Actuarial Notes

Reliance on the Work of Others in Property and Casualty Insurance Pricing

By Canadian Institute of Actuaries · 2024 · 224033

Study guide: Exam 6C

A CIA educational note on how property and casualty pricing actuaries can justify using another person's work. Prepared by the Property and Casualty Practice Committee, approved for distribution by the Actuarial Guidance Council on February 29, 2024 and dated March 6, 2024 (document 224033), it discusses the considerations practitioners can draw on to justify that use, and names effective communication between practitioners, the authors of the work and its potential users as a key tool.

On the syllabus

  • Exam 6C — objective A1; the whole note.

Abstract

  • Process
  • Your feedback
  • Using another person's work avoids duplicative work, reduces inconsistent findings and allows more insightful and timely analyses, but the practitioner needs to justify the decision to internal and external parties.

1 Introduction

  • 1.1 Purpose
    • The primary purpose is guidance for P&C pricing practitioners using the work of other actuaries — for example reserving actuaries' development factors, pricing actuaries' trend and reform adjustment factors used by reserving actuaries, a regulator's actuary's auto trend assumptions, vendors' classification and catastrophe models, and the Appointed Actuary's work in a rate filing.
    • Its elements can also guide pricing practitioners relying on non-actuaries, such as model developers, underwriters and investment specialists.
  • 1.2 Application
    • Applies to all P&C pricing actuaries; reliance is of particular significance for automobile insurance, which the note calls the only line of business in Canada regulated from a rate perspective.

2 Standards of practice

  • Section 1500 of the CIA Standards of Practice: the actuary may use and take responsibility for another person's work if justified, and an actuary who uses but does not take responsibility for it should so report (1510.01).
  • Paragraph 1510.07's considerations: early and periodic communication, confidence in the other person's qualifications, competence, integrity and objectivity, their awareness of the intended use, communication of information that may affect the work, and study of their report, especially any reservation.
  • What to communicate: the work's intended purpose, the environment it was created in, how the practitioner intends to use it, changes in environment or assumptions, corrections, and any reservations or uncertainties.
  • Avenues include meetings or emails, shared work files and reports, reserving and pricing committees, and periodic peer review (paragraph 1460.05).
  • The work need not be prepared by a Fellow, but the practitioner may have more confidence if a Fellow reviewed and signed it off.

3 Other considerations

  • 3.1 Materiality
    • Paragraph 1240.02: material is judged from the point of view of a user; the materiality applied is the practitioner's, not the author's, and more effort goes into documenting work with a more material impact.
    • A rate filing is an external user report under Section 1700, which requires each material assumption to be described with its rationale.
  • 3.2 Understanding the environment
    • Understanding the insurer's circumstances and the economic, social, legal and regulatory environment is critical to identifying the data required and selecting methodology and assumptions; pricing and reserving actuaries of the same insurer may conduct the quantitative and qualitative analyses together.
  • 3.3 Review and validation
    • The work does not have to be replicated, but due diligence includes reviewing its supporting documentation, high-level checks against prior results, spot checks, confirming its review and sign-off, and giving the author input on errors or ambiguities.
  • 3.4 Documentation and reporting
    • What may be documented: what was used and from whom, the author's credentials or position, the review performed by each side, adjustments and their rationale, materiality discrepancies, dependencies on the environment, and limitations of the work or its use.

4 Applications in advanced modelling techniques

  • Data scientists and actuaries using advanced modelling often contribute to decisions about classification and rating factors, and the note's expectations about justification are fully applicable to their work.
  • Paragraph 1450.01: the actuary should choose a model appropriate to the purpose and understand any limitations that might make its results inappropriate or misleading; the practitioner would ensure the model came from a reputable vendor or competent expert.

5 Conclusion

  • Practitioners would ensure the work is accurate, reliable and relevant for its intended purpose, and document their involvement in its review and validation.

Related readings

  • CIA CSOP — the Standards of Practice, whose Sections 1500, 1460, 1240, 1700 and 1450 the note quotes

Sources