Chapter 13: Reasons for estimating reserves and different reserving bases Flashcards
Reasons for assessing a general insurer’s liabilities
- to determine liabilities:
— for insurer’s published accounts
— for internal management accounts
— to demonstrate supervisory solvency - to provide an independent opinion on reasonableness/adequacy of the reserves booked by insurer
- provide information to management on business performance by area
- to estimate claims cost for premium rating
- to value an insurer for sale or purchase
- to negotiate a commutation for the buyer or seller
- to transfer a book of business
- to asceratin tax liabilities
- to test adequacy of case estimates
Reserving basis
The methodology and assumptions chosen in a reserving exercise
Considerations when setting reserving basis for:
Published accounts
Should have regard to legislation and accounting principles governing the preparation of these accounts. Matters to be considered include:
- whether the accounts are prepared on a going-concern basis
- whether the accounts are required to show a true and fair value
- whether the reserves are required to be assessed as best estimates or on some other basis, and precisely how the terms are used are being interpreted
- whether reserves are required to be discounte, and if explicit risk margins need to be held
Considerations when setting reserving basis for:
Tax purposes
- depends on the tax regulations in the relevant country
- tax authorities may penalise an insurer when it is found to have overreserved and therefore paid less tax
Considerations when setting reserving basis for:
Solvency accounts
In SA, seperate accounts are required as part of the process of supervision of solvency. The rules governing the preparation of those seperate accounts differ to those that apply to the published accounts.
The report should make reference to those rules and any guidance to actuaries or other professionals that may have been issued as to their interpretation
Considerations when setting reserving basis for:
Management accounts
The aim is likely to be to produce expected values of future experience, based on realistic assumptions to ensure a realistic picture of the entity.
Management may also wish to have figures produced on alternative bases or scenarios (sensitivity testing).
Considerations when setting reserving basis for:
Sale or purchase
A key component in valuing an insurer for purchase or sale is the evaluation of the liabilities on the balance sheet.
A purchaser will want to understand the reserving basis used and estimate the level of expected surplus or deficit in the booked reserves.
The purchaser will take a more pessimistic/prudent view of the reserves compared to the seller.
Considerations when setting reserving basis for:
Commutation
Similar considerations to those in a sale and purchase context. Analysis will normally need to be at a much mre detailed level, both in terms of the data analysed and the factors taken into consideration.
Extra considerations will be:
- effect on reinsurance recoverability
- relative strategic/commercial importance of the commutation between the two parties
- the actual/perceived financial strength of parties
Commutation
The finalisation of an outstanding liability by payment of an agreed amount
Considerations when setting the reserving basis for:
Transfer of liabilities
Similar considerations to those that apply in a sale and purchase context.
Should consider any particular regulations that apply in the country in question.
Reserving methodologies are likely to vary according to:
- class of business, in particular the length of the tail of the run-off of the liabilities and the exposure period of the insurance/reinsurance contracts
- types of claim that have been incurred or may be expected to occur
- extent and quality of the available data
- age of the business or cohort of claims, and historic claim development information available
- key factors that determine the development of the outstanding claims and claim payments
- historical trends and patterns
- purpose of the reserving exercise
What extra information can be gained from modelling IBNER and pure IBNR seperately?
By modelling them seperately, we can determine whether a change in our required outstanding claims reserve is due to an increase in the number of claims reported or due to prudence/optimism in our original case estimate assumptions.
Considerations regarding discounting when reserving
Extent to which we use discounting in respect of investment income in estimating technical reserves for published accounts/solvency supervision depends on relative legislation/accounting rules
Discounting more appropriate - realistic picture of economic results or financial condition of insurer
Importnat to ensure consistency between economic inflation assumptions and discount rate as well as any assumptions used for yields/asset returns in the solvency assessment
Regulation may specify a discount rate.
If a discount rate is not specified by regulation, it is determined based on:
Determine it by reference to
- currency of the liabilities
- risk-free yield curve at valuation date
- the nature of the liabilities and assets
Main items of topics that may be included in the scope of an aggregate report on the technical provision of an insurance entity
- PURPOSE of the report and to whom it is addressed
- a statement of whether the results are the outcome of a planning exercise, a valuation exercise, or some other exercise
- a statement of which TAS the report complies with
- an indication of any material EVENTS that HAPPENED since the effective date of the data
- a description of the DATA used and the source of the data
- a description of any material uncertainty over the ACCURACY of the data and how this has been allowed for
- a summary of the ASSUMPTIONS used and the rationales behind these
- a description of any other material MATTERS relating to the work
- the nature and extent of any material UNCERTAINTY in the work / results
- the METHODS and measures used in any calculations
- the nature and timing of any CASHFLOWS being calculated
- a description of any PROBABILITIES
- a comparison with PREVIOUS WORK
- a PROJECTION OF RESULTS at future points in time
When communicating the uncertainty of results, an actuary should:
- ensure stakeholders understand the level of uncertainty
- be consistent with the vocabulary used by other professionals, and explain terms
- emphasise the bigger issues
- explain what has been allowed for in the best estimate and what has not
- emphasise the unusual issues
- comment on the uncertainty in the context of scope and purpose
- avoid misunderstandings
