Broadening The Audience Actuarial Interaction With Chief Financial Officers

2002 Casualty Loss Reserve Seminar

September 23, 2002

Arlington, Virginia

Presented by:

Randy Buhlig, Director

KPMG LLP

Insurance Risk and Advisory Practice

303 Peachtree Street, N.E.

Suite 2000

Atlanta, GA 30308-3210

Telephone 404.222.3467

rbuhlig@kpmg.com

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CFO’s serve many constituencies:• CEO

• Board of Directors

• Audit Committee

• External Auditors (works for the Audit Committee)

• Internal Auditors (usually works for Audit Committee too)

• Investor Relations

• Business Unit Leaders

• Finance department

• Actuarial department (both pricing and reserving)

• Everyone else at the company

This list just covers the Company

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The post-Enron need for “Transparency” has grown the external list:• Shareholders

• Bondholders

• Bank (prime lending relationship)

• External Auditors (works for the Audit Committee)

• A.M. Best and all the other rating agencies

• Investment Bankers (gatekeepers for access to capital)

• SEC (influences GAAP)

• NAIC (influences statutory accounting principles)

• Public Company Accounting Oversight Board created by Sarbanes-Oxley Act of 2002 (influences auditing standards and GAAP)

• Financial Accounting Standards Board (influences GAAP)

• American Institute of Public Accountants (influences GAAP and auditing standards)

• Internal Revenue Service

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The post-Enron need for “Transparency” has grown the external list:• State regulators (including divisions responsible for premium taxes)

• Federal regulators

• Policyholders

• 401-K provider

• Agency force (can be very time consuming)

• Claimants

• Strategic business partners

• Financial news media

• All other news media

• Congress

These are all I could think of in 5 minutes

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• All these constituencies want information about the financial health of the business.

• However, the post-Enron environment has created a strong demand for assurances the numbers have been prepared properly and the senior management discussion or “message” describing the financial results and trends are not misleading.

• External auditors have some new rules to follow to improve assurances.

• Overtime, the need for “Transparency” will probably make the actuary’s role in the financial statement preparation process more visible.

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What can you do to prepare?

• First, make sure your numbers are prepared using professional standards of care (this is the “what” happened question)

• Second, and more importantly, start determining “why” the numbers reflect the situation portrayed by the financial statements.

Knowing why a trend is occurring is the first part in determining what, if anything, should be done about it.

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Start getting and reporting the answers for the following kinds of questions?

• How is the company performing against its pricing strategies and goals? Is competition permitting goal achievement (or not)? What is business unit leadership doing about the situation?

• Have any changes in underwriting or claims practices influenced the results? Were these changes planned by management or made in reaction to positive or negative trends?

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Start getting and reporting the answers for the following kinds of questions?

• Did the reserving analysis reveal any claim trends that were not considered when the company’s earnings forecasts were prepared? If so, are they expected to impair earnings? What are actions management can take to mitigate the trends?

These questions focus on two key areas of concern for a CFO:

Earnings Forecast Credibility, and

Management Actions needed to stay on forecast or change expectations

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• For many actuarial departments, discovering answers to the “why” questions is easier said than done.

• Many clients I work with still position their actuarial departments in isolated silos.

• In most cases, the silo is only a cultural barrier, not an intentional jail.

• Sadly, many financial executives still do not fully understand the actuarial profession and all the value that can be harvested when effective two way communication exists.

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How can you start?

• If you are already doing everything we talked about today, consider yourself fortunate and keep up the good work.

• If not, target the key financial executives within your organization and:– Start a relationship

– Be up upfront with your desire to help craft the message

– Learn the reporting issues your CFO deals with

– Make sure to teach your financial colleagues the perspective you gain on the business from your reserving and pricing activities

– Prove your value by delivering your view on the business….when it is needed

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Questions?

The job is a lot more interesting when the actuarial and financial professions work together