Reserving interaction with U/W and Marketing A Small Company perspective Barry Bablin, FCAS MAAA Farm Family Insurance Company Glenmont, NY

How does it happen?? b Information flow starts with monthly meeting to set IBNR reserves senior level management from Actuarial, Underwriting, Claims, Financesenior level management from Actuarial, Underwriting, Claims, Finance review overall company operation as well as any emerging trendsreview overall company operation as well as any emerging trends valuable source of exchange of ideas, perceptions and informationvaluable source of exchange of ideas, perceptions and information

Types of Issues b NY Labor Law Section 240 claims spike in development on 4-5 year old claimsspike in development on 4-5 year old claims worked with U/W and Marketing to limit the types of businesses written and significant restrictions on use of Additional insured endorsementsworked with U/W and Marketing to limit the types of businesses written and significant restrictions on use of Additional insured endorsements

b Homeowners - guaranteed replacement cost endorsement/Insurance to Value poor results in HO led to review of insured values and use of GRC endorsementpoor results in HO led to review of insured values and use of GRC endorsement found (surprise!) that values were in many cases out of date - exacerbating problem of GRC endorsementfound (surprise!) that values were in many cases out of date - exacerbating problem of GRC endorsement potential for settlements significantly greater than Cov. A amount results in possibility of further development - needs to be accounted for!potential for settlements significantly greater than Cov. A amount results in possibility of further development - needs to be accounted for! Types of Issues

Types of Issues Types of Issues b Overall perception of what U/W and Marketing view as the current state of the cycle currently perception is that “hard market” conditions continue to existcurrently perception is that “hard market” conditions continue to exist Underwriters less generous with various premium credits - influences loss ratio assumptions in any reserving methodsUnderwriters less generous with various premium credits - influences loss ratio assumptions in any reserving methods general feedback from agency force - “we’re way out of line with the competition” may suggest cooling of exposure growth - possible influence any reserving methods based on exposuregeneral feedback from agency force - “we’re way out of line with the competition” may suggest cooling of exposure growth - possible influence any reserving methods based on exposure

b Agent Compensation - tied directly to IBNR reserve selection as commissions are based on loss ratios, agents see this mysterious “IBNR” figure in commission statementsas commissions are based on loss ratios, agents see this mysterious “IBNR” figure in commission statements most don’t understand it!most don’t understand it! Creates a sensitivity to monthly changes as they directly impact individuals livelihoodCreates a sensitivity to monthly changes as they directly impact individuals livelihood be prepared to defend selection!!be prepared to defend selection!! Types of Issues

b Actuaries perform both pricing and reserving roles have benefit of perspective of both sides of actuarial practicehave benefit of perspective of both sides of actuarial practice not sure where one role ends and the other beginsnot sure where one role ends and the other begins Advantages of Small Company Environment

b First hand access to key U/W, Marketing, Claims, and Finance personnel physically all located in same buildingphysically all located in same building sit on many of the same committees - promotes continuous flow of information that can be utilized in setting reservessit on many of the same committees - promotes continuous flow of information that can be utilized in setting reserves get up to date information on:get up to date information on: –types of new business –areas of growth and decline Advantages of Small Company Environment

b Existence of one database which supplies both information for both pricing and reserving chance for fewer errors in moving data in/out of “reserve” database and/or “ratemaking” databasechance for fewer errors in moving data in/out of “reserve” database and/or “ratemaking” database Advantages of Small Company Environment

Disadvantages of Small Company Environment b Actuaries perform both pricing and reserving roles “My assumptions couldn’t possibly be wrong!!”“My assumptions couldn’t possibly be wrong!!” Lack of other actuarial expertise puts lots of risk in one actuary’s opinionLack of other actuarial expertise puts lots of risk in one actuary’s opinion

b First hand access to key U/W, Marketing, Claims, and Finance personnel “Your lying eyes!”“Your lying eyes!” may not look objectively at results and pay excessive heed to “rosy scenarios” of key playersmay not look objectively at results and pay excessive heed to “rosy scenarios” of key players Disadvantage of Small Company Environment

b Lack of credibility of data when is a trend a trend and not just “noise”??when is a trend a trend and not just “noise”?? Looking at development specific to classes, territories, or other subsets becomes an excersize in careful use of actuarial judgementLooking at development specific to classes, territories, or other subsets becomes an excersize in careful use of actuarial judgement Disadvantage of Small Company Environment

b Lack of human resources to analyze the many different aspects of reserve development need to focus on issues most important to company managementneed to focus on issues most important to company management may not have sufficient technical expertise to apply newer more sophisticated methodsmay not have sufficient technical expertise to apply newer more sophisticated methods Disadvantage of Small Company Environment

QUESTIONS??