Ch 23: Reserves and solvency cap reqs

Question 1

Reasons/purposes for calculating reserves of health and care insurer

Answer 1

• Determine liabilities to be shown in published accounts
• If seperate accounts are prepared for the purpose of supervision opf solvency, to determine liabilities to be shown in those supervisory accounts
• To determine liabilities to be shown in internal management accounts of the insurer
• To estimate cost of claims incurred in recent periods and hence provide a base for estimating future premiums required to attain given level of profitability
• To value the insurer for a merger or acquisition
• To influence investment strategy
• To assist with the assessment of reinsurance arrangements

Question 2

Types of resreves (long-term and short-term reserves)

Answer 2

Long-term:
* Reserves for policies (typically discounted value of future expected claims, expenses and premiums)
* IBNR
* Reserves for claims that have been reported but not yet fully settled
* Option and guarantee reserves
* In group risk context, unearned premium reserve and unexpired risk reserve (short-term) may apply
* Investment mismatching reserve

Short-term:
* Unearned premium reserve (basically need to hold the proportion of premiums already received that relates to future coverage)
* Unexpired risk reserve (propsectively calculate what is actually needed to provide sufficient cover for the unexpired risk, if UPR is deemed to eb inadequate, the URP reserve will supplement
* Claims in transit - claims reported but not assessed or recorded
* Outstanding claims reserve - claims notified but not yet fully settled
* Incurred but not enough reported - adjustemnt to outstanding claims reserve
* Equalisation or catastrophe reserve (where it is felt the current year is atypical and amounts need to be held back for abnormal events - idea is to take some from profitable years to dupplement future less profitable years to smooth results/profits

Question 3

Advantages and disadvanatges of using case estimates for reported claims

Answer 3

Advantages:
* It is the only approach that can make full use of all the known data on outstanding claims
* There may be many qualitative factors that will influence the amount of the claim. An experienced assessor will be able to weigh up all these factors when estimating the amount of a claim
* Case by case methods may still be applicable when statistical methods are not reliable

Disadvantages:
* Relies on judgement of individuals, different individuals may produce quite different results
* Assessors may be naturally conservative or optimistic (biased)
* If the estimate is to be used for negotiation there may be tendancy for estimate to be biased to the lower end
* In some cases there may be thousands of outstanding claims, it will take many person-hours in total to estimate each claim amount individually. Expensive and perhaps unnecessarily so as statistical methods could be more appropriate of claims were relatively stable)
* Difficult to produce range of estimates on a range of possible bases
* In some cases estimates will have to be made by outsiders who do not have access to all the data, in these cases not possible.

Question 4

Statistical methods to calculate outstanding claims reserve

Answer 4

• Chain ladder methods
• Average cost per claim methods
• Loss ratio methods
• Blends (like Bornhuetter-Ferguson method)