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Actuarial F103 - General Insurance > Chapter 14: Best estimate reserves > Flashcards

Chapter 14: Best estimate reserves Flashcards

1
Q

2 Important issues when presenting reserves

A

We should:

  • clearly define what we mean by our single point (or best) estimate
  • attempt to quantify the likely divergence from this estimate
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2
Q

Best estimate reserve

A

A point estimate reserve.

In statistics, the expected value of the outstanding liabilities,
after allowing for all the areas of uncertainty, (ie model, parameter and process uncertainty)

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3
Q

In SAM the best estimate is characterised as (4)

A
  • a point estimate
  • not inherently optimistic or pessimistic
  • based on sound and appropriate actuarial or statistical techniques
  • based on current and credible information

nothing is said in the requirements about the skewness of the underlying distribution or its volatility

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4
Q

Data required for reserving: (7)

A
  • premiums
  • number of claims
  • dates of reporting and occurrence
  • case estimates
  • paid claims (gross and net of recoveries)
  • other measures of exposure
  • expenses (direct and indirect)
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5
Q

Case estimates (for use in reserving)

A

Latest estimates of the cost of each claim of which the insurer is aware.

Case estimates may be easy to determine for some classes of business, but complex for others:

  • It may be easy to determine these case estimates if the benefit is fixed, such as the compensation offered for the loss of a limb under a personal accident policy.
  • When the estimation process is not so straightforward, a mechanical approach may be used, or the judgement of an experienced claims handler or legal advisor may be used.
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6
Q

Claims analysis:

3 cohorts of common origin

A
  • year of accident
  • year of reporting
  • year of underwriting
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7
Q

Data required:

Premiums

A
  • Earned premiums are appropriate for an accident year cohort.
  • Written premiums are appropriate for an underwriting year cohort.
  • A reporting year cohort would be very difficult to use in a loss ratio calculation, since premiums and claims would have to be found with the corresponding exposure.
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8
Q

The overriding principle of all claims analyses

A 
The need to determine the basic
- characteristics
- values, and
- trends
of past data.
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9
Q

Claims analysis:

Consideration needs to be given to (4)

A
  • materiality
  • homogeneity of data
  • how to deal with large/catastrophic losses
  • how to deal with latent claims
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10
Q

Main ADVANTAGE of grouping claims data by ACCIDENT YEAR

A

All claims will stem from the same exposure cohort.
The claims will therefore have been subject to the same risk environment, although they might have arisen from policies written under different rating and policy terms.

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11
Q

Main DISADVANTAGE of grouping claims data by ACCIDENT YEAR

A

The full number or amount of claims in the cohort is not known until the last claim is reported.
This relies on detailed claims records being maintained. (eg date of loss, date reported, payment date etc)

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12
Q

ADVANTAGES of grouping claims data by UNDERWRITING YEAR

A

We can follow the total outcome of all policies written in each year.
Similarly we can follow claims that arise from a particular group of policies that are subject to the same set of premium rates and use the results to test the adequacy of the premiums.
A further advantage is that the terms, rates and conditions are often more stable by underwriting year.

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13
Q

DISADVANTAGE of grouping claims data by UNDERWRITING YEAR

A

It will take more than one year before all the claims under that cohort have occurred.
Reporting delays, including IBNER, will extend this further.

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14
Q

ADVANTAGE of grouping claims data by REPORTING YEAR

A

No further claims will be added to the cohort after the end of the origin reporting period.

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15
Q

DISADVANTAGES of grouping claims data by REPORTING YEAR (3)

A
  • Projection methods based on this cohort will not allow for the IBNR. A separate allowance will therefore be needed for IBNR claims.
  • Claims will have come from several different exposure periods, each of which may have differed in respect of volumes of business, cover applying, claim settlement patterns and claim environments.
  • It is difficult to find an exposure base that would correspond to the definition of risk under the claims being developed.
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16
Q

Development period

A

The period or frequency at which each claim cohort is tracked over time.
Annual and quarterly periods are the most commonly used.

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17
Q

3 Methods of estimating the outstanding claims reserves

A
  • case-by-case basis
  • statistical methods
  • exposure-based reserving
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18
Q

2 Methods for deriving estimated ULTIMATE VALUES for LARGE LOSSES

A
  • claims development methods

- exposure-based methods

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19
Q

Considerations in deriving ultimate values for catastrophe losses

A

Catastrophe losses often tend to DEVELOP MORE QUICKLY than attritional claims.
The main reason for this is the increased focus on these claims from claims adjusters and policyholders due to the magnitude of the losses.

Once claims experience starts to emerge, the development pattern of similar catastrophes in the past may assist the actuary in refining initial estimates.

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20
Q

2 approaches to Exposure-based methods for estimating ultimate values of large losses

A
  • Bottom-up approach

- Top-down approach

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21
Q

BOTTOM-UP APPROACH to exposure-based methods for estimating the ultimate values of large losses

A

Examine on a policy by policy basis to determine the likelihood of whether each policy is exposed to the loss event.
If they decide the underlying insured is exposed to the relevant event, a claims expert needs to assess the extent of any claim on that policy.

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22
Q

TOP-DOWN APPROACH to exposure-based methods for estimating the ultimate values of large losses

A

We attribute the total market loss from an event to an individual insurer or policy level, based on the policy terms, excesses and limits.

23
Q

3 Bases on which business is written

A
  • Losses occurring
  • Claims made
  • Risks attaching
24
Q

Losses occurring basis

A

The policy provides cover for losses occurring in the define policy period, no matter when they are reported.

This is consistent with an accident year approach.
Such policies are thus subject to potential problems in defining the date of loss which may be established as a result of legal action.

25
Q

Claims made basis

A

The policy covers claims reported during a certain period.

It is used to reduce the tail on liability business by removing the development caused by late reporting.

26
Q

Risks attaching basis

A

A basis under which reinsurance is provided for claims arising from policies incepting during the period to which the reinsurance relates.

This is consistent with an underwriting year approach.

27
Q

5 ways in which to apply benchmarks

A
  • age to age development factor
  • ultimate to paid or incurred factors
  • ultimate loss ratios
  • IBNR as a percentage of paid: outstanding or incurred
  • IBNR as a percentage of premium
28
Q

Age-to-age development factor

A

The development factor as calculated in the standard basic chain ladder approach.
But here we would adjust the factors obtained from our own data by
… comparing them with the corresponding benchmark data.

29
Q

Issues that affect the stability of the claims development pattern (11)

A
  • distortions in the data
  • claims reviews
  • market wide initiatives
  • seasonality
  • developments in the business, economic and legal environment.

changes in:

  • terms and conditions
  • mix of business
  • claims handling processes
  • commencement of writing policies
  • average policy length
  • reserving policy
30
Q

Issues affecting claims development stability:

Changes in the mix of business

A

Changes in the mix of business will increase the heterogeneity in the data.

31
Q

Re-underwriting

A 
Sometimes an insurer will state that they have "re-underwritten" a class of business.
This may be for:
- a generally poor performing class of business, or
- a class which has suffered material losses from a single event which led to claims from a large number of policies.
32
Q

Chain ladder method

A

A statistical method of estimating the ultimate value of a set of development data, whereby a weighted average of the past development is projected into the future.
The projection for successive periods of future development is based on the actuary’s calculation of ratios of cumulative past development.

33
Q

Basic chain ladder method assumption

A

assumes that the future pattern of claims development derived from the past experience will remain stable.

It implicitly assumes that past inflation will continue into the future.

34
Q

Method for carrying out a basic chain ladder calculation (4)

A
  • Tabulate claims on a cumulative basis by development year / origin year
  • calculate the development ratios
  • apply these ratios to complete the table
  • from the cumulative results, find the amounts expected to be paid in each future development year / origin year cell.
35
Q

Subrogation recoveries

A

If an insurer indemnifies against a loss, it may be entitled to attempt to recover som or all of that loss from a third party.

36
Q

5 key strengths of the chain ladder method

A
  • the method can be applied to a wide variety of sets of data
  • provided the data can be arranged into a development triangle, the chain ladder method can be used to project it to ultimate
  • the basic method can easily be modified to allow for data distortions
  • the method is conceptually straightforward and it is easy to relate results back to the pattern of development
  • the method can be developed to serve as a starting point for a number of other methods, eg the Bornhuetter-Ferguson method.
37
Q

3 Key weaknesses of the chain ladder method

A
  • Results can be distorted by unusual experience
  • Limited use for recent cohorts, particularly for long-tailed classes
  • Considerable care is needed in applying the method to prevent unusual features in the data having a significant impact on the result
38
Q

Statistical methods of estimating outstanding claims might be impaired by distortions.
8 Causes of problems

A
  • errors in the data
  • inflation
  • large claims
  • latent claims
  • catastrophes
  • changes in procedures
  • changes in the mix of business
39
Q

Loss ratio

A

The cost of claims per unit of exposure.

40
Q

Advantage of the expected loss ratio method

A

The method is not distorted by anomalous data.
This can particularly have an impact in longer tailed business and at early durations if claims experience to date is particularly light or heavy.

41
Q

7 Disadvantages of the expected loss ratio method

A
  • It ignores the pattern of claims development to date
  • It is difficult to adjust for large claims
  • If loss ratios are derived from past years, the method will replicate past biases
  • The benchmarks used may not be appropriate as the business written may be different from that to which the benchmarks relate.
  • Where used, the ultimate loss ratios for previous years may be understated or overstated because of fluctuations in experience.
  • The underlying assumptions can be subjective.
  • Where premium rate changes are introduced, these are often only for renewed business and not for new business.
42
Q

Bornhuetter-Ferguson method

A

The Bornhuetter-Ferguson method can be thought of as a credibility estimate, based on a weighted average of an expected level of claims as estimated by the loss ratio method, and a projection of the ultimate claims based on experience to date as estimated by the chain ladder method.

It combines the advantages of the loss ratio method with the advantages of the chain ladder method.

43
Q

When to use the Bornhuetter-Ferguson method

A
  • where the available data for the particular cohort is sparse
  • where premium volumes are so small that the claims activity is expected to be extremely volatile
  • when a blend of experience and an exposure-based estimate is deemed appropriate
44
Q

Main strength of the Bornhuetter-Ferguson method

A

It can be used when the claims data is at a very early state of development.

45
Q

Main weakness of the Bornhuetter-Ferguson method

A

It can be difficult to gather the information for the prior estimate for the claims.

46
Q

Average cost per claim method

A

A family of methods, generally estimating 2 components for each origin year:

  • the claims frequency,
  • the claims severity
47
Q

7 Strengths of the ACPC method

A
  • Easy to understand and communicate
  • Provides information about how both claim numbers and claim amounts are expected to develop in the future
  • For direct business in particular, the data required is generally available
  • Can be used in conjunction with other projection techniques, such as chain ladder and Bornhuetter-Ferguson.
  • Helps explain volatile data and results when the data contain only a small number of claims
  • Can be applied to settled claims when claims reserving protocols have changed over the development history, making some other methods invalid.
  • If used in the correct way, it can be useful as a basis for estimating latent claims because we can make explicit assumptions about the average claim size, the long-term effect of inflation and the expected number of claims.
48
Q

4 Weaknesses of the ACPC method

A
  • Can be distorted by reopened claims, nil claims or partial payments
  • Assumes that the distribution of claims is the same for each origin year or settlement year
  • Needs more detailed information, which may not always be available
  • Small data samples may lead to volatile results
49
Q

Communication of the best estimate (3)

A
  • Results should be explained clearly and effectively to key stakeholders
  • Highlight that best estimate is just an estimate
  • Highlight key assumptions and comment on the main restrictions or shortcomings in analysis.
50
Q

Incurred claims might mean (2)

A
  • paid claims + estimates for outstanding reported claims

- paid claims + estimates for ALL outstanding claims (including a loading for IBNR)

51
Q

5 Examples of changes in claims handling procedures which might affect claims development

A
  • Changing the point at which a notified loss is accepted as a claim
  • Speeding up processing of notified claims
  • Case reserving philosophy is changed
  • Delays in claims payments
  • Failure to consistently mark claim records as settled
52
Q

How might market-wide initiatives affect claims development

A

From time to time a major issue might arise that the market is keen to quantify as quickly as possible.

E.g. introducing compulsory 3rd party motor insurance would impact motor comprehensive claims experience.

53
Q

What is meant by claims seasonality

A

Seasonality is the tendency for certain types of policy to have more claims at certain times of the year.

54
Q

3 Examples of distorting effects on the loss ratio

A
  • A catastrophe
  • Change in premium rates
  • Insurance cycle

Actuarial F103 - General Insurance (33 decks)

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