Agenda The case study – background and overview Initial considerations

Agenda The case study – background and overview Initial considerations
Our view of the case study Issues surrounding the case study Poor data quality Reliance on other’s work Suppression of case reserve Delayed action Possible course of action

Case Study G5 – Data quality
Business objective 1 We are representing the consulting actuary to a medium sized insurance company that has grown rapidly in recent years. Part of our engagement is to provide an actuarial certificate confirming the adequacy of the claims reserves. This certificate is included in the published Report & Accounts. Background information Have become concerned about the data quality over the past two to three years Heard market rumors that the company is suppressing case reserves in order to improve results Staff turnover in the claims department is abnormally high Two months ago the company's founder resigned as CEO “to spend more time with his family”. Task at hand – work requirement 2 After raising concerns on data quality, Company and it’s Auditors have confirmed in writing about the accuracy of the data The incurred claims projections give reserves consistent with those the company wishes to book The Finance Director has just phoned to remind that he needs the certificate by the end of the week. What would we do?

Our view of the case study
What is the issue? Clue in the case Relevant guidelines PCS (3.4) APS (8.3) AA Regulation (7) Draft regulation on claims reserving GN12 (4.2, 6.2) GN18 (3.3) TAS - D 1 Inaccurate results Reduced confidence on results/model Requires extra assumptions Medium sized insurer- grown rapidly in recent years. Data quality is a suspect over last 2/3 years Claims staff leaving means more new claim handlers Poor data quality Reliance on other’s work Suppressing case reserves Delayed action 1 2 The line of responsibility Actuary checked with the company and the auditors PCS GN12 (6.1) GN18 (3.1, 4.1) 2 3 3 Affects reserve – danger of insolvency If it is a consistent issue, then implicitly allowed for Concern if practice is new Very fast recent growth Incurred claim projection gives reserves consistent to the “wishes” of the company APS (8.10.3) AA Regulation ( 8.h.ii) Draft regulation on claims reserving 4 4 Possible adverse impact on various stakeholders Overstated profits Actuary became concerned about the data over the last two or three year AA Regulation (8.i) PCS : Professional Conduct Standards; APS : Actuarial Practice Standard (APS 21); AA Regulation: IRDA (Appointed Actuary) Regulations, 2000 GN : Guidance Notes issued by IFoA; TAS – D : Technical Actuarial Standard on Data produced by Board of Actuarial Standards, UK

Initial considerations
According to PCS An actuary giving advice which is formulated in the interests of a particular client must ensure that the client is aware that the advice is not of broader applicability than intended by the actuary, nor is it necessarily the advice that would be given to another client or to third parties whose objectives and requirements may be different. An actuary shall, in communicating professional findings, identify the client for whom the findings are made and in what capacity the actuary serves. 1 2 The consultant should set out the scope and purpose of the certificate Target Audience The target audience needs to be identified Scope Actuarial certificate stating adequacy of case reserves Included in published Report & Accounts Company, Policyholders, Shareholders, Reinsurers, Regulator, Credit rating agencies, Government A note of caution may be added for users other than the target audience

Issue: Poor data quality

Data quality Considerations
Concern about quality of data There is always some degree of imperfection in the data. Extent of imperfection and reasonability of results needs to be considered Complete access to underwriters, claims department etc. and to all information and documents to ensure the reliability of the data Adjustments could be made to improve reliability of data Reasonableness checks to be carried out on the data and documented Market rumors should not be completely relied upon, but should be tested against the facts available Other factors High staff turnover in claims department should have impacted the data quality CEO resigning can also be looked under suspicion which can potentially impact the management of appropriate quality of data Such factors add to uncertainty and are potential concerns and hence must be clearly accounted for and highlighted

Data quality Relevant Regulations
PCS 3 (Standard for advice) An actuary must consider the extent to which it is appropriate to carry out investigations to assess the accuracy and reasonableness of any data being used. The advice should normally include an explanation or qualification if the actuary has any reservations about the reliability of the data. APS 21 – Section 8 (Actuarial investigations) Appointed Actuary should be satisfied as far as possible that the data are accurate, reliable and consistent. If there are any doubts on the data, the Appointed Actuary is expected to seek assurance from the company as to their accuracy and completeness. The Appointed Actuary should also be satisfied that the company is correctly adopting appropriate statistical formats and procedures and that adequate documentation exists in respect of them. IRDA (Appointed Actuary) Regulations, 2000 (Powers of Appointed Actuary) The AA is entitled to : All meeting of the management including the director of the insurer. To speak and discuss on any matter, at such meeting – that may affect the solvency of the insurer or on which actuarial advice is necessary. TAS D (UK specific Technical Actuarial Standard) When data that is required is materially incomplete or inadequate, an assessment shall be made to determine whether the reliability of the data can be improved by adjusting or supplementing it. The treatment of, or action taken for, incomplete or inaccurate data shall be documented.

Data quality Relevant Guidance Notes
Guidance Notes issued by the Institute and Faculty of Actuaries, UK GN 12 GN 18 GN 12 The report should indicate the sources of the data the actuary has used and make clear what he or she is taking responsibility for. Many of the sources available for use in general insurance, and consequently the data also has some degree of imperfection. This does not prevent the use of data from such sources (with appropriate caveats in the report, if necessary), provided the actuary is satisfied that the results look reasonable. The actuary should make it clear at the outset that he or she may require frequent access to underwriters and other members of the company’s staff and that he or she may wish to use the work carried out by or for the company, including the work of another actuary who has worked for the company as an employee or consultant. However since the actuary providing the statement must take full responsibility for the opinion stated, he or she must be satisfied as to the validity of the material used for that purpose. If there are specific features of the business that present potential concerns or significantly increase the uncertainty of the recommendations, beyond that which an informed reader of the report may reasonably expect, then this fact should be clearly highlighted in the corresponding reservations, or limitation of scope, included in the report.

Issue: Reliance on other’s work

Reliance on other’s work Considerations
Confirmation on data accuracy Concerns have been raised with the company who have assured in writing that the data are accurate. After speaking with auditors, they have also confirmed in writing that they are happy with the data. Extent of responsibility should be made clear Limited reliability on the confirmations unless specifically agreed upon Ideally, despite of the confirmations reasonable checks on the data should still be carried out Any deviations should be highlighted along with proper reasons and evidences

Reliance on other’s work Relevant Guidance Notes
Guidance Notes issued by the Institute and Faculty of Actuaries, UK GN 12 The actuary may need to rely on or utilize work of other professionals. If there is a risk of confusion as to the division of responsibilities between the actuary and the other persons or organizations, the respective responsibilities should be made clear in the report. GN 18 The actuary should obtain assurances from the company as to the accuracy and completeness of the data provided. The actuary should review all key data for reasonableness but may otherwise rely upon the company in this respect. The actuary will need to amend the wording of the reference to data if he or she encounters Anything during the course of the work that gives rise to any material concerns with regard to accuracy of the data, and the company is unable to resolve these concerns satisfactorily. The relationship between management, underwriters, and auditors can be complex. The actuary should make clear his or her relationship with each of these parties and the extent to which he or she has used information obtained from them or relied on work undertaken by them. The actuary should not rely on the auditor unless there is a specific agreement for such reliance. 12

Reliance on other’s work Relevant Guidance Notes and Professional Conduct Standards
GN 33 It is expected that, in most situations: Actuary calculates independent estimation of the reserves and compare with those established by the syndicate. In other situations, the actuary’s work may not include independent estimation of reserves, but rather constitute a review of the methodology and assumptions used by someone else (e.g. the syndicate’s own actuarial or other staff) in estimating the reserves. This practice is acceptable, provided the actuary signing the SAO is willing to accept personal responsibility for the opinion stated, based on the work reviewed. In these situations the Report should include an explanation of the work performed by the actuary signing the SAO and include details of the work performed by the other party. PCS – Section 8 Members must avoid any action that would unfairly injure the professional reputation of any other member. Criticism of one member’s work by another member is acceptable, provided that the criticism is properly reasoned and believed to be justified. Where criticism of another member’s work is made in the context of any form of publicity and whether in relation to specific instances or in general, care must be taken to acknowledge that other members may quite properly hold different professional opinions and that special circumstances may exist in any particular case. 13

Issue: Suppression of case reserves

Adequacy of claims reserve Considerations
It is expected that in most situations, certification should/would include: Independent estimation of reserves by actuaries A review of methodology and assumptions used by someone else Claim reserves comprises of: (APS 21): Reported claims - Where estimate of loss has been determined IBNER – Where estimate of loss has not been fully assessed Incurred but not reported claims (IBNR) Reopened claims

Adequacy of claims reserve Relevant regulations
General Insurance – Claims Reserving Regulation, 2013 (Draft) Reserve for outstanding claims shall be determined in the following manner in consultation with the claims department and certified by the auditor: Amount of outstanding is known, provide in full. Or ‘case by case’ method and allow for changes in the settlement pattern, average claims amount, expenses & inflation etc., provided that standard reserving practices and methodologies are recommended by the AA. Need to consider: nature of insured object claims made so far jurisdiction changes in policy limits/ excess coinsurance , the earlier history of lead co-insurer IRDA (Appointed Actuary) Regulations, 2000 According to the IRDA (AA) regulations, the actuary should ensure that the actuarial principles have been used in the calculation of reserves. In larger sense, the duties of appointed actuaries include: Ensuring solvency of the insurer at all time. Drawing the attention of the management on to avoid any contravention of the act or prejudice to the interest of the policyholders. 16

Adequacy of claims reserve Different analyses (1/2)
Different methods 1 Experience based methods Chain ladder method (Incurred amounts/ Paid amounts) etc. Exposure based methods Loss Ratio Method Bornhuetter Ferguson Method etc. Diagnostic Tests 2 Paid to Incurred ratio or Case estimates to Incurred ratio Indicates the strength of the case estimates Average outstanding case estimate Highlights changes in the strength of case reserves Ratio of IBNR to case estimates Gives a feel for the outstanding claims and the uncertainty relating to them Paid/Incurred Claims Development Patterns Settlement ratio

Adequacy of claims reserve Different analyses (2/2)
Other Analyses 3 Comparison of results with respect to benchmarks Industry or market sources Other classes of business that are closely related Similar portfolios within the actuary’s experience Utilization of IBNER & IBNR against earlier years Other methods to establish the reasonability of results are: Seek advice from an approved/experienced person for e.g. an actuary responsible for preparing the report on FCR of the company Comparison of estimated solvency ratio with the previous years (According to the AA Regulations, AA should ensure solvency at all times) Bootstrapping – stochastic reserving to calculate reserve variability

Issue: Delayed action Delayed action What is the issue?
Clue in the case Relevant guidelines PCS (3.4) APS (8.3) AA Regulation (7) Draft regulation on claims reserving GN12 (4.2, 6.2) GN18 (3.3) TAS - D 1 Inaccurate results Reduced confidence on results/model Requires extra assumptions Medium sized insurer- grown rapidly in recent years. Data quality is a suspect over last 2/3 years Claims staff leaving means more new claim handlers Poor data quality Reliance on other’s work Suppressing case reserves Delayed action 1 2 The line of responsibility Actuary checked with the company and the auditors PCS GN12 (6.1) GN18 (3.1, 4.1) 2 3 3 Affects reserve – danger of insolvency If it is a consistent issue, then implicitly allowed for Concern if practice is new Very fast recent growth Incurred claim projection gives reserves consistent to the “wishes” of the company APS (8.10.3) AA Regulation ( 8.h.ii) Draft regulation on claims reserving 4 4 Possible adverse impact on various stakeholders Overstated profits Actuary became concerned about the data over the last two or three year AA Regulation (8.i) PCS : Professional Conduct Standards; APS : Actuarial Practice Standard (APS 21); AA Regulation: IRDA (Appointed Actuary) Regulations, 2000 GN : Guidance Notes issued by IFoA; TAS – D : Technical Actuarial Standard on Data produced by Board of Actuarial Standards, UK

Appointed Actuary Regulation – Section 8
Delayed action Regulatory guidelines Appointed Actuary Regulation – Section 8 Appointed Actuary has duty to draw the attention of the management and inform the IRDA in writing his or her opinion, within a reasonable time, whether, - Insurer has contravened the Act or any other Acts; The contravention is of such a nature that it may significantly affect the interests of the owners or beneficiaries of policies issued by the insurer.

Possible course of action - A
When to be taken? Consequence Provide certificate after ensuring the reasonableness of the data and methodology Data uncertainties are satisfactorily cleared based on data diagnostics and by preparing reserves in alternative methodology Proved by past reserving adequacy If the data uncertainty is not material or has very small impact on the final reserves When any alternative set of assumption for sensitivity testing did not prove to be significant For the client, the reserves are certified and the published account will be more credible. For the consulting company, the relationship is retained. Professional confidence will increase on the actuary. Key pointers Methodology and assumptions used in the review, should be stated Any change in circumstances from the data as at date to the certificate publishing date, which might affect the reasonable estimation of reserves, should be indicated. Professional misconduct guidelines of Actuaries Act to be followed.

Possible course of action - B
When to be taken? Consequence Certification of the adequacy of reserves highlighting the uncertainty in the data (with evidence) or any other areas of concern When the data uncertainty is proved based on the data supplied. When the explanation from the client is not agreeable. When such uncertainty is clearly identified and the consequences can be quantified with reasonable surety. When there is no other issues like time pressure / data support from the client. Client may require more explanations and his interest is primarily affected. The consulting company’s relationship is affected. Actuary may need a lot of convincing to do to both the consulting company & the client. Key pointers a. Clear disclosure of the data uncertainty and its consequence. b. If quantifiable, the level of uncertainty and possible consequence on the final reserves calculated to be stated. c. Professional misconduct guidelines of Actuaries Act to be followed.

Certification Regulatory guidelines
The Actuaries Act, 2006 Professional misconduct guidelines (as per Actuaries Act 2006) should be taken care of while preparing the certificate Responsibility and scope of work should be specified Appropriate caveats with respect to data and reserves should be included Particular reference to circumstances that might add to uncertainty Should be noted that highlighting uncertainty does not constitute qualification Should not fail to disclose any material fact, or any material misstatement or any material departure from the generally accepted procedure

Any regulatory/guidance impact
Possible course of action - C Action When to be taken? Consequence Denying to certify citing data qualifications and limitations (with evidence) Failure of reasonableness checks on data Information unavailable to verify facts Undue influence of the company’s management Non compliance with legal, regulatory or professional requirements by the company or its employees Even the peer reviewer (another experienced/qualified person referred to) is in agreement with the issues Time constraints do not allow necessary methods or checks to be carried out (one week in this case)~ PCS (2 – Professional Standards) Difficulty for client, consulting company and for actuary. Ensures that the professional standards are maintained. In the long run, the certification process gains more credibility Any regulatory/guidance impact The consulting actuary should inform the Board of Directors of the company about the key issue in order to sensitize them about the potential danger of ignoring it. Professional misconduct guidelines of Actuaries Act to be followed.

In preparing this, we have taken assistance from the following:
References In preparing this, we have taken assistance from the following: Insurance Regulatory and Development Authority (Appointed Actuary) Regulations, 2000 Board For Actuarial Standards, Technical Actuarial Standard D: Data AppointedActuaryandGeneralInsuranceBusiness.pdf

Agenda The case study – background and overview Initial considerations

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