Sarah MacDonnell provides some foresight into what is yet to come from the work of one of the General Insurance Reserving Oversight Committees working parties
I was in a meeting recently sitting across from someone who quite suddenly and unexpectedly proclaimed that they "love reserving". I happen to agree. In the 1990s, we saw the advent of the use of generalized linear models (GLMs), and pricing became the place to be. Thereafter, it was the rise of capital modelling.
For those of us who still hadn't managed to answer the "What do you do?" question at a party without the questioner's eyes glazing over, a similar feeling would occur when asked what type of actuarial work you do. But no more. The return of reserving as the place to be is here (in my opinion anyway).
The reserving seminar is going from strength to strength. We have a very active General Insurance Reserving Oversight Committee (GIROC) with six current working parties, and the last two Brian Hey prizes were won by GIROC working parties.
So what exactly is going on in reserving at the moment? Well, we happen to have a pretty good idea because we recently went out and asked those who know most about it. We conducted a survey of UK general insurance (GI) reserving practitioners and stakeholders. It was born out of a desire to answer questions we were struggling to answer definitively ourselves.
Following is a list of some questions we asked and the illuminating responses to them.
"Have reserving techniques moved on in the past few years? If not, why not?"
What are the latest techniques? How are we doing? What do those on the receiving end of our work think?
The answers to these questions were not always what we were expecting to hear and it became clear there were new topics of debate emerging that we had not envisaged.
In answer to the first question, no, there haven't really been any new reserving techniques adopted. Triangles, chain ladder and Bornhuetter Ferguson are still the methods of choice and there is very little appetite for new methodologies to be found. The reasons behind this are probably best encapsulated in a couple of quotes.
"It's a question of having resources to try out new methods and balancing this with how much value is it going to add."
"We want proven and pragmatic methods, otherwise it is no use if it is sitting in a theoretical box.
So what has changed?
The overall mood music from the survey was very positive. Based on the feedback from the executive board members that took part, reserving actuaries were doing better than we ourselves realised.
Not unexpectedly, we found large differences in practice between London Market and personal lines companies - be it in terms of the quality and nature of the data; whether fast close processes had been adopted; methods used to measure uncertainty; or the level of interaction with other areas of the business (to name but a few).
We have also seen a rise in the use of diagnostics and management information, particularly within personal lines.
However, the biggest surprise was how we were doing in terms of communicating. This is set against the background of what we were told the last time we went out and asked in 2006. Back then, the message was loud and clear; not at all well. The uncertainty around estimates was not being explained, neither were the key assumptions and drivers of models, and stakeholders were telling us that they did not understand actuarial models.
The updated message paints a very different picture. It appears actuaries are now embedded in the business, regularly in touch with a wide range of people from different backgrounds within their companies. The rise of reserving committees has certainly helped with this, where representatives of senior management and other areas of the business (such as claims and underwriting) regularly meet with actuaries to discuss the reserves. This means that ongoing communication is happening naturally.
Actuaries also have a higher profile at board level and there appears to be a better understanding of actuarial work. Reasons for this are likely to be multi-faceted. Board training in actuarial techniques is relatively common now, and changes in the mix of board members' backgrounds is also likely to have had a positive influence on boards' increased understanding of actuarial advice. The changing regulatory environment will have had an influence, with specific requirements for boards to demonstrate their understanding of actuarial models. Maybe we actuaries have also got better at communicating. There is certainly more detailed and explanatory reporting now.
The survey has also thrown up debates on topics that we had not envisaged at all at the start of the process.
Emerging topics for further consideration
What is the best approach to the booking of reserves - prudent versus best estimate?
This is a particularly pertinent question when we are coming into a new Solvency II world, where technical provisions require the best estimate to be stated alongside an explicit risk margin. However, this is not necessarily aligned with current and future accounting requirements.
Should actuaries be more forward-looking?
Reserving actuaries are arguably the first to spot emerging trends or features in the data. Should this knowledge be more routinely fed back into the forward-looking elements of the business, such as business planning and strategy? Or are reserving actuaries being too backwards-looking and only using this information to inform the reserve opinion on past business?
What is the optimal structure of actuarial teams?
Separate reserving, capital, and pricing actuarial teams versus actuaries specialising in a particular line of business covering all actuarial disciplines.
Not all good news
It became very clear from all areas of the survey that there was one element in particular where we could do better. That is uncertainty - both in measurement and communication. We are all doing this in different ways, which can be confusing for stakeholders. In addition, the use of percentiles, while popular, can have the potential to be (at worst) misleading for stakeholders where there is a mismatch of expectations over what information they provide.
More than just reserving
From speaking to senior management, it appears that actuarial advice is naturally being fed back into planning and strategy, be it in terms of alerting to issues when things go wrong, or engaging in debates with areas of the business. Actuarial advice appears to be highly valued and actuarial opinions sought. One chief executive said that "actuaries are absolutely fundamental to understanding" and another commented that "there are different areas where actuaries can add value".
Speaking to these chief executives and chief finance officers was like a master class in getting the most out of your actuaries. It raised the question - whose responsibility is the communication of actuarial advice? As a profession we have historically seen it as our failure. It appears that where companies are getting the most out of actuaries, the key may well be more down to the actions of senior management rather than the actuaries themselves.
A picture has emerged of the reserving actuary as a crucial cog in the company toolbox; not only advising on the level of reserves but also informing strategic direction, alerting to issues early and with opinions being sought and valued by management. The age of the reserving actuary is here.
Uncertainty: Personal lines and London Market
The diagram above illustrates the many different ways that uncertainty is being measured and compares and contrasts the differing practices in the personal lines and London Markets.
Each diagram consists of a pentagon with a different reserving method at each point. The larger the blue circle, the more companies use that method. Most companies use more than one measure for uncertainty, hence the lines between the circles represent this - the thicker the line the more companies use both the methods that the line is joining. For example, for personal lines, 67% of respondents said they use scenarios to measure uncertainty and 42% of all respondents use both scenarios and 'bootstrap'.
Key to methods 'Bootstrap' - a generic term to incorporate stochastic chain ladder methods such as over-dispersed Poisson bootstrap, also includes Mack method. 'Capital model' - output of capital models used
A series of interviews with UK general insurance reserving practitioners and stakeholders were conducted between August 2013 and September 2014.
The aim of this document is to summarise the findings of those interviews and to provide a record of current UK reserving practice and the contemporaneous views of those involved in it. The topics covered are wide ranging so this survey is intended to be used as a reference document to dip in and out of, rather than something to be read from cover to cover.
The survey can be found at bit.ly/1GibQdl.
A big thank you to all who took part. The engagement, especially from the actuarial community, was tremendous and the interviews overwhelmingly open and frank, leading to some very interesting discussions.
What is GIROC?
Its remit is to:
be responsible to the General Insurance Board for all matters relating to reserve estimation for general insurance business;
monitor and respond to ongoing developments in the general insurance reserving area;
identify the need for, promote and co-ordinate research in reserving-related matters;
develop a communication programme with the wider general insurance industry.