Chapter 16: Assessment of the reserving results Flashcards
Results of a reserving exercise need to be checked to ensure:
- they are reasonable
- they are supported by emerging experience
Approaches to analysing the reserving results
- daignostic tests to check the results are reasonable
- carrying out an analysis of the emerging experience
Diagnostic
A diagnostic is a measure used to assist with interpretation of data or results and to help us test and verify the underlying methodology and assumptions
Considerations when interpreting the diagnostics
- does the diagnostic fall within the expected range?
- one-off movements
- materiality
- treatment of large losses
- underlying reasons for the results
Considerations when interpreting diagnostics:
One-off movements
Changes in the diagnostic over time, or unusually high or low figures may result from unexpected emerging experience that is considered to be a one-off.
Considerations when interpreting diagnostics:
Materiality
Where an analysis of the diagnostics does highlight unusual features in experience, an actuary may decide notto update their methodology or assumptions if the resulting change in reserves is immaterial relative to the size of the company’s total reserves.
Considerations when interpreting diagnostics:
Treatment of large losses
When examining the diagnostics, exceptional items such as large losses should be excluded, although of course it will be important that the end reserve does include an allowance for them
What should we do if the diagnostics highlight unusual features?
We should:
- understand the reason for the unusual feature
- understand the implications for the reserving process
- take appropriate action, e.g. change methodology or assumptions if necessary
Common diagnostics
- changes in the loss ratio
- paid to incurred and/or case estimates to incurred ratios
- average outstanding case estimates
- ratio of IBNR to case estimates
- survival ratios (how long reserve or IBNR estimate will last if current claim development continues at a given rate)
- claim frequency and average cost per claim
- reinsurance to gross ratios
Loss ratios may highlight:
- changes to premium rating strength
- sources of uncertainty
- inconsistencies in model assumptions
- errors in the reserving process
Paid to incurred and/or case estimates to incurred ratios increasing ratio trend over time may indicate:
- case estimate strength has been reduced
- there has been an underlying change in business
- there has been an acceleration in the claims settlement pattern
- there has been a slow down in the rate at which outstanding claims are established
- there is a distorting large loss settlement
Changes in reinsurance to gross ratios can be a result of:
- changes in the amount of business being retained or ceded by the insurer
- changes in the mix of non-proportional and proportional reinsurance cover
- changing policy terms, such as deductibles, limits and reinstatements
- changes in the underlying gross experience
- inconsistencies in the treatment of gross and net claims estimates
Development pattern diagnostics
- changes in the development pattern
- stability of the development pattern
- comparison between classes
- claim development vs premium development
- comparison to benchmarks
Reasons why older origin years aren’t more developed even though we usually expect them to be:
- external influences such as inflation, catastrophes/changes in underlying nature of the risks
- internal influences such as changes in underwriting, claim handling and settlement and recording procedures/reinsurance arrangements
- changes in type of business attracted within a class and types of claims emerging
- random fluctuations or large claims
- if policy limits have been exhausted on some or all of the policies in a portfolio, that would limit the scope for further deterioration of the incurred claims position
Sources of development patterns that can be used as benchmarks
- industry and market sources
- other classes of business that are closely related
- similar portfolios within the actuary’s experience
An analysis of emerging experience can be broken down into differences due to:
- experience being different based on the previous model
- changes in methodology
- changes in assumptions
Considerations when selecting rate indices
Underwriting cycle allowance
- rate indices are typically only available for renewal business and therefore may not adequately allow for any differences between new and renewed business
- there may be changes in actual premium charges, in Ts&Cs and limits and deductibles of the cover provided, which will also impact on the profitability of the business being written
The underwriting cycle wen assessing reserves
Consider whether we have allowed appropriately for the underwriting cycle.
One way to allow for it in reserving exercises is by using a rate index when deriving initial expected loss ratios for use in credibility-type methods
Reserving cycle
Many insurers tend to cut reserves to the bone when the market is soft to avoid having to make result look too adverse, but reserve more strongly in hard markets when they can afford it.
Why do general insurers wish to flatten the reserving cycle?
- so that reserves are more accurate
- so that the profitability of the business can be more readily understood
Reasons two parties may derive different reserve estimates, even if they use the same data over the same time period
- the data used was different
- the methodology used was different
- additional information was available from underwriting and claims handling staff
- there may be genuine differences of opinion
When comparing results with others, the actuary should be aware of the following professional issues:
- alternative estimates may have been prepared by someone with a financial interest
- be careful that challenges are not just to reduce figures, i.e. pressure from management
- analysis of reserves using a greater number of portfolios will in general result in an lower overall estimate
