Actuarial & reserving teams are doing more to combat the uncertain environment: Sealy, PwC Bermuda

The reserving cycle exists, and studies have shown that historically, final estimates tend to be underestimated in bad years and overestimated in good ones, but both actuarial and reserving teams are now doing more to mitigate significant uncertainty in the current environment, according to Damian Sealy of PwC Bermuda.

Sealy, a Director and the Actuarial Leader for Bermuda and PwC in the Caribbean, where he leads the delivery of actuarial services for PwC Bermuda and the Caribbean’s audit and advisory engagements, recently joined Artemis as part of its Live series of video interviews.

His actuarial career spans 18 years and during this time Sealy has worked with the majority of insurance-related companies, ranging from large global property and catastrophe reinsurers to collateralized reinsurance and insurance-linked securities (ILS) structures in Bermuda.

The interview covered a range of topics, but centred on current market conditions, from an actuarial standpoint, and what this means for loss trends, and interestingly, touched on previous soft markets and whether actions taken in these cycles is manifesting within reserving and reporting today.

“I think conversations amongst actuarial teams, be it in an advisory setting, consulting or audit teams or between actors and their boards, continue to be centred around the hard market conditions in the P&C insurance sector, and the impact these conditions are having in a range of areas. We have underwriting, reinsurance, the assessment of capital, and, of course, reserving,” said Sealy.

He explained that what actuaries want is lots and lots of relevant and reliable historical data bucketed in homogenous groups, to enable analysis to identify trends in order to estimate the financial impact of future events.

“But the key concept underlying that is the past is a good predictor of the future. But is it?” questioned Sealy.

According to Sealy, in terms of actuaries’ ability to simply use past data to estimate the future, inflation and geopolitical risks are key factors.

“General inflation has been cited as a cost concern, a contributing factor to the adverse prior development that we’ve been seeing in reserves. And these heightened inflationary effects impact on paid claim estimates, to the extent that the cost of disposing claims are impacted by inflationary effects,” he said.

“We have the ongoing conflict in Ukraine, between Ukraine and Russia, commencing back in early 2022. The war between Israel and Hamas starting late last year. War continues to be a significant impact on the world economy and the insurance business,” added Sealy.

But what does all of this mean for loss trends?

A study conducted by PwC of the US P&C market, sourced from more than 200 firms, revealed that the whole US market has had favorable development for a long time, releasing reserves in each of the last 18 calendar years.

“Interestingly, our study also indicated that since the 2000 accident year, 2019 is now the first year to experience cumulative adverse development since its initial recorded loss reserves. And it should be noted that 2018 is not too far from being a second year to experience that,” he explained.

Sealy relocated to Bermuda from the UK in 2019, a time when the market started to shift from soft to hard. Given his experience in different market cycles, Artemis was interested to know whether decisions taken in soft markets by underwriters are now manifesting within reserving in reporting.

“It’s fair to say that the reserving cycle, it exists,” said Sealy. “Various research studies of insurance markets historically have shown that the final estimates have tended to be underestimated in bad years and overestimated in good years. The under and overestimation observation, historically, generally following the profitability of the insurance cycle.”

He went on to note that during the soft market years of 2016 to 2019, there was a clear message throughout the insurance marketplace.

“In previous markets there had been an experience of underestimation of reserves, therefore, current soft market conditions must be accounted for when reserving and provisions made for effects on reserve risk. There was also an increased expectation on reserving actuaries to challenge the optimism that might be coming through from other parts of the business, particularly pricing, underwriting, business planning,” said Sealy.

“All in all, I believe the market was trying to do the right thing, especially smooth those peaks and troughs as much as possible. Many of the questions and considerations of a soft market do apply in a hard market. At the time, there was focus on understanding the business processes, for example, to understand the underwriting changes,” he added.

Ultimately, Sealy feels that actuarial teams and reserving committees are now doing more than in the past.

“And by more, I mean more sensitivity analysis, more scenario testing, and importantly, a consideration of a wider range of possibilities, simply because there’s significant uncertainty in this environment,” he said.

Expanding on this, Sealy explained that, “one of the main trends we’ve seen here is a need for speed. Companies are trying to be faster. They’re trying to complete their analysis quicker, through automating the reserving process, for example, and being able to produce indications that are updated quickly and really see and understand the changes in the experience.”

The full video interview with PwC Bermuda’s Damian Sealy is embedded below and can also be viewed, along with previous Artemis Live video interviews, on Artemis’ dedicated video page.

You can also listen in audio to all of these interviews by subscribing to the Artemis Live podcast here.

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