1. Property/Casualty Loss Reserves Chuck Emma, FCAS, MAAA Pinnacle Actuarial Resources, Inc. CAS Annual Meeting November 15, 2005

2. Background Company Failures/Impairments/Downgrades Public Scrutiny Nov. 2003 S&P Article Continuing Reserve Developments

3. Framing the Scrutiny Who is saying what and why do they care? “Actuaries are signing off on reserves that turn out to be wildly inaccurate.” “Whether by naiveté or knavery... reserve additions have undermined confidence in estimates...” What an outside analyst seems to want Don’t let the reserves disturb the earnings projections Explanations and caveats … “yeah, yeah, yeah”

4. Scrutiny and Criticism Some of the points have merit, but...... there are problems with the reasoning Observation: “Reserves are developing adversely” Conclusion: “Actuaries are either stupid, are crooks, or are both.”

5. The Questions Are reserve developments a cause of, a symptom of, or a lagging indicator of the industry’s problems? Is the SAO serving the industry properly? What is the role of actuarial practice?

6. Scrutiny and Criticism Profession’s Response Some heard this as a educational challenge Some saw it as a chance to advance reserving methodologies (and sell software) Some wondered if they should continue signing opinions

7. Development as % of Surplus Missingless than - 10% -10% up to - 5% -5% up to 0%0% up to 5%5% up to 10%10% and up # of Co's Year 30448330754506114220 1998 1999 19350326746565125210 2000 19296269799556142210 2001 17280231632604159349 2002 31208178593636207369 2003 60201180644601208341 2004 64200260710603140238

8. Development as % of Reserves Missing< -10%-10% to -5%-5% to 0%0% to 5%5% to 10%10% to up # of Co's Year 143761335427297128311 1998 1999 107696293430393121301 2000 130647252442350151319 2001 119602200330377199445 2002 138520192258409212493 2003 165501179338400215437 2004 167547229387395185305

9. Analysis of Company Developments $35BB over two years 30 Largest Developments 2003: Top 30 approximated total industry development 2004: Industry developments much better than Top 30

11. 30 Companies Where’s This Coming From? 35-40% Asbestos related 40% “Reinsurance”, Excess Casualty 30% includes WC, MM, Mold Did anyone notice that industry surplus grew significantly over the past three years?

12. 30 Companies SAO’s RMAD disclosure slow to show 50% had RMAD’s in 2002 67% had RMAD’s in 2003 83% had RMAD’s in 2004 80% of appointed actuaries are employees A&E represents approximately 10% of reserves as stated in the SAO

13. Analysis of Company Developments What Does this Mean? Underlying factors can not be isolated to one or two factors Public Perception Management’s responsibility Actuaries’ responsibility

14. What’s Next? Optimism: U/W results are better More adequate? Pessimism: Recent developments continue? Markets softening? EIL Reserves -- coming back?

15. What’s Next? SarbOx Impact Section 404 – CEO/CFO must come to know much more about reserving process SarbOx for all companies? More Disclosures Risk / variability / uncertainty Relationship of reserves beyond solvency to viability CAS Task Force on Credibility – Six significant recommendations

16. Future Considerations Potential Major Changes ? More Disclosures Differences in estimates Changes in estimates Variability Greater Visibility of Actuary Mandatory calls to ABCD in more situations