While reserving cycles exist and research has shown that historically final estimates tend to be underestimated in bad years and overestimated in good years, Damien Seeley of PwC Bermuda says both actuarial and reserving teams are doing more to mitigate the significant uncertainties in the current environment.
Mr Seely is a Director and Actuarial Leader for Bermuda and PwC in the Caribbean, where he leads the delivery of actuarial services to PwC’s Bermuda and Caribbean audit and advisory business. He recently participated in Artemis’ live video interview series.
Mr Seely’s actuarial career spans 18 years during which he has worked with the majority of insurance-related companies, from leading global property and casualty reinsurers to Bermuda collateralized reinsurance and insurance linked securities (ILS) structures.
The interview covered a variety of topics, but centered on the current market conditions from an actuarial perspective and what that means for loss trends, and, interestingly, also touched on past weak markets and whether actions taken in those cycles are showing up in reserving and reporting today.
“I expect conversations between actuarial teams in advisory settings, consulting and audit teams or between stakeholders and their boards will continue to revolve around the challenging market conditions in the P&C insurance sector and the impact these are having on various areas: underwriting, reinsurance, capital valuation and, of course, reserving,” Seely said.
He explained that what actuaries need is large volumes of relevant, reliable historical data compiled into homogenous groups to enable analysis to identify trends in order to predict the financial impact of future events.
“But the key underlying concept is that the past is a good predictor of the future. But is that really the case?” Seeley asked.
According to Seely, inflation and geopolitical risk are key factors when it comes to actuaries’ ability to predict the future using only historical data.
“General inflation has been cited as a cost concern and has contributed to previous adverse developments seen in reserves, and this increasing impact of inflation has had an impact on claims estimates and claims processing costs are also impacted by inflation,” he said.
“Conflict has been ongoing in Ukraine between Ukraine and Russia since the beginning of 2022. War broke out between Israel and Hamas late last year. The war continues to have a major impact on the global economy and the insurance industry,” Seely added.
But what does all this mean for loss trends?
A survey of the U.S. P&C market conducted by PwC on more than 200 companies revealed that the overall U.S. market has experienced long-term, favorable development, with reserves being released every year for the past 18 years.
“Interestingly, our research also showed that 2019 is the first year since the 2000 accident to experience a cumulative adverse impact since the initial loss reserves were recorded. And it’s notable that 2018 is not far from being the second year to experience that,” he explained.
Seely relocated to Bermuda from the UK in 2019 as the market began to transition from soft to hard. With experience in various market cycles, Artemis was interested to know whether decisions made by underwriters in the soft market were now being reflected in their reported reserves.
“It is fair to say that reserving cycles do exist,” Seely said. “Various research studies of insurance markets have shown that historically, final estimates tend to be understated in bad years and overstated in good years. Historically, the observations of understating and overstating have generally followed the profitability of the insurance cycle.”
He further noted that during the soft market period from 2016 to 2019, there was a clear message across the insurance market.
“Previous markets have experienced under-stated reserves, so reserving actuaries must take current soft market conditions into account and prepare for the impact on reserve risk. There are also increased expectations for reserving actuaries to challenge optimistic views coming from other parts of the business, particularly pricing, underwriting and business planning,” Seely said.
“Overall, I think the market was trying to do the right things, particularly trying to smooth out the peaks and valleys as much as possible. Many of the questions and considerations of a soft market also apply to a hard market. There was a lot of focus at the time on understanding the business processes, for example, to understand underwriting changes,” he added.
Ultimately, Seely feels the actuarial team and reserve committee are doing more than they have in the past.
“And by more, I mean more sensitivity analysis, more scenario testing and, importantly, considering a wider range of possibilities because there is a lot of uncertainty in this environment,” he said.
Seely expands on this point, explaining, “One of the main trends we’re seeing here is the need for speed. Companies are looking to speed things up – for example, by automating the booking process or generating metrics that update quickly so they can complete analysis faster and actually see and understand changes to the experience.”
The full video interview with PwC Bermuda’s Damian Sealy is embedded below and can also be viewed on Artemis’ dedicated video page, along with previous Artemis Live video interviews.
All of these interviews are available to listen to in audio format. Click here to subscribe to the Artemis Live podcast.
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