2002 Reserving Call Papers Highlighted

by Giuseppe Russo

Recently there have been significant developments in the area of property/casualty insurance loss reserve analysis. Many of these developments are discussed in the eight papers submitted to the 2002 Committee on Reserves' Call Paper Program.

Four of the papers address issues related to the Statement of Actuarial Opinion and codification, two critical areas continuously evolving for practicing actuaries. The first paper, which uses accounting literature as a reference, examines the interrelationship of materiality and the range of reasonable reserve estimates. A second paper addresses materiality from external points of view such as those of the U.S. Supreme Court, the Securities and Exchange Commission, and the Financial Accounting Standards Board. The author presents findings from research on materiality standards used by actuaries and the regulatory community in order to provide a framework that may be helpful to actuaries grappling with materiality thresholds. The third paper tackles the question of how to determine management's best estimate of loss reserves. The author utilizes economic and statistical decision theory to model a company's future value as a statistical decision function. One chooses the reserve estimate that minimizes the average value of this function. The fourth paper uses U.S. industry commercial lines data to develop distributions of unpaid losses by line of business. The author combines these distributions by using statistical tools such as the standard normal copula to develop a company-wide aggregate unpaid loss distribution. This distribution can be used to address various issues such as enterprise risk, materiality, best estimates of reserves, and fair value.

Two papers deal with reserving for catastrophic events and latent exposures. As new risks develop, such as mold and terrorism, this topic will continue to become increasingly important both to the reserving actuary and government regulators. The first paper discusses the proposal adopted in 2001 by the NAIC regarding the establishment of pre-event tax-deferred catastrophic reserves. This paper gives background on the problem, provides a description of catastrophic reserves, and lists current constraints on establishing these reserves. The paper also discusses possible changes in the current design and outlines steps needed to enable and fully implement catastrophic reserves. The second paper analyzes market reactions to insurance carrier announcements of additional asbestos and environmental liabilities. The authors study market data to estimate and document the market's reaction to these reserve increase announcements and then evaluate reasons for these reactions. This paper should serve as a reminder to all actuaries that their professional work products do matter to the outside world and that great care must be exercised when analyzing reserve liabilities.

The final two papers discuss reserving issues surrounding runoff entities. The first paper examines two runoff books of medical malpractice liabilities. The authors review some of the causes of distortions that may be produced by traditional reserving methods and suggest adjustments the reserving actuary may want to consider when evaluating a runoff book of business. The second paper takes the reader through a real-life example of a Florida workers compensation entity placed in runoff. The author discusses how reserves are established despite distortions in traditional reserving methods caused by data problems and changes in the legal environment (such as tort reform).

Papers will be included in the CAS 2002 Fall Forum and will be available on the Web Site. Eligible papers will be considered for a share of $2,500 in prize money to be awarded at the opening session of the Casualty Loss Reserve Seminar in September.