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
2. Future claims payment patterns differ
3. Emerging risks written many years ago
4. 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

Explain the fundamental accounting concept which is the accruals concept

Answer 3

Transactions are recognised when they occur

Question 4

When considering which claims should be accounted for in an accounting period, there is a requirement to…

Answer 4

Estimate all claims arising from incidents in the year, whether the claims have been reported or not

Question 5

Explain about IBNR, but not calculation

Answer 5

Incurred But Not Enough Reported claims which have occurred but have not been reported yet

Question 6

How is IBNR calculated?

Answer 6

Extrapolation of past claims

Question 7

IBNER is concerning what usually and how

Answer 7

Incurred but not enough reported are case reserves on reported claims adequate

Question 8

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

Answer 8

An unexpired risk provision

Question 9

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

Answer 9

To meet their liabilities at any one time

Question 10

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

Answer 10

Incident year (also called accident year)

Question 11

Claims by incident year must also be in the return to who?.

Answer 11

PRA

Question 12

What four factors determine how claims statistics are categorised?

Answer 12

• 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 13

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

Answer 13

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

Question 14

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

Answer 14

• 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 15

Projections are typically performed from the claims development…

Answer 15

Triangles

Question 16

Give 4 main claim methodologies

Answer 16

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

Question 17

Explain the projection of paid claims method

Answer 17

Extrapolates IBNR from paid claims

Question 18

What is the projection of incurred claims method?

Answer 18

Extrapolates IBNR from incurred claims

Question 19

What is the loss ratio method?

Answer 19

Use for most recent years assume loss ratio then work out IBNR

Question 20

What is the Bornhuetter-Ferguson method?

Answer 20

Combination of the loss ratio method most recent years and either the paid claims method or incurred claims method for ealier years

Question 21

When is the exposure based method of IBNR estimation used??

Answer 21

Used for long tail liability claims such as latent claims like asbestos, pollution and health hazard

Question 22

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

Answer 22

The board

Question 23

Who on the board decides the claims reserving policy, this will usually be headed by…

Answer 23

Chief financial officer.

Question 24

What are discounted claims?

Answer 24

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 25

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

Answer 25

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

Question 26

What is claims run off?

Answer 26

Incurred cost during the year on the amount set aside at start of year. Hence it will be the opening provision less the closing provision for the same claims adjusted by claims payments made.

Question 27

If the run-off of a company has been adverse in previous years, analysts such as rating agencies may believe the amount set aside for claims is?

Answer 27

The amount set aside for claims is inadequate

Question 28

State briefly what an unexpired risk provision is

Answer 28

An amount set up as a liability in the accounts if an assessment of the unearned premium reserve is deemed to be inadequate to cover the expected cost of claims