Chapter 17: Reinsurance reserving

Question 1

Data issues for inwards reinsurance reserving:

Answer 1

• Claim reporting delays are longer
• There is a greater tendency for claims to develop upwards
• Exposure can be very heterogenous
• Data can be sparse
• Benchmarks are often less relevant
• There can be IT constraints
• There is more opportunity to group data differently

Question 2

Main methods of reserving for outwards reinsurance:

Answer 2

• Use data gross and net of reinsurance, then find the difference
• Perform standard triangulation techniques directly on reinsurance data alone
• Adjust gross data using a broad-brush approach
• Case-by-case approach only on the largest losses
• Develop all individual losses then apply reinsurance to each one
• Derive a reserve distribution net of reinsurance

Question 3

Factors to consider when grouping data for inwards reinsurance:

Answer 3

• Type of cover (quota share, surplus, excess of loss)
• Type of contract (facultative, treaty, finite, non-traditional)
• Basis for cover (losses occurring, risk-attaching, claims-made)
• Line of business
• Homogeneity of data
• Credibility of data
• Length of origin and development periods
• Claim type
• Type of cedant

Question 4

The suitability of an outward reinsurance reserving method can be assessed by considering:

Answer 4

• Its simplicity (e.g. how easily can it be added to an automated reserving process?)
• The consistency of gross and net estimates
• Whether it can be used to assess the volatility of net outcomes or reinsurance recoveries, e.g. by using stochastic techniques such as bootstrapping
• Compliance with regulation (e.g. SAM)
• How the method copes with:
  o Different types of reinsurance, e.g. proportional, non-proportional, working layer, high layer
  o Sparse data
  o Changes in reinsurance programme or panel over time
  o Reinsurance recoveries on unreported claims
  o Catastrophes and large claims, e.g. whether it allows for claims that breach the vertical cover
  o Aggregate features like profit commissions, and loss-sensitive contracts like stop loss cover
  o Interactions between covers, e.g. whole account covers
• Whether the method can be used to investigate:
  o Capital requirements and enterprise risk management
  o Credit risk