Midwest Actuarial Forum March 23 2004 PC Reserve

Midwest Actuarial Forum March 23, 2004 P&C Reserve Analysis Peter F. Patrino, CFA

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

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

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 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

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

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

Variability In Development

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