What does an Actuary Really Do? n An Actuary’s primary job is to calculate expected Insurance Losses. n Examples: u What is the average Physical Damage to a Vehicle registered in Connecticut? (SEVERITY) u What is the probability of having a car accident in Connecticut? (FREQUENCY)

How does an Actuary Project Insurance Losses? n An Actuary uses history to try and project the future. For Example: The Connecticut Population has been growing 1% per year on average for the last 10 years. An actuary would then project that next year it will grow another 1%.

How Does an Actuary Begin? n DATA u In order to use history to project the future, the actuary must have historical data from which to project. F Example: A hospital is looking for Medical Malpractice Insurance. The hospital must provide the insurance company a loss history of at least 10 years of data. F The data is provided based on insurance policy years. An insurance policy covers losses from accidents that occur during the year. F Frequently the data is provided in hard copy paper print outs. The actuary must then manually enter the loss data into a spreadsheet or computer program in order to work with it.

Once the Data is Available, what kind of analysis does the actuary do? n Step 1 – Identify any loss cost trends. u Loss cost trends are made up of changes in severity of claim as well as changes in frequency of claim. u If the data isn’t sufficient to calculate trends directly, the actuary may use industry default trends such as those promulgated by ISO (Insurance Services Office).

LOSS DEVELOPMENT n Step 2 –The concept of Loss Development is the Key to a casualty actuary’s work. F Insurance losses are not necessarily reported to the insurance company when they occur. For example, in hospital malpractice a baby who is born with a defect due to malpractice is allowed to sue the hospital directly when he or she reaches the age of 18. So the insurance company may have to wait 18 years to know if there will be a claim. F Question: Is 10 years of data sufficient to project Hospital Malpractice losses?

Loss Development Triangle n Data is formatted into what is called a Loss development triangle. n If you are trying to project the losses that are going to OCCUR next year, which is the trigger for the insurance policy, then the data is sorted by “accident year”.

Development n Next the data is shown at “Annual Evaluations”. This shows what the losses for a single accident year are at the end of each subsequent calendar year. n Why do the losses change each year? u When a claim is reported, the insurance company claims department puts up a claim reserve. The reserve is the claims’ adjusters best estimate of what they think the claim is worth. u If the claim settles for something different than what the adjuster thought, then the claim develops either up or down.

SPREADSHEET TIME! n Loss Development Factors n Factors to Ultimate n Ultimate Losses