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Case 4: Additional Actuarial Reports Prior to Year-End

Thus far, our series on loss projections in uncertain times has covered several analytical tools companies can use to track and analyze unforeseen changes to their risk portfolio. These have included analyzing changes due to limited or closed operations, utilizing claim lag analytics, and evaluating potential impacts on loss development factors (link to each prior post). Each of these tools will be pulling data from the most recently evaluated actuarial analysis, so while the prior year-end analysis can be used, a mid-year or third quarter analysis would enhance their functionality significantly.

Many of our clients only complete one actuarial report a year, and the most common type of report is for companies that need to properly reflect reserves for retained liabilities on year-end financials. Some clients, such as those on guaranteed cost programs, do not retain losses but still do an annual report prior to program renewal for use in renewal negotiations. Because retained losses are a balance sheet item, many companies with significant retained liabilities have quarterly or semi-annual reports completed so that trends and changes can be tracked more closely. It is important to note that, as time moves forward, the projected losses for the current period become the most recently expired period. In other words, loss projections flow into reserve analyses.

Why would I need more than one report per year?

With the current pandemic extending through the summer and further into the future, it’s increasingly likely that companies will see an impact on their year-end actuarial reporting. The degree of this impact is still relatively uncertain, though. While making use of the analytical suggestions laid out in our prior articles will help mitigate any surprises, completing an analysis evaluated as of mid-year or third quarter will make preliminary changes feel more concrete and ascertainable.

Depending on the amount of resources available, these analyses can vary from relatively simple internal updates to independent actuarial reports. If an additional full actuarial report isn’t an option, various “light” actuarial tools, such as RISK66’s Loss Forecaster software, can help companies pursue a reasonable in-between option where internal updating is combined with credible actuarial methodology and industry-wide benchmarking.

No matter what option is ultimately chosen, completing a mid-year analysis allows companies to check on interim loss experience and development, evaluate impacts on reserves, and, crucially, quantify the impact to their loss projection. The nuances involved with mid-year analyses are such that discussing their contents is beyond the scope of this blog. However, SIGMA has developed and written several resources on this exact topic, which are listed below. Working through these relatively brief materials should help readers get a better feel for mid-year analyses and what options would best fit their circumstances.

• Actuarial Analysis and Mid-Year Updates Video
• Using an Actuarial Analysis to Anticipate Future Reserves Video
• Lunch and Learn Webinar # 4, which covers how to do a mid-year report in LF

How can roll-forward and reconciliation exhibits help?

Once a mid-year analysis is completed, it’s important to understand two items relating to the estimated required reserves: how have they changed since the prior analysis, and how might they change going forward? Two common actuarial exhibits, reconciliations and roll-forwards, are typically constructed to help with these exact topics. If you’ve chosen to have a full actuarial analysis completed, these exhibits may already be included in the report, but if not, you may want to create similar types of tables yourself. Either way, understanding the basics of these calculations will help you have a better grasp on what a mid-year or third quarter analysis is showing and how you can utilize the results.

Again, in the interest of brevity, this article will not dive into the exact calculations, but in lieu of that, we encourage our readers to review the following SIGMA resources:

• Dates to Consider Blog
• Reconciling Reserves Video
• Lunch and Learn Webinar # 3, which has roll-forward discussion

Key Considerations

As with our prior articles, we’d like to provide several key items to discuss internally when completing a mid-year or third quarter analysis.

•  What are the guidelines for rolling forward reserves?
  • - If this report is for planning purposes only, it is generally recommended that roll-forward estimates extend no further than six months past the evaluation date.
  • - If this report were to be used for audit purposes, note that auditors typically only accept roll-forward exhibits that are evaluated within 60-90 days of the roll-forward date.
  • - Even if additional actuarial reports are not completed prior to year-end, roll-forward exhibits allow companies to complete “year-end” reports at an evaluation date prior to the actual year-end date, giving them extra time for discussion and, potentially, for further analysis.
  • - If a roll-forward estimate is being used, many auditors still require the data as of the roll-forward date to be reviewed when it is available.
• Should we adjust for identified loss trends and, if so, to what degree?
  • - Using the suggested analytics provided in our previous article will give decision-makers a better feel for when and how trends should be accounted for.
• Should these preliminary results be discussed with our auditors
  • - Providing a mid-year or third quarter report to your auditor may help set expectations at year-end for both parties. It might also be helpful in the current environment to have preliminary discussions with your auditors about emerging losses and other qualitative issues.
• Do we know if our exposures are still accurate?
  • - If possible, updated exposure estimates should be used in the report, especially if the original estimates were determined pre-pandemic. Reviewing exposures and discussing these internally prior to completing a mid-year analysis will help smooth the process and ensure the resulting report is as accurate as possible.

Conclusion

Despite the various analytical tools and reports available, it’s difficult to know what lies ahead for the insurance industry. Thankfully, companies don’t have to blindly accept whatever circumstances may befall them in the future. By making thorough, consistent use of the suggestions laid out in this series, our readers should be able to minimize the severity of upcoming surprises or adversity.

We appreciate your desire to utilize analytics and become more educated in the face of uncertainty, and we look forward to future discussions on these topics. If you would like to discuss how this series could apply to your company’s current situation, feel free to contact us at support@SIGMAactuary.com.

© SIGMA Actuarial Consulting Group, Inc.