Abstract
This paper aims to engender an awareness of the psychological, technological, and operational obstacles which confront actuaries throughout the reserving process, preventing them from developing appropriate best estimates.
Although reserving issues are a regular subject in actuarial literature, nowhere is the term “best estimate” defined. In response to this absence, the authors consider criteria for actuaries to target in developing a best estimate, settling on two ideals: precision and lack of bias.
This paper examines issues related to limits on human intelligence, performance, and judgment, and considers the impact of external constraints, business agendas, and methodological issues. The individual actuary’s response to these issues -- in addition to any reaction to specific statistical patterns and sensitivity to the work environment -- all significantly impact the reserving process. In fact, each actuary may be viewed as a reserve estimator -- whose “parameters” have been set by a combination of ability, personality, and experience -- which produces best estimates in response to specific sets of data, reserving models, and business realities.
This paper also explores practical reserving considerations and concludes with several recommendations for reserving actuaries to implement in order to reduce the bias, and improve the precision, of their best estimates.
KEY WORDS Actuary, Actuarial Judgment, Best Estimate, Bias Client Relations, Decisionmaking, Estimation, Heuristics, Judgment, Loss Reserving, NAIC Issue Paper #55, Social Psychology, Valuation, Working Conditions
Although reserving issues are a regular subject in actuarial literature, nowhere is the term “best estimate” defined. In response to this absence, the authors consider criteria for actuaries to target in developing a best estimate, settling on two ideals: precision and lack of bias.
This paper examines issues related to limits on human intelligence, performance, and judgment, and considers the impact of external constraints, business agendas, and methodological issues. The individual actuary’s response to these issues -- in addition to any reaction to specific statistical patterns and sensitivity to the work environment -- all significantly impact the reserving process. In fact, each actuary may be viewed as a reserve estimator -- whose “parameters” have been set by a combination of ability, personality, and experience -- which produces best estimates in response to specific sets of data, reserving models, and business realities.
This paper also explores practical reserving considerations and concludes with several recommendations for reserving actuaries to implement in order to reduce the bias, and improve the precision, of their best estimates.
KEY WORDS Actuary, Actuarial Judgment, Best Estimate, Bias Client Relations, Decisionmaking, Estimation, Heuristics, Judgment, Loss Reserving, NAIC Issue Paper #55, Social Psychology, Valuation, Working Conditions
Volume
Fall
Page
305-351
Year
1998
Categories
Actuarial Applications and Methodologies
Reserving
Management Best Estimate
Actuarial Applications and Methodologies
Reserving
Uncertainty and Ranges
Publications
Casualty Actuarial Society E-Forum
