VOLUME XCII NUMBERS 176 and 177 PROCEEDINGS OF THE Casualty Actuarial Society ORGANIZED 1914 2005 VOLUME XCII Number 176—May 2005 Number 177—November 2005 COPYRIGHT—2007 CASUALTY ACTUARIAL SOCIETY ALL RIGHTS RESERVED Library of Congress Catalog No. HG9956.C3 ISSN 0893-2980 Printed for the Society by United Book Press Baltimore, Maryland Typesetting Services by Minnesota Technical Typography, Inc. St. Paul, Minnesota FOREWORD Actuarial science originated in England in 1792 in the early days of life insurance. Because of the technical nature of the business, the first actuaries were mathematicians. Eventually, their numerical growth resulted in the formation of the Institute of Actuaries in England in 1848. Eight years later, in Scotland, the Faculty of Actuaries was formed. In the United States, the Actuarial Society of America was formed in 1889 and the American Institute of Actuaries in 1909. These two American organizations merged in 1949 to become the Society of Actuaries. In the early years of the 20th century in the United States, problems requiring actuarial treat- ment were emerging in sickness, disability, and casualty insurance, particularly in workers com- pensation, which was introduced in 1911. The differences between the new problems and those of traditional life insurance led to the organization of the Casualty Actuarial and Statistical Society of America in 1914. Dr. I. M. Rubinow, who was responsible for the Society’s for- mation, became its first president. At the time of its formation, the Casualty Actuarial and Statistical Society of America had 97 charter members of the grade of Fellow. The Society adopted its present name, the Casualty Actuarial Society, on May 14, 1921. The purposes of the Society are to advance the body of knowledge of actuarial science applied to property, casualty, and similar risk exposures, to establish and maintain standards of qualification for membership, to promote and maintain high standards of conduct and competence for the members, and to increase the awareness of actuarial science. The Society’s activities in support of this purpose include communication with those affected by insurance, presentation and discussion of papers, attendance at seminars and workshops, collection of a library, research, and other means. Since the problems of workers compensation were the most urgent at the time of the Society’s formation, many of the Society’s original members played a leading part in develop- ing the scientific basis for that line of insurance. From the beginning, however, the Society has grown constantly, not only in membership, but also in range of interest and in scientific and related contributions to all lines of insurance other than life, including automobile, liability other than automobile, fire, homeowners, commercial multiple peril, and others. These contributions are found principally in original papers prepared by members of the Society and published annually in the Proceedings of the Casualty Actuarial Society. The presidential addresses, also published in the Proceedings, have called attention to the most pressing actuarial problems, some of them still unsolved, that the industry has faced over the years. The membership of the Society includes actuaries employed by insurance companies, industry advisory organizations, national brokers, accounting firms, educational institutions, state insurance departments, and the federal government. It also includes independent con- sultants. The Society has three classes of members: Fellows, Associates, and Affiliates. Both Fellows and Associates require successful completion of examinations, held in the spring and fall of each year in various cities of the United States, Canada, Bermuda, and selected overseas sites. In addition, Associateship requires completion of the CAS Course on Professionalism. Affiliates are qualified actuaries who practice in the general insurance field and wish to be active in the CAS but do not meet the qualifications to become a Fellow or an Associate. The publications of the Society and their respective prices are listed in the Society’s Yearbook. The Syllabus of Examinations outlines the course of study recommended for the examinations. Both the Yearbook, at a charge of $40 (U.S. funds), and the Syllabus of Examinations, without charge, may be obtained from the Casualty Actuarial Society, 1100 North Glebe Road, Suite 600, Arlington, Virginia 22201. I JANUARY 1, 2005 EXECUTIVE COUNCIL* STEPHEN P. D’ARCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . President PAUL BRAITHWAITE . . . . . . . . . . . . . . . . . . . . . . . . . . President-Elect DEBORAH M. ROSENBERG . . . . . . . . . Vice President--Administration THOMAS G. MYERS . . . . . . . . . . . . . . . . Vice President--Admissions AMY S. BOUSKA . . . . . . . . . . . . . . . . . Vice President--International JOANNE S. SPALLA . . . Vice President--Marketing & Communications BETH E. FITZGERALD . . . . . . Vice President--Professional Education DONALD F. MANGO . . . . . Vice President--Research & Development THE BOARD OF DIRECTORS Officers* STEPHEN P. D’ARCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . President PAUL BRAITHWAITE . . . . . . . . . . . . . . . . . . . . . . . . . . President-Elect Immediate Past President† MARY FRANCES MILLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 Elected Directors† GARY R. JOSEPHSON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 DAVID J. OAKDEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 PATRICIA A. TEUFEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 OAKLEY E. VAN SLYKE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 ROBERT V. DEUTSCH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 SHOLOM FELDBLUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 ANDREW E. KUDERA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 ROBERT F. WOLF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 REGINA M. BERENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 CHRISTOPHER S. CARLSON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 ALLAN KAUFMAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 KAREN F. TERRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 *Term expires at the 2005 Annual Meeting. All members of the Executive Council are officers. The vice president–administration also serves as the secretary and treasurer. † Term expires at the Annual Meeting of year given. II 2005 PROCEEDINGS CONTENTS OF VOLUME XCII Page PAPERS PRESENTED AT THE 2005 CAS SPRING MEETING An Examination of the Influence of Leading Actuarial Journals L. Lee Colquitt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Riskiness Leverage Models Rodney E. Kreps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 Discussion by Robert A. Bear. . . . . . . . . . . . . . . . . . . . . . . .61 Why Larger Risks Have Smaller Insurance Charges Ira L. Robbin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89 ADDRESS TO NEW MEMBERS—MAY 16, 2005 “The Meaning of Life, the Universe, and All That” Allan M. Kaufman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150 MINUTES OF THE 2005 CAS SPRING MEETING . . . . . . . . . . . . . . . .157 PAPERS PRESENTED AT THE 2005 CAS ANNUAL MEETING Modeling Financial Scenarios: A Framework for the Actuarial Profession Kevin C. Ahlgrim, Stephen P. D’Arcy, and Richard W. Gorvett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .177 When Can Accident Years Be Regarded as Development Years? Glen Barnett, Ben Zehnwirth, and Eugene Dubossarsky. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .239 The Application of Fundamental Valuation Principles to Property/Casualty Insurance Companies Wayne E. Blackburn, Derek A. Jones, Joy A. Schwartzman, and Dov Seigman. . . . . . . . . . . . . . . . . . . . .257 A New Method of Estimating Loss Reserves Colin M. Ramsay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .462 A Modern Architecture for Residential Property Insurance Ratemaking John W. Rollins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .486 III 2005 PROCEEDINGS CONTENTS OF VOLUME XCII Page Estimating the Workers Compensation Tail Richard E. Sherman and Gordon F. Diss . . . . . . . . . . . . . .579 Incorporation of Fixed Expenses Geoffrey Todd Werner. . . . . . . . . . . . . . . . . . . . . . . . . . . . .679 AUTHOR’S RESPONSE TO DISCUSSION OF A PAPER PUBLISHED IN VOLUME LXXXVI Application of the Option Market Paradigm to the Solution of Insurance Problems Discussion by Stephen J. Mildenhall Michael G. Wacek. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .717 DISCUSSION OF A PAPER PUBLISHED IN VOLUME XCI The “Modified Bornhuetter-Ferguson” Approach to IBNR Allocation Trent R. Vaughn and Phoebe A. Tinney Discussion by Glenn M. Walker . . . . . . . . . . . . . . . . . . . . .734 ADDRESS TO NEW MEMBERS—NOVEMBER 14, 2005 “Horizons” Ronald L. Bornhuetter. . . . . . . . . . . . . . . . . . . . . . . . . . . . .741 PRESIDENTIAL ADDRESS—NOVEMBER 14, 2005 “On Becoming an Actuary of the Fourth Kind” Stephen P. D’Arcy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .745 MINUTES OF THE 2005 CAS ANNUAL MEETING . . . . . . . . . . . . . . .755 REPORT OF THE VICE PRESIDENT–ADMINISTRATION Deborah M. Rosenberg. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .780 FINANCIAL REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .789 2005 EXAMINATIONS—SUCCESSFUL CANDIDATES . . . . . . . . . . . . . .790 IV 2005 PROCEEDINGS CONTENTS OF VOLUME XCII Page OBITUARIES Robert Grant Espie. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .823 Clyde H. Graves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .824 Sidney M. Hammer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .825 Richard L. Johe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .826 J. Gary LaRose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .827 Herbert J. Phillips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .828 Paul J. Scheel Sr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .829 Edward Merrill Smith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .830 Leo M. Stankus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .831 John A. W. Trist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .832 INDEX TO VOLUME XCII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .833 V NOTICE Papers submitted to the Proceedings of the Casualty Actuarial Society are subject to review by the members of the Committee On Review of Papers and, where appropriate, additional individuals with expertise in the relevant topics. In order to qualify for publication, a paper must be relevant to casualty actuarial science, include original research ideas and/or techniques, or have special edu- cational value, and must not have been previously copyrighted or published or be concurrently considered for publication elsewhere. The Society is not responsible for statements of opinion expressed in the articles, criticisms, and discussions published in these Proceedings. VI Editorial Committee, Proceedings Editors DALE R. EDLEFSON, Editor In Chief MARTIN ADLER NATHAN J. BABCOCK JEANETTE R. COSTELLO DANIEL A. CRIFO SUSAN J. FORRAY ANDREW SAMUEL GOLFIN JR. ALI ISHAQ GAIL P. MCDANIEL DARCI Z. NOONAN WILLIAM E. VOGAN GLENN WALKER VII