The Top Ten Casualty Actuarial Stories of 2005Based on our annual survey of CAS thought leaders, we have compiled a list of the top ten news stories affecting casualty actuaries in 2005. This listing, as shown in the accompanying chart, touches on two broad themes. First, the increasing impact of catastrophes, both natural and man-made, on our lives, and the implications that these catastrophes have on the insurance industry. This is illustrated by the damages caused by the hurricanes this year, the attempts to void the flood damage exclusions in homeowners' policies, the effort to extend Terrorism Risk Insurance Act (TRIA), and the evolution of catastrophe modeling.
The second broad theme revealed by several stories is the increased focus on the actuarial work product. Stories highlighting this theme are the increased scrutiny of finite reinsurance, the requirement that actuarial opinions include commentary regarding risk of material adverse deviation, the campaign to increase the credibility of actuaries, and the fact that actuaries are now more commonly being sued.
Here's the top ten listing for 2005:
10. TRIA Extension Likely, But Final Form Still Uncertain
The House and Senate have passed two different versions of TRIA, with the final form still uncertain. Actuaries will have a role in modeling, designing, and pricing coverage for exposures not covered by TRIA, and in designing and operating reinsurance mechanisms to handle terrorism exposures.9. Predictive Modeling Extends Beyond Credit Scoring and Beyond Personal Lines
The use of nontraditional criteria for rating purposes has become increasingly popular, as insurers try to find new ways to refine their underwriting process and gain a competitive edge in profitability. The use of credit scoring in personal lines has been the first step in predictive modeling, and the controversy surrounding this use has required actuaries to support the correlation between credit scores and insurance claim frequency/severity. The next challenge is to develop and test the impact of other criteria on pricing, underwriting, and marketing in new lines of business.8. Mississippi Suit to Void Flood Damage Exclusion in Homeowners Policies
Current homeowners insurance rates do not contemplate the extension of coverage for flood damage. Likewise, actuarial rate analyses for all lines of business do not anticipate the retroactive expansion of coverage in general. To the extent that insurers will be held liable for flood claims, every exclusion within every policy could be called into question, requiring the actuary to consider "legislative risk" as well as other kinds of risk.7. Actuaries Increasingly Find Themselves Being Sued
Actuaries are increasingly being held responsible in a legal setting for their work products and the impact of the work products on actuaries' employers and clients. Given the inherent uncertainty and volatility in reserve projections, it is important for actuaries to educate and manage the expectations of the users of their work so that reasonable differences of actual results versus expected are not seen as actuarial malpractice. Continued adherence to professional standards should remain an integral part of every actuarial project.6. Companies Starting to Manage Risk Holistically Through Enterprise Risk Management
There is a significant opportunity for actuaries to contribute to this emerging field in a valuable way. Highlighting the importance of enterprise risk management to the future of the profession, the CAS and SOA have co-sponsored a Risk Management Section. Standard & Poors boosts the importance of ERM by evaluating a company's ERM plan as part of its rating process. Actuaries must be at the forefront of thought leadership on this issue.5. CAS Task Force and the Academy's CRUSAP Campaign to Increase Credibility of Actuaries in the Wake of the Morris Report
The credibility of the actuarial profession continues to be challenged, as demonstrated by the Morris Report. Continued reserve charges demonstrate the need for better pricing and reserving by actuaries of casualty risks. In addition, other professions are threatening to move into areas where actuaries should be taking the lead. Task forces of both the AAA and CAS are creating action plans to deal with these issues. In addition, a marketing campaign has been created that describes actuaries as "The Best-Kept Secret in Business." The success of these efforts is crucial to all of us in the profession as we strive to keep pace with the challenges of the future.4. Evolution of Catastrophe Modeling
Given the increased incidence of hurricanes over the last two years, and the expectation that this trend will only continue, there is a renewed importance for actuaries to recalibrate their catastrophe models so that the models more accurately estimate the expected loss for the underlying exposure. Future modeling will move beyond hurricanes to include terrorism exposures and other lines of business. The fact that existing catastrophe models have not performed as well as expected calls into question the quality of all actuarial models. A reevaluation of the assumptions and methodologies underlying our models will be essential for future pricing and reserving adequacy, and will demonstrate the value of the actuarial contribution to insurer's financial results.3. Actuarial Opinions and Risk of Material Adverse Deviation
Loss reserve opinions signed in 2005 were the first in the United States required to consider comments regarding the Risk of Material Adverse Deviation (RMAD). These opinions require actuaries to do more than just opine that reserves are "reasonable." There is the need to assess, quantify, and provide commentary on any areas where the actuary believes there is a realistic possibility of material variation around the reserve estimates. The goal is to provide better information to investors, regulators, and policyholders. This is an opportunity for actuaries to increase their visibility in a positive way and to provide additional value to the insurance community.2. Increased Scrutiny of Finite Reinsurance
The scrutiny being given to finite reinsurance arrangements by the SEC has put additional focus on the actuarial profession. Actuaries are well equipped to handle the assessment of risk transfer in insurance contracts. There is risk to the credibility of actuaries, however, to the extent that actuaries are seen as having played a significant role in designing reinsurance arrangements that are found to have limited or no transfer of risk. In fact, a couple of prominent actuaries have already received Wells Notices from the SEC, indicating an expectation that the SEC will file a civil suit against the recipient. Favorable resolution of these cases could provide actuaries with a valuable boost in the eyes of the insurance industry.1. Hurricanes Cause Billions in Damages
The year 2005 represented the busiest hurricane season in recorded history for the United States, with 27 named storms and 13 hurricanes. Even more troubling is the expectation from many meteorologists that this is a trend that will continue for the next few decades. The significant potential exposure to hurricanes poses a number of challenges for casualty actuaries, including pricing ("Do we need to reevaluate our catastrophe loads and target ROEs?"), reserving ("Can we rely on claims department estimates of total loss exposure?" or "Will these losses develop differently than historical data?") and assessing capital requirements ("Is a once-in-a-hundred-years scenario appropriate?"). In addition, as noted in Story #4, there is the need to thoroughly examine the assumptions in our catastrophe models to make sure they are going to provide realistic results in the future.In spite of the unprecedented hurricane activity this past year, the industry has been able to withstand the financial impact of these storms. This is a testament to the actions taken in the past by insurers to prepare for such adverse scenarios. The accompanying 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.
Thanks to all of the actuaries who participated in this survey! Your responses are not only useful for this article, but are also used by the CAS in its long-range planning process.
