Institute of Actuaries of India CASE STUDY – DATA QUALITY Sipika Tandon Supriyo Chaki Adarsh Kishor Agarwal A V Karthikeyan Under the guidance of Mr. Saket

Institute of Actuaries of India

CASE STUDY – DATA QUALITYSipika TandonSupriyo ChakiAdarsh Kishor AgarwalA V Karthikeyan

Under the guidance ofMr. Saket Singhal

India Fellowship Seminar - December 2014

Serving the Cause of Public InterestIndian Actuarial Profession

www.actuariesindia.org2

Agenda

Initial considerations

The case study – background and overview

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

www.actuariesindia.org3

Case Study G5 – Data quality

Business objective

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.

– 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”.

Background information

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?

Task at hand – work requirement2

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4

Poor data quality


Suppressing case reserves

Delayed action

Possible adverse impact on various stakeholders

Overstated profits

The line of responsibility

Inaccurate results Reduced confidence on

results/model Requires extra assumptions

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2

4

What is the issue? Clue in the case

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3

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

Very fast recent growth Incurred claim projection

gives reserves consistent to the “wishes” of the company

Actuary became concerned about the data over the last two or three year

4

Affects reserve – danger of insolvency

If it is a consistent issue, then implicitly allowed for

Concern if practice is new

3

Actuary checked with the company and the auditors

a. PCS (3.4)b. APS (8.3)c. AA Regulation (7)d. Draft regulation on claims

reservinge. GN12 (4.2, 6.2)f. GN18 (3.3)g. TAS - D

Relevant guidelines

a. PCSb. GN12 (6.1)c. GN18 (3.1, 4.1)

a. APS (8.10.3)b. AA Regulation ( 8.h.ii)c. Draft regulation on

claims reserving

a. AA Regulation (8.i)

Our view of the case study

PCS : Professional Conduct Standards; APS : Actuarial Practice Standard (APS 21); AA Regulation: IRDA (Appointed Actuary) Regulations, 2000GN : Guidance Notes issued by IFoA; TAS – D : Technical Actuarial Standard on Data produced by Board of Actuarial Standards, UK

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Initial considerations

According to PCS

An actuary giving advice which is formulated in the interests of a particular client must ensure that theclient is aware that the advice is not of broader applicability than intended by the actuary, nor is itnecessarily the advice that would be given to another client or to third parties whose objectives andrequirements may be different.

An actuary shall, in communicating professional findings, identify the client for whom the findings aremade and in what capacity the actuary serves.

ScopeThe consultant should set out thescope and purpose of the certificate

Actuarial certificate stating adequacy of case reserves

Included in published Report & Accounts

Target Audience

The target audience needs to beidentified

Company, Policyholders, Shareholders, Reinsurers, Regulator, Credit rating agencies, Government

A note of caution may be added for users other than the target audience

www.actuariesindia.org

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Poor data quality



Delayed action


Overstated profits




1

2

4


1

2

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4




3




Relevant guidelines

a. PCSb. GN12 (6.1)c. GN18 (3.1, 4.1)


claims reserving


Issue: Poor data quality


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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 qualityConsiderations


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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 areany doubts on the data, the Appointed Actuary is expected to seek assurance from the company as to their accuracy andcompleteness. The Appointed Actuary should also be satisfied that the company is correctly adopting appropriatestatistical 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 :a. All meeting of the management including the director of the insurer.b. 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 qualityRelevant Regulations

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Guidance Notes issued by the Institute and Faculty of Actuaries, UK

The report should indicate thesources of the data the actuaryhas used and make clear what heor she is taking responsibility for.Many of the sources available foruse in general insurance, andconsequently the data also hassome degree of imperfection. Thisdoes not prevent the use of datafrom such sources (withappropriate caveats in the report,if necessary), provided the actuaryis satisfied that the results lookreasonable.

GN 12

The actuary should make it clear atthe outset that he or she mayrequire frequent access tounderwriters and other membersof the company’s staff and that heor she may wish to use the workcarried out by or for the company,including the work of anotheractuary who has worked for thecompany as an employee orconsultant. However since theactuary providing the statementmust take full responsibility for theopinion stated, he or she must besatisfied as to the validity of thematerial used for that purpose.

GN 18

If there are specific features of thebusiness that present potentialconcerns or significantly increasethe uncertainty of therecommendations, beyond thatwhich an informed reader of thereport may reasonably expect,then this fact should be clearlyhighlighted in the correspondingreservations, or limitation ofscope, included in the report.

GN 12


Data qualityRelevant Guidance Notes

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Poor data quality



Delayed action


Overstated profits




1

2

4


1

2

3







4




3




Relevant guidelines

a. PCSb. GN12 (6.1)c. GN18 (3.1, 4.1)


claims reserving


Issue: Reliance on other’s work


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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 workConsiderations

Reliance on other’s workRelevant Guidance Notes

Guidance Notes issued by the Institute and Faculty of Actuaries, UK

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 12

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.

GN 18

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Reliance on other’s workRelevant Guidance Notes and Professional Conduct Standards

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.

GN 33

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.

PCS – Section 8


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Poor data quality



Delayed action


Overstated profits




1

2

4


1

2

3







4




3




Relevant guidelines

a. PCSb. GN12 (6.1)c. GN18 (3.1, 4.1)


claims reserving


Issue: Suppression of case reserves


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Adequacy of claims reserveConsiderations


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

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

General Insurance – Claims Reserving Regulation, 2013 (Draft)

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:

a. Ensuring solvency of the insurer at all time.b. Drawing the attention of the management on to avoid any contravention of the act or prejudice to the

interest of the policyholders.

IRDA (Appointed Actuary) Regulations, 2000


Adequacy of claims reserveRelevant regulations

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Adequacy of claims reserveDifferent 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

— Highlights changes in the strength of case reserves Settlement ratio


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Adequacy of claims reserveDifferent 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


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Poor data quality



Delayed action


Overstated profits




1

2

4


1

2

3







4




3




Relevant guidelines

a. PCSb. GN12 (6.1)c. GN18 (3.1, 4.1)


claims reserving


Issue: Delayed action


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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.


Delayed actionRegulatory guidelines

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Provide certificate after ensuring the reasonableness of the data and methodology

When to be taken? ConsequenceAction

a. For the client, the reserves are certified and the published account will be more credible.

b.For the consulting company, the relationship is retained.

c. Professional confidence will increase on the actuary.

a. Data uncertainties are satisfactorily cleared based on data diagnostics and by preparing reserves in alternative methodology

b.Proved by past reserving adequacy

c. If the data uncertainty is not material or has very small impact on the final reserves

d.When any alternative set of assumption for sensitivity testing did not prove to be significant

Possible course of action - A


Key pointers

a. Methodology and assumptions used in the review, should be statedb. 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. c. Professional misconduct guidelines of Actuaries Act 2006 to be followed.

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Certification of the adequacy of reserves highlighting the uncertainty in the data (with evidence) or any other areas of concern


a. Client may require more explanations and his interest is primarily affected.

b.The consulting company’s relationship is affected.

c. Actuary may need a lot of convincing to do to both the consulting company & the client.

a. When the data uncertainty is proved based on the data supplied.

b.When the explanation from the client is not agreeable.

c. When such uncertainty is clearly identified and the consequences can be quantified with reasonable surety.

d.When there is no other issues like time pressure / data support from the client.

Possible course of action - B


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 2006 to be followed.

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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


CertificationRegulatory guidelines

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Denying to certify citing data qualifications and limitations (with evidence)


a. Difficulty for client, consulting company and for actuary.

b. Ensures that the professional standards are maintained.

c. In the long run, the certification process gains more credibility

a. Failure of reasonableness checks on datab. Information unavailable to verify factsc. Undue influence of the company’s

managementd. Non compliance with legal, regulatory or

professional requirements by the company or its employees

e. Even the peer reviewer (another experienced/qualified person referred to) is in agreement with the issues

f. Time constraints do not allow necessary methods or checks to be carried out (one week in this case)~ PCS (2 – Professional Standards)

Possible course of action - C


Any regulatory/guidance impactThe 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 2006 to be followed.

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References

In preparing this, we have taken assistance from the following:

Insurance Regulatory and Development Authority (Appointed Actuary) Regulations, 2000

http://actuariesindia.org/regulation/Actuaries%20Act%202006.pdf Board For Actuarial Standards, Technical Actuarial Standard D: Data http://actuariesindia.org/downloads/PCS/PCSV_3.pdf http://actuariesindia.org/downloads/APS/IAI_APS21-

AppointedActuaryandGeneralInsuranceBusiness.pdf



Q & A

Documents

Institute of Actuaries of India CASE STUDY – DATA QUALITY Sipika Tandon Supriyo Chaki Adarsh Kishor Agarwal A V Karthikeyan Under the guidance of Mr. Saket