Reserving Flashcards
What is the best way to group claims data for calculating the IBNR for the different reinsurance basis? (risks attaching and losses occuring)
Risk attaching : claims data shoul be grouped by underwriting period
Losses occurring : Accident year/quarter/half year
Suggest alternate appropraches if the chain ladder is considered inappropriate
BF or Cape Cod if development factors are unstable
BCL for older years and BF for last 3 years
A tail factor should be added if there is development after the expected run-off
Where Cape Cod and BF may not be used due to data being thin/volatile, benchmark development factors may be used
The FD is not happy with the increase in IBNR and suggests calculating reserves at an aggregate level for the business. Discuss the appropriateness of this (4)
- Combining classes will provide diversification and generally result in lower reserves
- This is not good practice for the following reasons:
- 1 The RI structures differ by line of business
- 2 If a line of business is sold or put in run-off the reserves for that line should be determined and sold separately. This may reduce the remaining reserves to an inadequate level
- 3 Calculating reserves separately provides a level of prudence that will help withstand adverse development
- 4 Reserving accuracy and credibility are improved by sub-dividing experience into groups exhibiting similar characteristics
- 5 Different classes of business have different development patterns. If classes are combined and the proportions between classes changes, the run-off development will be distorted
- 6 Liability business usually presents a bigger risk and has more tail development than property therefor should be separated
When is discounting allowed and what factors should be considered when applying discounting?
- DMT > 4
- Discount rate should not be greater than the rate of return on assets held
- The rate of claim settlement should be estimated from adequate data
List the factors that should be considered to arrive at an appropriate discount rate
- Expected future investment returns on a portfolio of assets backing the liabilities
- The rate of return on specific matching assets
- Yields on fixed interest securities
- An allowance for tax
- Allowance for default risk
- Consistency with inflation assumptions
Explain how you would incorporate the following into a reserving exercise:
a. Discounting
b. CHE
a. Reserves are usually calculated on an undiscounted basis and then the effect of discounting is applied by:
* determining future cashflows by calculating development factors based on paid triangles to get a prediction of future cashflows
* assume the ultimates are as per those arrived at from the incurred triangles
b. Claims run-off expenses can be calculated based on the following factors:
* the number of claims staff required to settle outstanding claims
* the average cost to company of each staff member
* project this into the future
What are the factors to consider when assessing the likelihood of large individual claims in liability classes of business?
1) Is bodily injury covered
2) is the future expectation of the repayment amount uncertain/high/for an extended period of time
3) has there been past exposure with large losses
4) is the class prone to CATs
Explain the considerations that need to be taken into account when separating claims between large and attritional for reserving purposes (large listed insurer writing PL & CL) - 10marks
- If the claims are thought to be completely once-off or CAT claims and not likely to repeat in future exclude completely and account for them elsewhere
- If the claims are likely to occur occasionally include only the part of the cost of such claims corresponding to the probability of their recurrence and the length of the periods being analyzed and projected (i.e. return period)
- PL short tail classes may include larger risks and the potential for ILC, however it would not be expected that a single large claim would influence the results so much as a large volume of claims - the threshold could therefore differ by line of business
- The treatment of excesses/deductibles should be consistent over the period of consideration
- Consider the definition of a large claim e.g. where policies have multiple perils
- Having a limited number of large claims might mean there is little data on which to base a separate allowance for large claims but not excluding them could mean distortion/unstable experience
- Claims at the start of development have higher levels of uncertainty and could develop into large claims
- Large claims are often subject to limited data and can occur in the tail of the development where their relative importance becomes greater
- Judgement is needed to consider the cut off point between large and attritional claims
- Consider splitting large and attritional on a gross and net of reinsurance basis
Test for sufficiency of OCR
Components required to test sufficiency:
1. OCR at start of the period
2. Claims paid during the period for claims reported until the beginning of the period
3. OCR at the end of the period
Result of the test is 1-2-3
If result < 0 then OCR at start of period was insufficient
Very high positive amounts could be a sign of over conservatism, which may cause excessive prudence which is not allowed under IFRS
Test for sufficiency of IBNR
Components required to test sufficiency:
1. IBNR at the start of the period
2. Claims paid during the period for claims incurred until the beginning of the period (but reported during the period)
3. OCR at the end of the period for claims incurred until the beginning of the period (but reported during the period)
4. IBNR at the end of the period for claims incurred until the beginning of the period
Result of the rest is 1-2-3-4
If result <0 then the provision at the start of the period was insufficient
Very high positive amounts may be a sign of conservatism which leads to excessive prudence which is not allowed under IFRS
