Quick Ones Flashcards
Commutation factor and the types of reinsurance contracts it applies to:
Premium to terminate a reinsurance contract. It covers all existing claims and all future claims in the cover period.
Applicable to all reinsurance contract types.
Stop loss cover
Is used to provide cover when there might be accumulations of risk. It is very expensive and it is only sensible for an insurer whose claims outcomes are very uncertain.
Profit margin, solvency margin, return on capital
insurance profit / net earned premiums
free reserves / net written premiums
profit after tax / free reserves at start of year
remember that free reserves = 3rd component on the balance sheet ie not assets or liabilities (share capital + share premium + profit and loss account)
when analysing accounts, what to mention about ratios calculated
that the ratios are heavily dependent on the valuation basis of the accounts
What does book price mean and how do you use it?
The book price is the insurer/reinsurer’s theoretical price. This price is usually used in credibility methods. (1-Z) is the credibility allocated to the book price.
the other rate is usually a IBC rate.
Pricing methods and the main classes of business they are used for:
- Burn cost (effective and indexed)
- Freq*Sev : individually trended losses = commercial business (apply individual programs)
- GLMs: classes where there is a lot of competition, and many predictable factors influencing amount of risk = motor and home business (personal + commercial)
- OLCs: where there are no limits to the amount of loss the directly insured can suffer = liability classes (casualty insurance) ILFs can be used when there is little to no data.
ALAE
Allocated loss adjusted expenses: expenses that can be allocated to a particular loss.
Not a big deal for non liability classes but can be very significant for say liability classes like casualty insurance: court inflation, lawyer costs etc.
The traditional method of calculating the expected cost of claims (9)
- Collect relevant data, including past exposure data and claims arising from the exposure.
- Adjust the data to make it more relevant e.g. if policy conditions have changed.
- Group data into risk groups (if there are significant differences between groups).
- Select the most appropriate rating model for the specific case.
- Analyse the data (e.g. to pick up trends in the ratio of claims to exposure over time).
- Set assumptions required by the model or process.
- Test the assumptions for goodness of fit or likelihood probability.
- Run the model or process to arrive at an estimate of future claims costs.
- Perform sensitivity and scenario testing, or apply other methods, to check the
validity of the estimate.
The difference between an exposure measure and a risk factor:
An exposure measure is the basic unit measure that insurers use to measure the amount of risk a risk poses for the cover period.
The risk factor is a factor that is expected (from data and experience) to effect the level of risk that a policy poses.
Investment strategy (risk appetite), what to consider: (4,many)
- Liabilities (nature, term, currency, uncertainty, discounting)
- Assets (existing portfolio, classes’ returns, free reserves vs liabs, non-investable funds, economic outlook)
- External (solvency req, regulatory constraints, competition, legal constraints)
- Internal (company spec objectives)
When asked about scenario testing a practical example:
Consider all the assumptions made to the reserve/SCR/premium etc and flex each of the assumptions.
3 key things to decide on when capital modelling
to do this 3 things need to be decided before starting:
- Risk profile = defined by the risks being modeled and the key outcome that defines success or failure
- Risk measure = the link between the outcome and the capital required to achieve that outcome
- Risk tolerance = the confidence interval stated in the risk measure
Economic Capital
Is the amount of capital the insurer deems is appropriate to hold given its assets, liabilities and its business objectives. It is determined by considering:
- the risk profile individual assets and liabilities in its portfolio
- the correlations of risks
- the level of credit deterioration that it would like to withstand
Also, remember that MVA -MVL = AVAILABLE capital and this amount is compared to economic capital requirement to see how much free capital there is.
Capital modelling: Insurance Risk
Model 2 parts: Res Risk + UW Risk
Res risk
- model ult costs of expired business under scenarios and compare with reserves currently held
UW Risk
- model prms and clms over period (1yr probably) looking forward [clms: att, lar freqsev, cat proprietary, prms mix and volumes]
- get a dist of underwriting result
- extract ‘worse case scenario’ or 1 in 200 yr from there and hold that amount of capital
Capital modelling: Market Risk
Market risk is a result of the value of assets decreasing relative to value of liabilities due to economic factors such as: interest rates, inflation, exchange rates.
This risk is heavily impacted by how closely an insurer matches its assets with liabilities.
How to model:
- decide how to group assets (equities, bonds etc)
- then apply stresses and calculate the charges over all assets (eg interestrates down by 5%) [difference between normal value and stressed value]
- OR use ESG models to model asset values (NB to calibrate correctly)
[say the val of assets go down from 25m to 22m then the market risk charge is 3m.]
Capital modelling: Credit Risk (1st part)
Credit risk is a result of uncertainty around creditors being able to repay monies owed. This can be split into 2: investment credit risk and counter party credit risk.
Modelling investment credit risk:
- take asset proceeds at various times and multiply by prob of default and size of default using credit rating of party involved
- overlay this with a model that predicts party’s credit rating at that time
- to be fancy you can consider the correlations between parties
[get the charge as the sum of all values that you might not receive in a 1 in 200 yr event, given transitions of the parties between credit states]
Capital modelling: Credit Risk (2nd part)
Credit risk is a result of uncertainty around creditors being able to repay monies owed. This can be split into 2: investment credit risk and counter party credit risk.
Modelling counterparty risk:
- centered around reinsurers defaulting
- model past claims, future claims and CAT scenarios with probabilities of default and sizes of default
- using credit rating agency matrices
Capital modelling: Operational Risk
It is the risk that gets modeled last. It would be a charge for all risks not covered else where. Risks due to uncertainty in internal processes, fraud etc.
Use risk registers to calculate a capital charge. Probably quite subjective.
Capital modelling: Group risk
ERM is best.
Heads of Damage
Refers to bodily injury (motor third party liability).
It refers to the components that the court awards compensation for separately. 3 components: loss of income, medical costs, compensation for pain and suffering.
How to use a stochastic ALM model to model reinsurance and investment strategy together to improve solvency position:
- Define objectives, period, risk tolerance, risk measure, whether to include new business.
- Select model parameters: ie distributions for liabilities (ATT, LAR, CAT), return distributions for assets and correlations, including premium rates, expenses, volumes, taxes.
- Project and measure outputs: start with current conditions, work through combinations, and pick optimal one.
- Test model output selected: varying input parameters.
Professional Indemnity
Indemnifies the insured against the legal liability resulting from negligence in the provision of a service
Environmental Indemnity
Indemnifies the insured against the legal liability to compensate third parties for the for death, personal injury or damage to their property as a result of unintentional pollution for which the insured is deemed responsible
Capital Terms: Available Capital Free reserves Free Capital Required capital Solvency margin Technical Reserves
Available Capital = MVA - MVL
Free reserves = Assets - Liabilities
Free Capital = Available capital - Required Capital
Required capital can be Regulatory capital OR Economic Capital. Solvency measured by comparing Available capital with Required Capital in practice.
Solvency margin = Free reserves
Technical reserves = reserves to meet liabs of existing policyholders (past and future exposure)
Key factors to consider when allocating a capital requirement: (5)
- For what purpose the capital is allocated? (performance measurement, pricing, or business planning)
- Decide on desirable properties of results: stability over time, easy to understand.
- Practically some methods may be too difficult eg Shapeley method if there are many classes.
- There may not be a single method that is suitable for all purposes of allocating capital.
- Consider what was done previously.
Allocating capital methods (1st):
Percentile method: scholastically simulate the capital requirement and pick one simulation. Use its compilation to allocate the capital (ie UW result for each class of business)
Allocating capital methods (2nd):
Marginal capital method: consider how much additional capital needs to be held as each element is added to the business (heavily dependent on order)
Allocating capital methods (3rd):
Shapley method: marginal capital method allowing for all combinations of order averaging.
Allocating capital methods (4th):
Proportion method: allocate economic capital to each class of business in proportion to its contribution to the risk metric on a standalone basis. Ie calc indiv capital requirement and aggregate all and calc proportion. Then cal agg capital requirement allowing for diversification and apply proportions.
Factors that effect level of risk and uncertainty (HNN FAV DCCC)
Homogeneity of risks Non-independence of risks Number of claims Fraudulent claims Accumulations - single event causes many claims Variability of experience Delay patterns Changing risks - changing address etc. Claim cost Claim inflation HNN FAV DCCC
Financial (finite risk) reinsurance products
Financial quota share (F) Industry loss warrant (I) Spread loss cover (S) Time and distance policies (T) FIST
Liability insurance products
Motor Third Party Liability (M) Marine and aviation liability (M) Directors and Officers liability (D) Employers' Liability (E) Environmental liability (E) Public liability (P) Product liability (P) Professional indemnity (P)
MM DEEPPP
Property Damage Insurance Products
Land vehicles Marine and aviation vehicles Buildings (Commercial and Residential Property) Construction and engineering Goods in Transit Moveable property (contents) LMB CGM
Financial loss insurance products
Fidelity guarantee
Creditors insurance (Protection against debtors defaulting)
Credit Insurance (Protection against loss of income)
Business interruption cover
Legal expense cover
FCC BL
Reasons for calculating reserves
To determine liabilities to be shown in published accounts (P)
Determine reasonableness and adequacy of reserves booked by insurer (A)
To value the company for merger or acquisition (V)
To transfer a book of business (T)
To determine liabilities to be shown in internal management accounts, business plans and budgets (I)
To determine tax liability (T)
To determine liabilities for accounts for supervision of solvency (S)
To negotiate a commutation for the buyer or seller (C)
To test adequacy of case estimates (A)
To assess performance of business and give indication of profitability of written book (P)
Estimate claims cost incurred as intermediate step in rating process (C)
PAV TITS CAP C
Assumptions needed for a capital model
RI share of ultimate claims/ RI bad debt Exhaustion of reinsurance and reinsurer Downgrade assumptions Ultimate gross claims Ceded premiums Expenses
Dividends
Operational losses
Gross written premium
Catastrophe claims Reserve movements (gross) by COB Inflation Tax Investment returns, split by asset class Claims payment profiles REDUCE DOG CRITIC
General advantages and disadvantages to be categorized for reinsurance reserving methods
- add to automated reserving process
- easy to understand and apply
- what happens when changes in reinsurance program
- assess distribution of recoveries
- adjust to allow for CATs
- specific features of contracts
Ratios and values to calculate: CEC PIP RSA
Claim ratio Expense ratio Combined ratio Percentage Reinsured Investment return Profit Margin Return on Capital Solvency margin Assets to Liabilities
Revaluation reserve on balance sheet
Accounts for unrealized capital gains or losses.
Capital Model Big Question Order of Things
Dane has consistently continued sensing religious dudes’ persuing doctorin constantly.
Data How to model Claims Experience Correlations Sensitivity testing Reinsurance Diversification Practical considerations Documentation Control cycle - monitor
