Chapter 17 Main Flashcards
Additional data issues associated with inwards reinsurance reserving
Claim reporting delays are longer for the reinsurer.
Greater tendency for claims to develop upwards.
Greater heterogeneity of exposure.
Sparse data.
Reduced applicability of industry benchmarks.
Data and system constraints.
Greater need for grouping data
What data (basis) should we use for inwards reinsurance and why?
It is better to use paid development basis. Reason is that different insurers will have different practices and assumptions regarding their reserves. This means that incurred data would have all this heterogeneity between insurers. These practices and assumprions can also change over time.
Paid data is based on legal processes and less on individual insurers.
For methods like BF, we could use target loss ratios where an expected loss ratio is required.
Discussion points on reserving for short-tailed inwards business
Use straight-forward approaches like chainladder, since more complicated methods would not yield much more accurate results.
Chainladder method easily extended to stochastoc which may be required by regulation.
Catastrophes are very different and should be removed and calculated separately. These should be handled with care.
Discussion points on dealing with medium and long-tailed inwards business
As delays increase, we rely less on past experience as it may not be a good guide.
Rather use hybrid methods, such as chainladder + BF or Cape Cod.
Could be issues if oldest development year not yet mature. May need to apply tail factor if triangulation used.
In some cases incurred claims data are more stable, and in other cases paid data are more stable.
5 different techniques for reserving for outwards reinsurance
Reserving using data gross and net of reinsurance.
Applying standard reserving techniques to reinsurance premiums and claims data triangles.
Applying broad brush factors to projected gross data.
Case by case reserving.
Developing individual losses and applying the reinsurance programmes to them.
Describe the approach of reserving using data gross and net of reinsurance
Reserve as normal, and then using the same methodology, reserve using premium and claims data net of reinsurance.
It is a good idea to split out attritional, large and catastrophic claims.
The difference represents the reserves for reinsurance.
6 Advantages of reserving using data gross and net of reinsurance
Simple to apply and understand.
Simple to add to a semi-automated reserving process.
We can use it to assess the volatility of net outcomes.
Appropriate for proportional reinsurance or very high excess reinsurance where thete are relatively few reinsurance recoveries made.
Appropriate where the reinsurance programme has been relatively stable over a number of years.
Simple to adjust the method to allow for major catastrophes.
8 disadvantages of reserving using data gross and net of reinsurance
Possible implied negative reinsurance recoveries.
Development patterns may not be appropriate if reinsurance terms have changed.
May be less appropriate for non-proportional covers.
Cannot accurately allow for some features on individual contracts such as aggregate limits or profit commissions.
Cannot accurately allow for claims that breach the vertical cover available unless these are adjusted for separately.
Will not allow for interaction between whole account and line of business specfic or stop loss covers.
Since we are looking at all reinsurance arrangements together and not individually, incorrect management decisions could be taken.
Does not quantify credit risk which is a prerequisite of SAM.
4 Advantages of applying standard reserving techniques to reinsurance premium and claims data triangles
Relativeĺy simple to understand.
Simple to add to a semi-automated reserving process.
Can be used to assess volatility of reinsurance recoveries and so also assess credit risk.
Simple to adjust the method to allow for major catastrophes.
5 Disadvantages of applying standard reserving techniques to reinsurance premium and claims data triangles
It may be hard to assess development patterns as data can be sparse.
Development patterns will be distorted by changes in reinsurance terms.
This approach does not allow accurately for individual contract aggregate features.
This approach does not allow accurately for the individual claims breaching limits in vertical cover unless we adjust for the claims separately.
We cannot be sure that the gross and net positions are consistent.
Advantages and disadvantages of applying broad brush factors to projected gross data
Advantages include:
More accurate treatment of proportional business
Still reasonably simple.
Disadvantages include:
All disadvantages of gross and net method.
Requires the ability to identify reinsurance premiums and recoveries data by cover type and line of business.
Requires more data such as detailed knowledge of current and historical proportional covers.
Advantages and disadvantages of case by case reserving.
Advantages include:
Simple
Consistent with corresponding gross losses
Appropriate for catastrophic covers and high excess reinsurance.
Disadvantages include:
Requires detailed knowledge of current and historical reinsurance covers.
Separate allowance needs to be made for recoveries on large IBNR claims.
Not practical for stop loss, proportional reinsurance or working layer non-proportional reinsurance.
Advantages of developing individual losses
This method should be capable of treating the features of each contract accurately.
Consistent with corresponding gross losses.
Allows the assessment of the distribution of reinsurance recoveries.
Can allow for complex programmes such as for stop losses and aggregate covers as part of the process.
Disadvantages of developing each claim separately
Complex and time consuming to set up and so not suitable for simple programmes.
Development of individual losses can include subjectivity.
How to allow for reinsurance recoveries for unreported claims.
