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 to corporate pressure and omitting possible negative developments from reports, an actuary with the Ohio Insurance Department said.[@@]

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

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

Regulatory actuaries are working to streamline and strengthen the language and disclosure in loss reserve opinions, she said. In addition, papers are being written to educate readers of insurer financial statements about what opinions and best estimates are and what they are not.

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

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

The actuary said that she undertook a survey of over 2,600 insurers in the National Association of Insurance Commissioners database and found that 80 percent of loss reserve development dollars in 2002 and 100 percent in 2003 were accounted for by just 30 companies.

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

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

The recent flurry of reserve activities has only publicized problems that many actuaries were already working on, according to Ms. Miller. These include papers and presentations at CAS seminars as well as efforts by the CAS, American Academy of Actuaries and the NAIC to provide lessons for the future by researching past company failures.

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

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

Mr. Dailey commented that in many cases, actuaries are blameless even 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 have a candid disclosure concerning the nature and reliability of reserve 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-tail business are highly variable, over time the variations do tend to balance out.

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

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

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

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

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