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Transitioning from Loss Forecaster to a SIGMA Analysis

Get on BoardThroughout SIGMA’s experience with supporting and improving the Loss Forecaster software, one question has appeared time and time again from our users:  why would they transition from utilizing Loss Forecaster to engaging SIGMA in an actuarial analysis, and how do they know when the time is right?  In this blog post, we hope to address both parts of this question and give our users a clearer view of the many nuances involved in the decision.

Of the various reasons listed throughout this post, the most generally applicable is definitely the creation and use of unique loss development factors.  While Loss Forecaster relies on years of industry information to estimate ultimate loss amounts, organizations with sufficient loss history may wish to incorporate their own loss development and create unique LDFs, which could subsequently result in ultimate loss estimates that more closely match their development history.  When deciding whether or not your organization would benefit from unique LDFs, it is very important to consider the extent of loss history available.  Generally, at least five sequential loss evaluations are necessary in order to achieve sufficient deviation from industry information.

A similar type of decision can arise when an organization is faced with either an “aberrant” or systemic change impacting their losses.  “Aberrant” may refer to a rare claim or situation where a number of non-normal claims have been filed that are not indicative of typical loss experience, and systemic refers to shifts in reserving practices, claims-handling philosophy, or similarly esoteric changes that aren’t immediately identifiable in a loss run.  In both cases, Loss Forecaster is incapable of examining losses on anything beyond a mechanical basis, which is why an actuary is needed to properly assess these changes and their true impact on current and future losses.

Actuarial judgement is also crucial when dealing with situations involving retention levels.   As an example, consider a situation in which your organization is trying to determine what retention best suits their needs for an upcoming policy period.  Perhaps their losses have never quite reached the current retention level and, as such, they are considering a higher retention level in order to save costs on premium.  While Loss Forecaster is capable of assisting in this decision, it can only analyze losses that actually exist within the loss history, thereby not fully assessing the possibility of a claim reaching the layer between the current retention level and the higher one.  Through a combination of advanced actuarial techniques, statistical modeling, and actuarial judgement, SIGMA would be able to truly examine this risk and consequently provide a more accurate analysis, ensuring that you are armed with the best information possible when making your decision.

A higher level of analysis isn’t the only benefit of engaging SIGMA. Whether it’s walking you through an analysis to make sure you understand its methodology or fielding questions during collateral negotiations, we pride ourselves on our ability to assist in all aspects of the analytic process beyond the analysis itself.  While our resource library and training videos can be extremely helpful in understanding core concepts of the actuarial industry, seeing those concepts in action and learning exactly how they impact your losses can be invaluable to your comfort with the results.

Many more situations have the potential to cause an engagement with SIGMA, a few of which are included below.  If you believe any of these may apply to your organization, but aren’t fully sure, feel free to contact the staff at SIGMA, and we’d be more than happy to assist in the decision.

– Reserve Allocations

  • In cases where reserves need to be allocated to various entities by using a methodology matching internal philosophy, engaging an actuary can be very beneficial.

– Non-Traditional Types of Risk

  • Many types of risk can be difficult to analyze through traditional means, including:
    • Asbestos Liability
    • Cyber Risk
    • Warranty Liability
    • Employment Practices Liability

– Large Volumes of Losses

  • When dealing with higher quantities of losses, most auditors will require a full actuarial analysis to ensure accuracy.
    • In general, losses are considered to be of a large volume when breaching a threshold of $1MM.
  • Similarly, this degree of analysis is required when an organization is going public.

As evidenced by the many questions we’ve received over the years, the decision of whether and when to “make the switch” is never an easy one.  Hopefully, this article has given you a bit more context in that regard, but if you have any questions, or would simply like to discuss your specific situation, you may contact SIGMA through the following avenues:

Al Rhodes, President & Senior Actuary: AL@SIGMAactuary.com or 866.228.8279 x 202
Timothy Coomer, Ph.D., CEO: TLC@SIGMAactuary.com or 866.228.8279 x 203

Have a great day!

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Enoch Starnes

About Enoch Starnes

Enoch joined SIGMA in 2013 and is an Actuarial Consultant. His consulting services with SIGMA include a specialization in data management, actuarial analysis, and statistical modeling. He manages the preparation of actuarial reserve analyses and loss projections for clients across a range of industries. His primary focus lies in workers compensation, automobile liability, general liability, medical professional liability, and products liability insurance coverages. In addition to corporate accounts, Enoch has significant experience consulting for public entities. Enoch also has extensive experience in statistically modeling the effect of varying levels of risk retention. Enoch graduated from the University of Tennessee at Knoxville in 2011 with a Bachelor of Science degree in Mathematics, specializing in Statistics and Numerical Analysis.

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Questions? Contact SIGMA…

SIGMA Actuarial Consulting Group, Inc.
5301 Virginia Way, Ste 230
Brentwood, Tennessee 37027
PHONE:    866.ACTUARY     866.228.8279
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