Are Actuaries Hiding The Bad News?

NU Online News Service, June 1, 3:46 p.m.EDT?Many actuaries in the private sector are caving in tocorporate pressure and omitting possible negative developments fromreports, an actuary with the Ohio Insurance Departmentsaid.[@@]

The comments by Mary D. Miller, speaking at the Casual ActuarialSociety Spring Meeting in Colorado Springs, Colo., were reported bythe New York-based Insurance Information Institute.

Ms. Miller said that 99 percent of the actuarial opinionscountrywide reported that loss reserves were reasonable, and lessthan one-half of the "top 30" companies contained a comment aboutthe risk-of-material-adverse-deviation. "That is very disturbing,"she said. "It does not do much to rebut the accusation that we'reyielding to management pressure to leave those comments out."

Regulatory actuaries are working to streamline and strengthenthe language and disclosure in loss reserve opinions, she said. Inaddition, papers are being written to educate readers of insurerfinancial statements about what opinions and best estimates are andwhat they are not.

"It is never going to be impossible to purposefully misstatereserves," said Ms. Miller. However, she added, it is hoped that"you'll be able to detect some of these misstatements sooner andthe resulting failures will have a smaller impact on theindustry."

Ms. Miller said that there is a sense of urgency to restorepublic confidence in the work of the casualty actuary. "I amconfident the profession will respond," she said.

The actuary said that she undertook a survey of over 2,600insurers in the National Association of Insurance Commissionersdatabase and found that 80 percent of loss reserve developmentdollars in 2002 and 100 percent in 2003 were accounted for by just30 companies.

She noted that most of the "top 30" companies were commerciallines carriers that wrote "troublesome lines" like workers'compensation, directors and officers liability, excess casualty,medical malpractice or construction defects coverage. Mold was themost significant issue for the personal lines carriers.

The lessons, Ms. Miller observed, are that while personal linescarriers are able to get it "pretty close," commercial lines isanother story. When traditional loss reserving methods are used incommercial lines, "sometimes reserve estimates are way off" and"not discovered until a great deal of damage has been done," shesaid.

The recent flurry of reserve activities has only publicizedproblems that many actuaries were already working on, according toMs. Miller. These include papers and presentations at CAS seminarsas well as efforts by the CAS, American Academy of Actuaries andthe NAIC to provide lessons for the future by researching pastcompany failures.

Joseph P. Dailey, a partner at Dailey and Selznick, a New Yorklaw firm specializing in actuarial and reserve-related litigation,warned there is an increasing frequency of actuarial malpracticelitigation related to loss reserves.

"Actuaries are an inviting target," he said. "When aloss-reserve deficiency suddenly appears, the initial tendency isto blame the actuary that certified the reserves," he said.

Mr. Dailey commented that in many cases, actuaries are blamelesseven if their estimates turn out to be materially in error.Opinions only require a reasonable estimate, but just as important,they require a candid disclosure to the user.

He focused on the legal requirement that actuarial opinions havea candid disclosure concerning the nature and reliability ofreserve estimates. Some of the problems now in public discourse"might be avoided by more meaningful disclosures," he said.

Mr. Dailey pointed out that although estimates of long-tailbusiness are highly variable, over time the variations do tend tobalance out.

However, even though the fluctuations balance out over time, thepotential for significant year-to-year variations for individualcompanies is highly material to investors and the general public,he said. "Unfortunately it will be the year-to-year variations thatcause the problems."

Chuck Bryan, president of CAB Consulting, noted it wasn't untila series of insolvencies attracted the interest of Congress in theearly 1990s that opinions of a credentialed actuary were required.At that time, "we became the profession relied on to handle theloss reserving issue."

Most recently, actuaries, he said, have come under criticism forsigning off on reserves that have turned out to be inadequate.

Mr. Bryan posed several questions that actuaries shouldconsider. Noting that it is not proven that the incidence ofinsolvencies is less now than before actuarial opinions wererequired, he asked: "Do opinions really make any difference in theprobability of insolvencies?" He also asked if actuaries will"raise a red flag if reserves are inadequate?"