2 - Reserving overview

Question 1

Uses of reserving exercise

Answer 1

• To set the provisions to be booked onto the balance sheet of the company
• Assist the management in setting business plan
• Valuing the business for sale (M&A)
• Identify areas of the business that underperform or are underpriced
• Identify trends in claims handling processes
• Identify key areas of uncertainty within the portfolio of business written
• Starting point to determine capital requirements of the company
• Parameterise the reserve risk distribution for the capital model

Question 2

Actual vs expected considerations:

Answer 2

• Analyse paid claims vs expected
• Average new claim size
• Development of existing claims

Quantify the changes in ultimate claims due to:

• Experience being different to expected
• Changes to actuarial assumption
• Changes in methodology
• Changes to the historical data
• Foreign exchange movements

–> If reserves are set on a quarterly basis, its good practice to consider the trends of emerging experience over longer periods e.g. yearly

Question 3

Claim cohorts

Answer 3

• Accident year
• Underwriting year
• Reporting year
• -> in practice a quarter or a month can be used e.g. seasonal trends motor insurance
• -> KEY: Need to use consistent bases for both claims and exposure to risk (eg. premium)