Chapter 8 Flashcards
What is claims reserving in insurance?
The process of estimating the amount insurers need to set aside to cover future claims payments.
Why is claims reserving important for insurers?
It affects profitability, financial stability, and compliance with regulatory requirements.
What does IBNR stand for?
Incurred But Not Reported claims.
Why are IBNR claims important in reserving?
They represent claims that have occurred but have not yet been reported, impacting reserve calculations.
Name one key method used for claims reserving.
The Chain-Ladder Method (Projection of Paid/Incurred Claims).
What does the Loss Ratio Method use to estimate reserves?
The ratio of losses to earned premiums.
How does the Bornhuetter-Ferguson method work?
It combines past claims data with expected future loss ratios.
What is the difference between case reserves and bulk reserves?
Case reserves are set for known claims, while bulk reserves account for unknown or IBNR claims.
What is the impact of inflation on claims reserves?
It increases future claim payments, requiring adjustments in reserve estimations.
What is the role of actuarial judgment in reserving?
Actuaries interpret data, adjust assumptions, and choose methods to estimate reserves accurately.
What is the purpose of claims development triangles?
To analyze how claims amounts change over time and improve reserving accuracy.
Why might an insurer under-reserve?
To make financial results look better in the short term, though it can lead to financial instability.
What happens if an insurer over-reserves?
It ties up excess capital, reducing profitability.
How does changes in claims handling affect reserves?
Faster or slower claim settlements can impact how reserves develop over time.
What is the regulatory requirement for claims reserves?
Regulators require insurers to maintain adequate reserves to protect policyholders and ensure solvency.
Which of the following best defines claims reserving?
a) Collecting premiums from policyholders
b) Estimating future claim payments insurers must set aside
c) Paying claims immediately after they are reported
d) Reducing insurance policy prices
b) Estimating future claim payments insurers must set aside
Why is claims reserving essential for insurers?
a) It increases their profit margins
b) It helps meet regulatory requirements and financial stability
c) It allows insurers to ignore claims data
d) It ensures policyholders pay higher premiums
b) It helps meet regulatory requirements and financial stability
What does IBNR stand for?
a) Incurred But Not Recorded
b) Insurance-Based Non-Reported
c) Incurred But Not Reported
d) Initial Balance Net Reserve
c) Incurred But Not Reported
Which method is commonly used to estimate claims reserves?
a) Chain-Ladder Method
b) Expense Ratio Analysis
c) Cash Flow Discounting
d) Market Value Approach
a) Chain-Ladder Method
What does the Bornhuetter-Ferguson method combine?
a) Historical claims data and expected loss ratios
b) Only paid claims data
c) Only premium earnings
d) Total incurred claims
a) Historical claims data and expected loss ratios
Which method uses the ratio of losses to earned premiums?
a) Chain-Ladder Method
b) Loss Ratio Method
c) Development Triangle Method
d) Case Reserve Method
b) Loss Ratio Method
What is the key assumption of the Chain-Ladder Method?
a) Future claims development follows past patterns
b) Inflation has no impact on claims
c) Claims payments are always constant
d) Premiums determine reserve amounts
a) Future claims development follows past patterns
Why do insurers use claims development triangles?
a) To track changes in claim amounts over time
b) To reduce the number of claims filed
c) To predict premium increases
d) To determine tax deductions
a) To track changes in claim amounts over time
Which of the following can cause an increase in claims reserves?
a) Faster claim settlements
b) Lower-than-expected claim payouts
c) Higher-than-expected claim costs
d) Decreasing inflation rates
c) Higher-than-expected claim costs
What is the risk of under-reserving?
a) It makes insurers more competitive
b) It can lead to financial instability and insolvency
c) It reduces policyholder claims
d) It improves investment returns
b) It can lead to financial instability and insolvency
What happens when an insurer over-reserves?
a) It enhances their profitability
b) It ties up excess capital
c) It reduces financial stability
d) It speeds up claim payments
b) It ties up excess capital
What does case reserving involve?
a) Setting aside funds for unknown claims
b) Estimating reserves for known individual claims
c) Allocating all reserves based on past premiums
d) Ignoring claims development
b) Estimating reserves for known individual claims
What factor can influence claim reserves the most?
a) Market share growth
b) Changes in claims handling procedures
c) Premium collection rates
d) Number of policy renewals
b) Changes in claims handling procedures
Which of the following is NOT a method for claims reserving?
a) Bornhuetter-Ferguson Method
b) Chain-Ladder Method
c) Capital Asset Pricing Model (CAPM)
d) Loss Ratio Method
c) Capital Asset Pricing Model (CAPM)
What does “development factor” refer to in claims reserving?
a) The interest rate used to discount reserves
b) The trend in claims payments over time
c) The increase in premium prices
d) The insurer’s market share growth
b) The trend in claims payments over time
Explain why the Chain-Ladder Method assumes that past claim development patterns will continue into the future. What risks does this assumption carry?
The method assumes that historical claim development trends reflect future trends, but risks include changes in claim settlement speeds, inflation, legal rulings, or unexpected events.
How does the Bornhuetter-Ferguson method balance credibility between historical data and external assumptions?
It weights past claims experience with an independent loss ratio assumption to prevent over-reliance on potentially volatile historical data.
Why might an insurer use a stochastic claims reserving model instead of a deterministic one?
Stochastic models incorporate probability distributions, allowing for scenario testing and uncertainty quantification, which deterministic models lack.
What impact does a sudden increase in litigation costs have on IBNR reserves?
It raises IBNR reserves as claims settlement costs increase, affecting financial stability.
Describe a scenario where the Loss Ratio Method could lead to under-reserving.
If past loss ratios underestimate future claims severity due to rising medical costs or social inflation, reserves will be insufficient.
Why is reserving for long-tail business more challenging than for short-tail business?
Long-tail claims take years to develop, making future losses harder to estimate and requiring more reliance on assumptions.
How might changes in regulatory requirements affect claims reserving practices?
New regulations may require insurers to increase reserves or adjust methodologies, affecting financial statements and capital requirements.
What are the consequences of reserve strengthening on an insurer’s financial statements?
It increases liabilities, reduces profits, and may lower shareholder confidence.
How does the concept of “reserve redundancy” differ from “reserve deficiency”?
Reserve redundancy means excess reserves (overestimation), while reserve deficiency means insufficient reserves (underestimation).
What are the trade-offs between reserving conservatively versus aggressively?
Conservative reserving ensures solvency but ties up capital; aggressive reserving improves reported profitability but risks insolvency.
Explain how inflation adjustments are incorporated into claims reserving models.
Actuaries use trend factors, economic forecasts, and claims severity indices to adjust for inflation.
How do changes in claims frequency versus claims severity affect reserving differently?
Increased frequency raises overall claim counts, while increased severity raises the average claim cost, requiring different reserving adjustments.
Why might the Mack Model be preferred over traditional deterministic reserving methods?
The Mack Model quantifies reserve variability, providing a probabilistic range instead of a single estimate.
How can reserving errors contribute to regulatory action against an insurer?
Under-reserving may lead to insolvency, triggering regulatory intervention or penalties.
Why might an insurer discount its reserves, and what are the risks of doing so?
Discounting reflects the time value of money, but it assumes claims payments follow expected timelines, which may not always hold.
Which assumption is fundamental to the Chain-Ladder Method?
a) Claims development is linear
b) Future claim patterns mirror historical data
c) Inflation is negligible
d) Claims frequency is constant
b) Future claim patterns mirror historical data
Why does the Bornhuetter-Ferguson method perform better in unstable claims environments?
a) It ignores historical data
b) It assigns weight to both historical experience and external expectations
c) It only uses incurred claims data
d) It assumes all claims are reported within a short period
b) It assigns weight to both historical experience and external expectations
Which of the following is NOT an assumption of deterministic reserving methods?
a) Claim severity and frequency remain stable
b) Historical trends will continue
c) Claims payments are random variables
d) Development factors accurately capture future claims
c) Claims payments are random variables
A sudden legal change increasing compensation limits would primarily affect which component of reserves?
a) Paid claims
b) IBNR reserves
c) Unearned premium reserves
d) Investment income
b) IBNR reserves
What is a major limitation of the Loss Ratio Method?
a) It cannot handle large claims
b) It assumes the loss ratio is stable over time
c) It requires full claim development data
d) It is too computationally intensive
b) It assumes the loss ratio is stable over time
If an insurer consistently reports adverse development in reserves, what does this suggest?
a) The reserves were previously overstated
b) The initial reserves were too low
c) The claims settlement speed has increased
d) Premiums were set too high
b) The initial reserves were too low
Which of the following best describes tail risk in claims reserving?
a) The risk of claims being settled too quickly
b) The risk of long-term claim liabilities exceeding expectations
c) The risk of reserve overstatement
d) The risk of regulatory scrutiny
b) The risk of long-term claim liabilities exceeding expectations
What happens when reserves are too conservative?
a) Regulatory intervention increases
b) Underwriting profits appear lower
c) Claims payments become unpredictable
d) The insurer runs out of capital
b) Underwriting profits appear lower
Which method is most appropriate for reserving when data is highly volatile?
a) Chain-Ladder Method
b) Bornhuetter-Ferguson Method
c) Loss Ratio Method
d) Run-Off Triangle Method
b) Bornhuetter-Ferguson Method
What is the biggest concern when insurers rely too heavily on past claims data for reserving?
a) Data storage costs increase
b) Future claims may not follow historical patterns
c) Regulators require newer models
d) It reduces reserve transparency
b) Future claims may not follow historical patterns
