Chapter 8 - Claims Reserving Flashcards
Give 7 reasons why there is uncertainty in setting an appropriate reserve for claims
- Legislation changes
- Future claims payment patterns differ
- Emerging risks written many years ago
- Latent exposures such as asbestos (e.g up to 40 years)
- Outcome of litigation on existing claims
- Failure to recover reinsurance
- Unanticipated changes in claims inflation
The claims reserving process is to?
Ensure an appropriate provision is set for the eventual cost of claims arising on policies written
Explain the fundamental accounting concept which is the accruals concept
Transactions are recognised when they occur
When considering which claims should be accounted for in an accounting period, there is a requirement to…
Estimate all claims arising from incidents in the year, whether the claims have been reported or not
Explain about IBNR, but not calculation
Incurred But Not Enough Reported claims which have occurred but have not been reported yet
How is IBNR calculated?
Extrapolation of past claims
IBNER is concerning what usually and how
Incurred but not enough reported are case reserves on reported claims adequate
If an unearned premium reserve is deemed inadequate what will be set up as a liability in the accounts?
An unexpired risk provision
Why do insurance companies and reinsurance companies need to maintain adequate reserves?
To meet their liabilities at any one time
Information on claims is usually gathered by what type of year and why?
Incident year (also called accident year)
Claims by incident year must also be in the return to who?.
PRA
What four factors determine how claims statistics are categorised?
- 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
Why when categorising claims for classes of business e.g motor, would you have split motor injury and motor damage?
Damage can be settled a lot quicker than the injury side of things.
For each claim development category for each class of business what statistics are usually collected by incident year:
- 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
Projections are typically performed from the claims development…
Triangles
Give 4 main claim methodologies
- Projection of paid claims
- Projection of incurred claims
- Loss ratio method
- Bornhuetter-Ferguson
Explain the projection of paid claims method
Extrapolates IBNR from paid claims
What is the projection of incurred claims method?
Extrapolates IBNR from incurred claims
What is the loss ratio method?
Use for most recent years assume loss ratio then work out IBNR
What is the Bornhuetter-Ferguson method?
Combination of the loss ratio method most recent years and either the paid claims method or incurred claims method for ealier years
When is the exposure based method of IBNR estimation used??
Used for long tail liability claims such as latent claims like asbestos, pollution and health hazard
Ultimately, who is responsible for deciding the amount to set aside for claims?
The board
Who on the board decides the claims reserving policy, this will usually be headed by…
Chief financial officer.
What are discounted claims?
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.
Why do company’s employ external actuaries to review the amount set aside for claims on a regular basis?
To increase confidence in the investors and external analysts that the provision is fairly stated.
What is claims run off?
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.
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?
The amount set aside for claims is inadequate
State briefly what an unexpired risk provision is
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
