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How a raptor helped us reinforce actuarial professional standards

Casualty|Insurance Consulting and Technology|Property
Risk Culture

By Shawn Balthazar and Helen Zhao | April 6, 2021

A fictional story about dinosaurs can tell us a lot about modelling and pricing standards and the benefits of applying them diligently.

Like most professionals, actuaries have a duty and an obligation to undertake a certain amount of annual learning and development activity. That includes keeping up to date with codes of conduct and practice standards. As much as we all recognize the importance of the topics, let’s be honest, few would regard them as the most riveting subject material.

However, over the last couple of years, we’ve teamed up with a few actuarial colleagues from Travelers, Rick Sutherland and Dereck Tanaka, to bring a fresh twist to updating U.S. actuaries on developments in the Code of Conduct and Actuarial Standards of Practice (ASOPs) at the Casualty Actuarial Society’s annual Ratemaking, Product and Modeling (RPM) seminar. In doing so, we’ve also been striving to emphasize how robust and ethical pricing and modelling practices are an essential element in improving insurer performance.

So, this year’s delegates found themselves transported — virtually of course — to Jurassic Park. What on earth can a fictional story about dinosaurs have to tell us about evolving modelling and pricing standards and the benefits of applying them diligently? You’d be surprised.

Art meets science

The thing about predictive modelling is there’s an art to it. Our assumptions and a certain degree of creativity in the sourcing and use of data must complement the hard mathematics and science that sit behind models. Therefore, we need guidance around how we can ensure those elements follow similar, consistent rules.

Let’s take ASOP 56 – Modeling, for example, which came into effect on October 1, 2020. This guidance states that assumptions should be consistent with the intended purpose of the model, and that actuaries should assess whether the combination of multiple assumptions is reasonable in aggregate based on past experience and future expectations. This requires us to consider the potential volatility of outputs and to validate outputs in a variety of ways, including potentially consulting with experts in the given field.

In our Jurassic Park scenario, we put delegates in the shoes of an actuary who’s looking at adding a dinosaur insurance pricing variable for park owners based on whether individual dinosaurs are naturally bred or lab created. So, what if the model shows a large surcharge for lab created dinosaurs, but intuition is to give a discount for them based on the premise that they may be bred to be more controllable and safer? How does he or she proceed, or should they just discard the variable?

Another scenario put ASOP 23 – Data Quality, and ASOP 53 – Estimating Future Costs, in the spotlight. In this case, our imaginary actuary was faced with pricing excess liability coverage for a new dinosaur park which would be the first on the U.S. mainland (most dinosaur parks being on islands of course). What practices should govern how valid it is to supplement the pricing model experience data with data gathered from other exotic animal amusement parks in the same state, but not dinosaur parks, might be? Similarly, what comparisons with existing data and potential adjustments should an actuary make when exposure and historical loss and loss adjustment expenses are unavailable, limited or unrepresentative? How should they consider differences between historical conditions and future periods, such as, in our dinosaur park scenario, more qualified staff, improvements in risk control, sounder security practices and enhanced technology?

Learn more

If you’d like to catch up on the other scenarios used to illustrate actuarial Code of Conduct and ASOP questions, please contact us.

After all, there’s no ASOP stipulating that keeping up with professional best practice has to be dull. We’re already thinking of themes for next year that will continue to drive home the message that standards are not just there to potentially penalize, but also to help improve insurance models and pricing.

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Manager, Insurance Consulting and Technology

Manager, Insurance Consulting and Technology

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