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Discussion of Unpaid Claim Estimate
Standard
Raji
Bhagavatula
Mary Frances Miller
Jason Russ
November 13, 2006
CAS Annual Meeting
San Francisco, CA
Background
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Guidance in estimating unpaid claims, applicable to
most work, not just opinion work
Exposure draft released in March
Comment period through June
32 comments received
In process of reviewing comments and amending
proposed standard
Have not finalized revisions to standard – thoughts
expressed today are still being considered
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Main Points of Discussion
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Title of standard
Scope of standard
Consideration of purpose and use
Handling of constraints
Identification of scope of work
Understanding of nature of claims
Methods and models
Assumptions
Uncertainty
Communications and Disclosures
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Title of Standard
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“Unpaid Claim Estimates,” not “Reserves”
Comments received argued both ways
“Reserves” is a line item on a US financial
statement, not the estimate of future
payments itself, but improper usage common
in US
“Unpaid claim estimates” is more accurate,
more generic and better accepted globally
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Scope of Standard
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Includes evaluation of self-insureds, not just
insurance entities
Excludes ratemaking purposes
– Some comments expressed disagreement, but deemed
necessary to limit scope
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Excludes oral communication
– Some comments expressed disagreement, but practical
necessity
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Excludes any actions taken after production of
unpaid claim estimate
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Consideration of Purpose and Use
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Should identify in communication
Has an impact on many items, such as
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Selection of intended measure
Choice of method or model
Whether uncertainty needs to be measured
Presentation of results
Documentation and disclosures
Once the intended measure is decided, the purpose
and use should not bias the estimate relative to that
intended measure
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Handling of Constraints
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Sometimes constraints exist in the performance of an
actuarial analysis, such as those due to limited data, staff
or time. Where the actuary believes that such constraints
create a significant risk that a more in-depth analysis
would produce a materially different result, the actuary
should notify the principal of that risk and attempt to
discuss the constraints on the analysis with the principal.
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Scope of Work
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Must identify what you are estimating:
– Intended measure
– Gross or net
– Collectibility risk
– Unpaid claim adjustment expenses
– Cohorts of claims
– Other items needed to sufficiently describe
scope
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Intended Measure
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Want it to be clear what the actuary is estimating
– “Best Estimate” or “Actuarial Estimate” not sufficient
– Best estimate of what? Mean? Mode? Low or High?
Risk margin included? Etc.
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Original exposure draft introduced term “Actuarial
Central Estimate” to use as a default
Many comments concerning whether a default should
exist and if so what it should be
– Concerns that ACE as default advocates something
biased lower than desired
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Discussing option of removing default – require
disclosure of intended measure in all cases
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Actuarial Central Estimate
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Defined in exposure draft – “An estimate that represents a
mean excluding remote or speculative outcomes that, in
the actuary’s professional judgment, is neither optimistic
nor pessimistic. An actuarial central estimate may or may
not be the result of the use of a probability distribution or a
statistical analysis. This definition is intended to clarify the
concept rather than assign a precise statistical measure,
as commonly used actuarial methods typically do not result
in a statistical mean.”
Intention was for definition to cover estimates produced by
“typical” actuarial methods such as loss development
Never intention to imply this is estimate actuary should
produce
Considering retaining term with reworded definition, but not
as default – gives actuary option to use term rather than redefine in own communication.
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Understanding Nature of Claims
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Should have an understanding appropriate to the
analysis
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Will not include a long list of considerations as
existed in original Principles
– Such educational material is better suited for practice
notes than for standards or principles
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Methods and Models
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Consider what is appropriate, even if same
method as used before
Original exposure draft only mentioned “methods”,
adding “models” to language in response to
comments
Significant discussion on language concerning use
of multiple methods
– Want to encourage use of more than one method
– Under what circumstances can the actuary use just one
method?
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Assumptions
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Consider what is reasonable and appropriate
given intended measure
– Assumptions should “have no known significant bias to
underestimation or overestimation of the identified
intended measure”
– Bias with regard to an expected value estimate would
not necessarily be bias with regard to a measure
intended to be higher or lower than an expected value
estimate
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Consider sensitivity of result to alternative
assumptions
May rely on assumptions provided by principal,
with appropriate disclosure
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Uncertainty
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Some comments received stating actuaries
should be encouraged or required to measure
uncertainty
This may or may not be appropriate given the
situation
Language will require consideration of
uncertainty, but not necessarily measurement
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Communications and Disclosures
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General guidance in other ASOPs
– ASOP 9, ASOP 23, ASOP 41
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Additional communication and disclosure
requirements specific to this standard
This does “raise the bar”, particularly for
company actuaries
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Communications and Disclosures
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Clearly convey the intended purpose or
use
– More than one intended use?
– Any compromises in order to produce a single
work product for multiple intended uses?
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Any resource constraint issues?
Clearly define the scope of the estimate
Include discussion of the uncertainties in
the estimated claim liability
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Communications and Disclosures Dates
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Actuarial communication should include
– Accounting date
– Valuation date
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Review date may have to be included in
certain circumstances
As an example, “This unpaid claim
estimate as of December 31, 2005 was
based on data evaluated as of November
30, 2005 and additional information
provided to me through January 17, 2006”
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Communications and Disclosures –
Significant Events and Assumptions
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Include explicit discussion of any significant
assumptions or events underlying the
estimate that may not be obvious to the
intended audience, including significant
assumptions regarding the accounting
basis or application of an accounting rule
Where the final work product reflects a
material assumption or methodology that
differs from what the actuary believes to be
reasonable
– Disclose the dependency of the final result and
– Disclose the source
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Communications and Disclosures –
Ranges
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What is the range intended to convey?
For example:
– a range of estimates of the actuarial central
estimate;
– a range representing a confidence interval
within the range of outcomes produced by a
particular model or models;
– a range representing a confidence interval
reflecting both process and parameter risk;
– some other clearly defined range
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Communications and Disclosures –
Material Changes
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If the analysis is an update, disclose
any material changes in assumptions to
the extent known by the actuary
Disclose the reasons for the change
Not required to quantify the effect
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