Actuarial Notes

Trending Procedures in Property/Casualty Insurance

By Actuarial Standards Board · 2009 · ASOP No. 13

Study guide: Exam 5

The Actuarial Standards Board's guidance for actuaries using trending procedures to estimate future values for property/casualty coverages. This revised edition (Doc. No. 133), adopted in June 2009 and updated for deviation language effective May 1, 2011, replaced the 1990 standard Trending Procedures in Property/Casualty Insurance Ratemaking and extends its guidance beyond ratemaking to reserving, valuations, underwriting and marketing. It is effective for actuarial services performed on or after November 1, 2009.

On the syllabus

  • Exam 5 — objectives A4 and A8; the standard as revised in 2009 and updated for deviation language in 2011.

Transmittal Memorandum

1 Purpose, Scope, Cross References, and Effective Date

  • 1.1 Purpose
  • 1.2 Scope
    • Applies to trending procedures for all property/casualty coverages — work for insurance or reinsurance companies and other risk financing systems such as self insurance.
    • A trending procedure does not encompass the process commonly referred to as "development", which estimates changes over time within a given exposure period.
  • 1.3 Cross References
  • 1.4 Effective Date

2 Definitions

  • 2.1 Coverage
  • 2.2 Experience Period
    • The period of time to which historical data used for actuarial analysis pertain.
  • 2.3 Forecast Period
    • The future time period to which the historical data are projected.
  • 2.4 Social Influences
    • The impact on insurance costs of societal changes such as changes in claim consciousness, court practices and legal precedents, and in other noneconomic factors.
  • 2.5 Trending Period
    • The time over which trend is applied in projecting from the experience period to the forecast period.
  • 2.6 Trending Procedure
    • A process by which the actuary evaluates how changes over time affect items such as claim costs, claim frequencies, expenses, exposures, premiums, retention rates, marketing/solicitation response rates and economic indices, by analysing changes between exposure periods.

3 Analysis of Issues and Recommended Practices

  • 3.1 Purpose or Use of Trending Procedures
    • Trending is used in ratemaking, reserving, valuations, underwriting and marketing; the trend estimate may be presented as a point estimate, a range, a point estimate with a margin for adverse deviation, or a probability distribution.
  • 3.2 Historical Insurance and Non-Insurance Data
    • In selecting data, consider its credibility, the period available, its relationship to the items trended, and known biases or distortions such as catastrophic influences, seasonality, coverage changes, nonrecurring events, claim practices, and distributional changes in deductibles, types of risks and policy limits.
  • 3.3 Economic and Social Influences
  • 3.4 Selection of Trending Procedures
    • Relevant information includes procedures established by precedent or common usage, procedures used in previous analyses, procedures that predict insurance trends from insurance, econometric and other non-insurance data, and the context in which the trend estimate is used.
  • 3.5 Criteria for Determining Trending Period
    • Consider the lengths of the experience and forecast periods, and changes in the mix of data between them.
  • 3.6 Evaluation of Trending Procedures
  • 3.7 Reliance on Data or Other Information Supplied by Others
  • 3.8 Documentation

4 Communications and Disclosures

  • 4.1 Actuarial Communication
    • Disclose the intended purpose or use of the trending procedure and significant adjustments to data or assumptions that may materially affect the result, with the ASOP No. 41 deviation disclosures.
  • 4.2 Additional Disclosures
    • The basis of a range of trend estimates, and changes from a prior analysis for the same purpose that might materially affect the results.

Appendix 1 Background and Current Practices

  • Background
  • Current Practices
    • Actuaries generally rely on data from the book of business analysed, other insurance data, and non-insurance data, in that order of preference.

Appendix 2 Comments on the Exposure Draft and Responses

Related readings

  • ASOP 43 - Property Casualty Unpaid Claim Estimates (ASB - 2007) — the reserving standard that commentators on the exposure draft (Appendix 2) said already covered "loss development", which led §1.2 to carve development out
  • ASOP 23 - Data Quality (ASB - 2016) — ASOP No. 23, Data Quality, to which §3.7 refers for reliance on data supplied by others

Sources