Insurance Flashcards
What is the purpose of insurance companies
The purpose of general insurers is twofold: to meet a need and to make money.
what is General insurance?
General insurance is any type of insurance that is not life insurance. It encompasses a wide range of types of insurance
Insurance companies themselves are subject to?
Policyholders reduce their uncertainty by passing risks to insurance companies. Insurance companies themselves are subject to risk and uncertainty.
Actuaries have traditionally played which roles in general insurance?
Actuaries have traditionally played roles in reserving and setting premiums but have also moved into much wider areas within general insurance. PB page 46
How is Insurers’ profitability is constrained
Insurers’ profitability is constrained by how much the customer is willing to pay, statutory controls on insurers, and competition from other insurance companies.
what are the Major uncertainties in insurance
Major uncertainties in insurance center around how many claims will occur and how much the insurer will have to pay to settle them. Other risks to the insurer include failure to recover fixed expenses, failure of other parties, falls in asset values, and the insurance cycle.
what will influence the insurer’s ability to cope with risks
The size of free reserves will influence the insurer’s ability to cope with risks. Reinsurance cover and investment policy also play a role in the insurer’s ability to cope with risks.
Technical reserves are held to cover the liabilities related to policies that have already been written and may also be called
insurance reserves or insurance provisions.
Which two main categories of liabilities do technical reserves cover:
(a) past liabilities in respect of accidents or losses that have occurred prior to the accounting date and (b) future liabilities in respect of future insurance cover from policies for which premiums have already been received.
Claim characteristics refer to
Claim characteristics refer to the ways in which and the speed with which claims originate, are reported, are settled, and are sometimes reopened.
Reporting delays are the time from
when the event occurs through to the time that the insurance company is notified of the event.
Settlement delays are the period between
Settlement delays are the period between notification to the company and the payment of the claim.
Difference between Short tail claims and long-tail claims
Short tail claims are generally reported and settled quickly by the insurer, while long tail claims take a long time for the insurer to settle.
The outstanding claims reserve is the first of the two main components of technical reserves, and it covers
the estimated reserves needed to settle the claims that the company knows about at the accounting date, incurred but not reported (IBNR) claims, expected increases (or decreases) in estimates for reported claims, additional reserves for claims that might require further payments, and claims handling expenses.
Why might the latest balance sheet of an insurance company (as given in the company
accounts) not give a true indication of the financial strength of the company?
Some judgement is required in setting values for assets and liabilities. So, for example,
when assessing the financial strength of the company a prudent (not realistic) basis may
be used.
Also, the balance sheet is a snapshot at a given moment. Circumstances may have
changed since the date of the balance sheet.
The outstanding claims reserve is one of the two main components of
technical reserves in insurance companies.
The outstanding claims reserve can be split into up to five separate components, which is?
including reserve for outstanding reported claims, reserve for incurred but not reported (IBNR) claims, reserve for incurred but not enough reported (IBNER), reserve for re-opened claims, and reserve for claims handling expenses.
Insurance companies should hold reserves to cover all of these items, even if the reserves are not shown split into these categories.
The reserve for outstanding reported claims is the estimated reserve needed to settle the claims that
that the company knows about at the accounting date.
The reserve for IBNR claims is needed to cover
The reserve for IBNR claims is needed to cover the claim payments for incidents which have happened but have not been reported to the insurance company.
The reserve for IBNER claims is needed to cover
The reserve for IBNER claims is needed to cover expected increases or decreases in estimates for reported claims.
The reserve for re-opened claims is an additional reserve that may be explicitly shown to allow for
The reserve for re-opened claims is an additional reserve that may be explicitly shown to allow for claims that the insurance company treats as being fully settled but might one day require further payments.
The reserve for claims handling expenses is held separately to cover additional expenses incurred
in settling claims in each of the above classes.
The need for outstanding claims reserves arises from
arises from reporting and settlement delays.
which two approaches are used by insurers to estimate the liability for outstanding claims.
Case estimates and statistical techniques
Individual estimates cannot be used for IBNR claims because
because the insurer does not yet know about the claim.
Statistical techniques are more useful for classes of insurance where there are
lots of claims and stability in the numbers and amounts of claims.
There is great uncertainty about the payments an insurer will need to make in respect of outstanding claims, which leads to
uncertainty in profitability and other aspects of the insurer that rely upon estimates for outstanding claims.
Long-tail classes have larger reserves for outstanding claims in relation to premium income, leading to
greater uncertainty.
The technical reserves can be split into two main components. What are they?
Outstanding claims and unexpired risks.
The outstanding claims reserves might be split into two, or perhaps even five
components. What are they?
Outstanding reported and IBNR
or
outstanding reported, IBNR, IBNER re-opened claims and claims handling
expenses.
ST7 Q1.5
Class 1 must be a short-tail class of business (because total claims reserves are
relatively low), with little in the way of reporting delays, eg household contents.
Class 2 is a long-tail class (because the total claims reserves are a much bigger
proportion of premiums), with extensive reporting delays. A class such as employers’
liability is possible, where some illnesses may not emerge for many years which will
make IBNR significant
Technical reserves in insurance include both reserves for claim events that
have already occurred and reserves for policies with unexpired exposure.
The reserves for unexpired exposure are determined by holding a portion of premiums in respect of that exposure, which is known
the Unearned Premium Reserve (UPR).
The UPR is the premiums that have been received which have not yet been
earned
The straight averaging approach to determine the UPR has some weaknesses as it does
not consider that risk and expenses may not be incurred evenly over the period of cover.
Acquisition costs incurred by the insurer at the start of a policy, such as commission paid to the sales outlet, should be allowed for
when setting the reserves in respect of unexpired exposure.
The UPR can be calculated using a formula that takes into account
UPR= proportion of risk unexpired X ( premium - acquisition costs),
The UPR calculated in this way is the net UPR, which does not allow for the acquisition expenses.
The URR would need to cover all the claims and expenses that are expected to be incurred
in the future by the unexpired portion of existing policies.
The URR would need to cover all the claims and expenses that are expected to be incurred
in the future by the unexpired portion of existing policies.
The UPR is generally expected to be bigger than the URR, as premiums are expected
to be big enough to cover the claims and expenses, which is what a profit-seeking insurer would generally want.
In cases where the UPR is greater than the URR, there is no need for the insurer to
keep reserves greater than the UPR for unexpired policies. However, the full UPR is generally held due to the accounting accruals principle.
Holding a reserve equal to the UPR for unexpired policies may result in
in some profit emerging over the coming months from these policies.
However, for policies where the URR is greater than the UPR, the insurer needs to
hold a reserve greater than the UPR to cover the possible future claim events.
These additional reserves are known (again, quite logically) as the additional unexpired
risk reserves (AURR), or the additional reserves (or provision) for unexpired risks.
It should not surprise you that
AURR =URR - UPR (minimum of zero)
State in layman’s terms the key difference between the UPR and the URR. Which of
the two calculations, UPR or URR, is open to most uncertainty?
Whereas UPR is the portion of premium set aside for unexpired risks, the URR is our
estimate of how much we need to cover the claims and expenses from unexpired risks.
The URR is probably open to more uncertainty. (We know what premiums we charged,
but we don’t know what the claims experience will be next year.)
In addition to reserves for outstanding claims and unexpired policies, which other two types of technical reserves can insurance companies may hold
claims equalisation reserves and catastrophe reserves.
Claims equalisation reserves (CER) are used to smooth the profits of an insurance company from year to year. In a good year, profits are transferred to _______, and in a bad year, funds are transferred from the ____ to ________the assessment of profit.
Claims equalisation reserves (CER) are used to smooth the profits of an insurance company from year to year. In a good year, profits are transferred to the CER, and in a bad year, funds are transferred from the CER to increase the assessment of profit.
Insurance companies hold ____ to reduce the volatility of profits over time, as insurance business can be highly volatile due to large fluctuations in _________.
Insurance companies hold CERs to reduce the volatility of profits over time, as insurance business can be highly volatile due to large fluctuations in claims.
______________ are used to cover the losses that might arise from a catastrophic event. These events can be natural or man-made, such as floods, earthquakes, explosions, or oil spillages.
Catastrophe reserves
Catastrophe reserves are contingency reserves held in case of an exceptional event, and insurers do not expect to use them for paying ?
claims.
Holding a large explicit catastrophe reserve can reduce the need for an insurer to hold __________________, which are the excess of assets over liabilities
extensive free reserves
