Chapter 8 Flashcards
The uncertainty over setting an appropriate level of claims reserve is influenced by a number of factors, what are these?
*legislative change
- future claims payment patterns
- claims, such as stress and disease claims
- cases of latent exposures such as asbestos
- the outcome of litigation on existing claims;
- failure to recover reinsurance;
- unanticipated changes in claims inflation
- unexpected changes to the interest rates (Ogden rate)
What is reserving risk?
This is the risk that the Group’s estimate of future claims is insufficient
What is the Ogden rate?
The Ogden rate represents the amount of interest that the claimant would be expected to earn on a lump sum calculated to compensate them for their injury. The lower the rate the higher the lump sum needs to be.
What is the method of projection of claims paid?
extrapolate the paid claims and not use any other information available such as the incurred cost of claims.
What is the Projection of incurred claims?
this method will produce a more accurate estimate of total claims than a projection of paid claims as it uses more information.
Loss ratio method
used on its own but can be used for the most recent incident years where the value of paid and/or incurred claims is low in relation to the total value of claims expected.
Bornhuetter-Ferguson
This is a straightforward combination of the loss-ratio method with either a paid loss or incurred loss development.
On what is the IBNR calculation based?
The IBNR calculation is based on an extrapolation of the pattern of claims reported in prior years and up to the balance sheet date. The prior year patterns are used to estimate the number of claims expected to be reported after the balance sheet date with incident dates prior to the balance sheet date. The total value of IBNR is calculated from multiplying the number of such claims by the average cost of claims.
What factors will be considered when determining the appropriate amount to set aside for claims?
Regard will be paid to:
- length of tail (being the time from the incident date through to advice and payment);
- expected claims pattern.
- expectation of a surplus or deficit in the run-off of claims; and
- average claim values.
For which type of claims would an exposure-based method of claims reserving be appropriate?
The exposure-based method would be used for very long-tail liabilities with high degrees of uncertainty such as asbestos, pollution and health hazard exposures.
What are discounted claims?
Discounted claims are claims where the amount set aside is reduced by the investment income expected to be earned in the future on the investments supporting the claims
What is the starting point in determining the appropriate amount to set aside for claims?
establish the information required to make the assessment. Information on claims is
generally gathered by incident year (also called accident year)
Which claims need to be accounted for in an accounting period?
All claims from incidents arising in the year, whether the claims have been reported or not.
The IBNR calculation is based on what?
extrapolation of the pattern of claims reported in prior years and up to the balance sheet date. The prior year patterns are used to estimate the number of claims expected to be reported after the balance sheet date.
True or false - the total value of IBNR is calculated from multiplying the number of claims by the average cost of claims.
True
