S&P slams actuaries for industry reserve issues

In a recent report, rating agency Standard & Poor’s points the finger at actuaries for problems with property & casualty insurer reserve shortfalls.
“Actuaries are signing off on reserves that turn out to be wildly inaccurate,” says S&P’s Steve Dryer. “It’s an abysmal track record. S&P predicts U.S. insurers will top 2002 reserve enhancements of US$22 billion this year.
S&P analyst Sid Ghosh says that reserve charges have been “huge surprises” in many cases. “So many companies tell one story one day with a great degree of confidence, and then six months down the road tell a completely different one. But reserve shortfalls don’t just happen overnight. What happened to all the reserving opinions signed by actuaries in prior periods?”
Ghosh adds that the inaccuracies are not just taking place in troublesome lines such as asbestos, but also in “bread and butter” lines.
S&P notes that insurers have been “hiding” reserve problems by spreading reserve hits over several quarters, or by finding reserve surpluses in one line to subsidize shortfalls in another. Insurers are also too dependent on reinsurance, the report notes, causing large discrepancies between gross reserves and net reserves.
The industry has turned reserving into a complex process, thus confusing the issue. “One can come up with at least 50 different methodologies for estimating reserves,” says Ghosh. “Even if a methodology is actuarially sound, you can easily compromise on the assumptions, which could lead to a significant understatement of reserve requirements.”
the actuarial profession should be held accountable for these issues, the report concludes. Among the strategies companies need to look at are the potential use of external actuaries, full ground-up analysis of files, and realistic assessment of reinsurance recoverables. It also suggests insurers predict future losses as a range attributed to a specific line or business, rather than a single aggregate figure.