What is responsive reserving?
The oscillations between reserve releases and strengthening
can never be eliminated entirely due to the unpredictability of the emergence of budgeted
catastrophic events or final payouts on long-tail liability claims. Nevertheless, data
issues do contribute to the amplitude of the cycle. If data has only limited availability,
it hampers the speed with which reserving teams can recognise inflated or inadequate
reserving estimates. Due to the very long duration between fixing reserves and final payments,
the reserving methodologies themselves are also subject to changes in general philosophy.
Actuarial methods need to be looked at critically to establish
whether certain systematic reserving methodologies potentially exacerbate movements in the
reserving cycle. This has been suggested in a recent actuarial paper by Forray and Ballweg:
‘[T]here appears to be a relationship...between the development indicated by actuarial methods
and the development that ultimately manifests, as shown by carried reserves over time’. The
reserving process finds it difficult to accommodate for the changing pricing environment of
the underlying business (i.e. initial loss cost inaccuracy). Moreover, the reserving triangles
for recent underwriting years are representative of business written in a different stage of
the cycle. The problem: you want hard market reserving triangles for business written in
a hard market and soft market reserving triangles for business written in a soft market.
The conversation between underwriters, pricing actuaries and reserving functions needs to
start from the moment that business is bound:
- Do the initial loss ratios accurately represent the risk?
- Are there elements in costing which might not be fully priced in? (e.g. are softer rates and
conditions in the direct insurance market fully priced in?)
- If reserving is more conservative than costing, what elements of the actual results present
cause for concern? Some of the key factors:
- – Speed of paid patterns
- – Change in speed of the insured’s first notification of loss
- – Change in coverage of the underlying portfolio
- – Change to layer structures
- – Increase in frequency
- – Increase in severity of smaller claims
Reserving process, frequency, methodology
A small team of reserving actuaries is responsible for reserving the whole book
of business, with specific actuaries responsible for certain segments (e.g. North
American; general liability; treaty non proportional). They look at large historical
data sets – both on an aggregate level and at a granular level – to apply common
reserving methodologies and estimate the necessary reserves.
Once the reserving process is completed, a loss-reserving committee, ideally with
representatives from broad specialist areas within the company, meet to discuss
overall trends and specific reserving cases. Standard reserving templates are filled
and sent out to the reserving committee for review.
The results are entered into finance systems. Typically, after the quarterly reserving
process is complete, the next quarterly reserving process begins again soon after.
This gives little scope for reserving actuaries to discuss the data with colleagues
in different units or to step back and analyse ways to improve reserving principals
or the appropriateness of techniques applied to each portfolio segment.
Due to the large amount of data required, the complexity of the data and the frequent
difficulty of pulling it from legacy systems, the reserving process is time-pressured.
This means actuarial reserving teams have limited capacity to consult with underwriters
and other colleagues who could help them better understand the business they are forecasting.
A recent PWC poll1
highlighted the amount of an actuary’s time that is currently taken up doing repetitive tasks:
- More than 40% of senior actuaries reported that they spend at least 10% of their time on
data-processing, manipulation and reconciliation instead of analysis and reporting
- More than one-quarter of reserving actuaries spent over 25% of their time on these activities
- Populating reserving templates can take as long as a week in some organisations.
20% of survey respondents required more than one week to populate the reserving templates.
Actuaries are both expensive and highly trained, thus any effort they expend on cleansing data
is a waste of a costly and scarce resource. This processing time is time that could be spent on
more valuable analysis and reporting. Moreover, data displays in reserving templates are often
too dense for a non-technical user to pick out key messages.
The speed with which a company can generate and analyse its data affects its ability to identify,
understand and respond to changes in the market that may impact its book of business.
The data used for reserving should be easily available so that actuaries spend little or no
time cleansing data. Where some data cleansing is necessary, a less costly member of staff
should be able to complete the work. For many firms junior actuaries are occupied with
repetitive tasks simply because a less experienced person might be at risk of accidentally
changing the data. The time saved by good data practice will enable actuaries to have more
frequent and in-depth discussions about larger reserving issues. Fewer shocks should occur
as the relevant stakeholders are alerted to changes in reserves as they happen.
The loss reserve committee should include key stakeholders from finance and underwriting.
The templates should be automatically populated and the quality of data visualisation and
templating should make it very easy for individuals from non-actuarial disciplines to digest
It’s important that data is recorded so that it is possible to analyse what went wrong. This
requires consistency of reserving approach across regions and specific classes of business
and an understanding of the reasons behind decisions to reserve differently.
An actuary with more time can improve reserving, enrich the data and work with other functions
to generate higher quality business intelligence:
- A reserving actuary should consider multiple reserving methods in order to
properly assess whether the current reserving methodology is appropriate
(e.g. Bornhuetter Ferguson2 and Benktander3).
- Cross-functional teams should be setup so that actuaries can inform underwriting
and claims about the developments they see in reserving to inform the work of
underwriters, claims and finance.
- At the same time, claims can give actuaries a closer insight into the trends they see
for loss development and the quality of client loss management and case reserves.
- Underwriters can give reserving actuaries a better insight into the confidence
they have in the loss-ratio picks used for costing (for Bornhuetter Ferguson4 this
step is very useful).