Top 10 Casualty Actuarial Stories of 2004
By Vince Yezzi and Bob Conger

The year 2004 produced a wide variety of news stories that affected casualty actuaries. We have compiled a list of the top ten such stories based on our annual survey of CAS thought leaders.

An overall theme to the stories is the increased scrutiny of insurer practices, including loss reserves, and the implications and opportunities this scrutiny represents for the credibility of casualty actuaries. To the extent that casualty actuaries can rise to the challenge of effectively communicating the technical content of our work to a broad array of audiences, the profession stands to gain strength as it heads towards the future.

The top ten stories were:

1. Turmoil at Marsh—Brokers face credibility problems as Marsh lays off 3,000 employees and CEO Jeffrey Greenburg steps down. This is an opportunity for casualty actuaries to step up and be seen as credible alternative sources of information for insurance buyers.

2. Four Hurricanes Hit Florida and Insurance Financials Remain Intact—The four hurricanes that slammed into Florida in 2004 caused over $22 billion in damage. The insurance industry was able to bear up against these storms, however, based on actions taken in response to prior hurricanes. Casualty actuaries can respond to the additional interest that these hurricanes created in catastrophe models and enterprise risk management.

3. Increased Scrutiny of Finite Reinsurance—The SEC has become increasingly critical of reinsurance arrangements that are seen as primarily intended to smooth earnings. Casualty actuaries have an opportunity to give more input in the analysis of issues regarding transfer of risk. However, there is danger to our credibility if casualty actuaries are perceived as having had a large role in the design of reinsurance programs that do not pass muster.

4. Reinsurers Report Adverse Development on Prior Years—This issue is related to a later story on actuarial credibility, emphasizing the need for casualty actuaries to master the core function of reserving. We must continue to challenge and update the reserving methods used, including the methods used to understand and quantify the inherent uncertainty, and to be more effective in presenting our analyses and conclusions to senior management.

5. Asbestos Exposures Still Plague Insurers; No Asbestos Agreement Yet—Casualty actuaries have a continuing role in quantifying the future costs of asbestos litigation, and in analyzing potential solutions. The ongoing nature of this story (this is the fourth year in a row that asbestos has been a top 10 story) and the significant impact asbestos claims have had on the insurance industry, highlight the need for casualty actuaries to take a lead role in anticipating, evaluating, and managing the next mass tort crisis.

6. Insurance Prices Drop, Market Softens—After several years of increasing prices and hard market conditions, the insurance cycle is turning in many market segments. Softening market conditions increase the need for casualty actuaries to have a more active role in monitoring, analyzing, and explaining the adequacy of insurance pricing, thereby creating a stronger foundation for the loss reserves that will be established in the future.

7. NAIC Makes Significant Changes to Opinion Instructions—The new instructions for U.S. loss reserve opinions represent changes in both form and substance. No longer will it be sufficient for reserves to be simply characterized as "reasonable but subject to uncertainty." Beginning this year-end, formal reserve opinions will include some description and quantification of the uncertainty. This is a great opportunity for the profession to use its expertise in providing value to the users of the opinion.

8. Complying with Sarbanes-Oxley—Sarbanes-Oxley created a sweeping overhaul of corporate fraud, securities, and accounting laws. This new environment provides an opportunity for casualty actuaries to increase their prominence by having greater interaction with boards and audit committees. The associated rules and requirements also significantly increase the amount of work that many casualty actuaries (and other professionals) must do, as they help their employers and clients comply with the requirements.

9. Actuarial Organizations Respond to Recent Criticism of Loss Reserving—
   Our top story of 2003 noted the Standard & Poor's article, which stated, "Actuaries are signing off on reserves that turn out to be wildly inaccurate. It's an abysmal track record." The actuarial community is taking these assertions seriously. For example, at the 2004 CAS Annual Meeting, representatives from actuarial organizations in the U.S., Canada, Australia, and the United Kingdom met to discuss various efforts to support the actuary's ability to earn the public's confidence in the profession. At the same time, the CAS Board is working with a task force to prioritize a series of action plans relating to loss reserving. The importance of the success of these efforts was articulated by a number of our survey respondents who opined that, as long as there is a public question regarding our effectiveness in performing all aspects of the basic core function of loss reserving, all other issues, including those described in our Centennial Goal, should be considered secondary. The degree of urgency is illustrated by the situation in the U.K., where Sir Derek Morris has been very critical of the actuarial profession and has proposed a number of potential reforms. The profession must continue, and expand, its self-review, as these issues will not go away on their own.

10. New York Attorney General Spitzer Probes Brokers and Insurers—Eliot Spitzer's probe of contingent commissions and alleged bid rigging, and the subsequent review by other states, highlights this year's theme of increased scrutiny of the insurance industry. Many practices that were an accepted part of the insurance business are now being questioned as to whether there is a conflict of interest. Casualty actuaries can be a key part of disciplined business processes that will withstand scrutiny. These probes also prompt casualty actuaries to question to what extent our own practices would stand up to external scrutiny, and what could or should be done about it now. If casualty actuaries embark on a continual process of self-review and improvement, including responding positively and assertively to the kinds of challenges illustrated by all ten of the top 2004 news stories outlined here, the actuarial profession can position itself and our employers and clients to be above reproach.

The chart summarizes the results of the survey. Fifteen points were awarded to a story that received a first place vote, down to six points awarded to a story for a tenth place vote.

We have compared the consensus top ten stories with the responses of individual survey respondents, to determine the closest predictors of the top stories and their ranks. This year's winner, Paul Braithwaite, selected eight of the consensus top ten stories. Gary Josephson and Ralph Blanchard came in second and third, respectively, based on their selecting seven of the top ten stories and on the closeness of their rankings to the consensus. Thanks to all of those who participated in this year's survey