Chapter 8 - Claims Reserving

Question 1

Give 7 reasons why there is uncertainty in setting an appropriate reserve for claims

Answer 1

1. Legislation changes having a retrospective impact on existing claims
2. Future claims payment patterns differing from historical experience
3. Claims such as stress and disease emerging from risks written many years ago
4. Cases of latent exposures such as asbestos (e.g up to 40 years)
5. Outcome of litigation on existing claims
6. Failure to recover reinsurance
7. Unanticipated changes in claims inflation

Question 2

The claims reserving process is to?

Answer 2

Ensure an appropriate provision is set for the eventual cost of claims arising on policies written

Question 3

An accurate view on the required level of claims provision is needed to measure…

Answer 3

Financial performance

Question 4

Explain the fundamental accounting concept which is the accruals concept

Answer 4

Transactions are recognised when they occur

Question 5

Explain about IBNR, but not calculation

Answer 5

Based on using claims patterns from prior years up to the balance sheet date. These are then 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.

Question 6

IBNER is concerning what usually and how

Answer 6

Incurred but not enough reported. Liability claims are for example going to be understated, one reason is that it’s hard to predict which will develop into high cost claims. Estimates can be made on a portfolio basis, and this is when IBNER is used when referring to these claims.

Question 7

If an unearned premium reserve is deemed inadequate what will be set up as a liability in the accounts?

Answer 7

An unexpired risk provision

Question 8

Why do insurance companies and reinsurance companies need to maintain adequate reserves?

Answer 8

To meet their liabilities at any one time

Question 9

Information on claims is usually gathered by what type of year and why?

Answer 9

Incident year (also called accident year) because premiums are earned up to the last day of the accounting period and for profitability purposes this needs to be matched to incidents that give rise to a claim up to the same day.

Question 10

The PRA also require claims to be reported by…

Answer 10

Incident year

Question 11

Why when categorising claims for classes of business e.g motor, would you have split motor injury and motor damage?

Answer 11

Damage can be settled a lot quicker than the injury side of things.

Question 12

For each claim development category for each class of business the following statistics are usually collected by incident year:

Answer 12

• number of claims reported
• number of nil claims
• total value of paid claims
• total value of the outstanding case estimate of claims at the period end

Question 13

Projections are typically performed from the claims development…

Answer 13

Triangles

Question 14

If there are unusual claims trends, analysts will seek explanations from …

Answer 14

Underwriters or account managers to understand claim development patterns

Question 15

Give 4 main claim methodologies

Answer 15

1. Projection of paid claims
2. Projection of incurred claims
3. Loss ratio method
4. Bornhuetter-Ferguson

Question 16

Explain the projection of paid claims method

Answer 16

This is the simplest method. Claims given for incident year or report year are analysed to see how they develop to the ultimate value. If subsequent incident or report years can be assumed to follow a similar pattern then we have a simple estimate of the claims. E.g if 3 earlier accident years show that at the end of development year 2 this has proven to be 92% of the claim, then the figure can be grossed up to see 100% of the figure that should be reserved. The figure may have to altered for inflation costs. (These are perhaps best for property)

Question 17

What is the projection of incurred claims method?

Answer 17

Defined simply as the addition of the paid claims and the case reserves. Brings together the most that is clearly known to date about how the claims are developing on the business in question. Basically looking at what’s already been paid and what is still outstanding ( the reserves) this method will also be adjusted for inflation ( likely best for liability )

Question 18

What is the bornhuetter-Ferguson method?

Answer 18

Combination of the loss ratio method and either the paid claims method or incurred claims method. The paid claims or incurred claims help towards knowing what is already know, and then a more general estimator like the loss ratio method is combined to help towards predicting the future. By adding these parts together, it is the most reliable estimate we can get for overall losses and hence for required reserves.

Question 19

Ultimately, who is responsible for deciding the amount to set aside for claims?

Answer 19

The board

Question 20

When deciding the claims reserving policy, this will usually be headed by…

Answer 20

Chief financial officer.

Question 21

The team preparing the estimates for the claim reserves is likely to be headed by?

Answer 21

Actuary or someone with actuarial skills

Question 22

How often are claims reviewed?

Answer 22

Monthly for most volatile claims and quarterly for the rest of the portfolio

Question 23

Who will be involved in meetings regarding the amount to set aside for claims?

Answer 23

Claims reserving specialists, account manager, underwriters, pricing specialists and the person responsible for claims handling. Recommendations will be made to the executive team and the executive team will make recommendations to the board.

Question 24

The amounts set aside for claims will allow for…

Answer 24

Future inflation

Question 25

Some companies ???? Long tail claims. If they do this they must…

Answer 25

Discount long tail claims. They must explain this in their policy for discounting claims in the accounts.

Question 26

What are discounted claims?

Answer 26

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.

Question 27

Why do company’s employ external actuaries to review the amount set aside for claims on a regular basis?

Answer 27

To increase confidence in the investors and external analysts that the provision is fairly stated.

Question 28

The accuracy for the amount set aside for claims is likely to be judged by the…

Answer 28

Claims run off

Question 29

On what is the IBNR calculation based?

Answer 29

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.

Question 30

What are the factors that will be considered when deciding how to categorise claims statistics for the purposes of determining the appropriate amount to set aside for claims?

Answer 30

Regards 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
• average claim values

Question 31

Who ultimately has responsible for reserving

Answer 31

The Board

Question 32

The difference between the reserves on a set of claims at the beginning of the financial years and the reserves on the same claims adjusted for claim payments is known as what?

Answer 32

Claims run off

Question 33

What tables of claims are used by actuaries to estimate ultimate claims payments and IBNR particularly for liability claims

Answer 33

IBNR

Question 34

The method to estimate total cost of claims which extrapolates incurred claims including reserves. Incurred claims may be adjusted for inflation.

Answer 34

Projection of incurred claims

Question 35

Reserves for claims that have not been reported by insurers set by actuaries

Answer 35

IBNR

Question 36

What do we call the additional provision if unearned premium reserve is not deemed adequate to cover expected claims on unexpired risks.

Answer 36

Unexpired risk provision

Question 37

Method of estimating total cost of claims combining loss ratio method for most recent years but using an extrapolation of paid or incurred claims in earlier years.

Answer 37

Bornhuetter Ferguson method

Question 38

Method to estimate total cost of claims used for most recent years when claims data may be sparse. Estimated total costs of claims calculated based on expected loss ratio and premium income.

Answer 38

Loss ratio method

Question 39

Discount rate used to calculate lump sum payments in long term personal injury claims. The lower the rate the higher the insurer’s lump sum payments.

Answer 39

Ogden rate

Question 40

Actuaries usually adjust paid claims for this before estimating losses

Answer 40

Inflation

Question 41

Method to estimate total cost of claims which extrapolates solely from the paid claims and does not use any other information available such as the incurred cost of claims. Paid claims may be adjusted for inflation.

Answer 41

Projection of paid claims

Question 42

The risk that an insurer’s estimate of future claims is insufficient. Longer tail-lines of business present more uncertainty on the size and timing of payments.

Answer 42

Reserving risk

Question 43

Estimation of future claims payments.

Answer 43

Reserving