2010®

®

“Actuarial Science 101”A Basic Introduction to its Application to

Estimating Warranty Costs

Michael Paczolt, FCAS, MAAAConsulting Actuary

Milliman

March 4, 2010

®Agenda

What is an actuary?

Common vocabulary

Loss triangles

Methodology

Making selections

®What is an actuary?

• Background• Finance, Mathematics, Statistics• Rigorous Exams

• Classic Role• Pricing• Reserving

• Other Fields• Firm Valuation• Investments• Portfolio Management• ERM & DFA

®Where do actuaries work?

• Types• Consulting• Insurance• Other

• Fields• Health• Life• Pension• Property/Casualty• Other

®Insurance Basics

• Risk (not the board-game)

• Premium

• Diversification

®What determines my premium?

• Expected Loss• Expense• Profit• Risk Loads• Market Conditions• Underwriting• Book of Business• Credibility of Data

®Vocabulary

• Trend• Liability = Ultimate Loss – Paid Loss• Unearned Premium Reserve• Loss Reserve• Exposure

®Loss Triangles

• History as predictor of future• Paid & Incurred Methods• Group of similar aged warranties• Observe development• Update periodically

®Loss Triangles

24 Months of Coverage

326/50 = 6.533

®Warranty Methodology

• Loss Development

• Incremental

• Bornhuetter-Ferguson

• Frequency/Severity

• Loss Cost

®Making Selections

®Questions?