Casualty Actuarial Society

Professional Education

CAS 2006 Spring Meeting Handouts

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Audio recorded sessions are also available online for select sessions.

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2006 Spring Meeting Featured Speaker

Michael Broome graduated from Appalachian State University, where he designed his academic major in leadership development. During the last 22 years, the nearly three thousand audiences Broome has addressed have included events such as The Million Dollar Round Table, a Congressional Dinner, and-in Spearfish, South Dakota-a Barbecue and Goat-Dipping. He has shared the podium with noted politicians, journalists, athletes, and CEOs.

Broome will address the Casualty Actuarial Society on "Killing Stress Before It Kills You: Everything's Coming Up Neurosis." Ulcers don't come from what you eat…they come from what is eating you! In the midst of so many mergers, downsizing, and buyouts, Michael says stress is still more often the result of what we value than the result of difficult situations or people. Today's mandate to accomplish more in less time and to do it with fewer people leaves in its wake many who are searching for ways to cope. He teaches techniques of managing pressure, change, fear, anger, and worry. In a nation that nearly consumes its weight in antacid pills, this presentation will help you overcome burnout.


2006 Spring Meeting General Sessions

Enterprise Risk Management Roundtable-Where Are We?
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Over the last few years, many financial institutions worldwide have adopted enterprise risk management (ERM) as a way of measuring and managing the risks they assume.

While many CAS members have been exposed to ERM projects in their day-to-day activities, there remains a significant opportunity for many actuaries to play an even bigger role in this exciting field. Over the next decade, ERM should become even more prevalent across all industries as key concepts are better understood and more sources of risk are measured.

This panel will share their experiences, describe how their responsibilities have changed over time, and where they see ERM evolving. They will also discuss some of the challenges they have faced implementing ERM and their "secrets of success" as well as give their views on possible areas for additional research.

    Moderator:
    John J. Kollar, Vice President - Consulting & Research, ISO
    Panelists:
    David N. Ingram, Director, Enterprise Risk Management, Standard & Poors
    Steve Lowe, Managing Directors, Towers Perrin
    Donald F. Mango, Director of Research & Development, Guy Carpenter Instrat

Natural Catastrophes-Have the Rules Changed?
After a relatively long, calm period with few megastorms hitting the U.S. mainland, the past few years have seen a sea change in the frequency and severity of such hurricanes. Is this the point of inflection in a long-term, cyclical pattern or is it just an anomaly where a few hundred-year storms happened in close proximity to one another?

This panel will explore marketplace reactions to this risk, insurer attitudes about how to “subsidize” it, progress of current coping mechanisms, and their impact on insurer and reinsurer capacity.

    Moderator:
    Michael A. Walters, Consulting Actuary, Towers Perrin
    Panelists:
    James W. Jonske, Assistant Vice President, Allstate Insurance Company
    Stephen J. Mildenhall, Executive Vice President, Aon Re Services
    Robert L. Ricker, President and Executive Director, Citizens Property Insurance Corporation; Chairman, Florida Commission on Hurricane Loss Projection Methodology

Predictive Modeling-Panacea or Placebo?
With the introduction of statistical software packages and faster computing power, insurers have been able to take advantage of advanced statistical techniques such as spatial smoothing, distributional fitting, and the now popular generalized linear modeling techniques, to develop more sophisticated ratemaking methods and rating plans.

But where is the line between sophistication and complication for complication's sake? Do the increased number of rating variables and interactive tables in a rating plan make it better or just more complicated? Have we forgotten Occam's Razor (the rule that scientific and philosophic theories should be kept as simple as possible, all else equal)?

This session will focus not on the fundamental and theoretical concepts of predictive modeling as previous sessions on this topic have, but on the practical considerations around implementation, maintenance, and monitoring of the resulting rating plans.

Are the modelers the only ones in the company now who truly understand the rating plans? How are insurers to manage the renewal books that were written under the traditional rating plans? Outside of the company, how do others view these plans? Do regulators have the tools necessary to understand these models? How does competition monitor and emulate, and distributors understand and explain changes to customers from these complex rating plans? Have these new rating plans bore the fruit promised?

    Moderator:
    Serhat Guven, Consultant, EMB America LLC
    Panelists:
    Howard Eagelfeld, Actuary, Florida Office of Insurance Regulation
    Keith Toney, Vice President, Choicepoint Insurance Analytics, Insurequote, Inc
    Jonathan White, Assistant Vice President and Actuary, The Hartford Financial Services Group

International Reserving Practices
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Have you ever wondered what it's like to be a reserving actuary in a different region of the world? Regulatory oversight, accounting standards, reserving practices, methodologies, and techniques for estimating reserves vary throughout the world. As Casualty Actuarial Society members become more involved in global insurance issues, there is a need for a better understanding of the differences as well as similarities of various reserving practices throughout the world.

The panel will discuss reserving practices and regulatory requirements in their respective country/region, the role of the actuary in the reserving process, as well as their country's experience with establishing accurate reserves.

    Moderator:
    John C. Narvell, Global Chief Actuary, GE Insurance Solutions
    Panelists:
    Catherine Cresswell, Senior Consultant, Watson Wyatt Limited
    Junji Furuki, Actuary, Sompo Japan Insurance
    Ricardo A. Tagliafichi, Professor, University of Buenos Aires


2006 Spring Meeting Concurrent Sessions

Actuarial Ideas on Risk Transfer
In 2005, the American Academy of Actuaries conducted a survey of current practices and proposed ideas for reviewing risk transfer on reinsurance contracts. The contributing actuaries came up with interesting ideas that were in some cases not consistent with the current 10-10 timing-loss benchmark. This session will explore one of the actuarial submissions in detail documented in the paper "Reinsurance Involving Partial Risk Transfer: Addressing the Accounting Difficulties". Some of the concepts presented will be:

  • Critique of the FAS 113 definition of risk transfer;
  • Differentiation between "natural" reinsurance contract provisions that do not limit risk transfer and "structural" contract provisions that may limit risk transfer; and
  • Incorporating both reinsurance accounting and deposit accounting for booking reinsurance contracts based on the assessment of the percentage of risk transferred.
The presentation will include numerical examples to highlight and explain concepts.
    Moderator/Panelist:
    Michael J. Belfatti, Towers Perrin
    Panelist:
    Spencer M. Gluck, Senior Vice President, Guy Carpenter Instrat
Actuarial Malpractice: Guide for a Practicing Actuary
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The term "Actuarial Malpractice" is, unfortunately, no longer a novelty. Lawsuits against actuaries are becoming more and more common today. Is our profession ready for this environment? What does a practicing actuary owe to the public, his employer, his profession and himself? How does one stay out of trouble?

This panel will address this topic from several different perspectives; practical advice from the perspective of Professional Standards, a view point of an attorney involved in defending actuaries, and words of caution from a fellow actuary.

    Moderator:
    Chad C. Wischmeyer, Director, Mercer Oliver Wyman Actuarial Consulting, Inc.
    Panelists:
    Thomas Griffin, Senior Staff Attorney, American Academy of Actuaries
    Ronald Lepinskas, Partner, Lord, Bissell & Brook LLP
The Actuary and Enterprise Data Strategies – Part I: Why EDS and What Roles the Actuary Should Play
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The panelists will discuss the transition of standards - or lack of standards - from where they were - driven initially by business needs and state regulation - to now being driven by technology and financial requirements. The panelists will also speculate where the transition to standards might ultimately lead to.
    Moderator:
    Pete Marotta, Principal, ISO
    Panelists:
    Art Cadorine, Assistant Vice President, ISO
    Gary Knoble, Principal, Hog River Consulting
    Bruce A. Tollefson, President, Minnesota Worker's Compensation Rating Bureau
The Actuary and Enterprise Data Strategies Part II: How Do We Get There
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Panelists will address basic issues behind data management, including
  • privacy and confidentiality,
  • methods for controlling data and
  • the need to be concerned about data quality.
    Moderator:
    Pete Marotta, Principal, ISO
    Panelists:
    Art Cadorine, Assistant Vice President, ISO
    Gary Knoble, Principal, Hog River Consulting
    Bruce A. Tollefson, President, Minnesota Worker's Compensation Rating Bureau
Current Insurance Events in Puerto Rico
The panel will explore current events and actuaries' roles in the Puerto Rico insurance environment.
    Moderator:
    Tom Bayley, Senior Consultant, Towers Perrin
    Panelists:
    Eduardo Arthur, National Insurance Company
    Mareb del Rosario, Corporacion del Fondo del Seguro del Estado
    Diana Nassar-Veglio, Special Aide and Financial Analyst, Office of the Commissioner of Insurance of Puerto Rico
    Rubén Gely Rodríguez, Executive Aide, Office of the Commissioner of Insurance of Puerto Rico
D&O Liability: What Happened and What's Ahead
Did premiums decline again in 2005? Did frequency and severity continue their upward trend? Which board members are interested in their D&O coverage and what are they doing about it? Findings from the recently released Tillinghast 2005 D&O Survey will be discussed along with the panel's view on where the D&O market is headed in 2006.
    Moderator:
    Carl X. Ashenbrenner, Principal & Consulting Actuary, Milliman, Inc.
    Panelists:
    Vagif Amstislavskiy, Vice President, Zurich North America
    Elissa M. Sirovatka, Consulting Actuary, Towers Perrin
Discussion of Exposure Draft of the P/C Unpaid Claim Estimates Standard of Practice
The Actuarial Standards Board has recently released an exposure draft of a standard of practice on Property/ Casualty Unpaid Claim and Claim Adjustment Expense Estimates. Members of the ASB Casualty Committee and the Reserving Subcommittee will present the key components of the proposed standard including a discussion on scope, analysis of issues and recommended practices.

As comments on the Exposure Draft are being accepted by the ASB through June 30, this is a great opportunity to hear some of the background on this standard's development as well as to learn about and discuss some of the details of the standard.

    Moderator/Panelist:
    Christopher S. Carlson, Consultant, Pinnacle Actuarial Resources, Inc.
    Panelists:
    Mary Frances Miller, President, Select Actuarial Services
    Karen Terry, Assistant Vice President & Actuary, State Farm Mutual Automobile Insurance Company
Excess Workers Compensation Pricing Methodologies
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The panel will discuss current Excess Workers Compensation pricing methodologies, practical issues surrounding the current methodologies, the use and application of NCCI ELFs and the potential impact of the change to NCCI hazard groups.
    Moderator/Panelist:
    Russel Greig, Consulting Actuary, Towers Perrin
    Panelists:
    Jose R. Couret, Senior Vice President, Guy Carpenter & Company, Inc.
    Gary Venter, Managing Director, Guy Carpenter & Company, Inc.
How Have Investigations, Subpoenas and the New NAIC Attestation and Disclosure Requirements Impacted the Reinsurance Market?
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During 2005, many reinsurers and insurers alike were caught up in responding to federal and state subpoenas regarding the use of finite reinsurance. Now that we have gone through a renewal season we ask, "how has the industry changes as a result." In this session, representatives from the reinsurance industry will explain how this history has changed the products or terminology offered by the industry. Have the types of products offered changed?

The session will address impacts from the new "finite" disclosure and attestation rules. Also covered will be the current views of RAA, CAS, AAA, and the New York Insurance Department and how the industry has reacted to those views.

    Moderator:
    Mark Littman, Principal, PricewaterhouseCoopers LLP
    Panelists:
    Spencer Gluck, Senior Vice President, Guy Carpenter Instrat
    Kenneth Kruger, Senior Vice President, Willis Re
Insurance Regulation in Latin America
The panel will discuss regulation of insurance in Latin America and recent efforts geared towards standardization.
    Moderator:
    Andrew Giffin, Principal, Towers Perrin
    Panelists:
    Lcda. Dorelisse Juarbe Jiménez, Oficina del Comisionado de Seguros
    Eduardo Fraga Lima de Melo, Actuary, SUSEP
International Issues – Why Should I Care About International Issues?
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Many things are on the horizon that we may need to be aware of on the international front. With the accounting standards convergence between the IASB and the FASB, and the growing importance of international regulatory solvency guidelines looking they are for real, concepts such as discounting of loss reserves and explicit adjustment for risk may be required in the next several years, in addition to the potential reliance on internal company models for risk assessment. The panel will discuss what may be in store for us and will also discuss the continuing CAS role in international issues pertaining to our future education requirements.
    Moderator:
    Amy S. Bouska, Consulting Actuary, Towers Perrin
    Panelists:
    Glenn G. Meyers, Chief Actuary, ISO Innovative Analytics
    Mary Frances Miller, President, Select Actuarial Services
Medical Malpractice: Is the Crisis Over?
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In June of 2002, the American Medical Association released the results of a survey, which showed 12 states as "in crisis". During this time, legislation was being introduced in Congress as well as state legislatures across the country to reform the tort laws regarding medical malpractice. Since this time a number of states have adopted legislation designed to avert this crisis.

The panel will discuss the changes in legislation and what effect these had in curing the latest medical malpractice crisis.

    Moderator/Panelist:
    Carl Ashenbrenner, Actuary, Milliman, Inc.
    Panelists:
    Robert J. Walling, Principal & Consulting Actuary, Pinnacle Actuarial Resources, Inc.
    Kevin M. Bingham, Senior Manager, Deloitte Consulting LLP
Pharmaceutical Products Liability
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Is there another mega pharmaceutical exposure like Vioxx lurking in the dark? Each year the estimate of the ultimate costs of pharmaceutical claims seems to grow. Given most of these were not considered a significant exposure initially, what other exposures loom. Will the next mega exposure be weight loss drugs that may cause heart problems? How do insurers and manufacturers forecast and deal with these changing exposures? What are actuaries, claims people and underwriters doing to analyze and mitigate these exposures? The panel will discuss emerging exposures and offer their opinion as to their likely impact.
    Moderator:
    Michael Dubin, Director, PricewaterhouseCoopers
    Panelists:
    Claire A. Louis, PricewaterhouseCoopers
    Rick Ramotar, Senior Consultant & Actuary, Aon Risk Consultants, Inc.
Precision Rating---Rating by Address Rather than Territory
Geographic location is an important differentiator of insurance risk. Traditionally, loss and exposure data are aggregated at the zip code level (or some other geographic unit) for the purpose of determining a measure of geographic risk for the zip code. Zip codes with similar loss experience are grouped together to form territories and territorial relativities. Because zip codes are not developed for insurance purposes, the zip codes include risks that are heterogeneous with respect to geographic insurance risk. This heterogeneity can cause inequitable rates and rate discontinuities at the boundaries. Zip codes—and thus boundaries based on zip codes--are further problematic as the US Postal Service can change them frequently.

Given today's technology and data, it may be possible to incorporate geography at a more granular level (e.g., address) and avoid these issues. Of course, to do this it becomes critical to supplement internal data with external data and to use different statistical techniques to more accurately determine the geographic risk. This session with explore the advances possible in precision geographic rating given today's technology, to include a discussion of practical issues such as gaining regulatory approval and implementing the more complex rating schemes.

    Moderator/Panelist:
    Howard M. Eagelfeld, Actuary, Florida Office of Insurance Regulation
    Panelists:
    Stephen C. Fiete, Vice President, Aon Re Services
    Daniel Finnegan, President, Quality Planning Corporation
Rating Agency Views Post-Katrina
Hurricane Katrina (and to a lesser extent the other 6 major hurricanes that have hit the US the last two seasons) highlighted inaccuracies with the industry's expectations about hurricane exposure. How have rating agencies revised their view of catastrophe risk after Katrina caused much more loss than predicted? Will the industry be downgraded? What do rating agencies believe that companies should do differently going forward? Is the right amount of capital coming into the industry? Do they still believe hurricane models? What are their views on the recent start up reinsurers? Come to this session and hear first hand on these issues and more from representatives of three different rating agencies.
    Moderator:
    Marcus Tarrant, Manager, PricewaterhouseCoopers
    Panelists:
    Panayotis Karambelas, Vice President and Senior Analyst, Moody's Investor’s Service
    Thomas M. Mount, Managing Senior Financial Analyst/Actuary, A.M. Best Company
    Peter Patrino, Senior Director, Fitch Ratings
**Canceled** Recent Events and Their Impact on Reinsurance Pricing Worldwide
With 2005 being a record year of natural disasters, speculation about the pricing cycle along with the need to replenish surplus has attracted a lot of new capital and investors into the Reinsurance Industry. As rating agencies focus on diversification and ERM, how has this affected the 2006 renewal pricing? Will there be a subsequent impact on the current underwriting cycle?
    Moderator:
    Steve Kelner, Chief Valuation Actuary, GE Insurance Solutions
    Panelists:
    TBD
Should There Be a National Catastrophe Pool?
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The costly and devastating hurricanes of 2004 and 2005 have prompted some major insurers and government officials to propose significantly different involvement of state and federal government for funding catastrophic losses. The concept is that major natural disasters - Katrina-size hurricanes or severe earthquakes - are essentially uninsurable or not efficiently insurable by the private insurance/reinsurance market. The structure of government involvement might be a network of state or regional catastrophe funds that provide a financial backstop to insurers. Above these funds would be a national catastrophe fund that would collect premium from the state/regional funds and pay losses for the most extreme events.

Some of the incentives presented for this level of government participation in catastrophe insurance are that:

  • The likelihood of property/casualty insurance company insolvencies decreases given the greater catastrophe protection - especially for smaller insurers whose risks might be concentrated in one area.
  • Left to private insurance alone, some regions are becoming impossible to insure due to the threat of crippling losses from a single natural disaster. A public-sector backstop will decrease this burden and foster the capacity for personal and commercial coverage throughout the country.
  • The catastrophe protection offered by this structure could lead eventually to the availability of all-risks policies preventing the financial ruin of insureds lacking flood coverage as exemplified by Katrina's destruction.
But, there are counterarguments to this plan such as:
  • Free market economics without undue government intervention has, and will continue to, provide the capital to support insurers and reinsurers. And, an adequate supply of properly rated insurance will follow from the utilization of this capital.
  • The government structure relies on subsidy-based funding that will counteract risk management incentives and locating homes and businesses in lower risk areas.
  • The spreading of risk is fundamental to insurance. This is accomplished by participation of national and international reinsurers. The state/regional cat funds will confine the coverage afforded to most natural disasters to a relatively small number of participants in one area of the country.
The speakers will present ideas and arguments for and against a public-private partnership structure. Time will be allotted for a question and answer period after the main presentations.
    Moderator:
    David R. Chernick, Actuary, Milliman, Inc.
    Panelists:
    Edward T. Collins, Esq., Counsel, Allstate Insurance Company
    Mary Z. Seidel, Esq., Vice President & Director of Federal Affairs, Reinsurance Association of America
Statements of Actuarial Opinion: Opinions in '05, What's New for '06 and Beyond?
This session is intended to provide a forum for appointed actuaries and their users on the preparations in meeting last year’s (2005) Statement of Actuarial Opinion requirements. What were the challenges? Is there an increased understanding of a reasonable estimated range and risk of material adverse deviation (RMAD)? 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 how 2005 went and the direction of where we should/could be going.
    Moderator:
    Patricia A. Teufel, Principal, KPMG LLP
    Panelists:
    Holmes M. Gwynn, Senior Actuary, Texas Department of Insurance
    Chester J. Szczepanski, Vice President & Chief Actuary, Donegal Insurance Group
The Status of Sarbanes Oxley and Insurance
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As the initial push for publicly held companies to get compliant with Sarbanes Oxley (Section 404) has ended, we can step back and take a look at where the Insurance Industry stands currently. This session will focus on two main areas: What lessons have we learned, and are there any potential issues on the horizon?

Lessons learned can be broken into 3 sections: People, Process and Technology, and how controllership and documentation are heavily involved. Potential future issues include how do we maintain and foster a complete controlling environment in the future, and whether we can or should expect Mutual companies, and other Sarbanes-Oxley "exempt" companies, to be held to the same standards even though they are not legally obligated?

This panel will give us viewpoints from varying perspectives, as to how these issues relate to their responsibilities.

    Moderator & Panelist:
    Ann Griffith, Senior Consulting Actuary, Ernst & Young LLP
    Panelists:
    Steven M. Visner, Principal, Deloitte Consulting LLP
    Michael W. Kooken, Senior Vice President, Zurich North America
Why Don't Catastrophe Models Work or Do They?
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The United States has experienced unprecedented catastrophe activity in the last two years. In 2004, we experienced an unusual frequency of hurricanes. 2005 educated us on the severity. As a result, today, insurers and reinsurers are questioning the credibility of the catastrophe models they have been using over the last decade.

Do catastrophe models work? What is in the "black box"? Why didn't we anticipate the 2004 and 2005 events, or were they within the predicted range of the models?

The panel will present the view points from a major modeling firm as well as a user's perspective, and there will be room for questions at the end.

    Moderator:
    Benoit Carrier, Actuarial Director, Zurich North America
    Panelists:
    David A. Lalonde, Senior Vice President, AIR Worldwide Corporation
    Maria Kovas, Catastrophe Manager, Zurich North America
ERM Track

Enterprise Risk Management - Beyond Property/Casualty Insurance
Enterprise Risk Management is a process that covers many kinds of risk, taking a holistic approach to risk and opportunity. The ERM Risk Symposium draws specialists from many different industries and exposes various ways of handling these "new" risks. This panel will describe many of the issues facing practitioners in other industries.

This panel will also cover the organized activities of the CAS in moving toward the goal. Specifically, the panel will cover activities in the area of CAS-funded research, dynamic Risk Modeling applications, ERM and Risk management working groups, activity at the International Actuarial Association, and the like.

    Moderator/Panelist:
    David N. Ingram, Consulting Actuary, Standard & Poor's
    Panelists
    Robert F. Wolf, Director, Navigant Consulting
Enterprise Risk Management - Theory and Practice
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The CAS Centennial Goal calls for CAS members to be recognized as the leading experts in the evaluation of hazard risk and the integration of that risk with strategic, financial, and operational risk. CAS Members need to learn the theoretical underpinnings evolving for dealing with ERM and the potential practical applications and this session will provide some education on these topics. In particular, the session will also feature a case study to provide additional insight into the emerging world of ERM.
    Moderator/Panelist:
    Stephen P. D'Arcy, Professor, Department of Finance, University of Illinois
    Panelists:
    Christopher D. "Kip" Bohn, Assistant Director and Actuary, Aon Risk Consultants Inc.
Enterprise Risk Management - New Approach to Ratemaking and Reserving
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Enterprise Risk Management - New Approach to Ratemaking and Reserving? ERM envisions a holistic treatment of risk and opportunity across an enterprise. Ratemaking and reserving are the traditional actuarial functions. How does the ratemaking silo relate to an insurer’s enterprise-wide ERM process? How is ratemaking an ERM function? The panelists will address this and many more issues regarding ERM, risk and return analysis, and the ratemaking function.
    Moderator:
    John J. Kollar, Vice President, Consulting & Research, ISO Panelists:
    Russell Bingham, Director of Research & Development, The Hartford
 
Reserve Variability/Stochastic Reserving Track

Traditional reserving techniques like the chain ladder or Bornhutter-Ferguson produce a point estimate rather than an outcome distribution for reserves. Statistical models typically produce a distribution function for reserves, so one could state the probability that the final payments will be no larger than a given level of reserves.

There has been a great deal of work over the last decade regarding statistical reserving models.

However, a typical U.S. reserve review does not include statistical models. The purpose of this "track" of sessions is to explore the gap in detail.

These sessions are aimed at a typical reserving actuary, who must support a process that produces a point estimate of reserves on a periodic basis to be booked in corporate financial statements. Reserving actuaries in a typical working environment are not necessarily resistant to change or innovation, but rather face time constraints and the innumerable day-to-day issues associated with this type of work. In addition, the sessions are not aimed at the highly technical actuary, but rather individuals that have to deal with the gap between theory and practice in their daily work.

The sessions will review the fundamental questions of what to book and how to work with probabilistic distributions in addressing that question. They will then review current approaches to probabilistic distributions and the issues involved with incorporating them into an actuarial work product. Finally, we will go over two basic techniques that will produce probabilistic distributions, with the focus on their actual application in typical reserving work.

It is strongly recommended that interested participants specifically register in advance for these sessions on the application. We also recommend that participants review the report of the CAS Working Party on Quantifying Variability in Reserve Estimates which was published in the Fall 2005 CAS forum.

Session I - Reserve Variability: Where Are We Today?
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Current standards of practice regarding best estimates will be discussed. What is a 'best estimate', how is it currently defined, and what do we expect in the near future regarding further guidance? What can and should we do if we were able to develop a typically skewed distribution for a reserve. Finally, we know that other countries are requiring more statistical approaches. We will review requirements and practices regarding distributions outside the US.

    Panelists:
    Rodney Kreps, Managing Director, Guy Carpenter & Company, Inc.
    Mark Shapland, Actuary, Milliman, Inc.
Session II - Reserve Variability: Who is Doing What?
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The panelists will start with a review of the CAS Working Party on Reserve Variability. This report provides a rigorous framing of the core theoretical problem. Although it is quite lengthy, the panel will discuss and classify current approaches. In addition, the panel will discuss approaches for dealing with practical issues assuming that you have developed a distribution. The practical issues include accounting for correlation when aggregating lines of business, how to handle the most recent or very immature exposure periods, dealing with atypical reserves (like mass tort), dealing with tail emergence, and suggestions regarding presentation to management.
    Panelists:
    Mark Shapland, Actuary, Milliman, Inc.
    Roger M. Hayne, Consulting Actuary, Milliman, Inc.
Session III - Reserve Variability: Two Basic Models
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Download Spreadsheets (Note: Read and agree to Disclaimer. Spreadsheets are listed below the heading 'Stochastic Reserving Track Readings from 2006 Spring Meeting'

This session will review two basic models. The first is the Thomas Mack approach regarding variability of the chain ladder method that is explained in his 1993 paper, "Distribution-Free Calculation of the Standard Error of Chain Ladder Reserve Estimates." He will also discuss bootstrapping, as presented in the England & Verrall paper, "Analytic and Bootstrap Estimates of Prediction Errors in Claims Reserving."

This is intended to be a hands on session, and basic spreadsheets are available to calculate the distributions. It is suggested that attendees review the spreadsheets which will be available on the CAS Website.

Attendees are encouraged to work with the models prior to attending the session. The objective is for attendees to be able to understand the use of these models in their customary work. This will be a hands on session, focused on application rather than theory. Attendees will be able to bring their laptops to the session, although access to electrical outlets will not be supported (charge your batteries).

    Panelists:
    David Clark, Vice President & Actuary, American Re-insurance Company
ARIA Prize Paper

The Use of Dynamic Financial Analysis to Determine Whether an Optimal Growth Rate Exists for a Property-Liability Insurer
Authors: Stephen P. D'Arcy; Richard W. Gorvett
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Prior research on the aging phenomenon has demonstrated that new business for property-liability (P-L) insurers generates high loss ratios that gradually decline as a book of business goes through successive renewal cycles. Although the experience on new business is initially unprofitable, the renewal book of business eventually becomes profitable over time. Within this context, insurers need to manage their exposure growth in order to maximize long run profitability. Dynamic financial analysis (DFA), a relatively new tool for P-L insurers, utilizes Monte Carlo simulation to generate the overall financial results for an insurer under a large number of scenarios. This article uses a publicly available DFA model-along with the estimated market value of an insurer, based on 1990-2001 data for stock P-L insurers and underlying financial variables-to determine optimal growth rates of a P-L insurer based on mean-variance analysis, stochastic dominance, and constraints on leverage.

Hachemeister Prize Paper

Pragmatic Insurance Option Pricing
Author: Jon Holton
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This paper deals with theoretical and practical pricing of non-life insurance contracts within a financial option pricing context. The market based assumption approach of the option context fits well into the practical nature of non-life insurance pricing and valuation. Basic facts in most insurance markets like the existence of quite different insurer price offers on the same claims risk in the same market, support the need for this approach. The paper outlines insurance and option pricing in a parallel setup. First it takes a complete market approach, focusing dynamic hedging, no-arbitrage and risk-neutral martingale valuation principles within insurance and options. Secondly it takes an incomplete market view by introducing supply and demand effects via purchasing preferences in the market. Finally the paper discusses pragmatic insurance price models, parameter estimation techniques and international best practice of insurance pricing. The overall aim of the paper is to describe and unite the headlines of the more or less common insurance and option price theory, and hence increase the pragmatic understanding of this theory from a business point of view.

Discussion Paper Presentations

Sarbanes-Oxley Section 404 Internal Controls and Actuarial Processes
Authors: Leslie Marlo, G. Chris Nyce
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The passage and implementation of the Sarbanes-Oxley Act of 2002 was the most significant landmark legislation in securities regulation and corporate governance in the US since the SEC Act of 1934. In particular, Section 404 of the act requiring management assessment and assertion on the effectiveness of internal controls along with the requirement that the auditor attest to the assertion, has greatly impacted actuarial work processes for many actuaries. This paper discusses the implications of the Act for actuaries based on analysis of actuarial functions within insurance companies. Also discussed are the observed impacts within the industry to date. Based on these observations and experiences, an overview of a typical internal control framework is introduced. Impacts on Actuaries working in financial reporting are far reaching, as well are the risks created by the Act. On the other hand well designed and operated controls may serve to reinforce the professionalism of the Actuarial work product, reducing certain risks for Actuaries. In addition, there is an unrealized potential for the increased focus on controls and documentation to strengthen the integrity of results reported by insurers, leading to increased stability in loss reserve estimates.

Fair Value Accounting for Property-Casualty Insurance Companies
Author: Sholom Feldblum

The accounting standards boards have adopted fair value measures for financial assets and liabilities, subject to reasonable constraints from established practice and uncertainties in the new procedures. FASB and IASB standards since 1992 have espoused a consistent fair value perspective for long-term bonds, common stocks, and derivative securities. The benefits of fair value for relevance, reliability, and transparency cannot be gainsaid. For assets and liabilities with liquid markets, fair values are easily measured. For property-casualty policy benefit reserves, which are not traded, fair values are disputed. Much of this dispute stems from misunderstanding about risk margins in efficient markets and the cost of holding capital in a regulated industry.

This paper explains fair value accounting for property-casualty insurance. The fair values of policy benefit reserves – the present values at the risk-free rate plus the risk margin for the cost of holding capital – are based strictly on financial theory. They assume that underwriting risk is diversifiable and receives no additional return in efficient markets.

The cost of holding capital for property-casualty insurance operations is debated. We present the range of views and explain the implications for fair value accounting. We provide readers with the tools to judge fair value positions; we do not provide a single fair value estimate.

Proceedings Paper Presentations

Discussion of "Riskiness Leverage Models" By Rodney Kreps
Author: Robert A. Bear, RAB Actuarial Solutions LLC
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Kreps' paper is a major contribution to the CAS literature on the central topics of risk load and capital allocation for profitability measurement, which is a core component of an Enterprise Risk Management system. He has given us a rich class of mathematical models that satisfy two very desirable properties of a risk load or surplus allocation method: They can allocate risk down to any desired level of definition and they satisfy the additivity property. Tail Value at Risk and Excess Tail Value at Risk reasonably satisfy the properties that management would likely want of such a model, while still satisfying the properties of a riskiness leverage model and the properties of coherent measures of risk.

Donald Mango's ground-breaking work in developing the concepts of insurance capital as a shared asset and Economic Value Added [1] are discussed. A Risk Return on Capital model is suggested as an integration of the approaches presented by Messrs. Kreps and Mango. This method measures returns on capital after reflecting the mean rental cost of rating agency capital. Reinsurance alternatives are compared using both the Return on Risk Adjusted Capital approach presented by Mr. Kreps and this integrated approach.

Why Larger Risks Have Smaller Insurance Charges
Author: Ira Robbin, Partner Reinsurance Company Ltd.
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The insurance charge function is defined as the excess ratio (the ratio of expected loss excess of an attachment point over the expected total loss) and is expressed as a function of the entry ratio (the ratio of the attachment over the total loss expectation). Actuaries use insurance charge algorithms to price retrospective rating maximums and excess of aggregate coverages. Many of these algorithms are based on models that can be viewed as particular applications of the Collective Risk Model (CRM) developed by Heckman and Meyers. If we examine the insurance charge functions for risks of different sizes produced by these models, we will find invariably that the insurance charge for a large risk is less than or equal to the charge for a small risk at every entry ratio. The specific purpose of this paper is to prove that this must be so. The author will show the assumptions of the CRM force charge functions to decline by size of risk. The author will take a fairly general approach to the problem, develop some theory, and prove several results along the way that apply beyond the CRM.

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Posted on 09/22/2014
By Cheri Widowski

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