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Reserve Adequacy and the Underwriting Cycle

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Reserve Adequacy and the Underwriting Cycle. Key indicators that RAUC is significant issue: ... cycle-driven reserving management is a longstanding phenomenon, ... – PowerPoint PPT presentation

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Title: Reserve Adequacy and the Underwriting Cycle


1
Reserve Adequacy and the Underwriting Cycle
  • Stephen T. Morgan
  • CAS 2004 ANNUAL MEETING
  • Montreal November 15, 16, 17
  • General Session

2
Reserve Adequacy and the Underwriting Cycle
  • Moderator Steve Morgan ACAS, MAAA
  • Vice President
  • Clarendon Insurance Group
  • Panelists Meyer Shields FCAS, MAAA
  • Analyst
  • Legg Mason Wood Walker, Inc.
  • Mike Angelina ACAS, MAAA
  • Consulting Actuary
  • Towers Perrin

3
Reserve Adequacy and the Underwriting Cycle
  • Key indicators that RAUC is significant issue
  • Many companies issuing news releases noting
    significant reserve increases
  • Many published reports on industry reserve
    inadequacy/adequacy (SP, A.M. Best, Morgan
    Stanley, and Fitch)
  • Legislative enactments with implications for
    reserving (Sarbanes-Oxley)
  • Regulatory actions with implications for
    reserving (reserve opinions, data testing
    requirement, department audits and oversight)
    and
  • Actuarial response (training, improved reserving
    techniques, and software).

4
Reserve Adequacy and the Underwriting Cycle
  • Key questions to be asked about reserving
  • Have actuarial techniques kept up with the times?
  • Are current regulatory guidelines sufficient to
    ensure a reasonable probability of reserve
    adequacy?
  • Are current ethical guidelines and policing for
    actuaries sufficient?
  • Do companies have sufficient internal controls?
    and
  • Is data quality or lack thereof a hidden cause of
    missing the reserving mark?

5
Reserve Adequacy and the Underwriting Cycle
  • Have actuarial techniques kept up with the times?
  • Techniques developed BC (Before Computers) may
    not be up to reasonably projecting reserves in
    such a complex environment
  • Sampling theory teaches us how to determine the
    probability of pulling a red or blue ball from a
    population of what we think only includes red and
    blue balls. What happens when we pull a purple
    ball or even a black ball? How can we know ahead
    of time?
  • Can actuarial techniques ever be successfully
    used to estimate reserves when they are impacted
    by factors like case law and legislation?
  • Does history really ever repeat itself? and
  • Can all the things that go wrong with data be
    picked up in actuarial techniques?

6
Reserve Adequacy and the Underwriting Cycle
  • What others are saying
  • A.M. Best (October 4, 2004)
  • Despite the considerable reserve charges
    through year-end 2003, which totaled almost 47
    billion over the past three calendar years, A.M.
    Best believes the industrys overall carried
    reserve position remains deficient.
  • .reserves are up to 67 billion
    deficient.38.5 billion is related to unfunded
    asbestos and environmental.
  • While actuaries use their best professional
    judgment in estimating reserves, there is a wide
    degree of variability inherent in loss reserves.
  • Management teams may weaken reserves with the
    intention of strengthening reserves.when
    conditions improve.

7
Reserve Adequacy and the Underwriting Cycle
  • What others are saying (continued)
  • Morgan Stanley (May 12, 2004)
  • .we think the days of big-bath reserve charges
    are quickly fading.
  • At 80 billion, our estimated industry shortfall
    is at its lowest level in several years.
  • .insurers have been harvesting the gains of the
    hard market more quickly than in cycles past.
  • .nearly 5 billion of reserves from accident
    year 2002 were released in calendar year 2003.
  • Fitch Ratings (November 19, 2003)
  • .that property/casualty was sharply
    underpriced.and..companies do not have a firm
    handle on underwriting loss costs.
  • Fitch believes.reserving shortfalls.are
    attributable to a failure in the actuarial
    process as opposed to purposeful cheating
  • Often despite best efforts, management is simply
    wrong because current established actuarial
    processes are unable to assess ultimate loss
    costs..
  • Although cheating is highly troublesome,.reser
    ving shortfalls have increasingly been the result
    of the actuaries simply being wrong,and that
    generally actuaries do a relatively poor job in
    predicting future trends not yet evident in
    historical loss patterns.

8
Reserve Adequacy and the Underwriting Cycle
  • What others are saying (continued)
  • Standard Poors (May 10, 2004)
  • Insurers tend to under-report reserves during
    soft pricing periods and then build up reserves
    as markets harden.
  • While some reserving error is explained by
    simple uncertainty, a good deal is caused by
    deliberate earnings management.
  • .cycle-driven reserving management is a
    longstanding phenomenon,..
  • Insurance companies also often swap fund between
    reserves.to manage earnings rather than
    establish adequate reserves.
  • Standard Poors (November 19, 2003)
  • Actuaries are signing off on reserves that turn
    out to be wildly inaccurateIts an abysmal
    record.
  • But reserve shortfalls dont just happen
    overnight. What happened to all of those reserve
    opinions.?
  • Analysts also point to the convenient
    discovery.of a reserve surplus in one line of
    business that masks deficiencies in another.
  • It SP has also generally found its own
    relatively simplistic models are more reliable
    than legions of actuaries.

9
Reserve Adequacy and the Underwriting Cycle
  • The data is in the details.
  • Apologies to Anonymous
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