1
Q
Reinsurance Loss Reserving Problems
A
- Claim report lags to reinsurers are generally longer, especially for casualty excess losses
- There is a persistent upward development of most claim reserves
- Claims reporting patterns differ greatly by reinsurance line, by type of contract, by specific contract terms, by cedant and possibly by intermediary
- Because of the heterogeneity stated in Problem 3, industry stats are not very useful
- The reports the reinsurer receives may be lacking important information
- Because of the heterogeneity in coverage and reporting requirements, reinsurers often ahve data coding and IT problems
- The size of an adequate loss reserve compared to surplus is greater for a reinsurer
2
Q
Components of a Reinsurers Loss Reserves
A
- Case reserves reported by the ceding companies (excess-individual, proportional-bulk)
- Reinsurer additional reserves on individual claims. (Reviews individual claims and specifies additional if needed)
- Actuarial estimate of future development on components 1 and 2 (IBNER)
- Actuarial estimate of pure IBNR
- Discount for future investment income (certain types of claims such as PIP or WC)
- Risk Load (Adverse deviation loading is used to keep reserves at a conservative level, some actuaries load this in implicity through conservative assumptions, while others account for it explicity)
3
Q
Steps in Setting Reinsurance Loss Reserve
A
- Partition the reinsurance portfolio into reasonably homogenous exposure groups that are relatively consistent over time with respect to mix of business. (LOB, Contract type, Reinsurance cover, attachement point, intermediary)
- Analyze the historical development patters. If possible, consider individual case reserve development and the emergence iof IBNR claims separately.
- Estimate the future development. If possible, estimate the bulk reserves for IBNER and pure IBNR separately. (patterns over long period times. Do in 3rd/4th quarter)
- Monitor and test predictions
4
Q
Reinsurance Reserving Problem #1
Longer Report Lags
A
- Claim must first be perceived as reportable
- Claim must filter through:
- Cedant’s reporting system
- Cedant’s reinsurance accounting
- An intermediary
- Reinsurer books the claim
- Makes its way to reinurers claim system - Cedant may undervalue the claim
- Extreme delays in mass torts
5
Q
Reinsurance Reserving Problem #2
Persistent upward develop of reserves
A
- Economic and social inflation
- Tendency to underestimate the loss adjustment expenses
- Tendency of claims to be reserved at modal value (most popular)
6
Q
Reinsurance Reserving Problem #3
Reporting Patterns not Homogenous
A
- Assumed exposure is heterogeneous-reserving methods assume homogeneity
- Volatile data due to low frequency, long reporting lags
- Reinsurer know much less about exposure than primary
7
Q
Reinsurance Reserving Problem #4
Industry Statistics Unhelpful
A
- Schedule P is not comparable across reinsurers
- ISO development stats not directly applicable
- Heterogeneity of profile
- Every 2 years Reinsurance Association of America publishes summary of casualty excess reinsurance loss development statistics
- Most reinsurers’ loss reserves are aggregated into one LOB
8
Q
Reinsurance Reserving Problem #5
Reports are Lacking Important Info
A
- Proportional covers require only summary info.
- May only have UW Year or Calendar Year.
- For most treaties, premium and losses are reported quarterly, in arrears. Thus, always missing a quarter of premium.
- It’s desirable to have a professional reinsurance claims staff to advise cedant’s staff.
- In loss reserving, it’s useful to have an exposure measure to compare loss estimates against.
- For most treaties, there tends to be an added IBNR exposure for both premiums losses.
9
Q
Reinsurance Reserving Problem #6
Data Coding and IT Systems Problems
A
- Business has grown in size and complexity faster than data systems could handle
- Heterogeneity in coverage and reporting requirements
10
Q
Resinsurance Reserving Problem #7
Adequate Loss Reserve Large Compared to Surplus
A
- Management problem (as opposed to technical)
- Actuary may struggle in convincing management to post the appropriate reserve
- US Tax Reform Act of 1986
11
Q
U.S. Tax Reform Act of 1986
A
- Requires the discounting of loss reserves for income tax purposes.
- Now that insurers must discount loss reserves, they no longer have an implicit risk margin built into their loss reserve estimates.
- This buffer flows into profits and is taxed sooner, decreasing assets and increasing companies’ risk level
12
Q
Claim Report and Payment Lags
A
- When analyzing patterns, look at the inverse of the chain-ladder development factors. (lags)
- Create a graph with time on x-axis and lag percentage on y-axis
- Graph resembles a probability cdf and can be interpreted as probability that a particualr claims dollar will be reported ot the reinsurer by time t
- Stats can be calculated from this curve
13
Q
Methods for Short-Tailed Exposure Categories
A
- Exposure for which losses are reproted and settled quickly
- Treaty prop proportional, treaty prop catastrophe, treaty prop excess, facultative property
- Method 1: Set IBNR equal to some percentage of the latest year EP
- Method 2: Reserve up to a selected loss ratio (good for new LOBs), where the selected loss ratio is larger than the one computed from reported non-cat claims
- If losses summarized by UW year, then percentage estimates should be used to allocate losses to true accident years to avoid overstating AY loss development
14
Q
Methods for Medium-Tailed Exposure Categories
A
- Any exposure for which claims are almost completely settled w/in 5 years and with avg agg claims dollar report lag of one to two years
- Consists of Treaty prop excess higher layers, construction risks, surety
- Method 1: Standard CL Method
- Advantage is that it strongly correlates future development with an overall lag pattern
- Disadvantage is that IBNR is so correlated with reported claims that estimates not very credible for recent immature years
- Can use pd instead of reported to increase stability
15
Q
Method for Long-Tailed Exposure Categories
A
- Any exposure for which avg agg claims dollar report lag is over two years and whose claims are not settled for many years
- Consists of Treaty casualty excess, treaty casualty proportional, asbestos, pollution
- Asbestos, pollution, mass tort analyzed separately
- No claims for long time periods followed by huge
- Cannot use traditional reserving methods
- Must rely on complex models
- Method 1: Standard CL method
- Method 2: BF method
- correlates to future development for each year
- dependent on selected LR is disadvantage
- Method 3: Stanard Buhlmann (Cape Cod)
- Key innovation is that the ultimate ELR for all years combined is estimated from overall rptd claims experience
- disadvantage of SB method is that the IBNR by yr is dependent upon rate-level adjusted prem
- Method 4: Simple Credibility IBNR estimate
- Method 5: Other Credibility procedures
- Method 6: Alternative estimation methodologies
16
Q
Stanard Buhlmann Method
A
- SBELR = SB estimate of ELR
- SBIBNR (k) = SB IBNR estimate, year K
- RRL (k) = reported reinsurance loss, year k
- ARPP (k) = adjusted risk pure premium, year k
- Rlag(k) = aggregate claim dollar report lag, year k
- SBELR = ΣRRL(k)/Σ[ARPP(k)*Rlag(k)]
- SBIBNR(k) = SBELR * ARPP(k)*(1-Rlag(k))
- ARPP(k) * Rlag(k) is used up premium
17
Q
Simple Credibility IBNR Estimate (Method 4)
A
- When we don’t have complete confidence in rate-level prem adjustment, we can weight CL and SB
- Gives more weight to SB for immature years
- GIves more weight to CL for older years
- CredIBNR(k) = credibility IBNR for year k
- CLIBNR(k) = CL IBNR for year k
- CF = credibility factor (between 0 and 1)
- Z(k) = CF*Rlag(k)
- CredIBNR(k) = Z(k) * CLIBNR(k) + (1-Z(k)) * SBIBNR (k)
18
Q
Other credibility procedures (Method 5)
A
- Weight together IBNR estimates based on reproted and paid claims
- Rptd claims include case reserves that vary over time depending on the claims adjuster
- Pd claims tend to be more stable
- Weights could be based on relative claim report and payment lags for each year
- Use ELR inherent in underlying pricing of the exposure in lieu of or in conjunction with the SB ELR
- We call these a priori ELR estimates and can use them as our BF ELR estimates. These can then be used to calculate BF IBNR
- Weight this a priori IBNR against the CL IBNR
19
Q
Alternative estimation methodologies (Method 6)
A
- Stochastic Reserving Models
- Gives us more info and provide insight not available with traditional methods
- They tend to be complicated and black boxish
- Claim Count/Claim Severity Model
- An advantage is that we can build models for various lag distributions and then connect them
20
Q
Monitoring and Testing Predictions
A
- Monitoring and testing quarterly run off against predictions provides early warning of problems
- For short and medium tailed lines, past AY run-off can be compared with previous year-end reported open reserves and IBNR reserves
- More sophistication for long tailed lines
- If more claims than expected:
- Is it purely random?
- Was beginning IBNR too small?
- Were lags too short?
- Continue to monitor and see if it persists
Exam 7
flashcards
Decks in class (6)
# Cards
