Chapter 17: Assessment of reserving results Flashcards
The results of the reserving exercise need to be checked to ensure: (2)
- they are reasonable
- they are supported by emerging experience
2 Approaches to analysing the reserving results
- diagnostic checks
- carry out an analysis of the emerging experience
Diagnostic
A diagnostic is a measure used to help interpret data or results.
It can test and verify underlying methodology and assumptions.
5 Considerations when interpreting 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 diagnostics 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
When an analysis of the diagnostics does highlight unusual features in experience, an actuary may decide not to update his / her 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 such items.
What should we do if the diagnostics highlight unusual features? (3)
We should:
- understand the reason for the unusual feature
- understand the implications for the reserving process
- take appropriate action (eg change methodology or assumptions if necessary)
Common diagnostics
- Changes in loss ratios
- Paid to incurred and/or
- case estimates to incurred ratios
- ultimate claims/exposure (similar to LR, but exp is not prem)
- average outstanding case estimate
- ratio of IBNR to case estimates
- survival ratios
- claim frequency and average cost per claim (severity)
- reinsurance to gross ratios
- settled to reported claim numbers
- development patterns (eg. changes, comparison)
- claim development vs premium development
- benchmark comparisons
- residuals of fitted link ratios
Loss ratios may highlight: (4)
- Changes in premium rating strength
- Sources of uncertainty (eg. very large open claim)
- Inconsistencies in the model assumptions (eg if the progression of IBNR loss ratios is not monotonically decreasing with age of the claims cohort).
- Errors in the reserving process
Changes in reinsurance (net) to gross ratios may be as a result of (5)
- 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.
Where proportional reinsurance is in place, we can review the ratios to ensure this at least allows for the proportional element. For example, if a 30% quota-share is in place, we would expect at least 30% of premium, paid and incurred to be ceded to reinsurers. Splitting reinsurance by type can also be helpful to sense check the recoveries against each type of reinsurance.
5 Development pattern diagnostics
- Changes in the development pattern
- Stability of the development pattern
- Comparison between classes
- Claim development vs premium development
- Comparison to benchmarks
The development pattern can be checked against benchmarks such as (3)
- industry and market sources
- other closely related classes
- similar portfolios the actuary has encountered
An analysis of emerging experience can be broken down into differences due to (3)
- emerging experience being different to that expected out of the previous model
- changes in methodology
- changes in assumptions
Reasons for differences in reserve estimates
- 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 professional issues (3)
- alternative estimate may have been prepared by someone with a financial interest
- be careful that challenges are not just to reduce figures, ie pressure from management
- analysis of reserves using a greater number of portfolios will in general result in a lower overall estimate
Suggest what we can learn from examining:
(i) IBNR divided by premium
(ii) ultimate loss ratios.
(i) IBNR divided by premium can highlight errors or inconsistencies in the reserving process or a change in premium rating strength
For example, we would expect that for any given development period, IBNR divided by premium for employers’ liability business would be higher than for household property business.
(ii) Ultimate loss ratios can indicate where there have been changes in the stringency of claims, quality of underwriting, an improvement or worsening of claims experience or a change to the rating basis.
Connection between premium rate index and loss ratio
Other things being equal, an increasing premium rate index should lead to a lower loss ratio.