Managing A Loss Reserving Department and Communicating Results

Bill Burns — Vice President & Actuary

CLRS

September 11, 2006

Managing A Loss Reserving Department and Communicating Results

2 September 11, 2006

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Introduction

Actuarial profession is lacking in management literature

Hundreds of papers on quantitative techniques but only a handful (if that) on managing the loss reserving projects

Gregory Alff — 1993

This session will focus on managing the loss reserving process not the people


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The Big Day arrives and you find yourself in charge of the Loss Reserving Department…

Where do you start?


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Come prepared with a list of questions: Do I have the right staff?

How often do reserve reviews have to be done?

How much time does it take to do a review (in man-hours)?

What are the responsibilities of the individual staff members?

Do I have enough staff?


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Staff Evaluation

Technical skills

Knowledge of company operations

Verbal and written communication skills

Inter-personal skills

Management experience

Professional credentials


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How often are reserve reviews needed?

Depends on company

Size

Public vs private

Management’s needs/wishes

All lines — 2x year

“Major” lines — 4x year

Roll-forward at year-end (especially if a large complex company)


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How long does a review take? Depends on

Staff (size, abilities, etc.)

Quality of data

Depth of analysis

Complexity of book of business

Reinsurance program

Goal: Streamline the process as much as possible so you devote your resources to analysis and not data issues

Don’t make every time the first time


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Typical Department Structure

Chief Actuary

Reserving

PricingCorporat

e

Assistant

Actuaries

Actuarial

Assistants


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Responsibilities — Actuarial Assistants

Students (< 4 exams, 3 – 5 years experience)

“Ground Level”

Gather, scrub and balance data

Generate initial indications

Reserving package

In-house spreadsheets

Produce reports for management

Form and maintain relationships with peers in other departments


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Responsibilities — Assistant Actuaries

Seasoned students to new ACAS, FCAS

“5,000 Foot View”

Check work of actuarial assistants

Challenge assumptions and conclusions (“Smell Test”)

Propose alternative methods

Present results to chief actuary

Bring along your staff!


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Responsibilities — Chief Actuary

Seasoned ACAS, FCAS

Thick skin a must

Scar tissue optional

“10,000 Foot View”

Final word on reserve estimates (point and range)

Communicates results to senior management and B of D

Might write and sign opinions


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Communicating Results — Where are we?

Analysis is done and Chief Actuary has blessed the numbers

A formal report has been produced

The chief actuary now has to talk to a C-level executive (CEO, COO, CFO)


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Formal Report

Not a mystery novel

Conclusions upfront and in plain sight

If the reader wants to go further tell him/her where to find the information


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Formal report should include

Executive summary with conclusions

Breakdown by business segment reviewed, e.g.

Core business by line

Assumed business

ULAE

Methods and key assumptions

Data reconciliation

Tie in with prior analyses


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But formal reports can be hundreds of pages long

Do you really plan to give the entire report to a C-level executive?

What about reports you might have to give to:

Board of Directors

Department heads

Reinsurers

Regulators

Rating agencies

Each will have their own hot buttons as to what is important


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Rules of Thumb

Know your audience

K.I.S.S.

Avoid “Information Pollution”

As Pat Tures so eloquently put it:

“For actuaries a complex exhibit is a work of art. For everyone else it is a thorny tangle you wouldn’t want to touch even with gloves on.”


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XYZ Insurance CompanyProfit Center - Core Business

LOB: All

Loss Reserve Position as of 12/31/XX ($000)

Gross Net

Ult Loss & LAE 150,000 125,500

Paid Loss & LAE 110,000 91,000

Req'd Reserves 40,000 34,500

Carried Reserves 36,000 29,000

Red/(Def) (4,000) (5,500)

% Red/(Def) -11.1% -19.0%


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LOB: Commercial Auto


Gross Net

Ult Loss & LAE 30,000 27,500

Paid Loss & LAE 22,500 20,800



Red/(Def) (300) (400)

% Red/(Def) -4.2% -6.3%


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LOB: Personal Auto


Gross Net

Ult Loss & LAE 35,000 19,500

Paid Loss & LAE 19,500 5,700



Red/(Def) 1,300 (1,100)

% Red/(Def) 7.7% -8.7%


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LOB: Workers' Compensation


Gross Net

Ult Loss & LAE 85,000 78,500

Paid Loss & LAE 68,000 64,500



Red/(Def) (5,000) (4,000)

% Red/(Def) -41.7% -40.0%


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Company XYZ - Workers' Compensation Frequency Trend

4.00

4.50

5.00

5.50

6.00

6.50

7.00

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06


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Company XYZ - Workers' Compensation Severity Trend

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06


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Summary Loss reserving process is vital to the proper

management of insurance companies

A properly and adequately staffed actuarial department is the most critical component in the process

Your success will depend upon:

The value of the information you provide

How you present this information

Your track record

Communicate effectively and document your work

Documents

Managing A Loss Reserving Department and Communicating Results