Chapter 8 Flashcards
Purpose of Claims Reserving
To ensure appropriate provisions are made for the future cost of claims, which may take years to manifest, be notified or be settled
Factors contributing to uncertainty in claims reserving?
- legislative changes
- unexpected claims inflation
- long-tail claims
- litigation outcomes
- failure to recover reinsurance
- changes in claims payment patterns
- fluctuations in interest rates (Ogden)
Ogden Rates
Used to calculate lump sum settlements for future loss of earnings and care costs
Lower Ogden Rates - higher compensation payouts
Higher Ogden Rates - lower compensation payouts
2001 - 2017 : 2.5%
Feb 2017 : - 0.75%
Aug 2019 : - 0.25%
How is Incurred But Not Reported calculated?
- based on historical claims patterns
- uses extrapolation to estimate unreported claims
- multiplies estimated number of claims by the average claims cost
Claims Statistics Categories
- by class of business (motor, property, liability, etc)
- by incident year
- by claims development pattern (length of tail, expected claims pattern)
Key Data Points for Reserving
- number of claims reported
- number of nil claims
- total paid claims
- outstanding case estimates at the end of each development year
Claims Development Triangles
Tables that track the development of claims over multiple years, used to project future claims costs
Projection of Paid Claims Method
- extrapolates historical paid claims into the future
- assumes past claims inflation will continue
- a variation adjusts payments for expected future inflation
Projection of Incurred Claims Method
- uses both paid claims and outstanding reserves for a more accurate estimate
- can be distorted if claims handling procedures change
- may be adjusted for inflation
Loss Ratio Method
- used for recent years where little data is available
- estimates claims reserves based on expected loss ratio trends
- adjusts for premium changes and claims inflation
Bornhuetter-Fergusion (B-F) Method
- combines the loss ratio method with paid or incurred claims projections
- assigns more weight to loss ratio estimates in early years
- as data develops, greater reliance is placed on actual claims experience
Exposure-Based Method
Used for high-uncertainty, long-tail liabilities like asbestos, pollution and health hazards
Claims Review Frequency
Monthly for the most volatile claims
Quarterly for the rest of the portfolio
Claims Discounting
Some companies reduce reserves based on expected future investment income
IFRS 17 allows discounting if the impact is material and requires an explicit risk adjustment
Claims Run-Off
A measure of how accurate prior-year claim reserves were
Opening reserve - closing reserve + claims paid during the year
