Chapter 0: Introduction to General Insurance Flashcards
Actuarial Roles within general insurance
- Reserving
- Setting premiums
- strategic management of the business
- risk assessment (eg modelling catastrophic events)
- determining a suitable investment strategy
- assessing reinsurance requirements
- expense allocation
- capital allocation
- assessing the effectiveness of marketing campaigns
- assisting with the early settlement of liabilities in the event of a wind-up
Technical reserves
Reserves held to cover the liabilities relating to existing policyholders.
Might also be called insurance reserves or insurance provisions because they relate to the liabilities arising from writing insurance business.
2 types of technical liabilities
- Past
- Future
Past liabilities
Liabilities in respect of accidents or losses from events that have occurred prior to the accounting date.
Future liabilities
Liabilities in respect of future insurance cover from policies for which premiums have already been received.
Claim characteristics
The ways and speed in which claims
- originate,
- are reported,
- settled,
- and reopened (on occasion).
2 Main types of delays
- Reporting delays
- Settlement delays
Reporting delay
The time from the event occurrence through to the time that the insurance company is notified of the event.
Event delay
The part of the delay that relates to the period when the insured event happens and when the policyholder realises the event has happened.
(e.g. illness might develop long after exposure)
Settlement delay
The period between notification to the company and the payment of the claim.
4 Causes of settlement delays
- initial administrative processing
- establishing whether the insurer is liable
- waiting for a condition to stabilise
- establishing how much should be paid.
Short tail business
Means that the claims are generally reported quickly and settled quickly by the insurer
Long tail business
Means that there is a sizeable proportion of total claim payments that take a long time for the insurer to settle.
Reserves for outstanding claims: 4 Components
- Reserve for outstanding reported claims
- Reserve for incurred but not reported claims
- Reserve for re-opened claims
- Reserve for claims’ handling expenses
Reserve for outstanding reported claims
This is the estimated reserve needed to settle the claims that the company knows about at the accounting date.
Reserve for incurred but not reported claims (IBNR).
The IBNR reserve is needed to cover the claim payments for incidents which have happened, but have not been reported to the insurance company.
Reserve for re-opened claims
This is an additional reserve which may be explicitly shown to allow for claims that the insurance company treats as being fully settled, but which might one day require further payments.
Reserve for claims’ handling expenses
In settling claims, the company will incur some additional expenses (eg legal fees). The reserve for these expenses may be held separately.
2 Distinct approaches for estimating outstanding claims reserves
- making estimates of the liability for each individual outstanding claim.
- using statistical techniques to estimate the total outstanding payments for the portfolio.
Unearned premium reserve (UPR)
The portion of premiums held in respect of unexpired exposure.
The portion of premiums set aside to cover the claims and expenses for future accounting periods for which premiums have already been received.
2 disadvantages of a straight averaging reserving approach
- it ignores the fact that risk from the policy may not be spread evenly over the period of cover
- It ignores the fact that expenses of setting up and servicing the policy may not be incurred evenly over the period of cover.
Acquisition costs
The expenses that are incurred by the insurer at the start of a policy.
Claims equalisation reserve
A reserve that is used to smooth the profits from one year to another.
In a good year, when profits are large, money is transferred to the claims equalisation reserve, thereby reducing the initial assessment of profit.
In a bad year, money is transferred from the equalisation reserve, thereby increasing the initial assessment of profit.
Catastrophe reserve
Additional reserve set aside to cover the losses that might arise from a catastrophe.
Free reserves
The excess of the assets over the technical reserves.
4 Alternative expressions to “free reserves”
- “free assets”
- “solvency margin”
- “shareholders’ funds”
- “capital employed”
Solvency margin
The excess of the assets over liabilities.
Solvency margin ratio
Solvency margin divided by the net written premiums (not the assets)
Minimum capital requirement (MCR)
The legal requirement for an insurance company’s free reserves to exceed a statutory minimum level.
7 Major factors influencing the general insurer’s investment strategies
- Nature
- Term
- Currency
- Uncertainty
of its liabilities - Size of its free assets
- Legislative influences
- Taxation
post tax profits equation
post tax profits =
premiums − claims − expenses \+ investment return − tax
Deferred Acquisition Costs (DAC)
The acquisition costs that have been paid out but not wholly incurred for any policy that is unexpired at the time.
Underwriting result
The excess of premiums over claims and expenses.
Underwriting result =
Earned premium
− claims incurred
− expenses incurred
2 Main uses for reinsurance
- Enormous risks
- Accumulations of risk
Accumulations of risk
Occur when the insurer has an unbalanced portfolio of risks.
This can be due to the nature of the classes, the geographical areas covered or the types of policyholder attracted.
3 Reasons claims reserves occur
There are
- reporting delays
- settlement delays
- premature closure of claims files
Unexpired Risks Reserve (URR)
A prospective assessment of the amount required as at the accounting date to cover the claims and expenses from the unexpired risks
additional unexpired risk reserves (AURR)
Additional reserves (or provision) for unexpired risks
AURR = URR - UPR
The size of free reserves is an important determinant of (4)
- the amount of business the company can reasonably write
- the size of the risks written
- the amount of risk within the investment strategy
- the need for reinsurance.
8 Main monetary flows in the general insurer’s cashflow diagram
- premiums
- claims
- expenses (including commission)
- investment (in and out)
- reinsurance (in and out)
- dividends (out to shareholders)
- rights issues (in from shareholders)
- tax
