Midwest Actuarial Forum March 23, 2004 P&C Reserve Analysis

1. Midwest Actuarial ForumMarch 23, 2004P&C Reserve Analysis Peter F. Patrino, CFA

2. Outline • How does Fitch review reserves • The interaction of reserve quality & ratings • Where does Fitch see reserve quality today • Some other Fitch views

3. P&C Reserve Analysis at Fitch Internal • Retrospective Analysis • Claims Severity Analysis • Prospective Analysis – Schedule P Model External • Actuarial Memorandum Reviews

4. Fitch’s View of Reserves • If ratings are point estimates of the credit position of an entity, then property/casualty insurance ratings – relative to other insurance and most non-insurance ratings – have a wide standard deviation • WHY IS THIS THE CASE?  Uncertainty • WHAT IS THE CAUSE?  Reserves • Two Points: • when property/casualty insurers get into trouble, it is typically due to a reserve shortfall • the reserve analysis is the most challenging part of analyzing a property/casualty insurer

5. Fitch’s Industry Analysis for YE 2002 • US P&C Industry Reserve Deficiency • Overall – between $46 and $77 billion • 16%-26% of reported surplus • Non-Latent – between $32 and $38 billion • longer tail casualty lines • mainly accident years 1997-2002 • Asbestos – between $9 and $29 billion • policies written prior to early 1970s • Other Latent – between $5 and $10 billion

6. What Can Be Done…. • More disclosure – starting to see some • Accident Year • Line of Business • Range • Quicker recognition of trends • Eliminate discounting • Do whatever it takes to limit the variability in reserve development

7. Variability In Development

8. Some Final Thoughts • Prospective “gut” feel analysis made by seasoned professionals today is often better than detailed analytical decisions made next week • Repeating the same exercise year-over-year is not enough – go above and beyond, look for new ways to do things better • Reaction is not good