1. Management and the Actuary Involvement In Reserve Review Process
Roger Atkinson, FCAS, MAAA
Casualty Actuarial Society Spring Meeting
May 2004

2. Introduction: Transparency of Process
How The Process Evolved
Changing Indications – Need To Explain Internal / External
Increased Need For Transparency: Claim and Actuarial Processes
Increased Need For Predictability
Entire Process Reviewed With Leadership Team

3. Introduction: Transparency of Process
Step 1: Ground Management in Process
Step 2: Ground Management in Key Methods
Step 3: Develop Monitoring Discipline
Step 4: Develop Regular Reporting, With Consistent Language
Desired Outcome: Transparency with Broad Functional Involvement

4. Grounding In Process – Process Map
Segmentation
Data Input
Analysis
Reporting

5. Grounding In Process – Process Map
Segmentation
Data Input
Analysis
Reporting
Understanding of Basic Groupings
Why do segments change?
e.g., emergence of subgroup with different patterns
Organization: AY, UY, PY
Understanding of Segmentation Principles

6. Grounding In Process – Process Map
Segmentation
Data Input
Analysis
Reporting
Data Sources
How Reconciled With Financial Data
Types of Data: Premium, Losses, Counts
Data Security

7. Grounding In Process – Process Map
Segmentation
Data Input
Analysis
Reporting
Methods Used
Sources of Patterns
Initial ELR Development
Diagnostics
How Selections / Recommendations Are Made

8. Grounding In Process – Process Map
Segmentation
Data Input
Analysis
Reporting
Internal
Timing of Analyses
Depth of Analyses
How Report
External
Regulators
Auditors

9. The Analysis Process
Rec.
Data
Define the Process…..

10. The Analysis Process - Stages
Data
Actual Loss
Variance From
Expected
Method
Response
Actuarial
Adjustment
DEPARTURE
FROM DEFAULT
DEFAULT PROCESS
Define the Process…..
Rec.

11. The Analysis Process
The Basic Loss Process

12. The Analysis Process LDF Ultimate . Born-Ferg Ultimate .
Expected Data Point: .35 of Ultimate
Actual Data Point: .5 of Ultimate
Born-Ferg Response: Add difference to Ultimate (1.15)
LDF Response: Multiply point by (1/.35) = 1.43

13. The Analysis Process – Actual vs Expected
Creates Management Interest in Loss Flow Compared
To Reserve Model Expectation / Benchmark
- Measurable More Frequently and Quicker Than Reserve
Reviews (assemble from basic financial data)
- Creates Quicker Resolution of Data Issues
- Interest in Results: Claims, Underwriting
- More Communication With Claims Than Typical In Industry
- Additional Monitors Developed To Assist Analysis .

14. The Analysis Process – Actual vs Expected
But Beware:
- When React to Variance?
- Monitors Do Not Replace Reserve Review
- Anticipate Question: “What Will This Do To The Numbers?”
- Scrutiny of the Expected Losses: Changes Undermine
Credibility
- Will Consume Resources: Actuarial, Claims
- Actuarial Resistance .

15. The Analysis Process – Actual vs Expected
Level of Detail
Build From Lowest Level (Segment By Year)
Reports to Management:
Paid
Reported
Accident / Policy / Underwriting Year
Collapsed Segment Level
Graphs
Narrative With Explanations
Be Complete! .

16. The Analysis Process – Actual vs Expected
The Monthly Discipline
Preliminary Numbers Assembled, Reviewed By Actuaries
- Large variances immediately investigated
Share Data With Business Leaders – Prepare For Questions
General Communication to Senior Leadership, with Narrative
Follow-Up On Additional Questions .

17. The Analysis Process – Actual vs Expected
Considerations
Inclusion of current AY
Ranges for Expected Loss / Control Charts
How Frequently Expected Losses Updated: (YE only, quarterly)
Analysis of Report: Prior to Communication?
Frequency of Report: Weekly, Monthly
Expected Loss Issues – seasonality, “claim days”
Methodology for Expected Calculation – not just emergence
Large vs. Flow vs. Cat Loss – helps explain variation .

18. The Analysis Process – A v E In Reserve Review.
Consistent Discipline Throughout Process

19. The Analysis Process – A v E In Reserve Review.
Analysis Lends Itself to Graphical Representation

20. Lessons Learned From Increased Transparency
Once process is mapped and understood, natural monitors evolve
Increased accountability of actuarial staff
- Judgment more transparent
- Accuracy more transparent
- Consistency: Define default process
The information needs are as granular as ultimate analysis:
- Year
- Segment
- Sub-Segment
Fewer surprises emerge, improving actuarial credibility .