Triangulation methods incomplete

Question 1

What does triangulation mean?

Answer 1

• To review the development of claims/premiums/other quantities over time
• This contrasts to aggregating all the claims/premiums/other quantities for a given period of time

Question 2

Earned reserves defn.

Answer 2

Reserves held to cover the expected cost of all claims that have occurred whether they have been reported to the insurer or not

• Earned premiums is a starting point for finding earned reserves

Question 3

Unearned premium reserves defn.

Answer 3

• Proportion of paid premiums kept aside to pay the cost of claims likely to emerge on unearned exposures
• If these reserves are seen as insufficient, additional unexpired risk reserves (AURR) may be added to them

Question 4

Reserving exercise done on an accident year basis produces what reserves?

Answer 4

Earned Reserves

• Because it considers accident years and paid claims in years after
• Resulting reserves are for claims that need to be paid plus those that have not been reported yet (IBNER + Pure IBNR)

Question 5

Reserving exercise done on an underwriting year basis produces what reserves?

Answer 5

Earned reserves + Unearned reserves

Explanation:
Reserves meant to cover the cost of claims that have already occurred (both reported/not reported) + those likely to arise on the unearned exposure for unexpired policies @ the end of the year which were written in the U/W year of interest

Question 6

Best estimate reserves

Answer 6

• Generally understood as the mean of the dbn of ALL POSSIBLE OUTCOMES of unpaid liabilities
• Possible alternatives may be:
  o The median
  o The mode
  o Estimate w particular prob. of exceeding the outcomes

Question 7

ALL POSSIBLE OUTCOMES in context of unpaid liabilities meaning:

Answer 7

• Includes all reasonably foreseeable events based on exposures of the insurer
• Under solvency II, it also covers new claim types that the insurer has never experienced before called “events not in the data” or ENIDs

Question 8

Describe the dbn. shape of unpaid liabilities? Why does it look like that?

Answer 8

• Distribution is typically positively skewed
• This is due to high severity low frequency claims experienced in GI
• This results in the MEAN being larger than the median
• This makes the MEAN a more prudent estimate of best reserves

Question 9

What does the timing of reserving exercises depend on?

Answer 9

• The needs of the business
  o Estimate reserves quarterly & review assumptions annually unless experience indicates need to review assumptions for frequently (COVID)
• Capacity of the reserving team
• Usually aligned to when the accounts are published (annual or bi-annual reviews)

Question 10

Uses of reserving exercises within the company:

Answer 10

MAIN:
- To set provisions to be booked on the balance sheet of the insurance company

OTHER:

• Assist business in setting BUSINESS PLAN
• Identify key areas of UNCERTAINTY in portfolio of business (volatile reserves)
• Valuing the business for purchase or sale (M&A)
• PARAMETERISE the reserve risk dbn used for capital modelling
• Identify key areas of business that are underperforming or underpriced (SLACKING)
• Identify trend in CLAIMS HANDLING PRACTICES (slowing down or speeding up depending on run-off time)
• Starting point to determine CAPITAL REQUIREMENTS for insurance risk

BUMPS CC

Question 11

What is Actual/Expected (A/E) analysis about?

Answer 11

- Comparing the actual experience against the expected for quantities such as:
       o Paid/incurred claims 
       o Number of claims
       o Average new claim size
       o Development of existing claims

• Quantification of the differences in A&E ie. what proportion of the difference observed in A&E was due to:
  o Experience being different to expected
  o Changes to actuarial assumptions/methodology
  o Changes to historical data (error/reopened claims)
  o Foreign exchange movements

Question 12

What may cause differences in actual vs expected experience?

Answer 12

o Experience being different to expected
o Changes to actuarial assumptions/methodology
o Changes to historical data (error/reopened claims)
o Foreign exchange movements

Question 13

What are the main claim cohorts to consider when reserving?

Answer 13

• Accident year
• Underwriting year
• Reporting year

** In reality we may actually use accident quarter or month

Question 14

What consideration is most important to make when using a claim cohort of a particular type for analysis of claims development?

Answer 14

• Consistent bases should be used for both claims and the exposure to risk
• Exposure and claims being analysed must be from the same analysis period and claims must include both settled/unsettled

Question 15

What are two possible definitions of incurred claims?

Answer 15

• Paid claims plus estimates for outstanding reported claims e.g. case estimates
• Paid claims plus all estimates for outstanding claims (including IBNR loading)

Question 16

Development period defn.

Answer 16

• This is the period or frequency at which each claim cohort is tracked over time e.g. yearly, quarterly, monthly
• Usually quarterly or monthly
  o Management report: usually quarterly
• Does NOT need to be the same as cohort period

Question 17

Accident year claim cohorts description:

Answer 17

• Claims are grouped according to the year in which the claim event occurred
• IBNR, reopened claims & recoveries will be allocated to the original accident year cohort in which they occurred
• Projection of future claims development (reported or paid) should allow for IBNR claims, reopenings & recoveries belonging to the cohort
• Exposure base used is earned premiums

Question 18

Advantage & disadvantage of accident year cohort:

Answer 18

Adv.
- All claims stem from the same exposure cohort => claims will have usually been subject to the same risk environment BUT claims arise from policies that were underwritten under different rating & policy terms

• Accident year corresponds w accounting year => able to compare the actual experience for the year w what was booked in the accounts

Dis.

• Full number & amount claims in the cohort is unknown until the last claim is reported & settled
• Date of loss is not always known e.g. subsidence or asbestos for employers liability -> very gradual

Question 19

Reporting year cohort description:

Answer 19

• Claims grouped according to the year they were reported to insurer/reinsurer regardless of the original period of claim event or inception
• Reopened claims should be allocated with care depending on the situation
• No natural exposure base, usually average premium or current year’s premiums are used as proxies

Question 20

Advantages & disadvantages of reporting year:

Answer 20

Adv.
- No further claims added to the cohort after the end of the reporting period -> able to assess the delay before reliable estimates can be observed for notified claims

Dis.

• No allowance for IBNR -> separate allowance for IBNR needed
• Claims come from several different exposure periods eg. volume of business, cover applying & claim settlement patterns
• Does not pick up on changes in exposure or risk profile

Question 21

Underwriting year claim cohort description:

Answer 21

• Claims grouped according to the year in which the policy covering the claim was incepted regardless of when the claims were incurred
• IBNR claims, recoveries & reopenings are automatically included provided they are all allocated to the correct U/W year

Question 22

Advantages & disadvantages of underwriting year cohort:

Answer 22

Adv.

• Can track total outcome of policies written in each year
• Claims subject to the same set of premium rates test the adequacy of premiums
• Terms, rates & conditions are normally more stable

Dis.
- It will take more than one year before the claims in the U/W year cohort are run-off

Question 23

Why may some classes of business use shorter or longer development periods for cohorts? e.g. quarter, month

Answer 23

• Longer development periods usually more stable
• > Development may be volatile, we use long dev. periods and use linear interpolation to obtain required granularity level
• Shorter development periods (monthly) allow us to understand trends at different stages of development
  -> Observe seasonal trends for products
  o Offered on a seasonal basis eg. travel insurance for summer vacations
  o That incur claims more heavily in certain seasons
  -> Shorter development periods may make it difficult to identify bigger picture trends
  o May need to apply judgment to smooth results for analysis

Question 24

How to prioritise reserving work and considerations to make for various business classes when working on reserving:

Answer 24

• Focus on the more material groups/classes (in terms of size & uncertainty)
  o Any significant issues can be identified earlier rather than later

CONSIDERATIONS:

• Materiality also affects the selection of methodology
  o Obtain more accurate projection for material tasks
• Classes w small premiums/past claims may actually have large underlying exposures
  o These classes need more analysis than suspected
• Certain classes are tough to project using standard actuarial approaches e.g. Excess treaty for liability classes w high attachment levels have lack of data, longer reporting delay/settlement period
  o Such classes result in no loss or large loss
  o Use freq-severity analysis or exposure based method

** freq-severity analysis: Set a dbn which models severity of claims which varies w freq. and decide at which point the particular class is represented on the dbn curve

** exposure based method: Use an exposure benchmark (internal or external) and adjust the benchmark for our own portfolio

Question 25

Considerations for data heterogeneity:

Answer 25

• Need high quality data (always important)
• Different needs in terms of quantity & type of data:
  o If data is needed on big picture basis -> publicly available statutory returns & published accounts may suffice
  o Reserving needs more detailed data
• Always balance homogeneity & credibility

Question 26

Challenges presented by data heterogeneity:

Answer 26

• Management might want results on a product type, scheme, dbn channel or even individual broker (finer level of detail) =>
  o This goes against grouping data for required homogeneity
  o Time consuming => insufficient analysis of data & overly-mechanical approach to meet deadlines
• Hence reserving is done at a more desired aggregated level
  o Then allocation approach used to align IBNR against required level of granularity
• If the data is impossible to subdivide into homogeneous groups:
  o Ensure the mix of diff. subdivisions within the data is reasonably stable through time for stable aggregate development pattern

Question 27

How should large losses and non-standard risks be analysed?

Answer 27

• They should be analysed separately from attritional claims
  o They may develop faster than attritional claims e.g. due to catastrophe losses get extra attention from loss adjustors & p/hs
  o They may develop slower than attritional claims due to court disputes
• In early stages of development, credibility-based approaches used (there is very little info available)
  o A benchmark may be used to estimate ultimate claims
• As more info emerges, usual exposure based & claims development methods are used to find ultimate claims
  o Large claims are projected from the date of actual loss and not the start of the origin period when using claim development method
  o Exposure based method has two approaches, bottom up and top down
• Need to decide whether to cap losses or not
  o May cap if we decide claims above a certain amount are 1 in 200 year events (don’t need to reserve for it under Solvency II)
  o Need to adjust cap amounts for inflation

Question 28

Large losses exposure based methods: Bottom up

Answer 28

Bottom up
- Project the losses at policy level first & sum up losses to get overall reserves
- U/W staff/Claims staff estimate the likelihood of each policy being exposed to the loss event considering:
o Dates
o Perils covered
o Location

• If likely, claims expert estimates claim size of the
  policy considering:
  o Size of loss in relation to excesses & limits
• Binding authority business (sold & signed by brokers) usually provides limited info on underlying exposures hence leading to underestimation

Question 29

Large losses exposure based methods: Top down

Answer 29

• Estimate the total market loss first
  o For coinsurance: total mkt loss = sum of provisions of each coinsurer (w diff views/risk appetites)
• Then allocate the loss to each class/policy group based on terms of policy, excesses & limits