Actuarial Standard of Practice No. 13
Trending Procedures in Property/Casualty Insurance
STANDARD OF PRACTICE
TRANSMITTAL MEMORANDUM
June 2009
TO: Members of Actuarial Organizations Governed by the Standards of the Actuarial Standards Board and Other Persons Interested in Trending Procedures in Property/Casualty Insurance
FROM: Actuarial Standards Board (ASB)
SUBJ: Actuarial Standard of Practice (ASOP) No. 13
This document contains the final version of the revision of ASOP No. 13, Trending Procedures in Property/Casualty Insurance.
Background
The existing ASOP No. 13, Trending Procedures in Property/Casualty Insurance Ratemaking, was developed by the Subcommittee on Ratemaking of the Casualty Committee in July 1989 and adopted by the ASB in July 1990. Since the promulgation of the original standard, developments in trending procedures have continued, and the use of trending in non ratemaking areas has become more widespread. The Subcommittee prepared this revision of ASOP No. 13 to reflect appropriate actuarial practice with respect to trending procedures in property/casualty insurance and to be consistent with the current ASOP format. Further, this proposed revision expands guidance on the application of trend procedures beyond ratemaking to include reserving, valuations, underwriting, and marketing analyses.
Exposure Draft
The exposure draft of this revision was issued in January 2008 with a comment deadline of May 1, 2008. The Subcommittee on Ratemaking carefully considered the thirteen comment letters received and made changes to the language in several sections in response. For a summary of the substantive issues contained in the exposure draft comment letters and the responses, please see appendix 2.
The most significant changes from the exposure draft were as follows:
1. Section 1.2, Scope and section 2.6, Trending Procedure, were revised to indicate that, for the purpose of this standard, trending does not encompass the process commonly referred to as “development.”
2. Section 4.1, Actuarial Communication, and section 4.2, Additional Disclosures, have been revised to indicate that the actuary needs to make specific disclosures when certain aspects of the trend procedure have a material effect on the result or conclusions of the actuary’s overall analysis.
The ASB voted in June 2009 to adopt this standard.
Subcommittee on Ratemaking
Beth Fitzgerald, Chairperson
Gregory L. Hayward Jonathan White
Marc B. Pearl
Casualty Committee of the ASB
Patrick B. Woods, Chairperson
Steven Armstrong Claus S. Metzner
Raji Bhagavatula David J. Otto
Beth Fitzgerald Alfred O. Weller
Bertram A. Horowitz
Actuarial Standards Board
Stephen G. Kellison, Chairperson
Albert J. Beer Robert G. Meilander
Alan D. Ford James J. Murphy
Patrick J. Grannan Godfrey Perrott
Thomas D. Levy James F. Verlautz
The ASB establishes and improves standards of actuarial practice. These ASOPs identify what the actuary should consider, document, and disclose when performing an actuarial assignment. The ASB’s goal is to set standards for appropriate practice for the U.S.
Section 1. Purpose, Scope, Cross References, and Effective Date
1.1 Purpose
This actuarial standard of practice (ASOP) provides guidance to actuaries when performing professional services using trending procedures to estimate future values.
1.2 Scope
This standard applies to actuaries when performing professional services to estimate future values using trending procedures for all property/casualty coverages. This includes work performed for insurance or reinsurance companies, and other property/casualty risk financing systems that provide similar coverage, such as self insurance.
For purposes of this standard, a trending procedure does not encompass the process commonly referred to as “development,” which estimates changes over time in losses (or other items) within a given exposure period (for example, accident year or underwriting year).
If the actuary departs from the guidance set forth in this standard in order to comply with applicable law (statutes, regulations, and other legally binding authority), or for any other reason the actuary deems appropriate, the actuary should refer to section 4.
1.3 Cross References
When this standard refers to the provisions of other documents, the reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. If any amended or restated document differs materially from the originally referenced document, the actuary should consider the guidance in this standard to the extent it is applicable and appropriate.
1.4 Effective Date
This standard is effective for actuarial services performed on or after November 1, 2009.
Section 2. Definitions
The terms below are defined for use in this actuarial standard of practice.
2.1 Coverage
The terms and conditions of a plan or contract, or the requirements of applicable law, that create an obligation for claim payment associated with contingent events.
2.2 Experience Period
The period of time to which historical data used for actuarial analysis pertain.
2.3 Forecast Period
The future time period to which the historical data are projected.
The impact on insurance costs of societal changes such as changes in claim consciousness, court practices, and legal precedents, as well as in other noneconomic factors.
2.5 Trending Period
The time over which trend is applied in projecting from the experience period to the forecast period.
2.6 Trending Procedure
A process by which the actuary evaluates how changes over time affect items such as claim costs, claim frequencies, expenses, exposures, premiums, retention rates, marketing/solicitation response rates, and economic indices. Trending procedures estimate future values by analyzing changes between exposure periods (for example, accident years or underwriting years). A trending procedure does not encompass the process commonly referred to as “development,” which estimates changes over time in losses (or other items) within a given exposure period.
Section 3. Analysis of Issues and Recommended Practices
3.1 Purpose or Use of Trending Procedures
Trending is an important component in many analyses performed by actuaries including, but not limited to, ratemaking, reserving, valuations, underwriting, and marketing. The actuary should identify the intended purpose or use of the trending procedure. The actuary should apply trending procedures that are appropriate for the applicable purpose or use.
Where multiple purposes or uses are intended, the actuary should consider the potential conflicts arising from those multiple purposes or uses and should consider adjustments to accommodate the multiple purposes or uses to the extent that, in the actuary’s professional judgment, it is appropriate and practical to make such adjustments.
The actuary may present the trend estimate resulting from the trending procedure in a variety of ways, such as a point estimate, a range of estimates, a point estimate with a margin for adverse deviation, or a probability distribution of the trend estimate. The actuary should consider the intended purpose or use of the trend estimate when deciding how to present the trend estimate.
3.2 Historical Insurance and Non-Insurance Data
The actuary should select data appropriate for the trends being analyzed. The data can consist of historical insurance or non-insurance information. When selecting data, the actuary should consider the following:
a. the credibility assigned to the data by the actuary;
b. the time period for which the data is available;
c. the relationship to the items being trended; and
d. the effect of known biases or distortions on the data relied upon (for example, the impact of catastrophic influences, seasonality, coverage changes, nonrecurring events, claim practices, and distributional changes in deductibles, types of risks, and policy limits).
The actuary should consider economic and social influences that can have a significant impact on trends in selecting the appropriate data to review, the trending calculation, and the trending procedure. In addition, the actuary should consider the timing of the various influences.
3.4 Selection of Trending Procedures
The actuary should select trending procedures after appropriate consideration of available data. In selecting these procedures, the actuary may consider relevant information such as the following:
a. procedures established by precedent or common usage in the actuarial profession;
b. procedures used in previous analyses;
c. procedures that predict insurance trends based on insurance, econometric, and other non-insurance data; and
d. the context in which the trend estimate is used in the overall analysis.
3.5 Criteria for Determining Trending Period
The actuary should consider both the lengths of the experience and forecast periods, and changes in the mix of data between the experience and forecast periods when determining the trending period. When incorporating non-insurance data in the trending procedure, the actuary should consider the timing relationships among the non-insurance data, historical insurance data, and the future values being estimated.
3.6 Evaluation of Trending Procedures
The actuary should evaluate the results produced by each selected trending procedure for reasonableness and revise the procedure where appropriate.
3.7 Reliance on Data or Other Information Supplied by Others
When relying on data or other information supplied by others, the actuary should refer to ASOP No. 23, Data Quality, for guidance.
3.8 Documentation
The actuary should prepare and retain appropriate documentation regarding the methods, assumptions, procedures, and the sources of the data used. The documentation should be in a form such that another actuary qualified in the same practice area could assess the reasonableness of the actuary’s work and should be sufficient to comply with the disclosure requirements in section 4.
Section 4. Communications and Disclosures
4.1 Actuarial Communication
When issuing an actuarial communication subject to this standard, the actuary should refer to ASOP Nos. 23 and 41, Actuarial Communications. In addition, the actuary should disclose the following, as applicable, in an actuarial communication:
a. the intended purpose(s) or use(s) of the trending procedure, including adjustments that the actuary considered appropriate in order to produce a single work product for multiple purposes or uses, if any, as described in section 3.1;
b. significant adjustments to the data or assumptions in the trend procedure, that may have a material impact on the result or conclusions of the actuary’s overall analysis;
c. the disclosure in ASOP No. 41, Actuarial Communications, section 4.2, if any material assumption or method was prescribed by applicable law (statutes, regulations, and other legally binding authority);
d. the disclosure in ASOP No. 41, section 4.3, if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; and
e. the disclosure in ASOP No. 41, section 4.4, if, in the actuary’s professional judgment, the actuary has otherwise deviated materially from the guidance of this ASOP.
4.2 Additional Disclosures
In certain cases, consistent with the intended purpose or use, the actuary may need to make the following disclosures in addition to those in section 4.1.
a. When the actuary specifies a range of trend estimates, the actuary should disclose the basis of the range provided.
b. The actuary should disclose changes to assumptions, procedures, methods or models that the actuary believes might materially affect the actuary’s results or conclusions as compared to those used in a prior analysis, if any, performed for the same purpose.
Appendix 1 – Background and Current Practices
Background
Recognition of the significance of trend in many property/casualty analyses and difficulty of discerning turning points has led to a need for increasingly sophisticated trending procedures. Publications of the CAS such as Variance and the Syllabus of Examinations, and many other publications such as statistics and economics textbooks, provide extensive information on alternative procedures. The actuary may refer to these or develop other procedures, as appropriate for each situation.
Current Practices
Trending procedures are used in ratemaking, reserving, valuation, underwriting, and marketing for most property/casualty insurance plans or policies. In such procedures, actuaries generally place reliance on (1) data generated by the book of business being analyzed, (2) other insurance data, and (3) non-insurance data, in that order of preference. Mathematical techniques are often used to smooth and extrapolate from historical data. In the absence of strong contrary indications, there is a reliance on extrapolations of historical insurance data. Procedures based on non-insurance data are also used. In trending procedures, judgmental considerations generally include, but are not limited to, the historical data used, the success of these techniques in making prior projections, the statistical goodness of fit of the techniques to the historical data, and the impact of any sudden, nonrecurring changes (for example, tort reform) that had not yet been incorporated in the historical data.
Appendix 2 – Comments on the Exposure Draft and Responses
The exposure draft of this ASOP, Trending Procedures in Property/Casualty Insurance, was issued in January 2008 with a comment deadline of May 1, 2008. Thirteen comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. For purposes of this appendix, the term “commentator” may refer to more than one person associated with a particular comment letter. The Subcommittee on Ratemaking carefully considered all comments received, and the Casualty Committee and ASB reviewed (and modified, where appropriate) the proposed changes.
Click here to view Appendix 2 in its entirety.
PDF Version: Download Here
Last Revised: May 2011
Effective Date: November 01, 2009
Document Number: 133
Document Status: Adopted