By Betsy Branagan
What’s in a word? In the extreme, it could be the difference between profitability and ruin. One day the marketing executive is celebrating a 52% loss ratio and the next day the actuary is bemoaning a 94% loss ratio. And to make matters more confusing, both are right. Insurance terminology can be confusing and lead to miscommunication even between experienced professionals.
Before going through your next reserving cycle, you might want to ask your reserving actuaries to consider the following tips:
- Identify what time element your audience generally deals in. Actuaries generally work with data aligned in an accident year or policy year configuration. Most other functions in an insurance organization deal with calendar year data. It might be clear to an actuary when discussing reserve results with another actuary that “the current year loss ratio is 62%” is a reference to an accident year loss ratio. That same phrase uttered to someone on the finance team is likely to be interpreted as the calendar year loss ratio. Reconciliation nightmares can be avoided by simply attaching the time dimension to communications. Saying “the current accident year loss ratio is 62%” provides more clarity to all audiences.
- Avoid taking shortcuts in labels. The reserving process might combine loss and defense cost containment (DCC) reserves and the reserving team may take a shortcut of saying “loss reserve” while meaning “loss and DCC reserves”. No one else will understand that unless the documentation, presentations, and exhibit labels clearly spell it out.
- Provide underlying details of metrics. Telling someone “severity” is $2000 isn’t clear. An improvement would be telling them that the “current accident year severity is $2000”. But knowing whether severity is defined as “paid loss on closed claims /claims closed with pay” or “paid loss on reported claims / claims closed with pay”, or any number of other calculations, is a better way to ensure everyone is interpreting the information the same way.
For those dealing in international markets, there may be non-actuarial terms that could lead to confusion so be careful to recognize those situations as well. After all, if you’re planning on meeting the football team on the first floor after work, you might be in for a surprise!
Without clear communication and labeling, numbers can easily be misinterpreted, and poor decisions can be the result. Take simple steps to avoid this; after all, no one wants to be the person showing up to play a European football game wearing a helmet and pads.
Betsy Branagan is vice president, reserving and claim analytics at Xceedance.