Chapter 0: Introduction to general insurance Flashcards
Actuarial roles in general insurance
- reserving
- setting premiums
- strategic management of business
- risk assessment
- determining suitable investment strategy
- assessing reinsurance requirements
- expense allocation
- capital allocation
- assessing effectiveness of marketing expenses
- assisting with early settlement of liabilities in event of wind-up
Free reserves
Excess of of the value of an insurer’s assets over it’s technical reserves and current liabilities. Also known as the solvency margin and sometimes, in the case of a proprietary insurer, referred to as shareholders’ funds or NAV.
Technical reserves
Held to cover liabilities relating to existing policyholders.
- AKA insurance reserves/insurance provisions
Technical reserves main categories
- Past - liabilities w.r.t. accidents/losses from events that have occured prior to accounting date
- Future - liabilities w.r.t future insurance cover from policies for which premiums have already been received
Claims characteristics
Ways and speed at which claims:
- originate
- are reported
- are settled
- are reopened (on occasion)
Main types of delays
- reporting delays
- settlement delays
Reporting delay
Time from event occurence through to the time that the insurance company is notified of the event.
Settlement delay
Period between notification to the company and the payment of the claim.
Event delay
Part of the reporting delay that relates to the period between when the insured event happens and when the policyholder realises the event has happened.
Causes of settlement delays
- admin processing
- establishing whether insurer is liable
- waiting for a condition to stabilise
- establishing how much should be paid
Short tailed classes of business
Claims are reported quickly and settled quickly by insurer
Long tailed classes of business
A sizeable proportion of total claim payments that take long time for the insurer to settle
Components of the reserve for outstanding claims
- reserve for outstanding reported claims
- reserve for incurred but not reported (IBNR) claims
- reserve for re-opened claims
- reserve for claims’ handling expenses
Reserve for outstanding reported claims
Estimated reserve needed to settle the claims that the company knows about at the accounting date
Reserve for incurred but not reported (IBNR) claims
Needed to cover the claim payments for incidents which have happened but have not bee reported to the insurance company
Reserve for re-opened claims
Additional reserve which may be explicitly shown to allow for claims that the insurance company treats as being fully settled but which may one day require further payments.
Reserve for claims handeling expenses
When settling claims, the company will incur additional expenses. Reserve for these expenses may be held seperately.
Distinct approaches for estimating outstanding claims reserve
- making estimates of the liability for each individual outstanding claim (case estimates)
- using statistical techniques to estimate the total outstanding payments for the portfolio
Unearned premium reserve (UPR)
Amount set aside from premiums written before the accounting date to cover risks incurred after that date (unexpired exposure)
Disadvantages of straight averaging approach
- ignores the fact that the risk from the policy may not be spread evenly over the period of cover.
- ignores the fact that the expenses of setting up and servicing the policy may not be incurred evenly over the period of cover
Aquisition costs
Expenses incurred at the start of the policy. Costs arising from the writing of insurance contracts (e.g. commission)
Unexpired risk reserve (URR)
AKA Provision for unexpired risks
Terms is used in 2 ways:
- Reserve required to cover the claims and expenses that are expected to emerge from an unexpired period of cover
- Reserve required to cover the excess of (1) over the UPR. This is sometimes known as the additional reserve for unexpired risk (AURR)
Additional unexpired risk reserve (AURR)
In cases where URR is greater than UPR the company expects to make a loss on the unexpired policies. The insurer then sets up an additional reserve (AURR) to cover the expected shortfall.
AURR = URR - UPR (minimum of zero)
Claims equilasation reserve
Reserve used to smooth profits from one year to the next.
In a good year when profits are large, money is transferred to the claims equalisation reserve, reducing the initial assessment of profit. In a bad year, money is transferred from equalisation reserve thereby increasing the initial assessment of profit
Catastrophe reserve
An additional reserve set up to cover the losses that may arise from a catastrophe
A reserve built up over periods between catastrophes to smooth the reported results over a number of years. Purpose of catastrophe reserve is smoothing, not solvency.
Alternative expressions to free reserves
- free assets
- solvency margin
- shareholders’ funds
- capital employed
Minimum Capital Requirement (MCR)
The minimum capital amount legally required to be exceeded by the insurance company’s free reserves in South Africa.
Solvency margin
Another term for free reserves
Solvency ratio
Free reserves divided by net (of reinsurance) written premiums
Major factors influencing the company’s investment strategy
- nature of liabilities
- term of liabilities
- currency of liabilities
- uncertainty of liabilities
- size of free reserves
- legilative influences
- taxation
Post tax profits equation
Post tax profits = premiums - claims - expenses + investment return - tax
Accruals accounting principle
Income and expenditure should accrue over the period to which they relate
Underwriting result
Term given to excess of premiums over claims and expenses.
Underwriting results = Earned premiums - Claims incurred - Expenses incurred
Deferred Acquisition Costs (DACs)
Aquisition costs relating to contracts in force at the balance sheet date. Carried forward as an asset from one accounting period to the subsequent accounting periods in the expectation that they’ss be recoverable out of future margins within insurance contracts after providing for future liabilities.
Cashflows that may take place in a general insurance company
- premiums
- claims
- expenses (including commission)
- investment (in & out)
- reinsurance (in & out)
- dividends (out)
- rights issue (in)
- tax
Main uses for reinsurance
- Protect against enourmous risks
- Protect against accumulations of risk
Accumulations of risk
Occurs when a single event can give risk to claims under several different policies. Such an accumulation might occur by location (property insurance) or occupation (employers’ liability insurance), for example.
Size of free reserves is important determinant of:
- the amount of business the company can reasonably write
- the size of risks written
- the amount of risk within the investment strategy
- the need for reinsurance
