1. Math 479 / 568 Casualty Actuarial Mathematics Fall 2014 University of Illinois at Urbana-Champaign Professor Rick Gorvett Session 1: Introduction and Overview August 26, 2014

2. Agenda Syllabus Moi The actuarial profession The casualty actuarial profession The P/C insurance industry

3. Syllabus Course goals and context Class schedule –Readings –Exams –Assignments Projects and “Engagement” Grading

4. Syllabus (cont.) “Engagement” –This is a participatory course Elements –Class participation –Current events –Case studies –Small projects –Social media (e.g., Twitter)

5. Me MBA and PhD in Finance FCAS, ASA, CERA Former practicing casualty actuary CAS Board of Directors Editor-in-Chief, Variance (I wish…)

6. What is an Actuary? The Technical Definition Someone with an actuarial designation Property / Casualty: –FCAS: Fellow of the Casualty Actuarial Society –ACAS: Associate of the Casualty Actuarial Society Life: –FSA: Fellow of the Society of Actuaries –ASA: Associate of the Society of Actuaries Other: –EA: Enrolled Actuary –MAAA: Member, American Academy of Actuaries

7. What is an Actuary? Better Definitions “ One who analyzes the current financial implications of future contingent events ” - p.1, Foundations of Casualty Actuarial Science “ Actuaries put a price tag on future risks. They have been called financial architects and social mathematicians, because their unique combination of analytical and business skills is helping to solve a growing variety of financial and social problems. ” - p.1, Actuaries Make a Difference

8. Membership Statistics (Nov., 2012) Casualty Actuarial Society: –Fellows: 4,015 –Associates: 1,614 –Total: 5,629 Society of Actuaries: –Fellows:14,187 –Associates: 9,111 –Total:23,298

9. Casualty Actuaries by Type of Employment Insurance companies:2,550 Reinsurers: 546 Consultants: 890 Organizations serving insurance: 318 Brokers and agents: 120 Government: 93 Academic: 24 Other: 738 Retired: 350

10. CAS Exams – Advanced Topics Ratemaking Loss reserving Regulation Financial reporting Estimation of liabilities Enterprise risk management Insurance company valuation Advanced ratemaking Financial risk and rate of return Exam 5 Exam 6 Exam 7 Exam 8 Exam 9

11. History of the CAS Founded in 1914 –(Big plans for the centennial in NY, Nov. 2014!) –Initial concern: workers compensation (introduced in 1911) Functions: –Membership standards (e.g., exams, code of conduct) –Communications with public –Seminars, research In academia, still the minority presence

12. Traditional Actuarial Functions Loss reserving –Co. ’ s policyholders have had “ occurrences ” (or “ incidents ” or “ claims ” ) –Actuary determines the aggregate dollars that will ultimately be paid out on those occurrences Ratemaking –A “ risk ” (or “ insured ” or “ policyholder ” ) has an exposure to loss –Actuary determines the “ rate ” (cost per unit of exposure) –“ Premium ” = exposure × rate

13. Recent Developments in Actuarial Practice Risk & return, and other financial applications –E.g., ROE, ALM, insurance securitization Dynamic financial analysis –An approach to modeling the interaction between insurance and financial operations Enterprise risk management –Holistic approach to identifying, quantifying, and managing risk

14. Other Emerging Developments Statistics –Predictive modeling –Big data Modeling –Catastrophe –Behavioral Financial reporting and regulation

15. How Well Do We Do All This? “ Insurance Actuaries – A Crisis of Credibility ” –Issued by Standard & Poor ’ s, November, 2003 Some quotes: –“ Perpetual additions to reserves are an indication that all is not well with insurers ’ assessments of their future payouts, but it is time to examine how actuaries contribute to the problem, according to Standard & Poor ’ s analysts. ” –“ ‘ Actuaries are signing off on reserves that turn out to be wildly inaccurate, ’ … ” –“ ‘ …reserve shortfalls don ’ t just happen overnight. What happened to all the reserving opinions signed by actuaries in prior periods? ’ ”

16. The Actuarial Profession ’ s Response CAS – Memorandum summarizing visit with S&P: “ S&P acknowledged that they deliberately used flamboyant language in the article in order to get the attention of the reader. As strange as it seems, they say they did not want to impugn actuaries. In fact, their concern is that the voice of the actuary (internal or external) is not being heard by company managements. ” AAA news release: S&P report is “ fundamentally flawed. ”

17. The Property / Casualty Insurance Industry Industry facts and numbers Companies Lines of business Very nice resource: Insurance Information Institute (iii) website – www.iii.org

19. Next Time Risks and Risk Theory Risks and risk management –Description of “ risk ” –Management of risk –Control and financing of risk Risk theory –Utility theory –Ruin theory –Solvency issues