Episode 92: Actuarial Reserving

My guest for Episode 92 is Larry McClure, FCAS, Chief Reserving Actuary, Americas P&C at SCOR.

The theme for the episode is 𝗔𝗰𝘁𝘂𝗮𝗿𝗶𝗮𝗹 𝗥𝗲𝘀𝗲𝗿𝘃𝗶𝗻𝗴.

Larry and I explore the following topics:⁣

✅ The business imperative for actuarial reserving
✅ Schedule P, Statement of Actuarial Opinion, and actuarial reports
✅ Key decision points impacted by reserving actuaries 
✅ Reserving actuary interactions with finance, claim, and pricing actuaries 
✅ Fundamentals of a reserving analysis 
✅ The impact of limits, attachment points, and policy changes on reserving
✅ Key reserving differences between insurance and reinsurance 
✅ Key reserving differences between US and international jurisdictions 
✅ Fair value accounting under IFRS 17
✅ Regulatory regimes in the UK, Ireland, Australia, and France
✅ The impact of social inflation and COVID on reserving 

If you are interested in learning about actuarial reserving, you want to listen to this.

My Website: maverickactuary.com

Episode Transcript

(00:00):
Welcome to episode ninety two of Livewith the Maverick. My name is Dominic
Lee, founder of Maverick Actuary.We are a content community. Our mission
is to maximize the impact and valueof QUN professionals on a global scale.
The goal of this series is toeducate our community on the most relevant themes

(00:22):
in actuarial science, risk management,and analytics. The theme of today's discussion
is actuarial reserving and we are veryexcited to have with us O our guests,
Larry McClure. Larry is Chief ReservingActuary America's PNC AT score. So
welcome Larry, Well, thank you, Thank you, Dom I'm really happy

(00:43):
to be here and I can trulysee everyone you know, just real quick.
You know me and Larry. Larryis definitely one of the first people
I would say on the podcast whoare truly considered to be like a friend.
Like you know, we're former colleagueswhere we became Facebook friends and now
I really consider Larry to be atrue friends. So I'm an apologies Larry
and everyone else. I can't believeit took us ninety two episodes to do
a formal reserving episode, but I'mvery excited. So over to you,

(01:07):
Larry. Yeah, so great.I mean, just just starting thank you
very much for having me. Ireally do appreciate it. And you know,
reserving is a passion of mine,so I'm happy to talk about it
just about any time, just aboutanybody. But just to start off,
I'd just like to mention that,you know, any of the opinions that
I say today are my own.They don't necessarily represent my employer's score y.

(01:30):
And you know, we'll always stayaway from any material non public information
because I very much value my freedom. So but we'll move on with the
rest of it. But just wantedto cover the legal stuff first. Yeah,
excellent, and thanks for doing that, Larry. So yeah, I
just love to give you an opportunityto introduce yourself. Yeah. So I

(01:53):
started in actuarial kind of came toactuarial work kind of into the secutest.
I was worked in it for overa decade, went to school at night.
Finally got my degree and passed acouple exams, and started in the
actual program at Travelers I think innineteen ninety eight. I checked my resume

(02:14):
last night, so I think that'saccurate. So yeah, and started in
the actual program at Travelers and wasreally there, you know, other than
a short foray outside of Travelers.I was there until about twenty seventeen.
My kind of last position for thelast eight years at Travelers was as the

(02:34):
corporate reinsurance actuary, So I kindof got a taste for reinsurance, but
decided I needed a new challenge,So in twenty seventeen I went over to
XL Catlan, which quickly became ACCESExcel with the acquisition of ACCE of the
XL Catlan business, and started doingreserving kind of full time in twenty seventeen,

(02:55):
and you know, been on thereserving game since. So, like
I said, it's a big passionof mine outside of work. My wife
and I live in Connecticut. Wehave two grown children, Tucker's twenty seven
and Drew is twenty four. Andwhen i'm when I'm not busy with all
the volunteering that I do for aLittle League and and Caine, the casualty

(03:19):
actualis in New England. My wifeand I own an eighteen eighty five farmhouse,
so that keeps me pretty busy tryingto keep that standing. That's that's
basically the battle at this point.It's just make sure it doesn't fall down.
So so yeah, I spent alot of time at home when I
can, when I'm not here inNew York City working. So what kind
of animals do you have? Well, I like to say I have none

(03:43):
invited, many, many uninvited animals. And you know, we live kind
of right on the edge of town, so we have you know, pretty
much you met. You know,these days in Connecticut we're getting bears and
deers and foxes and possums and groundhogs and you know, of course all
the little stuff too, the woodchucksand chipmunks and whatnot. So it is

(04:04):
a little bit of a menagerie outon the edge of town here. So
interesting. So yeah, you mentionedthat you transitioned from primary to reinsurance and
your current role is chief Actuary America'sPNC that Score. So how would you
describe your company and this role theScore. It's a French company based in

(04:25):
Paris, so this is my secondFrench company. I was at ASS for
a number of years, five anda half years. I speak no French,
so that's a challenge. Sometimes Iwork with a lot of people that
have French accents and they're great,and I've gotten fairly good at listening to
them. But yeah, I've beenhere for about twenty months now in this

(04:48):
role. You know, when Iwas at ACCE EXL, I started on
casualty reserving, eventually took on thecheap reserving actuary there that was on the
primary side, but kind of felta desire to get back into reinsurance.
I spent a lot of time workingon reinsurance at Travelers from the seated side.
And now, you know, kindof this opportunity to SCORE gave me

(05:10):
an opportunity to work on the assumedside and in reserving, which you know,
it's like I said earlier, hasbecome kind of a passion of mine.
You know. SCORE describes itself,I think accurately as a top tier
reinsurer. But we're not, youknow, the big guy, right,
So we're not the Munich or theSwiss Free. We're a little smaller and
I like to say that we're kindof we're just the right side. It's

(05:31):
a little bit of Goldilocks, right, not too big, not too small,
just the right you know. So, and you know, working for
a French company is great. Iget to go over to Paris a couple
of times, you know, everyso often, and it's a wonderful place,
so highly recommend it, especially ifyou're an art lover. So that
sounds like a great opportunity. Yeahfor sure. Yeah, so yeah,

(05:55):
I mentioned that the theme of today'squestion is actually reserving. Yeah, excited
to get into this. You know, there's people who have different levels of
proficiency. I certainly that was myfirst rule, so I know a little
bit about it, but some peoplewho are listening maybe coming across it for
the first time. So before wediscuss how actuaries get involved with this subject,
let's let's first take a step back, Like what is reserving? Well,

(06:17):
I mean, I think reserving isbasically kind of using math, using
you know, systems of math orsystems of equations approaches, mathematical approaches to
estimate the ultimate cost of claims thatan insurance company has. So you know
when insurance is a kind of astrange business, right when you know when

(06:39):
your local mom and pop store sellsa loaf of bread, they know how
much that bread costs, and theyknow how much they sold it for,
so they know instantly how much moneythey made on that loaf of bread.
You know, before expenses anyways,And in insurance, we sell a product
that is essentially a promise. It'sa promise written on a piece of paper
these days, probably electronically more oftenthe not. But and you know,

(07:01):
so it's the reserving actuary's job tokind of estimate the ultimate cost of the
all the claims and project that toalso their ultimate value and to kind of
and to ensure that there will beenough money to pay those claims at the
end of the day. Right Sothat's that's really important not just for policyholders,

(07:21):
but also for our regulators, regulartours, regulators and policyholders, policyholders,
regulators and investors, I should say. So, you know, everybody
kind of has a vested interest inthe at the end of the day making
sure that promise can get fulfilled.Right So, and you know, reinsurers

(07:41):
sit at the kind of at theend of that process in so far as
you know, we'll take risks fromprimary insurers and provide them additional additional capital,
right, contingent capital should they needadditional capital. So from a reserving
perspective on the reinsurance, you know, we look at risk that is written
by our primary insurance seedent and seededto us. So it's a little different

(08:07):
thing for you know, dealing withprimary and and reinsurance. I'm sure we'll
get into that more later on.But yeah, but the basic trade is
I was just gonna say, thebasic trade is, you know, the
basic idea is, you know,what are our losses going to be at
ultimate? Right? So sorry,go ahead. What I was going to
say, I love the loaf ofbread. Analogy that's very relatable. The

(08:31):
one I remember from from early inmy career was the iPod. I mean,
you know, kind of similar,you know, what it cost to
make an iPod, But yeah,the loaf of bread is better. Analogy
that's very simple to understand, easyto understand. Yeah, yeah, So
in terms of the purpose purpose youknow, that reserving service for insurance company
you talked about of course estimating theultimate value of the claims. So the

(08:52):
companies are essentially, you know,trying to figure out how much money they're
on the hook for for the service. The problem is that they are Now
when you think of that a littlebit more broadly, like from a micro
perspective, like when you think ofthe purpose, you know, from a
company perspective, how do you thinkof you know, that. Well.
I mean, the one thing thatthe reserving analysis, you know, the

(09:13):
kind of information that you can gleanfrom that is, you know, we
look at, you know, thelosses on a fairly detailed grain, right,
so we can look at, youknow, various lines of business or
various product segmentations, whether your insuranceor reinsurance. You're going to have some
kind of data segmentation scheme to tryto group similar similar risks. Right.

(09:37):
So the founding principle behind reserving isthat similar losses, the past experience of
similar losses, should be repeated inthe future. Right. So if we
said this class of business typically doublesin size from the initial reporting to the
final of final value, if thehistorical pattern has been that it doubles,

(10:01):
then we're going to assume that thenew years will double as well. Now
that's obviously subject to a lot ofcaveats. You know, did something change
in the way the policies are written, or the way claims are adjusted,
or something else. We need tobe mindful of that. But we start
with the baseline assumption that losses inthe future, the development on losses in

(10:22):
the future is going to mirror thedevelopment on losses in the past, right,
and so we can say, youknow, when we get halfway through
the development period, our loss isrunning higher than expected, lower than expected.
We can provide that information to ourmanagers, to our underwriters, to
our pricing actuaries, to you know, to to the various other constituents that

(10:43):
we have, and give them insightsinto how their book is performing over time.
So that's a big piece of it. As I mentioned earlier, there's
a big piece of you know,regulatory compliance. I mean, not the
sexiest thing the under the sun,but you know, definitely needs to happen
to keep you insurance operations, youknow, in business, and keep our

(11:03):
regulatory friends happy. Our audit friends, we deal a lot with them.
They are another one of our constituents, you know, making sure that you
know, they understand the assumptions thatwe're we're making and they might not agree
with every one of them, andthat's okay, but but we do want
to kind of walk them through ourthought processes. Right. So, so

(11:26):
we have a lot of folks thatwe deal with on a on a you
know, kind of regular basis,I guess I would say, So there's
a lot of insight that can begleaned from looking back, just like anything
in life, right, you canlook back at your history and you can
learn from it. Right. Well, that's kind of what we do every
day, right, so, youknow, which differs a little bit from
what the pricing actually is. Dothey're looking at next year's policy, We're

(11:48):
looking at all the policies that we'vewritten in the past, you know,
to the extent is still open anda claims so so yeah, I think
that that maybe that's a good highlevel view anyways of kind of what we're
doing and the reserving shop. Soa few things I heard from you.
Obviously, solvency is the first thing, because you want to know almost there
and hoo for You talked about regularregulatory compliance that involves I think financial reporting.

(12:11):
One that one that I you know, I kind of pitched by you
because I you know, our firstcompany saw this a lot was from a
profitability perspective, especially you know forpublic companies who have to report earnings.
I always saw a very direct connectionthere to reserving. Sure, Yeah,
and I think that's also where whyyou find a lot of reserving actuaries sitting

(12:33):
in the finance area, you know, either directly in the finance area or
kind of tangentially next to the financefinance area. So because we do spend
a lot of time with our financecolleagues kind of putting together all the supporting
material we need for our quarterly oryou know, annual financial statements. You
know. Uh, every every USbased company anyways will have an appointed actuary.

(12:58):
That's the person the actuary that's nominatedtypically by the board to sign the
official opinion on the reserves. Wehave to do that every year, so
there is kind of a statutory mandateto have a reserving actuary, at least
one. Anyway, it's for eachlegal for each legal entity. But you
know actuaries, you know, themost reserving departments are you know, many,

(13:20):
many, many actuaries. Because there'sa lot of numbers on our on
our spreadsheet, so as you know. So, yeah, so that's a
big part of it. Yeah.I spend a lot of time. I
mean I personally present to our boardevery quarter, give them an idea what
the results are, what's changing,what are we looking at, what are
we worried about. You know,we have a very open and honest conversation

(13:43):
with our board here at SCORE andI'm sure, that's very typical across the
industry, right, So so yeah, that's that's a big part of it.
Yeah. So if you if younotice I'm thinking of this conversation in
terms of making it most valuable isI'm trying to take it to kind of
work backwards. So I'm starting atthe top because I think if we we

(14:03):
talk about the analysis and we'll we'llget to that eventually. I think is
always good to start high level andthen work or we don't. So we
talked about, you know, whatreserving means even before we brought actuaries into
the equation. So now that we'vebrought the actuaries into the equation and meet
knowledge that actuaries are instrumental to thereserving exercise, what key deliverables do they

(14:24):
produce? Yeah, so you know, as we kind of just alluded to,
I guess earlier, management information isa big part of what we do.
So, uh, feedback loops toour business unit customers is a big
part of what we do every quarter. Uh, and this is true for
virtually all reserving actuaries that I'm awareof you on some regular frequency, usually

(14:48):
quarterly, you will you know,we will we will meet collectively, you
know, across all the various disciplinesclaims, finance, accounting, management,
whatnot. And we will talk aboutthe results that we're seeing, and we
because we also want to it's notjust us delivering information to them, it's

(15:09):
also we want to be able tokind of regularly ask them questions about what's
going on in the book, ifthey're changing their underwriting appetite or claims,
is changing their claim fanneling processes oryou know, what have you. We
want to be aware of that becausethat could definitely affect the way losses will
develop over time. Right. So, and then you know, as we

(15:31):
as we as you remember if welearned on our exams, we have mathematical
techniques to start to deal with that, you know, should those things happen.
Right, So, so the communicationthe management information is a really really
big deliverable. So you know,while reserving to some folks may feel like

(15:52):
it's a little less exciting than pricingin a lot of ways, it really
it's super important because you know,we're providing a lot of information to kind
of key stakeholders and kind of howthe reserves are developing. And for most
insurers that's the largest liability on thebalance sheet, right, you know,

(16:14):
there are not many insurers that haveyou know, non loss liabilities you know
that are the larger than their lostliabilities, right. So so yeah,
that's a big part of it.I think that's that's where we spend a
lot of time, you know,with our various constituents, could be a
board, could be management committees,could be you know, other other auditors,

(16:34):
internal orders, external auditors, whatnot, regulators, whatnot. So I'm
glad you mentioned the claim because Iremember as a reserving actuary one of my
favorite parts was actually we partially wemet with the claims team, you know,
who was not they weren't actuaries,but they were on the grown and
they were kind of the first lineof defense. And you learn so much,
I mean even outside of reserving,just things just you learn things that

(16:56):
you wouldn't expect about this particular claim, how it came, about what it
involves. And I just thought thatwas one of the most interesting parts of
being a reserving actuary for me.Yeah, at one hundred percent, I
agree, one hundred percent. Ispend a lot of time with our claims
professionals here and at all the allthe times I've been on reserve in a
reserving role. I think the relationshipbetween reserving and claims is really really important.

(17:19):
You know, we want there,like you said, they are there
where the rubber meets the road,right where the dollars are are ultimately being
kind of decided the strategies if it'sbeing litigated, the strategies are being decided,
you know. So and and ifyou get into you know, kind
of more complex things like arbitrations orsome latent claims, you're going to spend

(17:41):
a lot of time with your claimsfolks. So so that's that's a really
big and very important relationship that wehave. Now when I think of the
deliverables that I alluded to, whenwe think about the you know, I
know you mentioned the quart to thereserve review orre you're coming up with the
what we call the indications and whatyou think the companies liable for based on

(18:03):
you know, the line of business. And also some companies may have like
month end closed, that's another commonone. I can think of annual and
quarterly things like these all have domestreamimpacts. So there are reports and statements
that these deliverable supports. So whatare some of those key reports and statements
that these deliverable support. Yeah,so that's a good point from in the

(18:26):
US. In the US anyways,when we think about kind of our called
yellow blanks or statutory reports, ScheduleP is is the one that kind of
leads to mind. So Schedule Pcontains, you know, buy annual statement
line of business contains triangle data.So the data when we take our data
from a reserving perspective, we're lookingat how the data develops over time.

(18:48):
Generally we arrange the data in atriangle. So along with each diagonal is
another valuation point. So and asyou move to the down into the right,
you get more and more current datato and just setting the data up
in a triangle format allows us tokind of analyze it quickly. So,
uh, the Schedule P is theone that leads to mind. Uh you

(19:10):
know, uh, you know,allocation of reserving results to Schedule P line
and then the production of scheduled Pand and ultimately answering questions you know,
from our regulators because in investors,because they will that's one of the public
facing documents that they will have accessto. So we will often get questions
about you know, changes in inin development as seen through schedule P.

(19:33):
So that's a really important one.Like I said, with the with the
annual opinion, there are a bunchof uh, you know, kind of
mandated required documents that we have topublish and sign. I have to publish
and sign that detail you know,how we developed our range and and risk
factors and stuff like that. Sodisclosure is a big part documentation. Disclosure

(19:59):
is a big part the reserving world. Right, So, like like any
any place where you're using uh,you know, mathematical methods and judgment in
combination, which we are, youknow, documenting what methods were used and
what judgments were made is a bigpart of of the of the actual reserving
story, if you will. So, so I spend a lot of my

(20:22):
you know, first first few monthsof every year. I spend a lot
more time in Microsoft Word than Ido in Microsoft Excel. So uh,
that's that's just the reality of it. So so, I mean, I
think my actual report, the bigreport is somewhere in the order of a
thousand pages with with exhibits, andit's about one hundred and forty pages of

(20:48):
just text. So just to giveyou an idea of kind of how you
know, voluminous the documentation can be, right. So, and this is
the statement of actual opinion that you'rereferring to right within the annual statement.
Is that what you're referring to,Well, that's the report, the report
that accompanies the opinion. So theway it works is you put out the
actual opinion and the summary early on, and that gets included in the yellow

(21:11):
blank and the actual statutory and thenthere is a there's a full report that
gets written subsequent to that and hasto be completed a little later. And
that's the big one where we documenteverything in you know, I would say
excruciating detail, but it's really onlyexcruciating for me and anyone that has to

(21:32):
read it, I suppose. So, but you know, it's you know,
like we say in most kind oftechnical roles, I mean, documentation
is your friend, right, youwant to document the assumption you make.
So we spend a lot of timedoing documentation. Again, not the most
exciting part of the job, butabsolutely necessary to make sure that somebody else

(21:55):
can come in and figure out whatwe did. I mean, that's a
that's a basic actual precept, right, So so we spend a lot of
time on documentation. And then there'sothers just very obvious ones like the balance
sheets, you know, just thinkingof the basic financial statements annual and then
quarterly to where you know, thereserves kind of would impresumably would impact.
Yeah, and that's where we workreally closely with our finance partners. So

(22:19):
you know, we will produce,we will we will add the you know,
kind of the loss reserve piece ofthat. It could be lost reserve,
it could be expense reserve, itcould be you know, either unallocated
or allocated defense and class containment oradjusting another in the modern world. So
we we take care of a lotof different reserves in support of the financial

(22:41):
statements and then work closely with ourfinance friends to get everything you know,
where they need it to be.Right. We also do stuff like estimate
the discount for workers comp and youknow various other you know, kind of
required metrics that we need to calculatein order to produce our finance statements.
So that's actually a good segue becausewhat I was going to ask about.

(23:06):
The next thing I was going toask is like, when we think of
the deliberals so deliverable. Sorry,we talked about deliverable is what they are
and some of those downstream impacts.Now, being an actuary, as we've
spoken about before, you're not dependingon the rule and depending on where you
sit, you may not be theactual decision maker. Oftentimes, when you're
reserving actuary, your work is supportingan actual decision point and that could be

(23:26):
by senior management or someone else.So what are the key decision points that
are impacted by you know, thedeliverables these actuary deliverables that reserving actuaries produced.
Yeah, that's that's a great point. So you know, our job
as reserving actuaries are my job asa cheap reserving actuary for for us is
to is to be an advisor essentiallyto the management committee. Ultimately, ultimately

(23:51):
management is going to make the finaldecision as to what losses get booked.
And that's one of the reasons whywe produce arrange, right, So when
we produce a range around our centralestimate, and we can talk a little
bit more about how we do that, but when we produce a range,
one of the reasons why we havethat is not only to give external parties

(24:11):
an idea how much volatility there couldbe in in the in the numbers,
but also to to kind of assessthe reasonableness of the manage its booking decisions.
Right, So if management wants tobook a little bit more, a
little bit less, as long asit's in that range of reasonableness, then
generally speaking, the opining actuary,the appointed actuary can can sign off on

(24:36):
the reserves being reasonable. You know, these are all estimates, so at
the end of the day, wedon't know the final answer. If I
knew the final answer, I'd beon a beach somewhere sipping a cool drink.
But I don't know the final answer. So I produce a range and
then you know, kind of leaveit up to management, you know,
with with a fair amount of councilright to come up with booking decisions.

(24:59):
And there may be reasons why theywant to book a little more. Maybe
they are a little worried about somethingthat we're not worried about, or maybe
a little less for various reasons,and we could you know, we could
speculate on some of those, Isuppose, but uh yeah, I mean
that's our job is essentially as advisors, right ultimately, and you know,
where it would really become problematic ifmanagement wanted to book something either really really

(25:25):
outside of outside of our range,either high or low. Right, so
I would say that high is lessproblematic than low low, you know,
just meaning that we don't have youknow, we wouldn't say that the reserves
are adequate at that point, orwe couldn't say that they were adequate,
and then we get into the discussionsabout whether we can offer our opinion on

(25:47):
those reserve or clean opinion on thosereserves. You know. The folks that
get aggrieved when reserves get too highare are taxing agencies. Reserves are an
expense. So the more reserves youhave, the less unless you have in
taxble income. So you know,taxing, our friends at the IRS and
other taxing jurisdictions will be more agreedif the reserves get too hot, Investors

(26:11):
and regulators generally speaking might be okaywith it. Regulators will certainly be okay
with it. Investors may or maynot, depending on how worried they are
about the volatility. Right. So, but yeah, that's it. It's
a big part of kind of whatwe do ultimately. So I'm fortunate to
work for a company where you know, we generally book our best estimate.
So that makes my job a loteasier. But I have been at places

(26:34):
where that's not true and it doesmake the job harder. So I see,
yeah, No, I like that. You talked about that relationship with
management, and you talked a bitabout booking, and previously we talked a
bit about claims and a few otherpartners. But I want to actually dig
a bit deeper on those relationships.So observing actuaries, Reserving actuaries work with

(26:55):
various business partners for different reasons.So first let's talk about who are the
key business parts and as the interactwith and then what's the nature of those
interactions. So we talked a littlebit about finance already, So finance the
key interaction there is really preparing allof those financial reports for management, regulators,
auditors, whoever, the customers are, boards, board of directors,

(27:18):
whatnot. That that's and and weso we work closely. I've reported directly
to the local CFO. I've alsoreported to through other kind of you know,
next door to the finance chain,kind of setting right off to the
side. I don't know that itreally matters as much as long as you're
talking a lot and frequently so uhso, yeah, I mean, when

(27:44):
I'm here in New York, Ifit, you know, just a couple
of deaths over from my finance colleague, and we talk all the time and
and try to get you know,we want to make sure that when we're
presenting to the board, we're we'reyou know, presenting one message essentially,
you know. So so we'll I'lltalk a lot about the reserves. They'll
talk about you know, kind ofsome of the other movements could be changes
in seating commissions or expenses or whatnotinvestments. So so that's a big partnership.

(28:11):
Claims that we talked about earlier.I mean that I think is probably
the most critical resource. So Ispent a lot of time with our claims,
folks. I participate in claim theaudits, which is which is a
lot of fun, to be honest, to get actually to get actually into
get your hands dirty a little bit, and read claim files. I think
is important from time to time.I don't I don't have enough time to

(28:34):
do that every day, but certainlyread a lot of our large loss notices
that come from claim and you know, we we quite frequently want to go
back and ask the clarifying question youknow, is this is this all?
Are we expecting more? You know, so we could position the reserves accordingly.
Right, So that's a big oneobviously. You know, kind of
our underwriting and management colleagues we talkto provide feedback loop what we're seeing.

(29:00):
Are there changes in their book thatwe need to be mindful of. That's
that's a big part of what wedo. Trying to think pricing. Pricing
actuaries are probably the other big constituentthat we should probably touch on real quick
because you know, I mentioned beforepricing actuaries are kind of pricing next year's
policy, but that will eventually becomea reserving risk. Right as soon as

(29:22):
that policy you know, kind ofis earned, if you will, it
becomes the reserving risk. So youknow, the alignment of assumptions between pricing
and reserving is really a very keyelement to have in it for any insurance
company, right, and for areinsurance company, I think even more so
because you know, we have alot less data generally speaking than our primary

(29:44):
than a primary carrier would, soyou know, aligning We don't have to
agree on every assumption, but weshould generally be aligned. As you know,
what historical range chases look like,what a trends look like, would
a loss development patterns look like,So that when we're projecting, you know,
kind of our passed UH policies,we're using a consistent set of assumptions,

(30:07):
right, So that's key. Andagain, uh, you know,
the pricing actuaries are, especially inreinsurance, are are working on a deal
by deal, set by seat atbasis. So they're always more in the
weeds than we are in in inthe reserving side. So it's really important
to kind of talk with them periodicallyto see what they're seeing on the front

(30:29):
lines, if you will. Right. So, so that's probably the other
one that I would probably highlight today. Yeah, what about ILFs? Is
that something that both of you Iknow, that's more probably more of a
pricing some of the Yeah. Yeah, well I've certainly worked on insurance.
What you're talking insurance link securities?No, no, no, sorry,
increase the respectors oh il s.I'm sorry I didn't hear. Sorry,

(30:52):
No, definitely, definitely. Youknow. One of the things that we
observed, you know, coming comingout of the social inflation period, which
we'll probably touch on later, isthat limit profiles changed a lot and if
your limits, you know, limitson offer, your attachment points and your
limits, if those change a lot, that's going to impact your development factor

(31:15):
pattern. So we definitely want toknow from our pricing colleagues if the underlying
limit distribution or attachment point distribution ischanging, because that's either going to tend
to speed up or slow down ourloss development. And if we don't take
that into account, we're you're goingto either over project or under project and
both are bad for different reasons obviously. But yeah, we do need to

(31:40):
be mindful about changes in mix,changes in underlying exposures, and one of
the great ways to get that isfrom talking to our pricing colleagues. So
that's a great point. Okay,good Yeah, Wait, I like the
way you tie that together there.I think that's important reserving on pricing.
So now that we have a sonunderstanding of business is imperative for reserving on

(32:01):
you reserving actuaries key interactions. Finally, let's dig a little deeper into the
details of reserving. I know allthe actuarial nerds are happy, know,
so we can start talking more aboutthe details. No, this is a
very hard question because I know I'minto this but at a high level,
if it's even possible, how wouldyou describe a reserve analysis? Yeah,

(32:22):
so, I mean I think theanalysis is really looking at So we do
it on a quarterly basis, Sowe're going to look at all the data
that's come in in the last quarter, all the losses that have come in.
In our case, we're going tolook at what premium has been earned
in the last year we do wedo everything on an underwriting year basis in
the reinsurance world, so we're lookingat groups of contracts, not groups of

(32:45):
claims when we do underwriting. Sothat's a difference between primary and reinsurance.
Primary insurers will tend to group claimsby accident year and reinsurance will tend to
group claim by contracts by reinsurance contracts, so underwriting year typically, So for
example, I'm still earning premium onmy twenty twenty three underwriting year, right,

(33:08):
so my premium is moving as wellas my losses. So the first
thing we do is we look atwhat changed since last quarter. We got
more premium in, we earned IVand R on that premium, we got
losses in or the losses higher orlower than we expected. So we look
at ave actual versus expected. That'sour one of our key diagnostics as as

(33:29):
soon as the data becomes available,and that gives us a kind of a
guideline for how we want to approachthe reserve review. So then we'll look
at places where our actual losses havebeen materially higher or lower than expected.
And as you might imagine, wespend more time on the places where the
losses are materially higher than we dowith the losses are materially lower. But

(33:51):
yeah, we'll kind of target ourreview. We have enough reserving segments that
we can't always get to everything everyquarter. We will target our review based
on that experience. And then reallywhat we're our job is to figure out,
you know, do we need tomake any changes to the big reserve
review that we do every fall.Do we need to make any changes in

(34:13):
the intervening quarters to make sure thatour reserves are still you know, where
they should be. Right, Sowe will look at, you know,
do we need to change methods.We have a variety of approaches, mathematical
approaches that we can use to estimatethe ultimate value. We can start with
the original price loss ratio and workall the way to the point where we're

(34:36):
actually holding no ibn R at theend, where we're just basically saying the
incurred losses are our ultimate losses,and we have various methods in between.
So we will look at methods alongthat continuum and we'll see if, you
know, if the more loss responsivemethods are running hot or running cold.
That will tell us whether you know, we're trending towards a higher number or

(34:59):
trending forwards a lower number. Sowe start to think about where are the
reserves moving on each segment, andthen how does that work in aggregate Because
one of the things you get inany portfolio of liability, insurance liability,
is you get diversification, right,so you'll get some good guys and some
bad guys. And you know thatdoesn't necessarily mean that, you know,

(35:20):
you may wind up, you know, across an entire book being essentially flat,
but you're going to have some winnersand losers in there, right,
So we'll spend some time thinking about, you know, who are the winners,
who are the losers? Do wehave good rationale for that? Can
we explain it? Is it drivenby losses? Is it you know what?
What what changed? So really,what I tell my team is that

(35:40):
we're storytellers at our core, right, Our job is to come up with
the story every quarter, what changed, what what do we do? How
do we react to it? Andthen we just document that and present that
to management. So you know,ultimately the reserve review is a story about
our losses. So and I thinkif you think about it as kind of

(36:01):
telling a story, I think ithelps you contextualize the reserve review and turn
it from a mathematical exercise into somethingthat people can kind of consume on a
kind of more human basis, ifyou will, right. So, So
I spent a lot of time withmy team talking about what's you know,
asking the question what's the story?Right? So, and we get to

(36:23):
be fairly good storytellers after a while. So and hopefully it's mostly based in
fact, but there's there's some opinionmixed in there too from time to time
for sure. So yeah, I'ma big fan of storytelling with Lebrian.
You know something, I want tohelp these cultivate and showcase within the profession.
You I want to take a stepback on the difference between primary and

(36:47):
primary carriers and reinsurance. I knowhe started to talk about it. I'm
just going to read repeat something thatyou said on this guy some clification.
The first, like you know,I was, I want to understand the
difference between reserving between primary carriers andre insurance. And the first thing you
mentioned is that I believe you saidprimary carriers do things on a calendar accident
your basis, and then reinsurance onan underwriting year basis. I keep forgetting

(37:09):
of underwriting on policy here, probablyshouldn't say. It was sometimes the same
thing, right, year of account, year of account for our friends in
the in the UK, especially atLloyd's, like to say year of account,
policy year, underwriting year. It'sall very similar. So yeah,
there are really two schemes of segmentingyour data, right. You can you

(37:30):
can group all your claims by anaccident year typically action quarter, accent year,
and your premium then would be calendaryourn premium, right, so so
align with the you know, theline the premium to the to the to
the losses. So that's very typicallyused by most especially well certainly most US

(37:51):
space primary insurers will group their dataand the idea behind that is that these
accidents all occur in a similar economicclimate, so you would want to think
about them in a similar way.Right. So that's that side of the
house, and that's typical in primaryinsurance. In reinsurance, we typically think
of everything on a renewal cycle basis, So we think about, okay,

(38:15):
when does this treaty come up forrenewal, and so all of the production
side of the house, right,the underwriters and whatnot, is all focused
on the renewal cycle. So wegroup our data in a similar manner,
which is group everything by that underwritingyear. So the premium earns over the
span of the underwriting year, andif it's a risk attaching treaty, then

(38:37):
it can earn over multiple years.Right. So premium development is something that
comes into play when you're dealing withunderwriting year data, right. Whereas in
calendar accident year, as soon asthe year is over, the calendar year
is over, your earned premium isfixed, right, but for maybe some
adjustment to the premium that may needto be made. But there's development period

(39:00):
per se on premium unless you haveyou know, like I said, adjustments
to flow back for the prior year. But but yeah, in underwriting year,
like it is much slower because we'rewaiting for all of those contracts to
expire, right, So our lossestake longer. That year takes longer to
kind of fully earn, if youwill, So our development patterns are longer

(39:23):
and therefore more leveraged. So,you know, but it is the way
that our business, you know,customers think about the business. So we
do that work even though there aresome technical reasons why it's more complicated and
more leveraged. It's it's there's abusiness imperative to do it that way.
And you know, there, likeI said before, there are outside of

(39:44):
the US, there are various placesthat just prefer to do year of account,
Lloyd's being kind of the number oneone that I can think of,
right, because everything at Lloyd's comesfrom a world where there were certain names
on certain contracts in a certain periodand you kind of had to settle up,
right, So a similar kind ofmindset to what we would see here
in reinsurance. So what specifically isthe additional degree of freedom that you mentioned

(40:08):
when you look at reinsurance versus primarythere's really a couple of things. So
there's the fact that it takes longerfor everything to develop, right, So
there's more leverage and all your developmentfactors, right. And then the other
thing is the data. The dataquality and quantity is much different. Like,
if you're a primary insurer, you'rewriting the policies, you know all

(40:29):
the policy attributes, right, youknow all the underwriting characteristics, you know
all the claim statistics, you knowprobably hopefully anyways, and you know you
have access to all of that data. In reinsurance, we have access to
the data that the seedent is contractedlyrequired to give up, which is a
small subset of the total, right, so we have to work with much

(40:52):
less information. And I think generallyspeaking in the reinsurance world, that's just
me me that reserving actualies tend tobe a little bit more conservative because we
have to build in a little bitmore of a hedge against uncertainty than you
would have to if you're doing somethingyou know, I'm going to say relatively
straightforward like personal lines, you know, personalized homeowners or auto or something like

(41:15):
that, right, where you havea lot a lot a lot of data
and very homogeneous data. Right,we may not have very homogeneous data either,
right, So whether it be underlyingcontract type or whatnot. So the
heterogeneity in our data also is anotherissue, another challenge for us. Right,

(41:36):
we try to segment our data sothat it's as homogeneous as possible,
but it's never going to be asclean as data on the primary side,
right, So there's just it's kindof a next level thing. When you
move from primary to reinsurance, thedata gets center, it gets more leveraged,
and you know, as a consequence, you're you're just less certain about

(41:58):
every estimate that you make. Right, So does that help? Yeah,
yeah for sure. So other thanhow the data is organized or grouped for
the analysis, are there any othersignificant differences between both? Yeah, so
we'll definitely segment by reinsurance type.So proportional quota share versus non proportional excess
a loss makes a big difference,as you might imagine. You know,

(42:19):
if we're taking a share of eachand every then it feels a lot more
like primary, Right. If we'retaking only the excess piece on like an
excess a loss contract, then it'smuch more leveraged. So when we segment
data, the first thing we dois what kind of treaty, what kind
of contract is this from? Right, Where obviously on the primary side they
don't have that for the most part, right, unless they're selling a claims

(42:42):
let's they're selling a claims made offeringand a loss is occurring offering, they
may segment though separately, but itwould be a similar thing to doing something
like that on the primary side,right. So, but yeah, I
mean we do definitely segment by reinsurancetype first. And just because where reinsure
as our primary focus, that doesn'tmean we don't do any primary We have

(43:05):
program business and other stuff that looksa lot more like regular insurance, right,
So we kind of have to beable to live in both worlds,
if you will, so m hm. So, yeah, So that's that's
helpful in terms of understanding the differencesbetween primary carrier reserving and reinsurance deserving.
Another thing interesting dynamic you've had thepleasure of witnessing or working with is understanding

(43:29):
the difference between reserving in the USversus in international jurisdictions. Yep. So
I'm curious to learn about some ofthe key differences in reserving between US and
international. Yeah. So, youknow, at SCORE we work with a
lot of colleagues, you know,in Paris and UK and you know,
Dublin and elsewhere. We have colleaguesin the Far East as well. And

(43:53):
you know, outside the US,I think that the risks are different,
right, I mean, the keything in the US, this is the
casualty business. From my opinion.You know, when I talk to my
colleagues outside the US and we talkabout, you know, the risks that
flow through a typical kind of commercialliability book, they just don't get it,

(44:15):
at least not right away. Andit's not it's not for lack of
aptitude or smart it's just not somethingthey're used to. They're not used to
the ligigiousness that we have in oursociety. They're not used to people suing
all the time. And in fact, you know, once you get outside
the US, it's much harder tosue. You may have to pay if

(44:36):
you lose, you may have topay the other guy's lawyer costs, right
for example, in the UK orsomething like that. Right where here,
you know, we always say nothingstopped anybody from suing anybody at any time.
Right. And and you know whatwe saw when we think we think
about kind of the casualty deterioration inthe last ten years, we saw the

(44:57):
prevalence of just megal law suits,right, we call that social inflation.
And you know, when I talkto my colleagues outside the US, they
just they find it really hard toconceptualize a two hundred million dollar verdict from
a single auto accident, right,They just they just they can't figure that
one out, right, And andthey also come from a world where socialized

(45:19):
medicine is prevalent, right, sothey won't have the they don't have the
workers comp medical like we have here, right because we have we don't have
widespread socialized medicine. And people wouldargue with me politically about that, but
but you know, we we wehave. You know, we have exposures
that run through our book that justdon't exist. But you know, outside
that, the actual A math isthe actual A math. So if you

(45:42):
are a US reserving actuary and youwanted to go work on a book of
continental European motor I mean you coulddo it. The math is the same.
I mean, math is universal language, right, you know, so
you know there there wouldn't be Infact, I think you'd probably find it
generally speaking, less challenging. Butbut you could do it, you know,
fairly straightforward. There may be regulatorynuances that you'd have to adapt to.

(46:05):
But you know, from a puremath perspective, there's really no reason
you couldn't do it right. SoI just like I said, I think
just the overall climate and the typesof losses that we have running through the
insurance system in the US are justforeign to most folks outside of the US.
They just don't have that culture ofrelgigiousness. So yeah, another thing

(46:27):
when we talk about US and international, of course, is the accounting laws.
They're yeah, a great point.So yeah, I mean I don't
think about it much because as aFrench reinsurer, we're under IO for S
seventeen and have been for the lastwell year and a half, I guess.
But but yeah, so you know, fair value to accounting or you

(46:51):
know, whatever you want to callit, whether it be solvency two or
IO for seventeen, you know,those are those are differences in the way
you're data and your insurance company.The results of your insurance company are going
to be reported externally. And whenwe think about fair value accounting, the
big thing with from a reserving perspectiveis we now have to think long and

(47:15):
hard about what we expect our futureloss ratios to be. So any unearned
premium or policies that have been youknow, written but not yet earned.
We need to have a loss ratiofor those because we're going to earn all
of that premium and the you know, expected losses on that for the future
period. And then we're also thinkinga lot about the pattern that those losses
are going to you know, goingto come in at and be paid.

(47:37):
You know, So when are thoseloss is going to be reported to us?
And then when are they going tobe paid? Because ultimately, under
IBRASE seventeen, we're projecting all ofthose future cash flows out and then we're
discounting them back to present value.So we go through all of that math
to get a discounted kind of fairvalue present value view of the liabilities,

(47:58):
Whereas in the US. In theto contrast that, there's very little discounting
in US reserving under US statutory reserves. There are some prescribed reserving for US
workers comp but essentially think of USreserves is undiscounted. And the rationale for
that is varied, but at leastone of them is that provides an implicit

(48:19):
hedge for the regulators. Right,the fact that you're not discounting your reserves
means there's essentially extra money in thereto provide a solvency buffer. That's at
least one rationale for it. Butyeah, I mean, and you know,
one of the things if you wereto work outside the US or do
reserving outside the US, you know, there may be specific concerns or specific
assumptions that you need to make tosupport the accounting regime that you're working under.

(48:44):
Right, So you know, mosttypically these days it's I US seventeen.
But if you go down to Australia, I think they use a stochastic
reserving approach, so you'd have toyou know, you'd have to run your
you know, most of our reservingis very deterministic other than you know,
setting a ring around the central estimate. But if you know, if you
were working in under a regulatory regimethat required stochastic reserves, then you would

(49:08):
have to model your reserves and makeassumptions as to volatility and timing of payment
and all that. So so itcan get very complicated. You know,
the US system is actually kind ofprobably the simplest regime out there at the
current moment. And you know,I just I guess I forgot because I

(49:29):
get I get so caught up inI for seventeen having, you know,
working for a French company. Soyeah, but I still sign a US
statutory opinion, so I can't forgetit all right. So yeah, So
sounds like nature of is going tocone thing. Standards are the main ones
the main yeah for sure, Yeahfor sure. And and and regulatory regime,
like you know what regulatory regime areyou're working under. If you're working

(49:51):
in Ireland under the Central Bank ofIreland, the regulatory requirements are going to
be quite high, you know,so and you know just Buring example,
right, And you know the UKhas its own set of regulations. Are
friends in France that the ACPR havetheir own set of regulations. So depending
on where you are, right,that's going to be a big determination and
how much and what documentation you haveto produce to satisfy all those regulatory requirements.

(50:17):
Right, So okay, that's helpful. No, certainly, I think
anyone would agree, whether you're ininsurance or not, is that the economy
has been in some interesting places.We had an interesting experience in the past
probably a decade or so at aminimum, And of course the economy directly
impacts especially with property and casualty,you know, reserving itself. So what

(50:40):
market terns of you observed in recentyears that are relevant for observing actuaries.
Well, there's been a lot.I mean, it's really been a very
tumultuous ride. I think that's fairto say. And you know, I
think what I would probably highlight basedon my experience, I guess i'd probably

(51:00):
say there's there's a few Social inflationhave kind of alluded to a couple of
times, and I'll talk a littlebit more about that in a minute.
Macroeconomic inflation when you know, theRussia Ukraine War started, we all remember
a couple of years ago that,you know, energy prices went through the
roof and and we had supply changedisruptions, and you know, if you

(51:22):
were trying to build an addition onyour house, you know how much fly
would cost for a brief period oftime, it's still pretty high. So
so that was when COVID obviously,you know, it can't we can't overlook
COVID. So I think macroeconomic inflations, social inflation and COVID are kind of
the big ones to run through.And then I guess climate change would be

(51:43):
a fourth. If I was goingto throw a fourth in there, I
throw climate change. I mean,that's definitely changed the risk appetite of most
insurers and reinsurers, some quite significantly. You know, some have exited marketplaces
quite publicly, especially Florida, rightso, due to climate change. So
from my world, which is whichis largely dominated by by casualty reserves,

(52:06):
you know, whether it be autoliability, general liability, or whatnot, professional
liability, social inflation is by farthe largest impact that we've seen. And
that really just refers to the factthat you know, over the last decade
or so, jury awards have skyrocketed, and you know, if you paid
attention to the news, you've seenyou know, like I alluded to before,

(52:29):
two hundred million dollars single auto accident, you know, jury awards,
you know, and they've gone up. And it's not just auto accidents,
it's product liability, it's premises,it's all of that. Right. So,
and so we we saw you know, you know, the way I
kind of think about casualtry reserves isin four kind of eras, if you

(52:51):
will, kind of the pre socialinflation world of twenty fourteen and prior,
and you go back too much,then it gets a little dicey, but
let's just assume, let's not goback too fole Are twenty fifteen to twenty
nineteen is kind of the core socialinflation years where we saw across the industry
dramatic increases in casualty reserves. Twentytwenty to twenty twenty two roughly is COVID,

(53:14):
So we kind of think of ofyou know, jury awards, courts
being closed, plaintiffs attorneys not beingable to access juries. And I mentioned
juries a lot because it really is. You know, what plaintiffs attorneys want
to do, by and large isget in front of sympathetic juries and find
ways to make them very mad atthe at the the accused, if you

(53:37):
will, and if they're a corporatedefendant, very mad at the corporate corporation
for being as callous as of coursethey are alleged to be, and you
know, get the biggest number theycan gat. And remember the first thing
in any one of those claims isthe disclosure of available limits. Right,
so the insurance companies are required inmost touristics have still acquire to to disclose

(54:00):
the limits that are available, sothat that sets the kind of the tone
for the whole litigation at that point, right So, and then of course,
I would say twenty three and subsequentright where I think maybe the pause
button on COVID has come off andwe're kind of expecting lawsuits to continue,
but we really haven't seen enough ofthat yet, but I think it's a

(54:22):
pretty good vet that that's going tocome back. But you know, across
the entire industry, social inflation wasa you know, multi billion dollar event
essentially in reserves. And you know, I was at when I was at
ACSEXXL, we you know, didsignificant reserve strengthenings. We've done those here
at SCORE prior to my joining forthe most part, and you know,

(54:45):
that was a that was a bigissue. Now the response from the insurance
industry has been swift. Races havegone up dramatically, available limits to come
down dramatically, and you know,I think we think that the product isn't
a lot better shape than it wasa few years ago. But you know,
time will tell, obviously, So, but that's been you know,

(55:06):
in my career kind of span,if you will. That was probably the
most dramatic since the financial crisis intwenty eight twenty oh nine, right.
So yeah, and then you knowyou go back to some large cats before
that in twenty oh five and whatnot. So I'll be a quick follow up
because because one of the things interestingthings you mentioned in our pre meat was

(55:28):
that you said that there are fourchanges, four changes in ten diagonals.
So when you think of reserves,of course that that can impact the way
you're doing reserving. And I thinkthat was really interesting. So how do
you think through given the four erorsyou mentioned there's four changes in ten diagonals?
Yeah, yeah, and it's reallyit's really really hard to deal with

(55:49):
that much change. I mean,actuaries are not great at dealing with that
much change in such a short periodof time. I remember when I was
in acts, I think our onlevel factor was something like two point five
two hundred and fifty percent, right, so rate and policy structure had essentially
changed by a two and a halffactor. That never happens. I mean,

(56:09):
we're used to thinking about trends andten percent a year, fifty percent
a year, five percent a year, not two hundred and fifty percent.
You know over five years. Youknow, that's just a number that doesn't
compute, right, So I thinkI think there's two things you have to
think about. You have to kindof separate loss development from from rate adequacy.

(56:31):
Right, so rate adequacy, Arethe policies adequate? Are they priced
adequately? That's kind of separate whenI from a reservement perspective, I'm really
interested in, given that we havethis many losses, this number of losses
dollar wise, anyway, how arethey going to develop to their ultimate And
I'm not entirely convinced that the patternchanged a lot. I think it changed

(56:52):
a little bit, But if everythinglifts equally, the pattern doesn't change because
they're all just ratios to one another, you know. So I think the
shape of the church probably changed alittle bit. But it's really hard to
tease that out, you know,when so much is changing so fast.
Right, So it's something that Isuspect our academic friends we'll spend a lot

(57:14):
of time writing papers about as weget more and more diagonals for those years.
And you know, we do,like we said earlier, we do
have mathematical approaches to that, butwhen the factors get as large as they
are, they kind of start tobreak down and look silly. So we've
kind of focused mostly on the developmentfactors looking at the kind of development factors

(57:35):
on a ratio basis, so it'sto not get too biased by the size
of the losses that they're sitting ontop of. And I think that served
us pretty well. And I thinkgenerally speaking, we should kind of assume
that the go for world is goingto kind of look like twenty fifteen to
twenty nineteen, and if we usethat as a baseline assumption, I'd be

(57:57):
happy to be proven wrong that theloss has lots of moment isn't that severe,
But I think for our baseline,it probably makes sense to at least
assume that that's a good place tostart, right So, but yeah,
it's it's very, very challenging,and we spend a lot of time looking
and stress testing our assumptions and seeing, okay, well, what if we

(58:19):
let more of this come in andhow much does that move the number?
And I think that's a very it'skind of an iterative and painful way to
go about it, but I thinkthat is probably the best approach, is
to kind of start to stress testyour assumptions and see how you know,
how how stewed or how changed theycould be depending on what assumptions you use,

(58:40):
what years you include. That's abig deal. You know, when
we're talking about excess casualty and umbrella, we want to use a lot of
years. But as you mentioned,that means we're going through multiple eras to
try to get and that makes itreally hard. So I think for the
moment, we're kind of going shorteron our averages until we kind of know
more so, but yeah, that'sthat's where it gets a lot less mathematical

(59:05):
and a lot more judgmental. Right, So yeah, so yeah, great,
great question. Yeah. Well,I learned so much Larry in this
conversation, and I'm looking forward tosharing you with the community. I think
a great first episode on Reserving.Could not ask for a better episode of
a better person. So I justwanted to thank you again for your time.

(59:25):
Oh you're very welcome. Thanks forthe opportunity. I really enjoyed it.
Okay, great, I have agreat rest of the night, Larry,
take care, Yeah you too,by now bye.