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.
What can paid and incurred loss ratios tell us?
By reviewing the paid and incurred loss ratios, we can see at an early stage how the experience to date has turned out for each origin year.
For example, where loss ratios are unexpectedly high, we can then investigate further whether this is due to a unique claim or type of claim, or is an early indicator that claims experience is going to be materially worse than expected.
Triangulations of these ratios can be helpful to spot trends and sense check assumptions (eg initial expected loss ratios) for reasonableness.
Considering IBNR as a percentage of case estimates is useful in those situations where a complete paid or incurred claims development history is not available.
This will be useful for long-tailed classes, or immature portfolios where the earliest development year is yet to be fully run-off.
Paid to incurred and/or case estimates to incurred ratios
This diagnostic can indicate the strength of case estimates. An increasing ratio trend over time, when we are reviewing a triangle of cumulative paid claims divided by cumulative incurred claims, may have a number of possible explanations, such as:
case estimate strength has been reduced
-If the ratio of paid claims to incurred claims has increased, this may indicate that the strength of case estimates has reduced.
-However, if the ratio of case estimates to incurred claims has increased, this may indicate that the strength of case estimates has increased.
-Care needs to be taken that the definition of incurred claims (ie what has been included) has not changed.
an underlying change in business
an acceleration in the claims settlement pattern
a slow-down in the rate at which outstanding claims are established
a distorting large loss settlement.
A general insurer writes public liability insurance and reserves using the basic chain ladder method. On examining the relationship between paid and incurred claims it is found that the ratio is decreasing over time. Suggest what impact this will have on claims development and hence the reserves calculated
Actual claims development is slower than that suggested by the use of the basic chain ladder. If no adjustment is made to the basic chain ladder method, then the reserves calculated will be an underestimate of the amount required. If the reserves are also discounted, then the payments will be assumed to be made earlier than will eventually be the case, and will therefore be affected to a lesser extent by discounting. This will offset to some extent the inaccuracy in the basic chain ladder model. A revised model should take account of both of these factors.
Average outstanding case estimate
A review of this triangle can highlight changes in the strength of case reserves.
Ratio of IBNR to case estimates
For more mature cohorts, this diagnostic is helpful, particularly where IBNR is expected to be mainly in respect of IBNER, rather than ‘pure’ IBNR claims. Such a diagnostic gives a feel for the outstanding claims and the uncertainty relating to them.
Survival ratios
Survival ratios show how long a reserve or IBNR estimate will last (before all outstanding claims are paid) if current paid or incurred claims development continues at a given rate.
We may consider the ratios on a number of different averages (say one year, three years and five years) paid or incurred claims to avoid years of particularly high or low claims activity.
We can compare these survival ratios with other similar portfolios or market benchmarks.
In some cases, these may be used to set the reserves for particularly uncertain classes of business.
For example, a ratio often used to estimate asbestos loss reserve adequacy is the three-year survival ratio, which is the ratio of loss reserves to the three-year paid loss average.
Assuming that average paid losses remain constant, with no additional reserving, the survival ratio indicates how many years the reserves should last.