Professional Insight
Ethical Issues

Should Reserves Reflect Anticipated Savings?

Ethical Issues is written by members of the CAS Committee on Professionalism Education (COPE). The column’s intent is to stimulate discussion among CAS members. Therefore, positions are sometimes stated in such a way as to provoke reactions and thoughtful responses on the part of the reader. Responses are welcomed. The opinions expressed by readers and authors are for discussion purposes only and should not be used to prejudge the disposition of any actual case or modify published professional standards as they may apply in real-life situations.

Editor’s Note: This article was published previously in the Ethical Issues column in the November 2000 issue of Actuarial Review. COPE made some small adjustments and updates, but the title and topic addressed are essentially unchanged.

Jane Smith, FCAS, MAAA, is a consulting actuary. Jane has been asked to complete an actuarial analysis of Widget Incorporated’s (Widget) self-insured workers’ compensation program. Widget has been self-insured for workers’ compensation for the past 20 years but has never staffed a risk management or safety department. As might be expected, Widget’s self-insured losses are approximately 50 percent higher than losses that would be expected based on industry rates and Widget’s level of payroll by job class. Claim frequency is approximately 20 percent higher than the expected level.

Jane has just completed her loss reserve analysis, projecting a required retained loss reserve of $50 million for past accidents and $10 million for the prospective accident period.

Can Jane produce a report and corresponding actuarial opinion that incorporates Betty’s estimates of the likely impact of these new programs?


Before presenting her results, Jane learns that Widget has just hired Betty McCormick to fill the newly created position of Risk and Safety Manager. Betty joins Widget from Trinkets Incorporated (Trinkets), Widget’s main competitor. Jane reaches out to Betty to discuss any potential operational changes. Betty enthusiastically tells her about her tenure at Trinkets, indicating that her programs reduced workers’ compensation costs and claim frequency by 75 percent and 50 percent, respectively. She further indicates that she has studied the situation at Widget and believes that the programs implemented at Trinkets can also be effective at Widget. As such, she feels very strongly that it is appropriate for Jane to reduce her loss reserve and prospective period estimates to incorporate the likely impact of these programs. Betty thinks that it is reasonable to expect a 33 percent drop in the costs associated with historical accidents and a 50 percent reduction in the prospective period. Betty’s compensation is partially tied to the reduction in losses that she can achieve.

Although Jane recognizes that Widget’s lack of risk management has likely led to their higher than average loss experience, Betty has not provided any concrete evidence of the effectiveness of her proposed programs. She has not actually put any of these programs into place yet at Widget, nor has the company budgeted for them. In addition to the company financial statement accrual, Jane is also required to issue a statement of opinion regarding Widget’s loss reserves to the self-insurance regulators.

Can Jane produce a report and corresponding actuarial opinion that incorporates Betty’s estimates of the likely impact of these new programs?


It is appropriate for actuaries to consider operational changes in the loss projection process. At least two specific professional statements/standards give us guidance in this area:

  • Section 3.6.7 of Actuarial Standard of Practice (ASOP) No. 43, “Property/Casualty Unpaid Claim Estimates,” addresses changing conditions. It states: “The actuary should consider whether there have been significant changes in conditions, particularly with regard to claims, losses, or exposures, that are likely to be insufficiently reflected in the experience data or in the assumptions used to estimate the unpaid claims.” Note, however, that Jane should remember to disclose the change considered as required by paragraph f in section 4.1 of the same standard.
  • Section 3.7 of ASOP No. 36, “Statement of Actuarial Opinion Regarding Property/Casualty Loss and Loss Adjustment Expense Reserves,” indicates that a reserve should be considered reasonable if “it is within a range of estimates that could be produced by an unpaid claim estimate analysis that is, in the actuary’s professional judgment, consistent with both ASOP No. 43, “Property/Casualty Unpaid Claim Estimates,” and the identified stated basis of reserve presentation.”


It would be inappropriate for Jane to reduce her figures without any hard evidence of the implementation and impact of these new programs. This is particularly true since Betty’s compensation is tied to loss experience. It is very common for new risk managers to feel that the changes that they implement will produce significant savings. While incorporating operational changes is appropriate, the standards of practice do not require the actuary to use an unsubstantiated figure.