Actuaries Abroad

The U.K. and U.S. Compare Notes by Kendra Felisky-Watson

On a beautiful Friday in June, the CAS and the Institute/Faculty of Actuaries held the first Joint Seminar at Staple Inn, the historic home of the Institute in the middle of London. Approximately 60 people attended the seminar to learn more about the differences and similarities between the two actuarial bodies. A sign of the growing number of CAS members in London as well as U.K. interest in the CAS is that the audience was split about equally between CAS members and Institute/Faculty members. (Please remember that there are actually two actuarial bodies in the U.K.: the Faculty of Actuaries covers Scotland and the Institute of Actuaries covers everywhere else. However, all administration is performed jointly; for example, the exams are administered together.)

The seminar was split into four sections, with a U.K. and a U.S. representative for each part. The four sections were: education and professional guidance; reserving; rating; and developments and current issues in the CAS and Institute/Faculty.

Education and Professional Guidance

Both the CAS and the Institute/Faculty have recently revised the syllabus of examinations, including concentration of country-specific information onto one exam only to recognize the growing international presence of each actuarial body. Another similarity is that both actuarial bodies teach professionalism through seminars consisting of several case studies.

Kevin Armstrong, staff actuary with the Institute, described the membership and education process in the U.K., including the new structure of the Institute/Faculty exams. Kevin also explained the continuing professional development (CPD) philosophy of the Institute/Faculty and the relevant CPD requirements. He summarised his presentation on the Institute/Faculty by concluding that there is strong support for broadening the exams, CPD is recognised as important, practising certificates may be required in more areas, and that the Institute/Faculty wants to emphasise other skills as well as passing exams.

Kevin Thompson, CAS Vice President-Admissions, then explained the structure of the actuarial profession in the U.S., including a description of the American Academy of Actuaries. He discussed the organisational structure of the CAS and the exam process including the new Year 2000 Syllabus. The CAS's continuing education policy and the opportunities provided by the CAS to meet those requirements were discussed. Kevin also went over the Statements of Principles and the AAA Professional Standards as well as the CAS's counseling and discipline procedures.

Reserving

I explained the loss reserving methods that are covered on the U.K. syllabus and compared them to the ones actually used in practice. Even though it is not really used anymore, another method, the separation method, was discussed because it was on the syllabus for many many years. (Okay, John Ryan did actually admit that he had used it once.) Craighead Curves were once used almost exclusively in the U.K. general insurance world, but are rarely used today even though they produce very pretty graphs. The exposure methods used by several London Market entities to estimate the reserves on latent claims were also discussed. U.K. reinsurance companies and Lloyd's syndicates, if they write U.S. business, are in the interesting position of actually having more reporting requirements to U.S. authorities than they do to the U.K. authorities. I went over which reserve opinions are required for which authorities and on what accounting and legal basis.

Spencer Gluck presented a very interesting discussion of various U.S. approaches to reserving. After discussing the basic triangles, he spent some time going over the use of claim count data to test things such as changes in timing of payments or case reserve strengthening. He recommended we check that the statistical evidence is consistent with anecdotal evidence, or, "do not believe everything the underwriters tell you." Spencer also went over the techniques mentioned in the Berquist-Sherman paper for adjusting for inconsistencies, as these are not really used here in the U.K. In the most interesting part of his presentation, he described what he calls the "chain ladder +" methods (Bornhuetter-Ferguson, Cape Cod and Generalised Cape Cod). Finally, Spencer discussed how he is using multiple regression models for reserving, which generated many questions from the audience.

Rating

After a nice lunch where we were able to discuss the morning's presentations as well as enjoy the lovely rose-filled courtyard, the seminar reconvened with presentations on U.S./U.K. approaches to rating. Gary Venter kicked off the afternoon session with a reminder that ratemaking is not done in an actuarial vacuum because other considerations must be addressed by the actuary. The business impacts (market share, profitability, and risk selection) must be considered when deciding to write or not write the business. Actuaries usually tend to concentrate on methodological issues such as data, credibility, and risk loads. However, we must also think about the political issues of state approval, labor, business groups, consumer advocates, as well as regulators. Finally, the actuary must be a "salesman" and balance the three conflicting areas of underwriters, management, and regulators. Gary then went on to discuss rating issues such as credibility and estimators in further detail.

The presentation on the U.K. approaches to rating was made by Karl Murphy, who started off well by mentioning that there are no statutory requirements in regard to rating in the U.K.! There are no restrictions on the prices to charge and virtually no restrictions on rating factors. U.K. insurers will update rates very frequently, sometimes daily and will use up to 20 different rating factors. This means that actuaries must prove that they can add value to the pricing process. Luckily, actuaries are becoming more and more involved in pricing in the London Market due to the influence of American-owned companies. Karl's area of expertise is in generalised linear modeling (aka GliM), which most U.K. primary companies use for rating. Karl explained the detail of how GliM models work and why people use them. It is also interesting to note that credibility is not used at all in the rating process in the U.K.

Developments and Current Issues

The final part of the day covered developments and current issues with regard to each of the actuarial bodies. Peter Wright, the chairman of the Institute/Faculty of Actuaries' General Insurance Board, discussed these areas for the U.K. For example, the Institute/Faculty recently decided on a new category of members-honorary fellows-to accommodate people who make a contribution to the actuarial profession but may not be fully qualified fellows, that is, academics. He then went on to discuss issues at Lloyd's that may potentially involve actuaries, such as whistleblowing and actuarial opinions on the reinsurance to close, in addition to the opinions required on the loss reserves alone. Peter also discussed proposals from the General Insurance Board for statutory actuarial financial condition reports that would not only encompass loss reserve opinions, but an opinion on the whole company by the actuary.

The final presenter of the day was our illustrious president, Steve Lehmann, who spoke about the significant increase in membership in the CAS over the last five years. He also touched on the importance of the continuing education seminars offered by the CAS. The CAS had also instituted a new category of membership, affiliate, which may be of interest to Fellows of the Institute/Faculty. He also mentioned the new Vice President-International position that is being implemented by the CAS Board. Finally, Steve discussed the Task Force on Nontraditional Areas of Practice and other major CAS initiatives as well as touched on the success of the CAS's promotion of DFA.

Unfortunately, most people could not stay to enjoy the cocktail party and sun in the courtyard because they had to rush off before the day's demonstrators (anarchists and eco-warriors) closed down the main train stations and Tube. All in all, it was a very informative day and I think people on both sides of the pond enjoyed hearing about the profession on the other side and how the other actuaries tackle similar problems. It was also nice to see all the CAS members that are working in London. I think most agreed that we must get together more often.