from many insurance companies, some defendant manufacturers, the trial bar and labor unions. Faced with these obstacles and the pending Supreme Court nomination hearings, the asbestos trust fund is not likely to move to the Senate floor, it at all, until October at the very earliest.

What is the next step for Asbestos Legislation?

Many states are adopting their own versions of Asbestos and basic Tort Reforms that will limit class action lawsuits and extreme verdicts that threaten the solvency of many current and new Asbestos defendant companies.

This panel will address the legal landscape of Asbestos in the continuing flux of state v. Federal legislative activities.

    Moderator:
    Sandra C. Santomenno, Senior Actuary, GE Insurance Solutions
    Panelists:
    Jennifer L. Biggs, Consulting Actuary, Towers Perrin
    Philip Goldberg, Shook Hardy & Bacon
    Mary Z. Seidel, Vice President and Director of Federal Affairs, Reinsurance Association of America

"What's the Value in Value Added Reserving?"
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Developing reserve estimates is a core competency for an actuary. Back in the "good old days" we were taught not to talk to people in the claim department for fear that even asking a question about their reserving and settlement practices would cause them to change, even if subtly. That admonition no longer holds. Today there are so many forces creating change in claim organization that we know that changes that will impact the data received by the actuary are inevitable. Value added reserving means knowing enough about the company's operations, including underwriting, claim and reinsurance, that changes in any of these functions can be spotted in the data and adjusted for in the reserve estimation process. On the flip side, value added reserving can mean elucidating unexpected patterns found in the data to those outside the actuarial function, which may highlight unanticipated changes in any one of these functions. Find out why these panel members think that value added reserving practices produce a "better answer." The panel members will talk about where they have found value from the application of value added reserving, from the perspective of the actuary doing the analysis, from the perspective of being a source of information to the actuary about a given function, and from the perspective of a non actuary receiving a value added reserve analysis. The actuarial panelists will also discuss what they do differently in a value added reserve study.

    Moderator/Panelist:
    Martha Winslow, Senior Consultant, Towers Perrin
    Panelists:
    Sean Duffy, Second Vice President, Specialty Claims, St. Paul Travelers
    Thomas Ghezzi, Principal, Towers Perrin
    Kevin Rehnberg, Senior Vice President, OneBeacon

Proceedings Paper Presentations:

The Application of Fundamental Valuation Principles to Property/Casualty Insurance Companies
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    Authors:
    Wayne E. Blackburn, Milliman Inc.
    Derek A. Jones, Milliman Inc.
    Joy A. Schwartzman, Milliman Inc.
    Dov Siegman, Milliman Inc.
This paper explores the concepts underlying the valuation of an insurance company in the context of how other (non-insurance) companies are valued. Among actuaries, the value of an insurance company is often calculated as adjusted net worth, plus the present value of future earnings, less the cost of capital. Among other financial professionals (e.g., chief financial officers, investment bankers, economists), value is often calculated as the present value of future cash flows. The authors will discuss both methods and explain under what circumstances the two methodologies derive equivalent value and under what circumstances the results of the two methods diverge. The authors will also addresse recent developments in the insurance industry that could affect valuation, including the NAIC's codification of statutory accounting principles, fair value accounting, and the Gramm-Leach-Bliley Act of 1999.

Discussion of David Ruhm’s “Distribution-Based Pricing Formulas Are Not Arbitrage-Free”
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    Author:
    Gary Venter

David Ruhm is entirely correct that risk load formulas based on transforming probability distributions of contract outcomes cannot guarantee arbitrage-free prices. This is what he illustrates by a clever and entertaining example. But the title of the paper seems to assert that no method of transforming distributions is arbitrage-free. This is not the case, as transforms of the probabilities of the underlying events that generate the outcomes are well known to produce arbitrage-free prices. In fact, Ruhm illustrates this by showing that the Black-Scholes formula arises from such a transform. He also shows that this formula builds in risk-adjustments to prices, thus addressing the misapprehension that since the options prices come from a risk-neutral valuation they do not incorporate risk adjustments. To illustrate the application of probability transforms to fundamental events in insurance, this discussion provides an example of using an alternative transform of underlying frequency and severity distributions to price loss layers.

Discussion of The "Modified Bornhuetter-Ferguson Approach To IBNR Allocation"
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    Author:
    Glenn Walker

In their 2004 Proceedings paper the "Modified Bornhuetter-Ferguson Approach To IBNR Allocation," Trent Vaughn and Phoebe Tinney present a valuable methodology for allocating IBNR to allocation units that do not always warrant separate IBNR analysis. Vaughn and Tinney properly warn that: "Actuaries should be aware, however, of the possible pitfalls of allocating IBNR down to an extremely fine level of detail. For instance, such allocations may incorrectly imply a degree of precision that does not exist. The actuary must be aware of this risk and communicate any concerns to the end user." But as we are quite painfully aware, there are times when the actuary has no choice. For instance, somebody must allocate ceded IBNR to individual reinsurers in order to complete Schedule F-preferably someone who appreciates the implications of a misallocation. Though Vaughn and Tinney have suggested that their methodology may apply, the analysis process should not end there.

This discussion highlights an area that is typically a pro forma accounting function, virtually ignored by actuaries, and has profound actuarial implications that deserve significant attention not yet addressed in actuarial literature.

Author Response to a Discussion of "Application of the Option Market Paradigm to the Solution of Insurance Problems"
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    Author:
    Michael G. Wacek
In his 2000 Proceedings discussion of the 1997 Wacek paper, Stephen Mildenhall chided the author for overstating the similarity between options and insurance. Mildenhall accepted the main point of the paper, namely, that the close resemblance between call option and excess of loss concepts can lead to insights about insurance and reinsurance risk management and product development. However, at a detailed level Mildenhall dismissed Wacek's assertion that the "the pricing mathematics is basically the same" for options and insurance, politely describing it as "inappropriate." Mildenhall was correct in doing so. Unfortunately, in emphasizing the difference in the details of the pricing of call options and excess insurance, Mildenhall missed the opportunity to show how these differences can be explained within a single pricing framework, though different from the one Wacek originally presented. The purpose of this response is first to acknowledge the author Wacek's error at the formula level, but then to move beyond it to illustrate how Black-Scholes and excess insurance pricing are consistent, even if the pricing formula details are different.

Incorporation of Fixed Expenses

    Author:
    Geoffrey Todd Werner, EMB America LLC
When setting rates, actuaries must include all of the costs of doing business, including underwriting expenses. Actuaries generally divide the underwriting expenses into two groups: fixed and variable. This paper addresses the incorporation of fixed expenses in the calculation of the actuarial indication. More specifically, the paper describes how the generally accepted method for including fixed expenses overstates or understates the actuarial indication. The materiality of the distortion depends on the magnitude of past rate changes, premium trend, and variations in average premiums for multi-state companies. For the example included, the generally accepted procedure overstated the indication by +1.8 percentage points. Finally, the paper suggests an alternative procedure that addresses the distortions.

Modeling Financial Scenarios: A Framework for the Actuarial Profession

    Authors:
    Kevin C. Ahlgrim, ASA, MAAA, Ph.D.
    Stephen P. D'Arcy, FCAS, MAAA, Ph.D.
    Richard W. Gorvett, FCAS, MAAA, ARM, FRM, Ph.D.
This paper summarizes the research project on Modeling of Economic Series Coordinated with Interest Rate Scenarios, initiated by the joint request for proposals by the Casualty Actuarial Society and the Society of Actuaries. The project involved the construction of a financial scenario model that simulates a variety of economic variables over a 50-year period. The variables projected by this model include interest rates, inflation, equity returns, dividend yields, real estate returns, and unemployment rates. This paper contains a description of the key issues involved in modeling these series, a review of the primary literature in this area, an explanation of parameter selection issues, and an illustration of the model's output. The paper is intended to serve as a practical guide to understanding the financial scenario model in order to facilitate the use of this model for such actuarial applications as dynamic financial analysis, development of solvency margins, cash flow testing, operational planning, and other financial analyses of insurer operations.

A Modern Architecture For Residential Property Insurance Ratemaking
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    Author:
    John W. Rollins
This paper argues that obsolete rating architecture is a cause of decades of documented poor financial performance of residential property insurance products. Improving rating efficiency and equity through modernization of rating and statistical plans is critical to the continued viability of the products. In particular:
  • The overall rate level should reflect an appropriate provision for the cost of capital held for catastrophic events, and the cost of capital should be allocated appropriately in development of rating factors;
  • The indivisible premium concept should be replaced with peril-based rating, and rating factors developed or adjusted to apply to peril-specific partial base rates;
  • Catastrophe simulation and geographic coding technology, incorporating non-historical experimental data sets, should be applied to the development of base rates, territory boundaries and factors, and classification plans;
  • Rating for the numerous miscellaneous exposures and coverage options, as well as maintenance of statistical plans, should be aligned with the peril rating concept.
The author develops an architecture and techniques for ratemaking which satisfy the above precepts for the Homeowners product in a hurricane-prone state. The transition from indivisible to divisible base premium facilitated by this architecture is illustrated in case study fashion, with practical implementation challenges and solutions discussed. Many ideas are transferable to ratemaking for other residential and commercial property products.

When Can Accident Years Be Regarded As Development Years?
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    Authors:
    Glen Barnett, Insureware Pty. Ltd.
    Ben Zehnwirth, Insureware Pty. Ltd.
    Eugene Dubossarsky, Insureware Pty. Ltd.

The chain ladder (volume-weighted average development factor) is perhaps the most widely used of the link ratio (age-to-age development factor) techniques, being popular among actuaries in many countries. The chain ladder technique has a number of interesting properties. We present one such property, which indicates that the chain ladder doesn't distinguish between accident years and development years. While we have not seen a proof of this property in English language journals, it appears in Dannenberg, Kaas, and Usman. The result is also discussed in Kaas et al. We give a simple proof that the chain ladder possesses this property and discuss its other implications for the chain ladder technique. It becomes clear that the chain ladder does not capture the structure of real triangles.


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The CAS Roundtable

Posted on 10/20/2014
By Jessica Leong

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