Monthly Archives: March 2013

CAS looks at healthcare

Some PR finery I worked on at the CAS ratemaking seminar.

HUNTINGTON BEACH, CA, March 12 — The key changes in federal health care reform remain months away, but property/casualty actuaries are already trying to determine what impact they will have on their own lines of business as new rules and regulations emerge.

Elements of the Affordable Care Act have been phased in since the law’s 2010 passage, but many key reforms begin January 1, 2014. The expected impact on health insurance is direct and widely studied – the law will expand access to affordable health care and attempt to rein in rising medical costs. Less obvious – but still important – are the indirect effects on other insurance lines, such as workers’ compensation and medical malpractice. Property/casualty actuaries need to consider the potential impact of these effects so they can adjust rates and reserves when changes occur.

At the Casualty Actuarial Society’s (CAS) Ratemaking and Product Management Seminar held March 12-13, two Fellows of the CAS led a discussion of the health care law’s major changes and how the reforms may affect property-casualty lines.

This particular presentation also had some very thorough slides, which are a good resource if you are looking for ways that Obamacare may end up affecting the property/casualty market.


ERM works. JPMorgan trades prove it.

Well, that’s not the obvious takeaway from today’s story about the London Whale trades:

JPMorgan Chase, the nation’s biggest bank, ignored internal controls and manipulated documents as it racked up trading losses last year, while its influential chief executive, Jamie Dimon, briefly withheld some information from regulators, a new Senate report says.

But when you dig into the New York Times story, you quickly learn that the ERM process worked quite well:

As the traders in London assembled increasingly complex bets, JPMorgan ignored its own risk alarms, according to investigators. In the first four months of 2012 alone, the report found, the chief investment office breached five of its critical risk controls more than 330 times.

The Senate report that triggered the Times story mucks through the grubby detail:

The [Chief Investment Office] used five metrics and limits to gauge and control the risks associated with its trading activities, including the Value-at-Risk (VaR) limit, Credit Spread Widening 01 (CS01) limit, Credit Spread Widening 10% (CSW10%) limit, stress loss limits, and stop loss advisories. During the first three months of 2012, as the CIO traders added billions of dollars in complex credit derivatives to the Synthetic Credit Portfolio [aka the SCP], the SCP trades breached the limits on all five of the risk metrics. In fact, from January 1 through April 30, 2012, CIO risk limits and advisories were breached more than 330 times.

The system was well-designed, and it was setting off the proper alarms.

But alarms only make noise. And JPMorgan did what any groggy soul does after a bender. It ignored the alarm:

The SCP’s many breaches were routinely reported to JPMorgan Chase and CIO management, risk personnel, and traders. The breaches did not, however, spark an in-depth review of the SCP or require immediate remedial actions to lower risk. Instead, the breaches were largely ignored or ended by raising the relevant risk limit.

Actually, that’s not fair. Morgan management didn’t ignore the alarms. They just built a new clock – here, a new VaR model. Rather famously, the new model, built in haste, sucked.

The Senate report offers a better metaphor, perhaps, via Achilles Macris in JPMorgan’s London office. He likened the synthetic credit portfolio to flying an airplane in its marvelous complexity. That would make the ERM reports like flight instruments, noted the Senate report. (Guess that’s why it’s called an ERM dashboard, duh!) Still, you can just picture the dials spinning wildly while the flight crew insists the plane is on course.

So the risk management system in place – the models, the reports – all worked just fine. All they can do is set off alarms, and they set off a lot of them, loud ones.

But no one was listening.



Towers Watson: Commercial rates up 7%

Here’s the survey.

And here’s a pretty picture:

towers q4-12All lines of business are up at least 3%, Towers said. Workers comp and EPLI had the largest increases.

I increasingly believe this is what hard markets look like now – less steep and longer lasting – thanks to more rigorous price monitoring and the management discipline imposed by Sarbanes-Oxley and Enterprise Risk Management.

Mid-market and large accounts had bigger increases than small accounts, a standard hard-market characteristic. AY2012 loss ratios are projected to be 4 percentage points less than AY2011, according to Towers, as earned price increases more than offset claims inflation. There I appear to differ from what Towers reports, as the consulting firm indicates “pricing data reported by carriers for the fourth quarter of 2012 indicated a pause in the upward industry price acceleration observed since the start of 2011.”

And whether the higher rates are also enough to offset the investment income lost to low bond yields is another question.


Mentioned that I was considering a new layout. Now you see it.


I’ll be at the CAS Ratemaking and Product Management seminar in Huntington Beach, Calif., next week.

I have to parachute in to cover a couple of talks, then leave the same day, so not much schmoozing for me.

I also downloaded the Android app for the meeting. There is an itunes app as well. They let you see the entire schedule and select the sessions you prefer.

It’s a really handy item. I used something similar at the Annual Meeting last fall.

Here is how you can download a copy.

Something new

Glance around and you’ll notice some changes to the blog.

I changed the Pages section to include some stuff I’ve written over the past couple of years. Since research and writing is a big part of my job these days, these are advertisements. I also removed some old pages.

I eliminated the word clouds of Categories and Tags. I haven’t been categorizing and tagging posts for a while, so these weren’t useful.

I’ve added links to recent posts and to monthly archives. I’ve also added “Top Posts & Pages,” which WordPress calculates using an algorithm unknown to me. For example, a top post today is a link to news headlines a year ago. Somebody’s spam generator got stuck there, I suppose.

I also plan to overhaul the appearance, so be not surprised if you click over here and see a radically different design.

Just trying to keep things fresh.


GuyCarp on Reserve Development

Actuary Jessica Leong at GCCapitalIdeas says the redundancy well is about dry:

The cycle turned on an accident year basis in 2004. Industry-wide accident year deterioration now appears imminent.


Guy Carpenter’s expectation is that the U.S. P&C industry will continue to release reserves, but that 2012 reserve releases will be less than the 2011 release. Although we expect accident years from 2011 will show reserve deterioration, we believe accident years 2010 and prior will continue to release reserves, and this should offset any deterioration in financial years 2012 and 2013. The industry may therefore only start to see deteriorating reserves in 2014 financials or beyond.

Sounds like the industry-wide prediction is:

  • AY2010 and prior will continue to release reserves.
  • AY2011 estimates of ultimate will rise.
  • AY2012 and AY2013 will be booked too low.
  • Last calendar year and this (2012 and 2013) will show favorable reserve development. By CY2014, though, the deterioration in AY2011 and subsequent will be greater than the takedowns in AY2010 and prior.

Industry results will be available via SNL Financial in a couple of weeks, but through third quarter 2012, we can say:

  • Overall reserve development has been favorable by about $8.5B
  • AY2011 reserves have been reduced by $6.1B.

For CY2011, BTW, reserve development was a favorable $12.1B.

Here’s a chart showing how favorable development has broken by accident year:

favorable dop by year thru q32012