8. Claim reserving Flashcards
What is reserving risk?
The risk that the Group’s estimate of future claims is insufficient.
What are 6 sources of reserving risk?
- Higher-than-expected gross losses
- Unresponsive reinsurance.
- Increasing claims inflation trends
- Economic uncertainty
- Long-tail lines of business
- Legislative changes
What are Ogden rates?
Interest rates used to calculate the lump sum payment for future loss of earnings and care costs in personal injury claims settled by the courts.
How does a lower Ogden rate affect lump sum payments?
The lower the rate, the higher the lump sum payment needs to be.
What does IBNR stand for in insurance?
Incurred but not reported
What are IBNR claims?
Claims that have happened before the balance sheet date that have not yet been reported.
Why is IBNR important in insurance company accounts?
To accurately calculate profitability, all claims with an incident date up to the balance sheet date, whether reported or not, must be recognised.
How is IBNR calculated?
Expected number of claims x Average claim cost
What happens to IBNR if claim numbers are stable?
It increases by claims inflation each year.
What is IBNER, and how does it relate to IBNR?
Incurred but not enough reported (IBNER) refers to claims where the case estimates are likely to understate the total cost due to factors like high-cost injury claims.
Why are claims generally grouped by incident year (or accident year)?
To match earned premiums with claims from incidents that occurred within the same accounting period for profitability purposes.
What 4 factors are considered when deciding how to categorise claims?
- Length of tail
- Expected claims pattern
- Surplus or deficit expectation in claim run-off
- Average claim values
What 4 key statistics are collected by incident year for each class of business?
- Number of claims reported
- Number of nil claims
- Total value of paid claims
- Total value of outstanding case estimates at period end
How is the case incurred value calculated?
Claims paid in the year + case estimates at year-end – case estimates brought forward from the prior year
What are the 4 main methods for estimating the total cost of claims?
- Projection of paid claims
- Projection of incurred claims
- Loss ratio method
- Bornhuetter-Ferguson method
- Average cost of claims
- Exposure-based
What is the projection of paid claims method?
It estimates future claims by extrapolating past paid claims, assuming future claims inflation will match past inflation.
How can the projection of paid claims method be adjusted for inflation?
By applying an inflation rate suitable for the type of claims, especially when future inflation is expected to differ from past inflation.
What is the projection of incurred claims method?
It estimates future claims using both paid and outstanding claims data, providing a more accurate estimate than the paid claims method.
What potential issue can arise with the projection of incurred claims method?
Changes in claims handling procedures can distort the results.
What is the loss ratio method used for?
Where paid and incurred claims are low relative to expected total claims.
What factors are considered when estimating future loss ratios in the loss ratio method?
Changes in premium rates and claims inflation.
What is the Bornhuetter-Ferguson method?
A combination of the loss ratio method with either the paid or incurred claims method, weighting them based on the expected development of claims.
How does the weighting change over time in the Bornhuetter-Ferguson method?
As claims develop, the projection relies more on actual paid or incurred claims and less on the loss ratio projection.
What is the average cost of claims method?
It estimates future claims by multiplying the expected number of claims by the average claim cost.
When is the exposure-based method used?
For very long-tail liabilities with high uncertainty, such as asbestos, pollution, and health hazard exposures.
Who ultimately decides the amount to set aside for claims?
The board of directors
Who is typically responsible for preparing the claims estimate?
The CFO
How often are claims reviews conducted?
Monthly for the most volatile claims, and quarterly for the rest of the portfolio.
What is the concept of discounted claims?
Discounted claims reduce the amount set aside by the expected investment income on future investments supporting the claims.
What is claims run-off used to assess?
The accuracy of the amount set aside for claims.
How is the claims run-off calculated?
By subtracting the closing provision from the opening provision and adjusting for the claims paid.
