25 Years Ago in The Actuarial Review

by Walter C. Wright

In the January 1978 AR, Robert A. Bailey, in an article titled "The Actuarial Dilemma," contributed to the debate about the need for actuarial opinions regarding the loss reserves of casualty companies. Bailey's concern was that various special interest groups—insurance companies, regulators, company actuaries, and consulting actuaries—were taking positions regarding loss reserve opinions, but that the actuarial profession itself was not taking a position. Bailey argued that uncertainty is a key aspect of loss reserves, and that this uncertainty is at the heart of actuarial science. Was he ahead of his time?

Following are brief extracts from his article.

Should not the actuarial profession's position be that loss reserves and the degree of uncertainty associated with them should be evaluated by competent professionals, namely actuaries? And shouldn't actuaries be the ones to establish the standards and principles, the content and scope of an actuarial opinion? Do we need to wait for company managements or government or accountants to tell us what we should do? We obviously have waited for a very long time with the full knowledge that the public interest is not adequately served by the present hodgepodge in loss reserving.

Loss reserving is about as actuarial as any work can be because it involves an estimation of an unknown quantity which is subject to future contingencies (inflation, court settlements, etc.) based on past experience and informed judgment. But if estimating the value of unpaid claims is actuarial, certainly the appraisal of the degree of uncertainty associated with that estimate is at the very core of actuarial work. What could be closer to the theory of risk? If we succeed in avoiding the appraisal of the uncertainty in loss reserves, by simply stating that in our opinion the reserves are "reasonable," which means, I suppose, that the reserves have a 50% likelihood of being inadequate, don't we leave a vacuum to be filled by some other profession? Don't we surrender an important area of actuarial work to be done by someone who may eventually treat actuaries as clerks whose role is to prepare worksheets for analysis by others? Or do we think the public will be satisfied with no information on what the range of results are likely to be for unpaid claims, and where the company's reported reserve and surplus stand in relation to that range?