2000's Actuarial Top Ten

by Robert F. Conger and Michael A. Walters

How They Ranked and Why

The performance of the property/casualty industry dominated this past year's news stories, having significant implications for casualty actuaries. Stories related to industry performance took the top four slots, according to our annual survey of CAS thought leaders. Also identified as significant trends were the continued emergence and evolution of new aspects of the property/casualty insurance business—including Internet distribution of insurance products and enterprise-wide perspectives on managing risk.

The top four stories identified were:

1. The failure or near-failure of various major carriers, notably in the U.S. market (where workers compensation results appeared to be a significant common element among many of the troubled companies) and in the Australian reinsurance market.
2. Deterioration of underwriting results, particularly for workers compensation and other commercial lines.
3. The long-awaited hardening of the insurance market, at least with respect to commercial lines and reinsurance.
4. Widely published opinions by industry observers that the industry's loss reserves are, in the aggregate, deficient.

Most respondents identified one of these stories as the number one story of the year for casualty actuaries, and many placed all four of these in the top ten. Of course, the underlying causes and effects of these four stories are closely intertwined, not independent factors.

The importance of these four stories lies in the opportunity for casualty actuaries to be part of the solution—or not. What was the role of casualty actuarial input to company management during the prolonged soft market of the latter 1990s? Perhaps actuaries were not vigilant in forecasting the outcome of the marketing, underwriting, pricing, reinsurance, and reserving actions being taken by management. Or, maybe actuarial indications such as price increases were dismissed as being inconsistent with other objectives such as market share. Perhaps actuaries were not sufficiently clear and persuasive in communicating their insights to management. Or, perhaps management chose not to ask for, or chose not to heed, the advice of their actuaries. Any combination of these possible explanations has the potential to weaken the public's confidence in the actuary's ability to help guide the sound managing of an insurer.

Thus, these stories represent a challenge to casualty actuaries:

Get engaged actively in key management issues;

Conduct analyses that carefully address an increasingly complex set of objectives, constraints, and dynamics;

Present results clearly and persuasively; and

Articulate the potential implications of alternative strategies and tactics being contemplated by management.

Other top stories expand the potential for actuarial influence and involvement. The number five story in this year's survey is the move by leading corporations towards an enterprise-wide, integrated view of managing risk. Enterprise risk management is gaining a foothold in a wide variety of industries, including, but by no means limited to, the insurance industry. This trend offers actuaries the opportunity to analyze risks far afield from the usual hazard risks insured by traditional property/casualty insurance products, and to do so for nontraditional types of employers. Within the insurance industry, actuaries have the opportunity to help develop products that respond to the enterprise-wide risks of policyholders, and to assist insurers themselves in adopting enterprise-wide perspectives on their own business risks, using DFA-type models to analyze and quantify these risks and their implications.

The use of complex models by actuaries was acknowledged, at least implicitly, in the eighth leading story: the implementation of a 96 percent increase in Florida hurricane insurance rates, based on models. We anticipate that the acceptance of other complex actuarial models will follow, as the profession demonstrates the effectiveness of such models.

The sixth leading story is the continued growth of the Internet as an important distribution channel for insurance products. This trend requires that actuaries quicken their pace to "Internet speed," and challenges them to develop underwriting and pricing methods and algorithms that can operate with the types of information available during a real-time interaction with a customer.

The number nine story also involves information, but concerns regulatory constraint on the use of personal financial data in the diversified and blurred financial services industry evolving in the wake of the 1999 Gramm-Leach-Bliley Financial Services Modernization Act. Interestingly, considering that the passage of GLB was far-and-away the top story in our survey a year ago, the development of privacy rules for the use of personal financial data was the only related story in the top ten this year. Clearly, respondents anticipate that the ultimate implications of GLB will be a long time emerging.

A recurring selection for the top ten list has been the transformation of the insurance industry through acquisitions and divestitures. Actuaries are involved in analyzing these transactions, and the jobs and markets in which actuaries work are being affected by them. This story was ranked seventh this year.

Rounding out the top ten list is a combination of factors pressuring the health sector, including medical inflation, Medicare-related litigation, and the development of a Patients' Bill of Rights. All insurance products that include coverage or compensation for the cost of injury-related medical care may potentially see claim, coverage, and other changes as a result of these factors.

As in prior years, this year's candidate stories were culled from the trade press to be externally oriented, and not intended to review CAS internal actions. In the first round of the survey, participants, drawn from the Board, Executive Council, committee chairs, and past presidents, narrowed and consolidated an initial list of approximately forty stories. The first round of this Delphi study also highlighted reasons for number one selections by various voters. The second round invited voters to review their initial selections. The final scores were tallied using the NCAA sports polling methods (10 points for first place down to 1 point for tenth place).

Continuing this year are the prizes for the best predictors of the final consensus of all participants. Ralph Blanchard won the Consistency Award because his original ten picks came closest to the final consensus ranking, with unweighted scoring. Ramona Lee finished second in this category, and finished on top for the Insight Award. Lee's original picks came the closest to matching the final Top Ten consensus, with weighted scoring. Rob Walling placed second in this category. Phil Ben-Zvi, Tom Myers, and Walling were in a dead heat for third place in the Consistency Award.

Finally, the overall Bellwether Award goes to Ramona Lee, who had the best combined score in both of the above categories.

Thanks to all the actuaries who participated in this survey. This result also serves as an important input to the Long Range Planning Committee on potential future directions of the actuarial practice.

How They Ranked and Why