SIGMA’s An Actuarial Advantage Book Club is a virtual, multi-session event hosted once a year. Each series includes four forty-five-minute sessions that give participants the opportunity to take a deeper look into An Actuarial Advantage, with insights and guidance from the SIGMA team. The book club is a great way to explore each chapter and discuss key actuarial topics in more detail.

An Actuarial Advantage was originally written by Tim Coomer, PhD, with the goal of educating his fellow insurance colleagues on actuarial concepts and methodology. The book is designed to be an accessible resource and includes real-world examples to make complex ideas easier to grasp, especially for those who may be new to the actuarial world. It offers valuable insights and clear explanations for the actuarial terms and techniques commonly encountered in the insurance industry, making it useful for professionals at any stage of their career.

Sign up for our upcoming session.

Let’s take a look at the top five questions from last year's book club, along with the answers and helpful resources.

1. How do companies decide when they need to hire an actuary to evaluate their reserves? Are there statutory requirements for public companies, for example, or anything similar for private companies?

Companies typically hire actuaries to evaluate reserves when their retained insurance liabilities become large, complex, or subject to regulatory reporting. Licensed insurance companies are required by state regulators and the National Association of Insurance Commissioners (NAIC) to obtain annual actuarial reserve opinions, while public companies often engage actuaries due to complex risks, auditor expectations, SEC reporting standards, or the need to support self-insured liabilities. Although there is not usually a direct statutory requirement for non-insurance public companies, actuarial analyses are often considered a best practice when reserve exposures are significant.

Private companies may face fewer formal requirements, but actuarial reserve studies are still common for businesses with self-insurance programs, large deductible policies, or captive insurance arrangements. Actuarial evaluations are frequently used to support collateral requirements, financing transactions, and reserve adequacy assessments, particularly in industries with long-tailed or volatile claims exposure.

Learn more about the most common situations when an actuary is needed.

2. Is there a distinction in the loss development factors used to estimate IBNR for claims that have not yet been reported versus the development applied to reported claims, and how does reporting lag impact the LDFs?

The loss development factor (LDF) considers both incurred but not reported (IBNR) losses for unreported claims and additional loss development on reported claims. Reporting lag can significantly impact the LDFs, as longer reporting delays generally result in larger development factors and longer periods before the factors mature toward 1.000. This is because a greater portion of ultimate losses remains either unreported or undeveloped at earlier maturities, increasing the amount of expected future development.

Learn more about the different types of claim lag.

3. In the process of applying loss development factors to estimate ultimate losses, how do you handle significant deviations or anomalies in the data, and what measures are in place to ensure that these estimates remain robust and reliable?

When using loss development methods to estimate ultimate losses, an actuary carefully analyzes the underlying claims data for anomalies that could distort historical development patterns, as well as if the historical data being used is sufficiently credible and relevant for the exposure being analyzed. Significant deviations such as catastrophic losses, operational changes, or shifts in claim handling practices, may be adjusted, separated, or weighted differently to ensure the resulting factors reflect claim behavior and do not skew estimates of future development.

The selected factors are based on actuarial judgment and often incorporate weighted averages of historical development patterns. Rather than relying on a single data point or simple average, greater emphasis is typically placed on more stable and credible periods of experience. When internal company data is limited or highly volatile, an actuary may also compare development trends against broader industry benchmarks to help validate assumptions and support the reasonableness of the reserve estimates.

4. The book focuses on WC, GL, and AL when talking about loss triangles. What kind of difference can there be if it was a line like property or Med Mal?

One key difference when reviewing loss development triangles for different coverages is the length of the development "tail." Property claims, for example, tend to have a very short tail, with development beyond 12 - 24 months being relatively uncommon. As a result, property triangles often show larger development factors for immature policy periods, but those factors generally converge to 1.000 relatively quickly. Workers compensation claims, on the other hand, may have development as far out as 180 months or even further.

Med Mal (or MPL) claims present another interesting consideration for loss development triangles - that of claim severity. In our experience, MPL claims often fall at opposite ends of the cost range, either relatively minor or very significant, with fewer “average” losses. On top of this, litigation related to these claims can be lengthy, and adverse loss experience can happen years after the initial loss date. These issues make it important for MPL triangles to include long-term historical experience, as LDFs based purely on short-term experience may not fully contemplate the potential for late development.

Learn more about legislative or regulatory changes that can affect a company’s risk portfolio.

5. How do you calculate confidence intervals if you have a few shock losses?

The calculation of confidence intervals varies depending on the risk profile. For high-frequency/low-severity risks, an actuary may calculate distribution parameters using historical pure loss rates. This approach doesn’t necessarily contemplate the estimated frequency and severity of each individual claim but instead relies on aggregated annual loss experience. For many types of coverages and situations, this approach is sufficient in producing a reasonable distribution of loss.

In other scenarios, such as those involving risks with a low frequency and potentially high severity, a more detailed approach might be needed. An actuary might first determine the expected claim frequency and severity, the type of distribution to apply, and relevant statistical parameters. These may be based on the company’s actual loss history, industry/benchmark data, or a combination of both. Then, the parameters would be used in conjunction with loss modeling software to produce hundreds or thousands of iterations of simulated losses, which would then be compiled and organized into a confidence interval.

Learn more about confidence intervals.

For more information on the topics covered in An Actuarial Advantage, RISK66’s complimentary education library is a great source for in-depth training material.

We welcome discussion with any of our insurance colleagues who want a better understanding of these topics, and those wishing to contact us can do so at support@SIGMAactuary.com or by scheduling a call with one of our consulting actuaries.

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