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Actuarial Science 101. Washington State Transit Insurance Pool. Presented by: Kevin Wick, FCAS, MAAA September 30, 2008. PwC. Risk Transfer/Role of Actuary Example of calculations What do you get from an actuarial report? Key questions to ask. Agenda. Risk Transfer Basics.

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PwC

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  1. Actuarial Science 101 Washington State Transit Insurance Pool Presented by: Kevin Wick, FCAS, MAAA September 30, 2008 PwC

  2. Risk Transfer/Role of Actuary Example of calculations What do you get from an actuarial report? Key questions to ask Agenda

  3. Risk Transfer Basics • All entities deal with risks and uncertainties • Ways to deal with risks include: • Retain • Transfer • Mitigate • Combination • Actuaries are trained at quantifying and measuring risk

  4. What Specifically Do Actuaries Do? • Reserves • Estimate the liability for costs already incurred but not yet paid • Balance Sheet (solvency) • Rates • Projected costs for accidents not yet incurred • Income Statement (budgeting) • Other • Confidence Levels, Cost Allocation, Retention Analysis Actuarial projections do not affect the final cost of claims. Apples to Apples

  5. Definitions

  6. Summary of Losses & ReservesWSTIP – Automobile LiabilityAs of June 30, 2008

  7. Selection of Ultimate LossWSTIP – Automobile LiabilityAs of June 30, 2008

  8. More Definitions

  9. Paid Loss Development TriangleWSTIP – Automobile LiabilityAs of June 30, 2008 Development Trend Diagonal

  10. Incurred Loss Development TriangleWSTIP – Automobile LiabilityAs of June 30, 2008 Development Trend Diagonal

  11. Other Considerations • Case reserving practices • Closure rates • Retentions • Per claim loss limits • Aggregate stop-loss limits • Measure and type of exposures • Geographical area

  12. Projected Year Losses for Automobile LiabilityApples to Apples

  13. Confidence LevelsMargin for Error • Reserves are ESTIMATES. • There is variability around these estimates (historical loss emergence shows general patterns but variation remains on a year to year basis). • Think of experiment with 1,000 trials – each trial is running off reserves until all claims settled. • 80% confidence level: • 800 trials result in payments at or below this level • Greater than “expected” reserve need • 200 trials result in payments above this level

  14. Confidence Levels (cont’d)Margin for Error • Confidence level of program: • Look at (Expected Reserves) + (Equity) • Ability to absorb variation around estimates • What affects confidence levels? • Size (law of large numbers) • Variability of claim size (big spread vs. small spread) • Confidence level applied to rates • Similar concept • How confident are you that next year’s losses will come in at or below the amount budgeted?

  15. What an actuarial report provides? • Financial reporting issues • people make decisions based on financial statements • unpaid claim estimate is critical for an insurance entity • Budgeting/rate setting • Program integrity • Protection • Sophistication/decisions

  16. Questions to Ask • What significant assumptions have you made? • Do your reserve projections reconcile to our booked reserves on the financials? • How accurate is your estimate? • What is the scope of your services and how does that compare to your other clients? • What trends are you seeing? • How are we doing?

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