Chapter 17: Reinsurance reserving Flashcards
Inwards reinsurance vs outward reinsurance
Inwards reinsurance is reinsurance business sold by the reinsurer.
Outwards reinsurance is reinsurance bought by the cedant (it is the same business, just from the cedant’s viewpoint)
Additional data issues for inwards reinsurance reserving
Data can be a problem particularly for reinsurers because:
- claim reporting delays are longer
- there is a greater tendency for claims to develop upwards
- exposure can be very heterogenous
- data can be sparse
- benchmarks are often less relevant
- there can be IT constraints
- there is more opportunity to group data differently
Factors to consider when deciding how to group data for reinsurance reserving
- type of contract (faculatative, treaty, finite/non-traditional)
- type of cover (quota share, surplus, per risk excess, per event excess, aggregate excess, stop loss, etc.)
- basis for cover (losses occurring, risks attaching, claims made)
- line of business (casualty, property, marine, aviation, construction, APH)
- attachment point (for excess covers)
- territory (Northern, Southern, Western, Eastern and Central Africa)
- type of cedant (small, large, pools and/or associations, regional, multinational)
Why do non-proportional reinsurance claims have a greater tendancy to develop upwards?
Particularly for liability classes where liability and amount can be in dispute for a number of years.
Largely because large claims have longer delays to settlement so there is more time for social and economic inflation to affect the final settlement amount.
Why do reinsurers experience greater heterogeneity of exposure?
They may write a wide range of lines of business and a wide range of contract types with very different Ts&Cs.
Why do reinsurers have sparse data?
Particularly for high excess non-proportional business, there may be very few actual claims so that the usual reserving triangles may be very sparsely populated
Why are industry benchmarks less applicable to reinsurers?
Because of the heterogeneity of their exposure, different reinsurers can experience very different claims development behaviour. This makes industry-wide benchmarks potentially less appropriate, particularly for smaller reinsurers writing business in specific areas
Data and system constraints experienced by reinsurers
The information a reinsurer receives about losses has less detail than the information the insurer receives.
Bigger problem for proportional covers where aggregate basis is used for reporting to reinsurer
Because of the complexity and individuality of reinsurance risks, it’s difficult for insurers to have IT systems that capture perfectly all the contracts written and their key features. Makes storing and accessing accurate information harder for reinsurers
Reserving for inwards reinsurance
- paid claims development patterns are more reliable than incurred
- for short-tailed business, normal triangulation methods may be used, although catastrophes should be treated seperately
- for medium and long-tailed business we can use the same methods but taking extra care where development years haven’t matured, e.g. by using hybrid models. Consider both paid and incurred development patterns
Why is it more appropriate for a reinsurer to rely on paid development based reserves than incurred?
- incurred losses are a result of an aggregation of loss data from a number of different insurers
- all these insurers will have slightly different reserving practices/may have changed in the past
- pool of cedant insurers may have changed
- incurred data is therefore much less consistent
- the reinsurer would need to review the losses submitted and adjust to make the year by year cedant by cedant data more consistent
In what circumstances might the paid development pattern be more stable than the incurred development pattern?
Occurs when case estimates are wildly volatile or prone to error. Could be, for e.g., due to:
- inexperienced loss adjustors
- high uncertainty in ultimate costs due to volatile inflation
- changes in the reserving basis over time
- other factors affecting ultimate settled claim values
Main methods used to reserve for outwards reinsurance
- use data gross and net of reinsurance, then find the difference
- perform standard triangulation techniques directly on reinsurance data alone
- adjust gross data using a broad brush approach
- case-by-case approach on only the largest losses
- develop all individual losses the apply the reinsurance to each one
- derive a reserve distribution net of reinsurance
Reserving using data gross and net of reinsurance
Advantages
- simple to apply and understand
- simple to add to a semi-automated reserving process
- can use it to assess the volatility of net outcomes (but not of reinsurance recoveries per se)
- appropriate for proportional reinsurance or very high excess reinsurance where there 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
Reserving using data gross and net of reinsurance
Disadvantages
- possibility of implied negative reinsurance recoveries (net reserves are higher than gross)
- where reinsurance protections have changed, it may not be appropriate to apply the net of reinsurance development patterns prior to the change after the change
- may be less appropriate for non-proportional covers
- cannot accurately allow for claims that breach the vertical cover available unless these are adjusted for separately
- will not allow accurately for the interaction between whole account and line of business specific covers or stop loss covers
- lack of direct link between gross and net experience could lead to inconsistent results for capital/enterprise risk management
- SAM regulations in South Africa require credit risk to be quantified in respect of reinsurance recoveries. The preferred approach is to set reserves for gross claims and reinsurance claims seperately
Applying standard reserving techniques to reinsurance premium and claims data triangles
Advantages
- relatively simple to understand
- simple to add 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
Applying standard reserving techniques to reinsurance premium and claims data triangles
Disadvantages
- may be hard to assess development patterns as data can be sparse (especially for higher retention non-proportional covers)
- where reinsurance protections have changed it may be inappropriate to apply the reinsurance recovery development patterns prior to the change after the change
- changes in reinsurer panel can change payment development patterns and this method will not capture this accurately
- this approach does not allow accurately for individual contract aggregate features
- this approach does not allow accurately for individual claims breaching limits in vertical cover unless we adjust for the claims separately
- we can’t be sure that the gross and net positions are consistent
Applying broad brush factors to projected gross data
Advantages
- more accurate treatment of proportional business
- still reasonably simple
Applying broad brush factors to projected gross data
Disadvantages
- issues with reserving for inwards reinsurance apply for non-proprotional business
- requires the ability to identify reinsurance premiums and recoveries data (paid and case reserves) by cover type and line of business
- requires more information, such as detailed knowledge of current and historical proprotional covers (adds to the data and resource requirements)
Case by case reserving
We only reserve for reinsurance on the largest, most material losses.
Reinsurance recoveries on smaller losses are ignored completely.
Case by case reserving
Advantages
- simple
- consistent with the corresponding gross losses (those losses for which adjustments are made)
- appropriate for catastrophe covers and high excess reinsurance
Case by case reserving
Disadvantages
- 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 layers of non-proportional reinsurance
Developing indivdual losses and applying the reinsurance programmes to them
- develop each individual loss to ultimate settled value
- run each loss through applicable reinsurance contracts to calculate ultimate recoveries
- track recoveries for each contract and aggregate them so we can apply aggregate limits and retentions
- calculate reinstatements and additional premiums
- aggregate recoveries and premiums by line and year so we can compare them to paid and incurred recoveries and premiums to calculate reinsurance reserves
Developing individual losses and applying the reinsurance programmes to them
Advantages
- should be capable of treating the features of each contract accurately
- consistent with the corresponding gross loss
- 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
Developing individual losses and applying the reinsurance programmes to them
Disadvantages
- complex and time consuming to set up and so not suitable for simple programmes
- there can be a significant element of subjectivity when developing individual losses (esp. large ones)
- how to allow for reinsurance recoveries for unreported claims
- requires detailed knowledge of all current and historical covers
