Chapter 23: Reserves & Solvency Capital

Question 1

What are the reasons/purpose of calculating reserves?

Answer 1

PPS MIIR

Published accounts
Premium rating
Supervisory solvency accounts
Mergers and acquisitions
Internal management accounts/information
Investment strategy
Reinsurance arrangements

Question 2

What are the different types of reserves?

Answer 2

SHORT TERM
IBNR
RBNS
UPR
URR
Claims in transit
OCR
IBNER
Equalisation & Cat reserve (for smoothing profits)

LONG TERM
Investment matching reserve

Question 3

What are the two methods of calculating reserves?

Answer 3

1. Case by case (small volume or unusual claims)
2. Statistical model (homogenous claims)

Question 4

What are the pros and cons of a case-by-case method?

Answer 4

Pros
1. If experts are available, we can best utilize the information
2. Works for heterogenous types of claims
3. Good for new class of business
4. Does not need historical data
5. When a statistical model is not available

Cons
1. Experts are required (expensive & outsiders)
2. Subjective and its difficult to check the estimates
3. Not enough data for each claim is available
4. Can’t use this for claims not yet reported

Question 5

What are the pros and cons of a statistical method?

Answer 5

Pros
1. Good for homogenous cohort
Cons
1. Can’t be used on new class of business due to lack of data
2. Needs a model

Question 6

What are the 4 types of models for calculating outstanding reserves?

Answer 6

1. Chain ladder
2. Average cost per claim
3. Loss ratio
4. Blends (BF)