Chapter - 13: Actuarial investigations and analyses Flashcards
State and explain the reasons why an insurer will estimate ultimate claims.
“The most common investigations are
1. To determine the liabilities to be shown in the insurers published accounts.
2. To prepare separate accounts for the purpose of supervision of solvency and to determine the liabilities to be shown in those accounts, if necessary.
3. To determine the liabilities that we show in internal management accounts of the insurer.
4. To value an insurer for purchase or sale. This is one of those investigations that we may need from time to time. As part of the due diligence process, a purchaser will want to evaluate the liabilities of the insurer to be acquired and make sure that there are no undiscovered liabilities. A seller will wish to make sure that hidden margins in claims reserve estimates are not being given away.
We can do the investigation at different stages of the transaction process, for example, as more data is made available to the purchaser. It is important to highlight areas of uncertainty that are relevant from the perspective of the vendor or the purchaser, depending on which party we are advising.
5. To assess the accuracy of the estimation made in earlier year end exercises for the companys case estimates and/or IBNR claims reserve
We will do this by comparing the eventual out turn ,outcome, of claims paid with the earlier estimates ,actual versus expected,. We can do a similar analysis on movements in incurred claims. The degree of detail ,level of disaggregation, will depend on the importance of the reserves to the overall insurance results and the credibility of available data.
This might cause us to change the assumptions that we use in the future, or even change the model or methodology.
6. To provide information to management on how areas of the business are performing, and provide an indication on the profitability of business currently being written.
Management may become concerned about one particular area of business perhaps a distribution channel or a sub sector of an account and will ask for a more detailed analysis of the claims experience.
Other common investigations include
7. comparison of best estimates against held reserves
8. calculation of ranges of results
9. transforming an underwriting year into an accounting year
10. calculating movements in reserves and analysing reasons for these.”
Suggest how the strength of basis will differ between the suggested main purposes for estimating liabilities.
“Published accounts - prudent side of best estimate to ensure stability and consistency from year to year.
Supervision of solvency - the most prudent in order to protect policyholders.
Internal management accounts - best estimate to give a realistic view of the financial condition of the company.
Purchase or sale - close to best estimate, but preferably on the optimistic side if you are selling and on the cautious side if you are buying.
Accuracy of previous reserve estimates - often no estimation is needed since we are comparing actual paid claims with those expected by previous estimates. If we are analysing incurred claims, then it makes sense to use the same basis as that used in the previous reserve estimation exercise in order that a meaningful comparison can be made.
Internal profitability - best estimate in order to get a realistic view. “
What are the investigations that a general insurer may need for investment and capital purposes?
Mnemonic - RICE AD
"The investigations relating to the capital of a general insurer that we may need include 1. Evaluation of the existing portfolio. We will review the current portfolio to see what return has been made, how this compares with what was expected and what the market has done. We will need to establish the mean term of the liabilities. We will calculate current market values and the total assets minus total liabilities, compared to regulatory capital requirements and those set by the Board of the company. We are likely to do this monthly, although in times of market turbulence or when the capital levels look low, we may do this more frequently. 2. Analysis of cashflow and asset liability modelling to assess the capital required to support the business, assess where the biggest risks are in the business and help to set the investment policy. The analysis could be deterministic or stochastic, and we should not underestimate the complexity of either approach. More detail on the mechanics of this is covered later in this course. 3. Allocation of capital between different classes of business. This requires us to allocate capital between different classes, and possibly to hypothecate assets to different classes. The allocation will probably come from the analysis of capital requirements. There are several ways of approaching this, and none of them is perfect. The actuary should use a pragmatic and consultative approach. 4. Determination of return on capital. Having allocated the capital to different classes of business, we can analyse the claims experience to determine the profitability of each class expressed as a return on capital once we have appropriately split investment expenses. We can compare this to the expected return and explain the differences.
RICE AD: Risk Assessment Investment Policy Capital Requirements Evaluate existing portfolio Allocate capital between classes Determine return on capital "
Explain why cashflow is particularly important for a general insurer, compared to a life insurer or a pension scheme
“One event may cause a large number of claims. Consequently, cash would be needed to meet the claim payments. For life assurance and pension schemes the payments are more predictable and more evenly spread over the year.
Also, the size of any individual claim is usually uncertain, whereas in life and pensions business the claim size is often known or easy to predict”
Why do we need to analyse an insurance companys past experience ?
MNEMONIC: PEACE REP
“We need to analyse an insurance companys past experience for many of the functions of the business. Management will often use the results of this analysis to assess the performance and profitability of the business.
Areas of analysis
The analysis may cover
1. Pricing and sales of policies – premium rating, risk acceptance and profitability of sales channels.
2. Claims reserve estimation and changes to claims experience or the claims environment.
3.Exposure analysis and potential aggregations of risk within an insurers portfolio.
4. Policyholders behaviour, for example, the likelihood that they will renew the policy or cancel midway through the policy period.
5. Estimation of claim trends, in particular frequency and inflation.
6. Other analyses dependent upon the information required by management, and the extent to which data is available.
7. Expense analysis and allocation – both direct and indirect.
PEACE REP: Pricing and sales of policies Environmental changes Anything else the management requires Claims reserves estimation/claims experience Expense analysis and allocation Risk exposure and aggregations Estimation of claim trends Policyholder behaviour"
Explain the analysis of claims experience for a general insurer
Mnemonic - INNER CRAP
“We should analyse the companys own claims experience and changes to the claims environment in detail as part of the actuarial reserve estimation exercise. We can use a number of methods to identify trends in the data, including the review of diagnostics
Below, we outline a number of analyses. Please note that the list is not exhaustive. Depending on the purpose of the analysis, we may do this
at an overall company level, or at a class of business level, or
at a more granular level, for example, by risk or rating factor.
We should compare the results to market benchmarks where such data are available.
1. Changing frequency and severity of reported and settled claims
2. Impact and incidence of large claims
3. Concentrations of claims and aggregations of risk
4. Indemnity and expense split
5. Types of claims reported
6. Recoveries made on gross claim amounts
7. Nil settlements
8. Partial payments on account
9. Reopened claims”
INNER CRAP: Impact/incidence of large claims New claim types Nil claims Expenses vs. indemnity cost Reopened claims Changing frequency and severity Recoveries on gross claims Assessing concentrations Partial Payments
“Analysis of Claims experience
1. Changing frequency and severity of reported and settled claims”
“In analysing the cause of changes to the overall claims experience of a particular account, it can be very useful to split the effects of
frequency ,number of claims reported or settled per unit exposure, and severity ,the typical or average cost of a claim reported or settled,.
Different influences will impact each of these in different ways and we construct most models so that we can implement changes and trends to these two aspects separately.
Using such analysis, we may identify the reasons for better ,or worse, than anticipated performance of the account, such as a sharp increase to the average cost of settling bodily injury claims under a third party motor liability policy, or a sudden increase in the number of claims under a warranty policy of a particular car manufacturer.
It may also provide much more information on the underlying experience of an account that seems to be stable, for example, if overall claim amounts are masked by an increase in one element and a decrease in the other.
This approach requires claim number data to be available. If this information is maintained historically, development triangles of the numbers of claims reported and/or settled may be available, allowing us to make projections to ultimate.”
“Analysis of Claims experience
2. Impact and incidence of large claims”
“The company may wish to analyse its large claims experience. This may be useful to determine the drivers for such claims, and specific areas of the account that are more prone to certain types of large claim.
When estimating reserves, it can be useful to analyse attritional and large claims experience separately.
In many cases, we will use different reserve estimation methods for each of these. If left unadjusted in the aggregate data, individual large claims would distort the experience of the risk group.
We should produce a report detailing all claims that exceed a certain size so that we can remove or truncate such claims. The threshold points for reporting and truncating will differ according to the class involved and the purpose of the analysis.
We may also need to vary the large claim threshold over time to make allowance for the effects of claims inflation. For example, if claims inflation has been 5% for each of the last three years, then we would adjust a current threshold of £500,000 to £432,000 if the claim occurred three years ago.
The analysis of large claims will help us to decide which reinsurance coverages are appropriate and will be a key driver of the capital which the business requires.”
“Analysis of Claims experience
3. Concentrations of claims and aggregations of risk”
“As with individual large claims, it is important that we can identify concentrations of claims so that we can deal with them separately from the main body of the data. In some cases, we may be able to do this from the individual claim records by considering such factors as class, date of claim, peril, type of claim, geographical area and so on.
For example, an aggregation of claims may arise within a domestic household book of business due to a large number of households being insured in one geographical area.
However, this approach may not be reliable. Therefore, when it is apparent that an event of significant proportions has occurred, it is usual for the insurer to set up a catastrophe code for the event, which is then placed on the claim records for all claims arising from the event.
This will also assist with any reinsurance recovery. Increasingly, reinsurers require detailed information regarding the exposure aggregations within the underlying portfolio of risks being insured, and the resulting accumulation of claims that may arise from a single event, such as a hurricane.”
“Analysis of Claims experience
4. Indemnity and expense split “
“It is very useful for the insurer to understand how its claim costs break down between
indemnity payments ,those that return the policyholders to the position they were in before the loss occurred, and
expenses ,which may include costs of investigation, legal defence costs and so on,.
In some instances, the insurer may need to review its claim settlement procedures to reduce costs. These procedures may include how it chooses to defend claims, for example, potential savings of settling prior to the case being referred to arbitration or a court of law.
We should not allow indirect expenses to distort the claims data as they should form part of the administration expenses. It is possible that some of these indirect expenses have been allocated to risk classes. If we do not separate the indirect expenses from the claim cost on each individual record, the data could become corrupted.
Direct expenses are, however, often included as part of the claim cost on each individual claim record. Provided that they remain consistent over time and users are aware that the claim figures produced include such expenses, their inclusion in the claims data should cause no problems.
However, by keeping separate records of expenses, we have the flexibility to produce figures, inclusive or exclusive of these expenses, for example, to enable separate allowances for inflation to be made.”
“Analysis of Claims experience
5. Types of claim reported “
“We may analyse the types of claims reported to identify
new types of claim emerging, or
the effectiveness of exclusions or changes to policy excesses in removing certain types of claim from the experience.
“
“Analysis of Claims experience
6. Recoveries made on gross claim amounts “
“The three main types of recovery on an insurers gross claims experience are from outwards reinsurance protections, salvage, or a third party involved in the claim incident. In each case, we should be able to identify these separately on the claim record in an insurers claims database.
In the case of reinsurance, it is usually a statutory requirement to analyse claims both gross and net of reinsurance. This may also help to produce more reliable projections. This is especially important where the reinsurance takes some form of XL cover and where there are limited reinstatements.
As XL cover is non proportional, the net and gross claims results will often be very different, whereas for proportional reinsurance they are more similar. Reserving is that much easier for stable data.
Reinstatements ,or any other loss sensitive feature, also act to make the net and gross results very different.”
“Analysis of Claims experience
7. Nil settlements
Some “
“Some claims are settled at no cost usually either because the claim amount ends up less than the excess, or because the claim is eventually found to be invalid. Should these count as a claim or not?
If one part of the portfolio naturally gives rise to more nil claims than another, a change of mix of risks within the data group could also alter the number of nil settlements in the aggregate data.
More particularly, some policyholders may report every incident that may result in a claim, whilst others may report incidents only when it becomes apparent that a claim will be made. If the mix of policyholders changes, this could affect the number of nil settlements in the data for that risk group.
In each case, the effect is the same. The aggregate number of claims will change, but the aggregate cost will remain the same. The effect of this will be to distort both the claim frequency and average cost per claim.
It is, therefore, important to be able to separate nil claims from those settled at some cost.”
“Analysis of Claims experience
8. Partial payments on account”
“For each claim, it is important to record each payment separately, with the date,s, of payment, and the status of the claim ,that is, whether settled or outstanding,. Then, when the data is aggregated, we will be able to distinguish between payments on settled claims and those still outstanding. If not, the average cost of settled claims and the claim payment patterns will be distorted.
Payment patterns are particularly important when using triangulation methods such as chain ladder methods. One key assumption of the chain ladder methods is that claim development is stable. If this assumption is not valid, the method becomes unworkable without adjustment.”
“Analysis of Claims experience
9. Reopened claims”
We should allocate reopened claim payments to the risk group and claim year of the original claim. If we create a separate claim for the additional ,or return, amount involved, we could distort the apparent overall experience of the subgroups concerned, the numbers of claims and hence the average cost per claim.
