Page 1 Recording of this session via any media type is strictly prohibited. MATH Matters How Risk Managers Should Use an Actuarial Report Norm Hainlen – Director, Alternative Risk Financing Wood Gutmann & Bogart (Coordinator) Al Rhodes – President and Senior Actuary SIGMA Actuarial Consulting Group, Inc. Tim East – Director, Risk Management The Walt Disney Company

Page 2 Recording of this session via any media type is strictly prohibited. MATH Matters Question…  How do you use the actuarial report?  Do you review the summary?  Do you review the data?

Page 3 Recording of this session via any media type is strictly prohibited. MATH Matters Question…  Do you review the calculations?  How do you use the actuarial report?  Do you grab the first number and close the report?

Page 4 Recording of this session via any media type is strictly prohibited. MATH Matters Not a bad strategy if: 1.You need a number for a financial statement 2.You need the loss pick for a meeting 3.Your broker handles that stuff

Page 5 Recording of this session via any media type is strictly prohibited. MATH Matters A bad strategy if: Actually, that is always a bad strategy – there is a lot more there the MATH is telling you.

Page 6 Recording of this session via any media type is strictly prohibited. MATH Matters Use the actuarial analysis as part of your stewardship report to the CFO, Board, … Use the MATH to show what has happened and what is expected to happen. The losses are x% of the program, so the MATH to get to that x% is important.

Page 7 Recording of this session via any media type is strictly prohibited. MATH Matters - Assumption – You are getting a reserve analysis and a loss projection. - You need at least two numbers – the estimated reserves and the loss pick. - How many more are there?

Page 8 Recording of this session via any media type is strictly prohibited. MATH Matters LOTS – let’s look at the MATH… Look at the reserves first: Reserves = Case Reserves + IBNR

Page 9 Recording of this session via any media type is strictly prohibited. MATH Matters o If the IBNR to case reserve ratio has been increasing, then the reserve position MAY be stronger. o If the ratio is decreasing, then the reserve position MAY be getting weaker.

Page 10 Recording of this session via any media type is strictly prohibited. MATH Matters It is good to know the MATH so you can figure out if a potential problem is looming or if you are now in a stronger position. A large claim can give an unusual ratio. Stronger reserving can give an unusual ratio.

Page 11 Recording of this session via any media type is strictly prohibited. MATH Matters Still looking at reserves: What is your range? There is one whether it is shown or not! It should not be large! It will not give you every possible outcome.

Page 12 Recording of this session via any media type is strictly prohibited. MATH Matters Reserve Range: The range gives you an opportunity to fund something different, but within a reasonable range. The MATH will let you know what is reasonable.

Page 13 Recording of this session via any media type is strictly prohibited. MATH Matters Let’s look at the loss pick: Do you get one number? OK Do you get a range? Better Do you get confidence intervals? Best - MAYBE

Page 14 Recording of this session via any media type is strictly prohibited. MATH Matters Loss Pick (Simple Example): o Pure Loss Rate x Exposures o Exposures should be easy o MATH Matters when calculating the pure loss rate

Page 15 Recording of this session via any media type is strictly prohibited. MATH Matters For each policy period:  Incurred/paid losses are developed to ultimate  Ultimate losses are trended to a common period  Exposures are trended to a common period MATH Matters for each step

Page 16 Recording of this session via any media type is strictly prohibited. MATH Matters  Do you understand how the ultimate losses are calculated?  Are the exposures appropriate and correct?  Are the trend factors reasonable?

Page 17 Recording of this session via any media type is strictly prohibited. MATH Matters Pure Loss Rate: Trended Losses / Trended Exposures  A pure loss rate for each policy period.  How variable? You need this for TCOR!  Is selected rate reasonable?

Page 18 Recording of this session via any media type is strictly prohibited. MATH Matters Loss Pick  How is the range calculated?  Does it seem reasonable?

Page 19 Recording of this session via any media type is strictly prohibited. MATH Matters Loss Pick MATH Matters – what is a confidence interval? The confidence interval tells you the probability an amount will not be exceeded. What is the “correct” percentile?

Page 20 Recording of this session via any media type is strictly prohibited. MATH Matters What do you need to know? + Addition - Subtraction X Multiplication ÷ Division

Page 21 Recording of this session via any media type is strictly prohibited. Take Aways…  TCOR – use projected losses and confidence intervals  Metrics – pure loss rate, frequency, severity  Confidence Interval – choice of program

Page 22 Recording of this session via any media type is strictly prohibited. MATH Matters – The Risk Manager’s View How to receive and access an actuarial report How to use it to drive results within your business

Page 23 Recording of this session via any media type is strictly prohibited. The Actuarial Process/Cycle Advance – Meet and plan before you send the data Scrub – Make sure the data is screened and vetted before the analysis begins Draft – Review the draft before the final to understand the assumptions, selections and trends

Page 24 Recording of this session via any media type is strictly prohibited. Reviewing the Report  Methods – How many methods did the actuary use, and which ones did they rely on?  Changes in Triangles – Don’t rely on the tables alone; discuss the data

Page 25 Recording of this session via any media type is strictly prohibited.

Page 26 Recording of this session via any media type is strictly prohibited.

Page 27 Recording of this session via any media type is strictly prohibited. Reviewing the Report  Methods – How many methods did the actuary use, and which ones did they rely on?  Changes in Triangles – Don’t rely on the tables alone; discuss the data  Other Measures: Case closure rate is a critical metric Loss-cost per exposure trends Loss development by reserve category

Page 28 Recording of this session via any media type is strictly prohibited. Using the Actuarial Report  Translate – Translate the actuarial results into terms that stakeholders can understand  Temper – Actuarial results can be misused or mis-understood; set realistic expectations

Page 29 Recording of this session via any media type is strictly prohibited. The Nature of Variance…

Page 30 Recording of this session via any media type is strictly prohibited. Using the Actuarial Report Translate – Translate the actuarial results into terms that stakeholders can understand Temper – Actuarial results can be misused or mis-understood; set realistic expectations Transform – Select outcomes and adopt metrics that can be used to improve the business results

Page 31 Recording of this session via any media type is strictly prohibited. Take Aways…  Dig In – Work with your actuary and those who supply the underlying data to understand the inputs, assumptions and results  Sort Out – The key metrics that define the true direction of your losses  Present – The results in terms that your organization can understand and act upon

Page 32 Recording of this session via any media type is strictly prohibited. MATH Matters How Risk Managers Should Use an Actuarial Report Questions & Answers Thank You!!