Actuaries should use a sophisticated technical method for lossreserving to cope with factors such as a deluge of claims on oneaccident date, an expert advised at an industry conference.

Joseph A. Boor, an actuary for the Florida Office of InsuranceRegulation, gave that counsel at the annual Casualty Loss ReserveSeminar co-sponsored by the Casualty Actuarial Society and AmericanAcademy of Actuaries.

According to Mr. Boor, the hurricane loss experience in Floridaand along the Gulf Coast since 2004 distorts the accident yearpattern and has presented actuaries with unique, but for the mostpart solvable, loss reserving challenges.

Mr. Boor, an expert on homeowners, property, and catastrophereserving, noted that some of the companies that insure Floridahomeowners had to increase their reserves during 2005 for 2004claims.

To help insurance companies and their actuaries avert futurereserve increases, Mr. Boor presented a technical method to moreeffectively assess reserve needs on hurricane claims.

Mr. Boor noted that among the reasons such a technical method isrequired is the large number of claims on one accident date whichdistort an accident year pattern.

He also mentioned that processing lags caused by high claimsvolume creates greater reserve needs and the potential for higherseverities must be addressed.

Complex reinsurance programs, he advised must be understood andevaluated.

Mr. Boor noted that the response of actuaries in the area ofhurricane loss reserving differs in whether they work for largecompanies with a long history, where data has been accumulated onprior storms, or small or newer companies where the available datamay not be as robust or available at all.

The recent spate of hurricane activity, he said, can be used asa basis for future estimation of reserve costs for hurricanes.

Mr. Boor mentioned that one key to understanding hurricanereserve development is to realize that not all hurricanes arealike. “Hurricane Rita in 2005 was weak and resulted in smallclaims, while Hurricane Wilma, also a 2005 storm, was strong andgenerated more expensive claims,” he said.

Mr. Boor explained to the actuaries the operation of his state'sunique Hurricane Catastrophe Fund, which covers 90 percent oflosses in excess of a per-hurricane retention, with a maximumamount recoverable by each insurance company each year.

He said the fund also adds 5 percent of loss recovery for lossadjustment expenses.

Bill Burns, vice president and actuary of the Holborn Corp.,made a presentation that addressed statistical/meteorologicalhurricane computer models in catastrophe reserving.

For the proper use of models, the presentation outlined theActuarial Standard of Practice, Number 38 that was developed by theTask Force on Complex Models of the Casualty Committee of theActuarial Standards Board and adopted in June 2000.

Under those standards of practice, the actuary should: determineappropriate reliance on experts; have a basic understanding of themodel; evaluate whether the model is appropriate for the intendedapplication; determine that appropriate validation has occurred;and determine the appropriate use of the model.