Conflicting Views

Issues surrounding discounting loss reserves were heating up in 1991, and the November 1991 AR ran two articles on discounting that took up almost half the newsletter. The longer of the two articles was a “Point: Counterpoint” discussion, with Steve Philbrick making the case for discounting and Ron Ferguson making the case against it; this debate provides a good overview of the conflicting views that fed the issue. The shorter article, which is excerpted below, summarized results of a public hearing before the Actuarial Standards Board — the headline and subheadline suggest the controversial nature of this issue.

CAS Supports Standards for Discounting of Loss Reserves at ASB Hearing

But Neil Bethel Notes That This Support is not an Endorsement of Discounting

A CAS official joined a half-dozen other prominent actuaries in supporting the issuance of a standard of practice on loss reserve discounting, but warned the Actuarial Standards Board (ASB) that such a standard “must include a discussion of the relationship of dis­counting and the amount of risk margin that may be present in a reserve.”

Neil A. Bethel, chairperson of the CAS Committee on Reserves, spoke at a public hearing held by the ASB on September 25, in conjunction with the Casualty Loss Reserve Seminar in Arlington, VA. The ASB, which had published two exposure drafts of a proposed standard titled, Discounting of Property and Casualty Loss and Loss Adjustment Expense Reserves, asked witnesses at the hearing two questions:

  1. Should loss reserve discounting be addressed by an actuarial standard of practice?
  2. If so, how should such a standard address risk margins?

Seven of nine actuarial witnesses at the hearing voiced support for the issuance of a standard. There was some sentiment that it should be delayed until a standard on risk margins could also be promulgated, but development of the latter might be years off, the hearing was told.

Bethel was one of those not favoring delay … If the ASB delayed its discounting standard “until generally accepted actuarial methods of determining risk margins were formulated,” it might tum out to be a long delay, he suggested …

“This standard would be seen by company management and accountants as de facto endorsement of discounting,” declared Daniel K. Lyons, speaking for the actuaries at General Reinsurance Corp …

Robert J. Gossrow, casualty actuary for the Illinois Department of Insurance, said the NAIC was not opposed to promulgation of the proposed standard. He suggested only that the document might benefit by adding a statement to “discourage discounting in statutory financial statements.” …

If the ASB does not promulgate a standard, “it is likely that others will step in and state what actuaries should do,” warned Harold J. Brownlee, a consulting actuary and recent past president of the American Academy of Actuaries (AAA). He mentioned the Financial Accounting Standards Board (FASB) and insurance regulators as among the “others.” …

The FASB has in fact taken two recent initiatives that may lead to allowing discounting of reserves under generally accepted accounting principles (GAAP), said Ralph S. Blanchard, III, speaking for fellow actuaries involved with the issue at Aetna Life & Casualty … “Discounting for GAAP may be only several years away,” said Blanchard, and for this and other reasons, the ASB should have a standard.

Personal Preference Voiced

But the chairman of the AAA Committee on Property-Liability Financial Reporting, David G. Hartman, voiced a personal preference for having a standard on risk margins issued before a standard on loss reserve discounting …

The final speaker of the day disagreed that a standard was needed. In fact, Thomas J. Kozik, a senior research actuary at Allstate, declared that “discounting is too trivial a task to glorify with a standard. It is analogous to having a standard for computing compound interest.” ….

Walter Wright served as AR editor in chief from 1998 to 2002 and as AR managing editor from 1993-1998. He retired from Oliver Wyman in 2008.