Chapter 23 - Reserves and solvency capital requirements Flashcards
What are the reasons for calculating the technical reserves of a health and care insurer
IS ALIVE
- to determine the liabilities to be shown in INTERNAL management accounts
- if SEPARATE accounts have to be prepared for the purpose of supervision of solvency, to determine the liabilities to be shown in those supervisory accounts
- to ASSIST with the assessment of reinsurance arrangements
- to determine the LIABILITIES to be shown in the insurer’s published accounts
- to influence the INVESTMENT strategy
- to VALUE the insurer for merger and acquisition
- to ESTIMATE the cost of claims incurred in recent periods and hence provide a base for estimating the future premiums required to attain a given level of profitability
Types of reserves Long-term insurance might hold
RIP OI
- Reserves for claims that have been REPORTED and not yet fully settled
- IBNR
- Reserves for POLICIES - typically the discounted value of future expected claims, expenses and premium cashflows
- OPTION reserves - additional costs that need to be set aside for the eventuality that a particular option ‘comes into the money’
- INVESTMENT mismatching reserve
Types of reserves held for short-term insurance contracts
PRICE IOI
- Unearned PREMIUM reserve (UPR) - the balance of premiums received in respect of periods of insurance not yet expired (claims that may arise between the valuation date and the next renewal date)
- Unexpired RISK reserve (URR) - reserve in respect of the unexpired insurance premium where it is felt that the premium basis is inadequate to meet future claims and expenses
– If the UPR is inadequate to cover the claims and expenses for unexpired risk due to insufficient premiums, then more will be needed. The URR is an estimate of what is actually needed to provide for the unexpired risk, rather than simply taking a proportion of premium - an INVESTMENT mismatching reserve
- CLAIMS in transit - reserve in respect of claims reported but not assessed, or not recorded
- EQUALISATION or catastrophe reserve - reserves where it is felt that the current year is atypical and amounts will have to be held back for abnormal events
– Equalisation reserves are amounts held back generally from profitable years - IBNR
- OUTSTANDING claims reserve - reserve in respect of claims notified to the insurer but not yet fully settled
- INCURRED but not enough reported - a reserve for outstanding reported claims
What are the 2 primary methods used to calculate reserves
- Case estimates
- Statistical estimates
What does statistical estimation involve when calculating reserves
It involves calculating the total claim amounts for outstanding claims based on relevant past experience
What factors need to be taken into account when calculating reserves on a Case estimate basis for indemnity products (ie PMI)
CASH PPP
- CURRENT levels of medical inflation
- AGE, gender
- SURGEON’S name, consultant or other medical principal
- HOSPITAL to be used
- PAST claims history of the claimant
- PROCEDURE type - this will indicate the cost of the procedure itself and the likely in-patient duration for accommodation costs
- POLICY coverage ( full indemnity, excess, limits,etc)
Can case estimates be used to produce estimates for claims that have not been reported ( whether incurred or not)
No
When are statistical estimates for reserves appropriate
They are appropriate for particular types of homogeneous claims where the portfolio is large enough and the experience is deemed to be stable
How are outstanding claims assessed on a statistical estimate basis
They are assessed in relatively homogenous cohorts, based on historical trends and patterns, adjusting for known or anticipated future changes.
The portfolio might be segmented by contract type, distribution type or geographical region and a statistical distribution fitted to the past experience to estimate the claims incurred from the earned premium
Assumptions underlying the basic chain ladder method (and how to deal with inflation)
- The expected amount of claims in monetary terms, paid in each development year, is a constant proportion of the total claims, in monetary terms, from that origin year
- No explicit assumption is made for claims inflation, but if inflation has been constant in the past, then this constant rate will be projected into the future
Assumptions underlying the inflation-adjusted chain ladder method
- For each origin year, the expected amount of claims in real terms, paid in each development year, is a constant proportion of the total claims, in real terms, from that origin year
- Explicit assumptions are made for past and future claims inflation
What are the concepts behind the Bornhuetter-Ferguson method
The concepts behind the method are:
- That whatever claims have already developed in relation to a given origin year, the future development pattern will follow that experienced for other origin years
- The past development for a given origin year does not necessarily provide a better clue to future claims than the more general loss ratio
Assumptions underlying bootstrapping the chain-ladder model
- The run-off pattern is the same for each origin period
- Incremental claim amounts are statistically independent
- The variance of the incremental claim amounts is proportional to the mean
- Incremental claims are positive for all development periods
What can cause distortions in the data
- External influences, such as inflation or changes in the nature of the underlying risk
- Internal influences such as changes in underwriting, claims settlement or recording procedures or reinsurance arrangments
- Changes in the type of business attracted to each treatment class
- random fluctuations or large claims in a small portfolio
How may the level of solvency capital required under regulation
- By a formula
- or risk-based measures such as (VaR)
