May 16, 2005 From the Actuary's "Best Estimate Range" to "Management's Best Estimate." Which "X" Marks the Spot? Moderator/Panelist: Robert F. Wolf, Principal, Mercer Oliver Wyman Panelists: Roger M. Hayne, Consulting Actuary, Milliman USA CK Stan Khury, Principal, Bass & Khury

Here is the situation. You've completed a reserve analysis Here is the situation. You've completed a reserve analysis. You've provided a point estimate. Management has indicated their desire to book the number "x", which is consistent with its business plan, but falls below your original point estimate. Management is asking for your "best estimate" range around your point estimate in the interest of assessing the reasonableness of "x". This session is intended to offer practical approaches and considerations in determining "best estimate" ranges using actual examples of best practices in determining reasonableness. Discussions will center on defining "reasonableness" in light of our written standards of practice and attempt to answer: Given your estimation of the range, what standards do you now apply to "x"? Does every number within your range constitute a reasonable estimate to carry as "x"? How can you differentiate between reasonable range and total range? Are they the same? As next year's requirements of a Company's Appointed Actuary call for disclosure of both reserve point estimates and reserve ranges in an actuarial opinion summary (AOS) report, these discussions are timely. We welcome audience participation, and views/opinions.

A lot Going On Changes in SEC disclosure rules, (2) Upcoming changes in NAIC reporting rules, (3) Task Force on Reserving Principles, (4) Working Party on the Variability of Loss Reserves. disclosure of both reserve point estimates and reserve ranges in an actuarial opinion summary (AOS) report Task Force on Actuarial Credibility…..Chaired by Pat Teufel First Step Short Term Recommendations – 1-2 Years, Approved by Board and will be issued to the EC for further recommendation, Comment, and Update- Three themes Education to our audience Self-Disciplining More Public Disclosure Actuaries Best Est vs. Managements Best Estimate Disclosure of how and why reserves have adverse development Only the Beginning- Further Discussions on longer Term Recommendations 3+ years

Mandatory Commentary on Diagnostics and Mandatory Disclosures Reasonable estimates are those that are not unreasonable--- Mandatory Diagnostics – all reserve anlayses should consider these diagnostics at all times. Based on the Carried Reserves (Schedule P) Triangles of : Implied Incurred/Ultimate Implied Paid / Ultimate Closed Counts/Reported Counts Average Paid Average Open Implied Average Unpaids My recommended Mandatory Disclosures and Commentaries …Examples If vertical trends in E and F differ materially from vertical trends in D If upward/downward trends in A and B appear any hindsight change in reserves one year hence Threat to surplus or ecomonic equity, et el. e.g. We estimate a 20% chance that surplus would decline by 50% due to the contingent events stated above…. implicit discount in the reserves (Fair Value wave) Stand Back and review what you are saying

Disclosure Discloure Disclosure Disclosure Discloure Disclosure. . let’s push and stretch…and lets do more and more… Opine on Finite Risk Premium Deficiency Reserves Reserves one Year Hence based on Business plan and forecasted profitability or unprofitability one year hence. Opine Domino Effect Reserve Deficiiency Risk  Reinsurers ducking for cover drop in Best Ratings  cannot renew old business  decline in liquidity -- risk of insolvency “”there is a  40% chance that surplus could suffer a 20% drop that could impact new/renewal business writings and hence liquidity in the upcoming year.  ””   In opining on the reasonableness of reserves at 12/31/04, we estimate that as of 12/31/05 reserves could materially deviate by_____  with a probability of m% “

These reflect management’s best estimate Looks Reasonable maybe even conservative

What’s Going On?

Severity on Claims that are settling? Average Paid Severity on Claims that are settling?

Are case reserves keeping up? Are resultant total carried reserves keeping up ?