Intro to SIGMA & Discussion on Scope and Data Requirements

If you’re reading this post on LinkedIn, you’ve likely already connected with SIGMA and, thus, are somewhat familiar with who we are and what we can offer. To supplement that familiarity, we’d like to take some time this year to dive into the specifics of SIGMA’s background and capabilities. Our firm has been fortunate enough to experience substantial growth over the years, and as a result, our audience has grown alongside that. So, if you’re relatively new to working with SIGMA or simply haven’t had the opportunity to work with us in recent years, we hope this series will provide you with a solid understanding of all the ways SIGMA can help you achieve your risk-related goals.

Over the next several posts, we’ll be covering some of the basic studies that SIGMA is capable of, how they can be used, and why they might be right for you. Today, we’ll be focusing specifically on the topic of scope and data requirements for actuarial analyses, but before we do that, let’s first review SIGMA’s history as a firm.

SIGMA was founded in 1995 in Nashville, TN by our current president, Al J. Rhodes. Initially, it began as a relatively small operation that involved Al and a few other employees, but SIGMA steadily garnered a solid foothold in the actuarial industry and grew in both size and scope. We have prided ourselves on the tenets of not only providing accurate and reliable results, but also offering the time to go through these results with each individual client. Because of this, SIGMA’s clients are assured in the knowledge that they have both solid results and the ability to fully utilize them.

Though our work has touched a number of arenas, ranging from actuarial reserve analyses to minor league baseball studies, we specialize in a few areas that we think would be of particular note to our LinkedIn audience. Many of these will be covered in subsequent posts and will include resource links for those who’d like to investigate further. Let’s start, though, with today’s topic: the scope and data requirements of an actuarial analysis.

In order to maximize the benefit of an actuarial analysis, begin by discussing how it will apply to the unique business operations and plans of the company. Some important questions to help determine the initial scope include:

• What are you trying to accomplish with an actuarial analysis?
• What is the overall structure of the program, including coverages and policy years?
• Have there been any changes in reserving practices, third-party administrators, or claim reporting procedures over the years?
• What operational details of your company affect loss experience?
• What types of loss control programs have been implemented?

Once these questions are answered, the next step is to gather the necessary data. Below are five items typically required for an actuarial analysis:

1. First and foremost is a current loss run for all open and closed claims. In general, loss runs include the following field for each claim: claim number, claimant name, loss date, report date, status, state, accident description, incurred losses, paid losses, and outstanding reserves. Loss runs should be provided for at least the past five policy years and should include all years with any remaining open claims. This allows ultimate losses to be calculated without reliance on industry average frequencies and severities.
2. Annually evaluated loss runs for past policy periods are also needed in order to compile loss development triangles, which track year-over-year development on incurred losses, paid losses, and claim counts. Past development history is used to estimate future development in losses from the current evaluation date to the ultimate paid amount when all claims are closed. If past loss runs are not available, industry loss development factors are used.
3. Exposure information for at least the past five policy years, as well as the projected year, is used to adjust historical losses by the volume of exposure for each policy year. Typically, payroll is used for workers compensation, revenue for general liability, and number of vehicles for automobile liability.
4. Retention levels for each policy year are used to cap losses at per-occurrence retentions, aggregate retentions, or quota share amounts when calculating the ultimate value of losses. The treatment of allocated loss adjustment expenses is also an important piece of information.
5. Credible data and discussion with your actuary on the front end will help produce reliable results from your actuarial analysis, impacting your balance sheet and influencing loss budgeting and financing decisions.

We very much appreciate you taking the time to briefly review at the various aspects of scope and data requirements and would like to offer additional information for those who’d like to delve a little further. Below are links to a few relevant RISK66 documents and videos covering this topic that we think may be useful.

PDFs:

• SIGMA Talk: Current Client
• SIGMA Talk: Prospective Client
• SIGMA Introductory Flyer

Videos:

• Guidelines on Sending Data to SIGMA
• Changes within your Organization that SIGMA should Know
• Assumptions Made by an Actuary
• Beyond the Data: What Should Your Actuary Know

If you have any questions about today’s topics, feel free to contact us, at support@SIGMAactuary.com. We hope you’ll join us for our next article as we move on to a crucial component of actuarial analyses: loss development factors.