0 - General Insurance Overview Flashcards
Why do general insurers exist?
- To meet a need:
- —->Small known outlay vs risk of large loss
- —->Pass on risk
- To make profits
Why do some insurance companies quote higher premiums than other insurance companies for car insurance for the same individual and period of cover?
- Different estimates of the expected claim amount
- Different levels of expenses, commission, reinsurance costs, investment returns and profit
- Some insurers don’t want the business, so quote too high
- Others may undercharge, hoping the policyholder will stay for years and that they will make money later
- Different forms of cover may have been requested
quotations - Could have related to driving in different countries
What are the roles of actuaries in GI sector?
- Capital allocation
- Risk assessment, eg modelling catastrophic events
- Strategic management of the business
- Determining a suitable investment strategy
- Assessing reinsurance requirements
- Expense allocation
- Assessing the effectiveness of marketing campaigns
- Assisting with the early settlement of liabilities in the event of a wind-up.
What are the three components of pricing?
- decide pure risk premium
- decide office premium
- decide other adjustments
What is pure risk premium based on?
What do we adjust it for?
Pure risk premium is based on:
- past experience
- adjustments to past experience
It is adjusted for:
- unusual experience
- trends
- inflation
- incomplete past data
- changes in risks
What is the office premium? What are some other considerations do we make?
Simply the pure risk premium adjusted for:
- expense loading
- reinsurance premium and recoveries
- profit
- investment income
Other adjustments we consider:
- business objectives of insurer
- competition
- insurance cycle
- reaction of policyholders
- no claims discounts
What are technical reserves about?
- For all business written in the PAST, claims occur and wrt these, insurers hold OUTSTANDING CLAIMS RESERVES
- There is usually a delay b/w reporting & settlement of claims
- For active policies insurers hold UNEXPIRED RISK RESERVES for cover that is yet to be provided
What are the types of outstanding claims reserves & how are they estimated?
- Reported claims
- IBNR
- IBNER (incurred but not enough reported)
- Reopened claims
- Claims expenses
Estimated using:
- Statistical methods (from high vol. of similar policies)
- Case estimates (from loss adjustors)
What are the types reserves for unexpired policies?
- Unearned premium reserve (UPR)
- Unexpired risk reserve (URR)
- Additional unexpired risk reserve (AURR)
- Claims equalisation reserves (smoothing profits)
- Catastrophe reserves (held by insurers w-out reinsurance in place)
What is the role of the insurer?
- Accept risks
- Management of risks through using:
- > Premiums
- > Reserving
- > Product design
- > Reinsurance
- > Accounts
What is the defn. of unearned premium reserve (UPR)?
UPR = proportion of unexpired risk x (premium - initial acquisition costs)
- Assumes that incidence of risk is uniformly spread over the lifetime of policy
What is the Unexpired Risk Reserve Defn. ?
Expected cost of claims & expenses from unexpired proportion of the policy
What is Additional Unexpired RIsk Reserve (AURR)?
AURR = UPR - URR
- only formed when policy is believe to be underpriced
What are free reserves?
Defn. : Excess assets over technical reserves + regulatory solvency margin
Also called:
Shareholders’ funds
Capital employed
Solvency margin (min. solvency margin required by regulations)
What does the minimum regulatory solvency margin depend on?
- Volume of business
- Risks involved
-> Variability of claims
-> Management style (risk-averse or not, reinsured or
not?)
High level overview of the pricing process:
(1) Actuaries FAMILIARISE themselves w risk to create a model which pieces together various bits of data to price the risk
(2) RISK COSTING (GROSS)
- Claims data (details about the claims and various rating factors for the policies at the times claims occurred)
- Exposure data (ALL policies that existed regardless of if any claims arose from them)
-> Possibly for many years, some data might be
old/irrelevant or new/partially incomplete
** Exposure data and Claims data are likely to be on
U/W basis and Accident year bases respectively,
need policy numbers to reconcile the two
(3) RISK COSTING (NET)
- Incorporate cover data (new/current p/h information) into pricing model and we end up with (net premium)
-> Money needed to cover claims but nothing else
DONE.
High level overview of capital modelling process:
After net risk premium calculation:
- Add on loading for capital/profit
- Discount for the investment income generated from time b/w inception/claim/reporting/settlement
- Add on allowances for various expenses:
- > Underwriting expenses
- > Claims management
- > Reinsurance
- > General admin overheads
Capital modelling purpose:
Helps decide how much capital is required to meet the insurer’s liabs at a required confidence level
Methods used for capital modelling
- Stochastic modelling
- Scenario tests
- Stress tests
Capital model assumptions include:
- Cashflows in the future
-> Need to have enough PV of funds & LIQUIDITY to
pay liabs when they are due - Financial variables (inflation, interest rates, prob. of default)
- Catastrophes
- Reinsurance
- Insurance cycle (competitive considerations)
- Operational losses (theft, fraud)
Capital model assesses capital requirements based on:
The various risks of the insurer:
- > Insurance risk (risk from cover provided)
- > Reserving risk (risk of insufficient/excessive reserves)
- > Market risk (risk of adverse change in value of A/L)
- > Credit risk (eg. risk of reinsurers failing, p/h not paying premiums, intermediaries failing etc.)
- > Operational risk (eg. risk of theft fraud etc.)
- > Liquidity risk (risk of not having sufficient liquid form assets despite being solvent)
- > Group risk (risk associated with insurer part of a wider group as opposed to individual)
- > Strategic/political risks (eg. risk of increased tax on insurers)
GI capital modelling falls into three main categories:
- Stochastic modelling
- Triangulation methods (Chain-ladder, Bornheutter etc)
- Asset-Liability modelling (Investment strategy)
Investment strategy depends on:
- Currency of liabilities
- Uncertainty associated with liabs
- Nature of liabs (real or fixed)
- Term of liabs
- Size of free reserves
- Legislation (Restrictions on acceptable investments)
- Taxation (Mainly concerned w after tax returns, tax can make investments artificially attractive and artificially unattractive)
CUNTS Leg Tax
What does a general insurer balance sheet look like?
ASSETS:
- > Investments
- > Fixed assets
- > Net current assets
LIABILITIES:
-> Technical reserves (outstanding claims, IBNR, IBNER,
CAT, Equalisation)
-> Free reserves
Why do insurers need balance sheets?
- Statutory accounts
- Management accounts (for operation of firm)
- Valuation assumptions
Defn. earned premiums:
- The proportion of the premium that can be classified as income because it has been “earned” for the period of cover that has been provided
Defn. incurred claims:
- A claim is incurred at the point when the event triggering a claim happens
- Analogous defn. for incurred expenses
- Defined to apply accrual accounting concept in company accounts
Defn. claims paid:
- The total amount of incurred claims that have been settled, are paid claims
- Analogous defn. for paid expenses
- Defined to apply accrual accounting concept in company accounts
What is the underwriting profit and how is it calculated?
- Underwriting profit is the amount declared as the insurer’s OPERATING PROFIT for the year and it is calculated as:
Earned premiums - Incurred claims - Incurred Expenses
Profits after tax calculation for insurers:
Profit after tax = Underwriting profit + investment income (on non-technical reserves) - tax paid
Cashflow structure for general insurance companies:
Premiums paid - Claims paid - Expenses paid \+ Investment income - Tax paid \+ Reinsurance recoveries - Reinsurance premiums \+ Money from share issues - Dividends paid
Why do reinsurers exist?
- To meet a need:
- > Small known outlay vs risk of large loss
- > Pass on risk
- Quite similar to what insurers do, except reinsurers can also operate wrt a group of policies as opposed to a particular policy like insurers
- Risks covered include:
- > Individual large risks
- > Accumulations of risk
- To make profit
