1956 Proceedings of the Casualty Actuarial Society, Volume XLIII

VOLUME XLIII NUMBERS 79 AND 80 PROCEEDINGS OF THE Casualty Actuarial Society ORGANIZED 1914 1956 VOLUME XLIII NUMBER 79- MAY 24, 1955 I~UMBER 80- NOVEMBER 15, 1956 1957 YEAR BOOK Printed for the Society by MAIL AND EXPRESS PRINTING COMPANY, INC. 225 Varick Street New York 14, N. Y. CONTENTS OF VOLUME XLIII Page ADDRESS OF THE PRESIDENT, MAY 24, 1956, NORTON E. MASTERSON : "INSURANCE LANGUAGE PROBLEMS" .................................. I PAPERS PRESENTED AT THE MAY 24, 1956 MEETING: "A REVIEW AND COMPARISON OF WORKMEN'S COMPENSATION EXPERIENCE IN NEW YORK STATE AND WISCONSIN"-- FRANK HARWAYNE ................................................ 8 "A HISTORY OF UNIFORM AUTOMOBILE ASSIGNED RISK PLAN"-- ELDEN W. DAY ................................................... 20 "STATISTICS OF THE NATIONAL BOARD OF FIRE UNDERWRITERS 'y-- J. H. FINNEGAN ............................ , ...................... 82 ADDRESS OF THE PRESIDENT, NOVEMBER 15, 1956, NORTON E. MASTERSON: "THE ACTUARY'S NICHE" ........................................... I00 PAPERS PRESENTED AT THE NOVEMBER 15, 1956 MEETING: "THE RATE LEVEL ADJUSTMENT FACTOR IN WORKMEN'S COMPENSATION RATEMAKING"-- MARTIN BONDY .................................................... 106 UCURRENT RATE MAKING PROCEDURES FOR AUTOMOBILE LIABILITY INSURANCE"-- PHILIPP K. STERN ................................................. 112 ~MONTH OF Loss DEFICIENCY RESERVES FOR AUTOMOBILE BODILY INJURY LOSSES INCLUDING RESERVES FOR INCURRED BUT NOT REPORTED CLAIMS~'- D. A. TAPLEy ..................................................... 166 DISCUSSIONS OF PAPERS ............................................. -... 199 REVIEWS OF PUBLICATIONS .............................................. 225 OBITUARIES ........................................................... 227 MINUTES OF MEETING, MAY 24, 25, 1956 ................................. 282 MINUTES OF MEETING, NOVEMBER 15, 16, 1956 ............................ 284 1956 EXAMINATIONS OF THE SOCIETY .................................... 243 INDEX TO VOLUME VLIII ............................................... 268 1957 YEAR BOOK ...................................................... NOTICE The Society is not responsible for statements or opinions expressed in the articles, criticisms and discussions published in these Proceedings. Vol. XLIII, Part I No. 79 PROCEEDINGS May 24-25, 1956 INSURANCE LANGUAGE PROBLEMS PRESIDENTIAL ADDRESS BY NORTON E. MASTERSON In advocating a better language for understanding and recording the complex multiple line fire and casualty business, a suitable opening quotation or text might be this one from Aristotle: "A likely impos- sibility is always preferable to an unconvincing possibility." My inspiration for this paper came not from this Greek philosopher but from papers of two ex-presidents of this Society--Syd Pinney's "What is so peculiar about an Actuary," and Tom Carlson's "Plain Talk." In fact a large part of this paper might sound like it should have been titled, "Plain talk on what is so peculiar about an actuary's critics." Such impression would have been contrary to my inborn midwestern tolerance of those who misunderstand because I desire to emphasize the correction rather than the criticism. We can learn much from criticism if we put it to constructive use. That results only when it leads to corrective action; otherwise criticism becomes a parallel adjunct to the thing criticized, insepa- rable and almost indistinguishable; like limburger cheese and its odor, taxes and their resistance, weather and complaints thereon. This is a most unique organization as to diversity of membership. It includes actuaries and officials in various fields: fire, casualty and some life insurance companies; stock, mutual, state fund, hospital service and reciprocal organizations; state and company rating bureaus; state and federal government departments; independent consulting actuarial firms; colleges and universities; and non- insurance organizations. Our constitution states that the Society shall take no partisan attitude, by resolution or otherwise, upon any question relating to insurance. In view of the diversity of interests, employment in corn- 2 INSURANCE LANGUAGE PROBLEMS peting companies and conflict of objectives as to private and state enterprise and as to the regulator and the regulated, that provision of non-partisanship is a necessary professional standard. This code of non-partisanship and the diversity of membership makes our Society an outstanding professional forum for objective discussion and thinking about the fire and casualty insurance business. We can and should make use of the all-embracing character of our membership for the consideration of problems resulting from misunderstanding or the absence of a common language of com- munication. One type of these problems relates to insurance prices or ratemaking where we have not been as effective in furthering public understanding of our prices and costs as have most commercial and industrial organizations. A professional society composed of actuaries of companies, actuaries of rating bureaus and actuaries of state insurance departments, can do much to explain our insurance rating or pricing to the public with the objective of securing greater understanding and appreciation of our price problems. There are two obstacles to hurdle---the actuarial peculiarities of insurance as a business and the meaning of words we use to explain our prices and way of doing business. The insurance business is unlike commercial and manufacturing businesses and requires different methods of determining costs and establishing prices or premiums. Our prices are not determined as are the prices of our insureds in the conduct of their personal or business pursuits. A short review of the characteristics of insurance prices will emphasize the nature of fire and casualty insurance as well as the differences from commercial and manufacturing, and even professional services. We deal in future contracts of performance, determining our price prior to performance; while in most other businesses the product is delivered prior to payment. Fire and casualty insurance premiums must provide for costs of future events, which, unlike insurance on lives, may or may not occur. The cost of the insurance service promised is greatly disproportionate to the price paid; you may pay only eight cents per $100 of fire insurance or only $30 for $300,000 of automobile bodily injury coverage. Future financial solvency is more important than current net price because the con- tract is not complete at time of sale. We are regulated by calendar year accounting periods but run a future performance business with ultimate settlement of obligations stretching far beyond each accounting year. Considering all of these unusual characteristics of insurance prices, one could expect difficulty in explaining actuarial bases for insurance premiums to the public. But because of the uncertainty of ultimate costs, you would not anticipate much difficulty in justifying reasonable margins for profit and contingencies. Unfortunately, that is not the case. In fact, profit or cost account- INSURANCE LANGUAGE PROBLEMS ing margins as low as 21/2% to 6% and contingent upon uncertain future events, often meet with more resistance than much higher margins on luxuries, instalment interest, automobiles, homes and other items of budgetary interest to the buying public. But even these relatively low margins for insurance profit and contingencies are subject to future risk. Ours is a risk-bearing business without escalator clauses for the abnormal and the unpredictable. A few startling examples of comparative attitudes toward insurance and other prices will illustrate. I have been an interested observer of two recent price changes involving home owners in a midwestern state. The first involved a revision of dwelling fire and extended coverage rates. The rates pre- pared by the rating bureau provided for a decrease in fire and an increase in extended coverage rates, with state insurance department approval being held up by reason of its counter-proposal of a greater decrease in fire and a lesser increase in extended coverage rates. The press news and editorial presentation or interpretation of the rate change made by the bureau was that a combined premium for $10,000 on a frame house for three years in a city will "go up $7.50." For several months this matter has been a controversial subject at hear- ings and in the press. The other price change affecting many of these home owners was an increase of five cents in the Sunday edition of a large metropolitan newspaper in this same midwestern state. This price increase will amount to $7.80 for three years and was made with a simple announcement that the change was necessary because of price in- creases in newsprint tonnage, coupled with rising production costs. But why was there an immediate public approval of an increase in newspaper expense while the equivalent combined price decrease in fire and increase in extended coverage insurance became a controversial issue? Undoubtedly, because there was an understanding of newsprint and newspaper production costs while there exists a mys- tery about fire and extended coverage insurance rates. The fire rate proposed by the bureau was eight cents and the counter proposal was six cents per $100. Both are almost beyond the reaches of chance and probability and remind me of a comment by one of our fire insurance actuaries in his paper a few years ago. Assuming

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