The Aussie Advantage: How Our Actuaries Pioneered Insurance Reserving

Australian actuaries have been relatively advanced in our general insurance reserving approaches for decades - a fact highlighted by the stark contrast between methodologies and international approaches.

A recent article on general insurance (GI) reserving authored by Andrew Manton-Hall of the General Insurance Practice Committee (GIPC)'s Reserving Working Group, was an excellent summary of a 2006 paper from a UK Institute Working Group tackling GI reserving.

As an actuary with 40 years in GI in Australia and a certain amount of experience with British and American practices, I thought, even in 2006, Australian actuaries were far ahead of our British colleagues on GI reserving methods and approaches.

We owe this to the pioneers of GI actuaries from the Actuaries Institute during the 1970s, particularly Dr Greg Taylor and a range of others. With hindsight, the Aussies developed the theories and methods from scratch, rather than taking UK approaches as a starting point, as at that time, there was no GI subject in the exam system.

There were a few key reasons Aussie actuaries took this approach:

• We were in a period of high inflation that, in particular, affected workers' compensation with indexed benefits - we invented inflation-adjusted methods.
• In workers' compensation and other direct classes, it is clear that the number of claims (claim frequency) is a key parameter of the experience - we invented the so-called 'PP' methods, PPCI, PPCF, PPAC, etc.
• Case estimating in workers compensation was a most inexact and variable process - we focused on the payment-based methods rather than the incurred-based methods.

So, in my view, we were already far ahead of the UK and US practices, where Incurred Chain Ladder methods ruled the way.

There are some other reasons. The UK profession was dominated at the time by 'London Market' work, including Lloyd's. These were heterogeneous portfolios of reinsurance and large commercial risk, and the insurer rarely knew the full details of exposure and claims. It was not practical for the actuaries to dig any further than incurred claim development.

Now, there are equally important direct insurance businesses, but the dominant reserving problems have been in motor insurance, which is combined with bodily injury and property damage. I remember several times when an overseas actuary would ask 'can you Australians teach us anything about this?' and the answer was 'Yes'.

Turning to the recommendations from the British paper, my observations would be:

Improving base knowledge - Australian actuaries are strong at:

• knowing the business that is being reserved;
• improving homogeneity (e.g. segmenting bodily injury and property damage);
• identifying outlier policies and claims;
• developing diagnostics appropriate to the setting.

We can however do better at understanding claims handling and case reserving processes.

Actuarial methodologies - on the plus side:

• we have not over-developed 'more sophisticated mathematical and statistical methodology', being mainly used to understand uncertainty;
• testing data quality is sound, but hopefully becoming less necessary;
• we mainly focus on using 'actuarial judgement' rather than relying on past averages, but there are exceptions;
• we often engage with key individuals and look for additional sources of information.

It is my opinion that we are not strong in understanding the link between underwriting cycles and consequent reserving cycles. This has become more relevant in the last five years or so, and is an area where our professional knowledge and application could be improved.

Disclosing uncertainty - we are pretty good at this and are supported by having strong standards because of the importance of risk margins. We are also good with a common vocabulary.

Communicating results - this is a mixed bag:

• mostly we are conscious of the relevant audience(s), but not necessarily good at tailoring the communication;
• using ultimate loss ratios is an approach that could be used more, although it doesn't address reserving changes;
• often our analysis of change (though some stubbornly continue to call it analysis of surplus) is too mechanical rather than explanatory.

Concluding thoughts

I am pleased that the GIPC Reserving Working Group has chosen to look at one of the most basic aspects of our roles in claim reserving. I would be interested in the occasional case study of what went wrong when reserves were wildly out, such as the experience in house and motor portfolios after the COVID-19 interruptions.

I agree with the emerging view that there are not major issues that need to be tackled across the profession, although a reminder of basics like this is helpful.

As a local profession, we can be very proud of the historical development and widespread application of claim reserving. It has been world-leading.

Catch-up on the GIPC's Reserving Working Group articles here.