Chapter 17: Reinsurance reserving (F203 Appx. 9) Flashcards
Data can be a problem particularly for reinsurers because (7)
- claim reporting delays are longer
- there is a greater tendency for claims to develop upwards
- exposure can be very heterogeneous
- data can be sparse
- benchmarks are often less relevant
- there can be IT constraints
- there is more opportunity to group data differently
7 Factors to consider when grouping data for reinsurance reserving
- type of contract (facultative, treaty)
- type of cover (quota share, surplus, aggregate XL, etc.)
- basis of cover (losses occurring, risks attaching, claims made)
- line of business (casualty, property, marine, …)
- attachment point
- territory (Northern, Southern, …)
- type of cedant (small, large, …)
5 Main methods reserving 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 and then apply the reinsurance to each one
- derive a reserve distribution net of reinsurance
The suitability of any reserving method can be assessed by considering
- simplicity
- consistency of gross and net estimates
- whether it can be used to assess volatility of net outcomes or reinsurance recoveries
- compliance with regulation
- how the method copes with:
- —- different types of reinsurance, (proportional, non-proportional, …)
- —- sparse data
- —- changes in reinsurance programme or panel over time
- —- reinsurance recoveries on unreported claims
- —- catastrophes and large claims
- —- aggregate features such as profit commissions, and loss-sensitive contracts such as stop loss cover
- —- interactions between covers
- whether the method can be used to investigate:
- —- capital requirements and enterprise risk management
- —- credit risk
Inwards reinsurance
Reinsurance business sold by the reinsurer
Outwards reinsurance
Reinsurance bought by the cedent
Why do non-proportional reinsurance claims have a greater tendency for claims to develop upwards?
Large claims have
… longer delays to settlement so that there is
… more time for social and economic inflation to effect the final settlement amount.
Why do reinsurers experience greater heterogeneity of exposure?
They may write
… a wide range of lines of business
… on a wide range of contract types with
… very different terms and conditions
Why do you reinsurance have sparse data?
Particularly for high excess nonproportional business there may be
… very few actual claims.
Why do reinsurers experience reduced applicability of industry benchmarks?
Because of the heterogeneity of their exposures different reinsurers can experience very different claims development behaviour.
This makes industry-wide benchmarks potentially less appropriate.
How do you re-insurers suffer from data and systems constraints?
The information that a reinsurer receives about losses can have less detail than the information that the insurer receives.
Reserving using data gross and net of reinsurance:
Advantages
- simple to apply and understand
- simple to add to 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 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
- 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 nonproportional covers
- cannot accurately allow for some features of individual reinsurance contracts such as aggregate limits aggregate retentions and profit commissions
- cannot accurately allow for claims that breach the vertical cover available unless these are adjusted for separately
- The lack of direct link between the gross and net experience could lead to inconsistent results for capital/enterprise risk management
Applying standard reserving techniques to re-insurance premium and claims data triangles:
Advantages
- relatively simple to understand
- simple to add to semi-automated reserving process
- can be used to assess volatility of reinsurance recoveries and so also credit risk
- simple to adjust the method to allow for major catastrophes
Applying standard reserving techniques to re-insurance premium and claims data triangles:
Disadvantages
- it may be hard to assess development patterns as data can be sparse
- where reinsurance protections have changed it may not be appropriate 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 cannot be sure that the gross and net positions are consistent
