Actual vs Expected: Curse or Blessing?

1. Actual vs Expected: Curse or Blessing? Cameron Heath & Anthony Wright

2. Institute of Actuaries TORP Working party Alastair Lauder Alexander Crosby Anthony Wright Cameron Heath Camilla Bennett Gregory Overton Jinita Shah • Joe Ryan • Katherine Laidlar • Keith Taylor • Marios Argyrou • Neil Bruce (Chair) • Sylvie LeDelliou • Tim Jenkins

3. Background • Part of the “Towards the Optimal Reserving Process” (TORP) working party • Long term aim is to identify areas where the reserving process can be made more efficient • The working party has noted the extremely broad potential scope of the “reserving process” • Idea is to focus on particular areas in series, whilst also having an eye on efficiencies to be gained in the wider process • Feedback suggested AvE is an area many people are thinking of as a step towards optimal reserving

4. Quick survey: • Do you think you know what AvE is? • Do you use one or more types of AvE within your reserving process? • If so, are they used as a direct input into the setting of reserves at any point? • Is it a mechanical process (rather than judgement being applied)?

5. Agenda What is AvE? Types of Expected Why use AvE and who is interested in it? What methods are used? How can AvE be displayed? Pros and cons of using AvE

6. Definition We think AvE is: Develop a (series of) expectations of the behaviour of an observable quantity over a period of time in the future based on assumptions at a particular point in time Compare observed experience during that period against those expectations Use the results to complete a task and/or come to a conclusion

7. Types of Expected Written & Signed Premium Number of claims reported & settled small vs. large Paid Incurred Average cost per claim

8. What methods are used? Extremely long list possible but 2 overarching types: Comparing movements in development data in a period Expected paid in the period vs actual paid in the period Eyeballing graphically Comparing previous ultimate to a new ultimate Re-apply previous models to fresh data Apply pre-selected models to fresh data

9. Why use AvE and who is interested in it? Interim periods Monitor emerging experience Leading indicators Start of regular reserve review Identify areas of concern Identify inappropriate assumptions End of regular review Analysis of surplus Fast close process Set future expectations

10. How can AvE be displayed? • Tables vs. charts • Split by class or year • Single AvE period or multiple periods Different exhibits are suited to different analyses Multiple exhibits are likely to be needed for a particular “use” Good ones can assist in interpretation, bad ones can make results impossible to identify

11. How can AvE be displayed? - Tables

12. How can AvE be displayed? - Tables

13. Example AvEgraph (eyeballing) • Plot of incurred development as a percentage of last selected ultimate claims (dotted line = 100%) • Looking for signs of obvious over/under reserving to assist in targetting resources • Requires some prior knowledge for efficient interpretation

14. Example AvE graph (multiple years)

15. Example AvE graph (single year)

16. Example AvE graph (single year)

17. Example AvE graph (single year)

18. Example AvE graph (single year)

19. Example AvE graph (multiple years)

20. Example AvEgraph (“banana chart”) Format derived by Lloyd’s of London as way to feed back development for each class against expectations

21. Example AvEgraph (range indication)

22. Pros and cons of using AvE…

23. Conclusion • Good thing - can be very useful in your reserving process • Used with care – eyes wide open • Next steps for WP • Paper and presentation at GIRO • Consider other areas for focus next year