Chapter 25: Reinsurance reserving 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, …)
6 Main methods reserving for outwards reinsurance
- use data gross and net of reinsurance, then find the difference (G-N)
—-this method uses triangulation techniques - CL, BF or even cape cod to get gross and net reserves to arrive at the reins recoveries
—-if using BF method, then estimate gross ultimate claims and then estimate net ultimate claims in which the apriori ELR is derived by netting down the gross ELR using a net to gross ratio
- use data gross and net of reinsurance, then find the difference (G-N)
- perform standard triangulation techniques directly on reinsurance data alone (R)
- adjust gross data using a broad brush approach (G*% ceded) using cession rates for proportional, for non proportional use paid triangles mostly esp. for short tailed and incurred or paid for long tailed)
- case-by-case approach on only the largest losses
———Reinsurance recoveries on smaller losses are ignored completely.
We set the reinsurance reserves on a case-by-case basis, after discussing these with claims handlers and underwriters, and perhaps with reference to any previous experience for events of that type. Typically we might reserve in this way for losses from the major property catastrophe (storm and quake) events, plus perhaps unusually large single risk events (explosions, fires and so on). This may also be a suitable approach for reserving for facultative reinsurance business.
- case-by-case approach on only the largest losses
- develop all individual losses and then apply the reinsurance to each one (I-R)
———————This approach is the most complex and time-consuming.
We develop each individual loss to ultimate settled value. We run each loss through all the applicable reinsurance contracts to calculate the ultimate recoveries. We track the recoveries for each contract and aggregate them so that we can apply aggregate limits and retentions. We can also calculate reinstatement and additional premiums.
We aggregate the recoveries and premiums by line and year and compare them to paid and incurred recoveries and premiums to calculate the reinsurance reserves.
One of the better ways to utilise this approach would be to use stochastic reserving at individual claim level, to develop the gross losses. We can then calculate a distribution of reinsurance recoveries as well as an expected value. This might be the most appropriate approach where identification of particular percentile outcomes are required.
- develop all individual losses and then apply the reinsurance to each one (I-R)
- derive a reserve distribution net of reinsurance (N)
——We can use the following simple approaches to derive a reserve distribution net of reinsurance under non-proportional covers: (also covered in stochastic reserving chapter 16)
- Derive a gross distribution, and scale down the distribution such that the mean equals the net best estimate. Under this method, we will usually overestimate the uncertainty surrounding net reserves because reinsurance protection will dampen down the volatility associated with individual large claims.
- Estimate a distribution of reinsurance to gross reserve ratios and apply this to the gross reserve distribution.
- Use a net triangle rather than a gross triangle to derive the predicted distribution. Under this method, we will underestimate volatility if (for example) reinsurance retentions are increasing for the more recent origin periods and overestimate volatility if, for example, reinsurance retentions are decreasing for the more recent origin periods.
- Simulate individual claims and net down explicitly before aggregation.
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 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.
This is a bigger problem for proportional covers, where the cedant might report losses on an aggregate basis. For example, for a quota share written on a ‘risks attaching’ basis, the cedant might report aggregate paid and incurred losses to date. If the reinsurer uses an accident year reporting basis, it must somehow split the risks attaching data supplied between accident years.
Usually the cedant provides more information about losses to a non-proportional contract. But even then, a reinsurer may need to spend a material amount of time and resource in requesting additional information which it feels that it needs to allocate and treat the losses appropriately.
Where a reinsurance contract covers several lines of business, the loss data may show which losses are associated with which lines. But often the premium is allocated to the lines according to a pre-agreed percentage split, perhaps based on the expected split of business when the contract was underwritten. To the extent that this split differs from the actual mix of business or does not appropriately allow for different levels of risk between lines of business, the premium split may be inaccurate. As premium (adjusted for rate changes) may be the only measure of exposure a reinsurer has, this can lead to a mismatch between exposure and losses in the reserving process.
Because of the complexity and individuality of reinsurance risks, it is difficult for a reinsurer to have IT systems that capture perfectly all the contracts written and their key features.
It is more difficult than for a cedant, whose contracts tend to be more homogenous. This makes storing and accessing accurate information harder for reinsurers. The actuary working for a reinsurer should be aware of the potential shortcomings of the data being used in the calculation of reserves.
(Outwards reinsurance) 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
(Outwards reinsurance) Reserving using data gross and net of reinsurance:
Disadvantages
- possibility of implied negative reinsurance recoveries
- —————–because of over reserving in initial dev yrs on account of prudence which is later corrected with a downward trend towards the end of the dev period in the gross reserves. this may be inconsistent with the net data trend resulting in negative 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
- does not permit accurate assessment of credit risk
- may not adequately reflect changes in the gross book of business.
- The lack of direct link between the gross and net experience could lead to inconsistent results for capital/enterprise risk management
(Outwards reinsurance) 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
(Outwards reinsurance) 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