Estimating and Reserving I

Question 1

The process that a company carries out in order to assess the level of funds that are required to meet current and future claims liabilities,??

Answer 1

Reserving

Question 2

Reserving is a key indicator of whether a company is financially solvent.

Answer 2

True

Question 3

What is required for internal and external reporting purposes and for monitoring financial performance?

Answer 3

Claims reserving

Question 4

The adequacy of premium rates, overall financial performance of the company, and the relative profitability of the various classes of business will be assessed by:

Answer 4

claims reserving procedures.

Question 5

Estimating is done on a case-by-case basis, but what does an insurance company estimating process involve?

Answer 5

Insurers place an estimate on each individual claim file, usually split into categories to reflect the sections of the policy being claimed against,
e.g. accidental damage (AD),
third party damage (TPD) and
third party injury (TPI).

Question 6

In household claims the estimate may be allocated AGAINST THE PERIL claimed against,
e.g. escape of water, fire or theft.

Answer 6

True

Question 7

In order to establish the size of reserve that is required:

Answer 7

an allowance is then made for direct expenses and a value is placed on each claim.

Question 8

why is an allowance is made for direct expenses and a value is placed on each claim??

Answer 8

In order to establish the size of reserve that is required.

Question 9

Direct fees example :

Answer 9

Fee charged charged by loss adjuster for using their expertise in establishing a claim.

Question 10

Why are Reserves regularly reviewed?

Answer 10

Ensuring that they continue to reflect the likely cost of claim.

Question 11

There are various methods used to produce a ‘global’ claims reserve, i.e. a reserve covering the whole book of business, but these methods fall outside the scope of this syllabus.

Answer 11

TRUE

BUT check out Reserving part II

Question 12

Who is in involved in the reserving reviews?

Answer 12

Actuaries, claims managers and underwriters.

Question 13

The reserving specialist will require their input on the book of business written and details of any unusual characteristics.

Answer 13

TRUE

Question 14

Actuaries, claims managers and underwriters are involved in the reserving reviews?

Answer 14

TRUE

Question 15

Who will require their input on the book of business written and details of any unusual characteristics.

Answer 15

The reserving specialist

Question 16

What is the objective of claims reserving?

Answer 16

To estimate the future cost of claims.

Question 17

The insurance market and the processing mechanism operating within it involve delays, such as the ones between the:

Answer 17

incident occurring and the notification of that claim to the insurer; and
notification of a claim and the settlement of that claim by the insurer.

Question 18

Insurance company needs to set up reserves for unsettled or unnotified liabilities such as the ones between the :

Answer 18

Incident occurring and the notification of that claim to the insurer and Notification of claims and the settlement of that claim by the insurer.

Question 19

So, there can be delays that the insurance company set up reserving?

Answer 19

True

Question 20

Who is in charge in the outstanding claims reserve which contains all the reserves allocated to each individual claim:

Answer 20

its claims handler.

Question 21

Outstanding claims reserve is the aggregation of individual claim reserves, covering the cost of claims that have been:

Answer 21

incurred and reported to the insurer.

Question 22

As the name incurred but not reported (IBNR) reserve suggests, the claim has been incurred by the insured but has not yet been reported to the insurer:

Answer 22

who consequently knows nothing about it!

Question 23

There is a possibility that the insurer may incur a liability to pay the claim:

Answer 23

TRUE

Question 24

but as the insurer is not aware of the matter it is impossible to reserve for it individually.

Answer 24

TRUE

Question 25

The amount to be reserved to take account of this situation is calculated using various statistical techniques.

Answer 25

TRUE

Question 26

These (various statistical techniques) are based on past experience of claims, in conjunction with:

Answer 26

actuarial modelling, along with a number of other sources of information.

Question 27

actuarial modelling, along with a number of other sources of information, such as:

Answer 27

e.g. legislation, market knowledge and judicial developments.

Question 28

The incurred but not enough reported (IBNER) reserve ?

Answer 28

covers shortfalls in provisions for outstanding claims reserves.

Question 29

The incurred but not enough reported (IBNER) reserve, other than covering shortfalls in provisions for outstanding claims reserves. ?

Answer 29

where amounts reported are understated, or

where the insurer has insufficient information on which to decide what would be adequate reserves.

Question 30

Other reserves , such as?

Answer 30

Equalisation reserves , Catastrophe reserves , Unearned premium reserve and unexpired risk reserve, Provision for claims handling expenses and Re-opened claims reserves .

Question 31

What are Equalisation reserves ?

Answer 31

Are required by law and are designed to smooth fluctuations in loss ratios (i.e. the ratio of premiums to claims) for certain classes of business.

Question 32

What are Catastrophe reserves ?

Answer 32

These are set up to cover a large number of related individual losses: arising from one event (e.g. hurricane)

Question 33

What are Unearned premium reserve and unexpired risk reserve??

Answer 33

The unearned premium reserve is that element of the premium for which insurance cover has not yet been provided. For example, if only six months of a policy period has expired at year end, only half the premium
has been ‘earned’.

An unexpired risk reserve is only needed where a loss is foreseen in relation to the unearned premium reserve.

Question 34

What is Provision for claims handling expenses:

Answer 34

cover the anticipated future costs of settling claims; it includes direct costs (e.g. loss adjusters’ fees) and indirect costs (e.g. office expenses)

Question 35

What is Re-opened claims reserves ?

Answer 35

where the claim is closed but then the underlying circumstances of the claimant deteriorate.
This often occurs with personal injury claims, which have to be re-opened later with a suitable reserve

Question 36

Covers the anticipated future costs of settling claims; it includes direct costs (e.g. loss adjusters’ fees) and indirect costs (e.g. office expenses), is example of which reserve?

Answer 36

Provision for claims handling expenses

Question 37

Is only needed where a loss is foreseen in relation to the unearned premium reserve??

Answer 37

An unexpired risk reserve

Question 38

Element of the premium for which insurance cover has not yet been provided. For example, if only six months of a policy period has expired at year end, only half the premium has been ‘earned’?

Answer 38

Unearned premium reserve

Question 39

Set up to cover a large number of related individual losses: arising from one event (e.g. hurricane), example of which reserve???

Answer 39

Catastrophe reserves

Question 40

Required by law and are designed to smooth fluctuations in loss ratios (i.e. the ratio of premiums to claims) for certain classes of business.

Answer 40

Equalisation reserves

Question 41

What are the reserves that are required by Law or the regulators???

Answer 41

Equalisation reserves, Unearned Premium Reserves, and Catastrophe reserves.

Question 42

What are the reserves that are only required by discretion???

Answer 42

Unexpired Risk Reserves, Provision for claims handling and Re-opened claims reserves….