GIRO 2005: Matters of Particular Interest to CAS Members
Louise A. Francis
The General Insurance Research Organising (GIRO) Committee Conference presented a full range of topics of interest to CAS members, including better reserve and price methods, solvency considerations, and new and interesting tools such as wikis, which can improve the performance of actuaries. CAS members have participated in the conference over the years. This year, Don Mango presented on capital as a shared asset.
Two years ago it was reported at the 2003 GIRO conference that there appear to be cycles in reserving that correlate with the underwriting cycle. To advise actuaries on the reserving cycle and address issues raised by the Morris and S&P Reports, a working party to investigate reserving issues was formed. The acronym for the working party is GRIT, which stand for General Insurance Reserving Issues Task Force. The GRIT working party produced an extensive report with a number of findings. Among these were:
- Actuaries' stakeholders are generally satisfied with the actuarial work-product. One commented "if actuaries did not exist we would have to invent them." However there was criticism that actuaries do not communicate well with their management and with other stakeholders.
- The booked reserve is often not the actuarial best estimate. Actuaries may need training on how to more effectively influence their managements and customers.
- There is a need for more consistency in the application of actuarial methods.
- There is a need for actuaries to better understand the underlying business. It is believed that a factor causing the reserving cycle is changes in policy term over the course of a cycle, along with shifts in the proportion of new and renewal business. The report recommends a review of policy and claims databases and proposes measuring changes in the business and outliers that could dramatically affect the liability estimate. The report also recommends a detailed review of underwriting and claims procedures.
- The report proposes some methods for addressing how the loss development tail varies over the underwriting cycle. It should be noted that the CAS is also concerned about the issues addressed in the GRIT report. Currently there are two CAS working parties working on reserving methodology issues: the Tail Factors Working Party and the Bornhuetter-Ferguson Initial Expected Loss Ratio Working Party.
Solvency standards throughout the European Union were another topic of discussion. Solvency II is expected to be fully implemented by 2010 and some aspects of the implementation will occur before then. Under Solvency II, companies' liabilities will need to reflect a best estimate, a risk margin, a minimal capital requirement, and solvency capital. Solvency II is intended to provide incentives for good risk management. Many companies are developing their own internal models (some involving dynamic financial analysis models) for meeting the solvency and risk margin standards. For more information on this topic see www.iaisweb.org.
Dr. Sebastian Cartovsky, who gave a presentation on the financial risk of climate change, cited a number of studies supporting a projection of global warming with accompanying increases in the number of extreme weather events. Dr. Cartovsky believes climate change will affect many lines of insurance. For instance, as temperatures rise, the health costs resulting from insect-borne diseases that thrive at warmer temperatures may increase, affecting health insurance costs. On the other hand, fewer people may suffer from cold weather diseases such as the flu. Methods for managing and financing the climate change risks were discussed.
| ...the CAS is also concerned about the issues addressed in the GRIT report. Currently there are two CAS working parties working on reserving methodology issues: the Tail Factors Working Party and the Bornhuetter-Ferguson Initial Expected Loss Ratio Working Party. |
The Claims Inflation Working Party reported on one of the key inputs in a pricing analysis. The working party distributed a survey to GIRO members asking for their estimate of inflation in the major lines of general insurance (i.e., U.K. motor insurance, U.S. medical malpractice, and the like). Survey responders were also asked what method they used to estimate inflation. The working party reported on the drivers of frequency and severity trend. They also discussed a number of techniques for estimating claims inflation, including econometric models, percentile matching, and graphical valuation.
The Maths Toolkit Working Party presented a number of topics related to information technology and analytical tools that could improve actuarial performance. One of the banes of doing an Internet search is that typing a word into a search engine often yields hundreds or thousands of irrelevant references. The Maths Toolkit Working Party pointed out that there are now new search tools that can help actuaries more efficiently locate the information they are looking for on the Internet, including blog searches and RSS feeds. (RSS or "really simple syndication" feeds are formats for syndicating news and the content of news-like sites.). The working party also introduced conference attendees to the concept of wikis as a way to share information. A "wiki" is a Web site devoted to a particular topic or application that allows Web site visitors to contribute to the information on the Web. The best-known example is the Wikipedia site. Wikipedia is an online encyclopedia where experts who visit the site and want to provide information on a topic of interest to them contribute the articles. The Wikipedia articles are reviewed and edited by a team of volunteers. The final tool the Maths Toolkit Working Party advocated is the programming language "R." "R" is free, open-source, statistical software that can be used to perform advanced statistical analysis, such as ge