Lights! Camera! Action!A Sequel

MAF Spring Meeting

Committee On Professionalism EducationApril 11, 2014

Antitrust NoticeThe Casualty Actuarial Society is committed to adhering strictly to the letter and spirit of the antitrust laws. Seminars conducted under the auspices of the CAS are designed solely to provide a forum for the expression of various points of view on topics described in the programs or agendas for such meetings.

Under no circumstances shall CAS seminars be used as a means for competing companies or firms to reach any understanding – expressed or implied – that restricts competition or in any way impairs the ability of members to exercise independent business judgment regarding matters affecting competition.

It is the responsibility of all seminar participants to be aware of antitrust regulations, to prevent any written or verbal discussions that appear to violatethese laws, and to adhere in every respect to theCAS antitrust compliance policy.2

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Legal Disclosure

The views expressed by the panelists are their own and may not necessarily reflect those of their respective employers.

Agenda

Professional Guidance

Skit

Small Group Discussion

Large Group Discussion

Takeaways

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Professionalism Skit: Price Optimization

Professional Guidance

Precept 1 of the Code of Conduct: An Actuary shall act honestly, with integrity and competence, and in a manner to fulfill the profession's responsibility to the public and to uphold the reputation of the actuarial profession.

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Professional Guidance

Precept 1 of the Code of Conduct– Annotation 1-1 -- An Actuary shall perform

Actuarial Services with skill and care.– Annotation 1-4 -- An Actuary shall not engage

in any professional conduct involving dishonesty, fraud, deceit, or misrepresentation or commit any act that reflects adversely on the actuarial profession.

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Professional Guidance

CAS Statement of Principles Regarding Property and Casualty Insurance RatemakingPrinciple 1: A rate is an estimate of the expected value of future costs.

Principle 2: A rate provides for all costs associated with the transfer of risk.

Principle 3: A rate provides for the costs associated with an individual risk transfer.

Principle 4: A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer.”

Professional Guidance

ASOP 12: Risk Classification“Risk Classification System—A system used to assign risks to groups based upon the expected cost or benefit of the coverage or services provided.” (2.10)

“Relationship of Risk Characteristics and Expected Outcomes—The actuary should select risk characteristics that are related to expected outcomes. A relationship between a risk characteristic and an expected outcome, such as cost, is demonstrated if it can be shown that the variation in actual or reasonably anticipated experience correlates to the risk characteristic.” (3.2.1)

Professional Guidance

ASOP 12: Risk ClassificationEffect of Adverse Selection— … The actuary should assess the potential effects of adverse selection that may result or have resulted from the design or implementation of the risk classification system. Whenever the effects of adverse selection are expected to be material, the actuary should, when practical, estimate the potential impact and recommend appropriate measures to mitigate the impact.” (3.4.1)

Skit Background

The Reputable Insurance Company is doing the annual auto rate review for the state of New Indianota.

Polly is the Product Manager. She is responsible for achieving the growth and profit objectives. She determines the rate strategy.

Jessie is the credentialed actuary that prepares the rate indication.

Elliot is an economist researcher that also analyzes the business.

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Lights, Camera, Action!

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General QuestionsWould Jessie be in violation of Precept 1 of the Code of Conduct by signing the affidavit when she has concerns about the adherence to actuarial standards? Does this represent a “material” violation of the Code, if Jessie is the only one who feels this way?

Ratemaking Statement of Principles 3: "A rate provides for the costs associated with an individual risk transfer." Would filing Polly’s proposed rate strategy be a violation of this principle?

Ratemaking Statement of Principles states that “Other Business Considerations are also a part of Ratemaking.” Is Elliot’s economic analysis an appropriate “other business consideration?” Does it allow for disregarding the loss experience?

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Possible Courses of Action

Jessie’s Options

• Alternative 1 -- Comply with Polly’s request.

• Alternative 2 – Elevate the issue (either to the Chief Actuary or potentially Polly’s boss)

• Alternative 3 – Get guidance from the State of New Indianota

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Professionalism Skit:Actuaries in Non-Actuarial Roles

Professional Guidance

Precept 1 of the Code of Conduct: “An Actuary shall act honestly, with integrity and competence, and in a manner to fulfill the profession's responsibility to the public and to uphold the reputation of the actuarial profession.”

Professional Guidance

Precept 3 of the Code of Conduct: “An An Actuary shall ensure that Actuarial Actuary shall ensure that Actuarial Services performed by or under the Services performed by or under the direction of the Actuary satisfy applicable direction of the Actuary satisfy applicable standards of practice”standards of practice”

Professional Guidance

Precept 10 of the Code of Conduct: “An Actuary shall perform Actuarial Services with courtesy and professional respect and shall cooperate with others in the Principal's interest.”

Professional Guidance

CAS Statement of Principles Regarding Property and Casualty Insurance Ratemaking– Principle 1: A rate is an estimate of the

expected value of future costs.– Principle 2: A rate provides for all costs

associated with the transfer of risk.

Professional Guidance

CAS Statement of Principles Regarding Property and Casualty Insurance Ratemaking– Principle 4: A rate is reasonable and not

excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer.

Professional Guidance

CAS Statement of Principles Regarding Property and Casualty Insurance Ratemaking, Section III: Ratemaking Considerations– Credibility– Trends

Professional Guidance

ASOP 13: Trending Procedures in Property/Casualty Insurance– Section 3.2 - Historical Insurance and Non-

Insurance Data. Must consider:• the credibility assigned to the data by the actuary;• the time period for which the data is available;• the relationship to the items being trended; and• the effect of known biases or distortions on the data relied

upon (for example, changes in claim practices).

Professional Guidance

ASOP 13: Trending Procedures in Property/Casualty Insurance– Section 3.3 - Economic and Social Influences. The

actuary should consider economic and social influences that can have a significant impact on trends in selecting the appropriate data to review, the trending calculation, and the trending procedure. In addition, the actuary should consider the timing of the various influences.

Professional Guidance

ASOP 13: Trending Procedures in Property/Casualty Insurance– Section 3.4 - Selection of Trending Procedures. The

actuary may consider relevant information such as the following:

• procedures established by precedent or common usage in the actuarial profession;

• procedures used in previous analyses;• procedures that predict insurance trends based on insurance,

econometric, and other non-insurance data; and• the context in which the trend estimate is used in the overall analysis.

Professional Guidance

ASOP 25: Credibility Procedures– Section 3.2 - Selection or Development of Credibility

Procedure. Consider if the procedure is expected :• to produce reasonable results• to be appropriate for the intended use and purpose; and• to be practical to implement when taking into consideration both

the cost and benefit of employing a procedure.

– Also consider the predictive value of more recent experience as compared to experience from earlier time periods.

Professional Guidance

ASOP 25: Credibility Procedures– Section 3.3 - Selection of Relevant

Experience• exercise professional judgment and use care in selecting

and using relevant experience• should have characteristics similar to the subject experience

(demographics, coverages, frequency, severity, etc.)• if does not meet and cannot be adjusted to meet such

criteria, it should not be used

Professional Guidance

ASOP 25: Credibility Procedures– Section 3.4 – Professional Judgment

• use professional judgment when selecting, developing, or using a credibility procedure

• use of credibility procedures is not always a precise mathematical process - blending the subject experience with the relevant experience may be based on the actuary assigning full, partial, or zero credibility to the subject experience without using a rigorous mathematical model

Professional Guidance

ASOP 25: Credibility Procedures– Section 3.5 – Homogeneity of Data

• consider the homogeneity of both the subject experience and the relevant experience

• within each set of experience, there may be segments that are not representative of the experience set as a whole

• predictive value can sometimes be enhanced by separate treatment of these segments

• also consider the balance between the homogeneity of the data and the size of the data set

Skit Background

Brie has been the VP of underwriting for the last three years. Wayne, the actuary supporting Brie’s product, along with the marketing department, has developed a new product with forms, rates and a 5-year pro-forma of the expected results of this new product on the market’s financial statements. Brie has reviewed the work and believes there to be flaws in the pricing assumptions. What should he do?

Lights, Camera, Action!

General Questions

Given her actuarial background, what level of influence should Brie have on the pricing indication?

Does Wayne have to incorporate Brie’s feedback in his pricing pick, and if so, to what extent?

Who ultimately owns the final recommendation?

Small Group Discussion

Discussion of General Questions

Given her actuarial background, what level of influence should Brie have on the pricing indication?

Does Wayne have to incorporate Brie’s feedback in his pricing pick, and if so, to what extent?

Who ultimately owns the final recommendation?

Potential Courses of ActionBrie should let the matter drop. It’s the Wayne’s call. It’s not the call Brie would make, but it would be best just to align with those chosen assumptions and make the most of it going forward.

Brie should go over Wayne’s head to The Chief. Leverage that existing relationship to get The Chief on her side. Then have the Chief override Wayne.

Brie should do her own independent analysis. Scenario test alternative assumptions. Have it peer reviewed by another actuary to ensure your choices are reasonable. Detail the impacts and go back to the Wayne. Try to collaborate and arrive at consensus.

Other???

Key TakeawaysWhile the advantages to having actuaries in non-actuarial roles are numerous, actuaries in those roles must be mindful of the potential drawbacks

Roles, responsibilities, and authority levels must be clear and ultimately must be respected

Know the Standards that apply to the work you are doing

SNAPPERS OVERVIEW

Snappers = Real Life Predicament

Structure of session– Read the case together.– Discuss opposing viewpoints

• Strict: Follow the rules regardless of the situation.• Practical: Be practical in the application of rules.

– See if there is a common ground.

Disclaimers: – Exercise is for education purposes only.– Any opinion expressed by anyone does not represent the opinion

of their employer or of the CAS.– No authoritative guidance should be expected of the moderator.

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Triangle ErrorYour systems vice president recently informed you that there was an error in the loss triangles provided for your loss reserve analysis as of March 31, 2014. You re-estimate the March 31 reserves with the corrected data and it produced reserve estimates that are 15% higher than your previous best estimate. Because of recently passed tort reform, you expect that your loss experience will improve throughout 2014 and that the difference will become immaterial by the end of 2014. Your CEO shares your expectations about the improved experience. Further, your company has already booked your original March 31 estimate and rebooking the new reserves would cause a delay in the company’s earnings release.

What do you do?37

Close to the Edge

You are the chief actuary (an FCAS) for a large commercial lines insurance company that writes mostly Work Comp and Med Mal. The market has been soft for several years, and thus your loss experience has been deteriorating, but you expect the market to harden soon. Due to the slow emergence pattern of the business, your reserve indications have a +/- 10% range. However, due to the reserve charge your company took the prior year, even a +5% deviation from the point estimate will dangerously deplete the company surplus.

What is your best course of action?

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Faulty Rating Plan

You are an actuarial manager and are attempting to gain approval for a new rating plan, but are having difficulty. You come across a competitor’s filing that implements a similar rating plan and was approved, but you believe the rating plan uses faulty logic. Your boss, who is not an actuary, says “If the logic works, then use it” and orders you to do so.

What do you do?

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