True GRIT: U.K. Task Force Reviews
"How Actuaries Do Things"
Kendra Felisky

My other half (better half? Certainly the larger "half!") likes to use the word synchronicity to explain those weird coincidences that you come across in life. Synchronicity is actually a word created by the Swiss psychologist Carl Jung to describe the alignment of "universal forces" with the life experiences of individuals. Jung believed that many experiences perceived as coincidences were not merely due to chance, but instead reflected the creation of an event or circumstance by the "co-inciding" or alignment of such forces. Jung spoke of synchronicity as being an "acausal connecting principle" (i.e., a pattern of connection that is not explained by causality).

To me this word describes the simultaneous reviews in the U.S. and the U.K. of "how actuaries do things." The CAS produced the Task Force on Actuarial Credibility. The General Insurance Board of the Institute and Faculty of Actuaries commissioned a task force in the early part of 2004 to consider a number of issues arising in relation to general insurance reserving. This was partly driven by the Morris Review of the actuarial profession and also by the perception that recent reserve deficiencies were due to inadequate actuarial methodologies or inadequate actuaries or both. Is it a coincidence that these issues were being considered at the same time on both sides of the pond?

I won't ponder this coincidence further but instead concentrate on the results of the U.K.'s task force. The task force quickly trashed their initial name, GRIT, and became GRIT (General insurance Reserving Issues Taskforce).

Jung believed that many experiences perceived as coincidences were not merely due to chance, but instead reflected the creation of an event or circumstance by the "co-inciding" or alignment of such forces.

GRIT then set up various workstreams investigating such areas as uncertainty and improving methodology. GRIT also consulted with stakeholders, brainstormed issues, and communicated with the membership. In July a draft consultation paper was presented, which is available on the Institute and Faculty's Web site. Feedback on this paper is being sought, particularly through a series of workshops at GIRO in October with a view to a final paper being presented in Spring 2006.

GRIT's overall conclusions and recommendations are summarized under the following headings:

• What Can We Learn from the Past
• Communicating Reality in an Unambiguous Way
• Understanding the Business Better
• More Consistency in the Application of Existing Methods
• Identifying Where our Reserving Methods Need to be Enhanced
• Behavioural Issues and Third Party Influences
• Implementation

What Can We Learn from the Past
The results of the membership-wide survey suggests that most of the members believe that the reserving performance of actuaries has been at least adequate, which differs from the views of our stakeholders and the press. There was differing views as to the causes of reserve deteriorations with some believing deteriorations are due to external factors and others believing they are due to systematic flaws in the actuarial methodology. Statistical analysis of the relationship between profitability and reserve strengthening suggests that there is indeed a link, with companies strengthening reserves in profitable times and vice versa. However, it is impossible to determine whether the movements in reserves are due to changes in actuarial best estimates as companies can and do book amounts different from the actuarial best estimates.

Communicating Reality in an Unambiguous Way
Actuaries should understand and accept that the purpose of an actuarial reserve assessment includes constructing a framework for evaluating reserves that enables non-actuaires to form their own views on both the key assumptions and the level of reserves. GRIT has commissioned a GIRO working party to investigate the methods currently available to quantify reserve uncertainty. Actuarial reports need to disclose more information on the key drivers of uncertainty to help communicate to non-actuaries both the uncertainty itself and why it exists. In addition, the need to improve communication was highlighted.

Understanding the Business Better
GRIT believes that considerable improvements can be readily made to the reserve estimation process through actuaries improving their understanding of the business. Some suggestions are made as to how to improve the homogeneity of reserving classes, which should enhance consistency of the historical development factors. GRIT also stresses the importance of understanding changes to terms and conditions.

More Consistency in the Application of Existing Methods
GRIT believes there is room for improvement and a need for greater consistnecy in the way actuaries apply common reserving methods. For example, there should be less mechanical application of chain ladder methods and more use of judgment in the selection of development factors. Actuarial training should be enchanced and extended to include more on practical issues.

Identifying Where Our Reserving Methods Need to be Enhanced
GRIT recommends that the focus for enhancement and research be on such areas as improving data quality, understanding the business better, and allowing for the underwriting cycle instead of more sophisticated mathematical and statistical methodology. In particular, the underwriting cycle is associated with features and instabilities that actuaries may not have focused on sufficiently, specifically, the lengthening of the claim development profile in the soft market and the failure of rate indices to capture the degree of rate softening.

Behavioral Issues and Third Party Influences
Actuaries need to be more aware of the falliblity in human behavior of anchoring, prospect theory, framing, and overconfidence. Where signficant judgments have to be made, the actuary should usually look for evidence beyond discussion with underwriters, particularly where reserves may be reducing in an soft market.

Implementation
GRIT's recommendations will lead to more work being done by actuaries when carrying out reserving, which will have resource implications. There should be a continued focus on reserving, which is crucially important to general insurance actuaries.

While GRIT has produced a long list of things that actuaries should do differently, they are careful to point out that despite everything, GRIT consistently heard stakeholders say that actuaries play an extremely important role in general insurance. Two memorable comments were:

• "Actuaries are indispensable"
  
• "If actuaries did not exist, we would have to invent them."

The GRIT paper is quite long, but it is eminently readable and very user friendly with many thought-provoking ideas. I strongly urge all actuaries to read it whether you are "synchronized" or not!