The Top Ten Casualty Actuarial Stories of 2003
by Vincent F. Yezzi and Robert F. Conger
Based on our annual survey of CAS leaders, we have compiled a list of the top ten news stories affecting casualty actuaries in 2003. This listing, as seen in the accompanying chart, (.pdf) reflects a wide variety of issues and illustrates the diverse areas where casualty actuaries influence the insurance industry.
This year, an unusually large number of the stories are about actuaries, including the CAS approval of mutual recognition, actuarial malpractice, and the role of actuaries in evaluating loss reserves.
In a second theme touching several stories, the tort system is likely to continue as a major driver for the insurance industry and thereby affect a significant number of actuaries. Three top stories related to this theme are medical malpractice reform, actuarial malpractice, and asbestos litigation.
Here's the top ten listing for 2003:
10. Mutual Recognition Approved by CAS Fellows. This approval allows the CAS Board to give Fellowship status to members of other actuarial organizations who meet a set of rigorous requirements. This approval represents a change to the CAS Constitution and is a significant step in the globalization of the CAS.
9. Proposed Convergence of FASB and IASB in Fair Value Accounting. This story also demonstrates the influence of the international community on the work of casualty actuaries. Phase 1 of this process will only affect the definition of an insurance contract, but the proposed Phase 2 would eventually require fair value accounting, where assets and liabilities need to be valued at market value. This will challenge casualty actuaries to adjust reserving methods to incorporate the new accounting standards.
8. Continuing Medical Malpractice Crisis, Including Availability and Affordability Problems. Many states have responded to this crisis by proposing reforms to limit non-economic (pain and suffering) claims to some fixed amount. In addition, the federal government has proposed tort-
reform legislation related to medical malpractice. Casualty actuaries have provided analysis and testimony to states and Congress on the potential impact of such legislation. Respondents noted that this high-visibility topic provides an opportunity for actuaries to rise above partisanship and to be seen as a valuable source of information in this important debate.
7. Actuarial Malpractice. An actuary has been sued by the domiciliary state for his involvement in signing an Actuarial Opinion for a failed insurance company. The work of other actuaries has come under increased scrutiny, as well. Actuaries are being held more responsible in a legal setting for their work products and their impact on employers and clients. It is more important than ever that actuaries adhere to the Code of Professional Conduct and various Standards of Practice, as well as carefully document the work scope and responsibilities of the actuary and the client.
6. Large Number of Reinsurers Out of Business In 2003. This directly affects actuaries to the extent that jobs are lost. In addition, this serves as a challenge to actuaries to identify the factors that caused the downfall of these companies and to provide better information to management in the future.
5. Credit Scoring Use by Insurers in Underwriting and Rating Personal Lines of Insurance. Actuaries have a major role to play in the debate among the insurance industry, consumers, and regulators. Actuaries need to identify and explain any correlation between credit scores and insurance claim frequency/severity, and provide information that could be used to educate the public regarding this controversial issue.
4. Asbestos Claims' Continued Effects on Insurers and Corporations. National legislation was proposed that would provide for the settlement of all remaining asbestos claims from a trust. Casualty actuaries played a significant role in crafting the legislation, including testifying before Congress. Actuaries need to continue to identify methods of reserving for asbestos claims to help the insurance industry get its hands around the quantification of this liability.
3. The Influence of Sarbanes-Oxley on the Governance Standards of Insurance Companies and Corporations. Increasingly, insurance company audit committees are requesting a direct meeting and dialog with the reserving actuary, most frequently to help them understand the key risks and uncertainties in the reserves. In addition, the spotlight on corporate governance has increased the demand for Directors and Officers insurance. Casualty actuaries will continue to help properly price this product, reflecting the increased potential for claims against senior management and boards of directors.
2. The General Level of Reserve Deficiency of the Property/Casualty Industry and the Resulting Reserve Increases Taken by Insurers and Reinsurers. Despite substantial reserve increases by a number of insurers during 2003, rating agencies estimate that the nonasbestos reserve shortfall for the industry is between $30 billion and $60 billion. There was consistent concern among respondents that actuaries must be very effective in performing the core function of reserving and effectively communicating our findings, if we are to maintain credibility with the insurance industry at large.
1. Actuaries Come Under Significant Public Criticism for Perceived Poor Performance in Projecting Loss Reserves. In particular, Standard & Poor's published an article in November stating that "actuaries are signing off on reserves that turn out to be wildly inaccurate. It's an abysmal track record." This is a challenge to casualty actuaries to support the work that we have done historically, to develop more rigorous analyses of loss reserves in the future, and to improve the way that we explain reserves to non-actuaries. We hope all actuaries will respond in a way that enhances our reputations and increases the value actuaries add to the insurance industry.
The chart summarizes the results of the survey. Fifteen points were awarded to a story which received a first place vote, down to six points awarded to a story for a tenth place vote.
We have compared the consensus top ten stories with the responses of the individual participants to determine the closest predictors of top stories and their ranks. This year's winner selected nine of the consensus top ten stories, including the number one story. In addition to being a good predictor of the consensus, this person is either very shy or technically challenged, as he or she did not enter a name! A number of participants selected eight of the consensus top ten stories, with Dave Hartman coming in second and Gail Ross third in overall scoring. This is the third year in a row that Gail has been one of the top finishers!
Thanks to all of the actuaries who participated in this survey! Your responses are not only useful for this article, but are used by the CAS in its long range planning process.