A Poor Understanding of Our Profession
Do you recall the articles that appeared in the insurance trade press about a week before last Thanksgiving reporting that two rating agencies were accusing U.S. property/casualty actuaries, in essence, of being utterly incompetent as loss reserve analysts? The reports stated that industry reserves have been proven seriously inadequate time and again, judging by the extent to which large and seemingly well-run insurers have radically "strengthened" reserves or simply collapsed in sudden financial ruin.
My first reaction was outrage, because the rating agencies used rather strong language. But my outrage quickly subsided into concern. The rating agencies held an entirely misguided notion of what actuaries doindeed, what they can doand what a reserve opinion is. And then I thought, "Wow, these rating agencies have just lobbed a couple of multi-megaton bombs on the property/casualty actuarial profession. The CAS and the AAA almost certainly will counterattack. This could get ugly."
So I looked forward to subsequent issues of the insurance magazines for the latest news from the front. I flipped through the Wall Street Journal each day, looking for a definitive in-depth analysis of the situation. I scanned the table of contents in Forbes Magazine, expecting to find an article ridiculing the rating agencies for their misconceptions. And
nothing happened. There were no follow-up articles in the trade press, no investigative reports in the Wall Street Journal or Forbes, not even a quick mention on NPR's Morning Edition or All Things Considered news programs. (See note at end.)
The issue seemed to vanish. The reasons why are explained in this issue's "From the President" column. I want to thank and congratulate the executive officers of the CAS and the AAA, who moved quickly to remove the issue from the headlines by responding directly and in person to the rating agencies. Congratulations, too, for such successful efforts at damage control.
The rating agencies are probably not the only ones who depend on the reserving specialist's actuarial work product and fail to understand its uses and limits. We need to make clear to our clients and our clients' clients that reserving actuaries are essentially forecasters.
We collect and monitor an incredible amount of data, run the data through a variety of models, adjust the outcomes based on our experience and professional judgment, and forecast how much cash will ultimately be paid out for losses and expenses. (For some lines of insurance, "ultimately" is a very long time!) Our forecasts often rely, in turn, on the forecasts of other professional forecasters. Weather forecasters immediately come to mind, of course, but we also need many other forecasts of how things will play out over the coming months and years: interest rates, stock market behavior, regulatory rulings, court decisions, legislative activity, and so on.
Our actuarial forecasting systems are the best available, and we work constantly to improve them. The same can be said of the systems used by other professional forecasters. But no professional forecaster, not even a reserving actuary, can guarantee that any particular forecast will turn out to be within any specific neighborhood of the "right" answer.
Reserving actuaries may not often hit the target exactly on the bull's eye, but they hit close to the bull's eye very often. And there's no reason to blame reserving actuaries when the real world doesn't reveal all its plans and secrets ahead of time. (Editor's Note: I spoke too soon. See the opinion column by Susanne Sclafane on pages 34-35 of the January 19, 2004 issue of National Underwriter.