chapter 8 Flashcards
(28 cards)
Who is ultimately responsible for deciding the claims reserve amount?
The board of the company, with recommendations from the executive team and specialists.
Who typically leads the team responsible for estimating claims reserves?
An actuary or someone with actuarial skills.
How often are claims reserves reviewed?
Monthly for the most volatile claims.
Quarterly for the rest of the portfolio.
Why must reserves account for future inflation?
Because claims will be paid in the future, not at the balance sheet date, so the estimated cost should reflect future payment values.
What is claims discounting?
A method where long-tail claim reserves are reduced by expected investment income on supporting assets.
What does IFRS 17 require for claims reserving?
Reserves must be at best estimate of future payments.
An explicit risk adjustment is required.
Discounting applies only if material.
Why do companies use external actuaries to review reserves?
To increase investor confidence and ensure provisions are fairly stated.
What is claims run-off?
A measure of reserve accuracy, comparing:
Opening reserves - Closing reserves + Claims paid
Why do rating agencies review past run-offs?
To judge whether reserves in the latest accounts are adequate.
What can cause favourable run-offs?
Prudent reserving practices.
Claims handling improvements (e.g., reducing indemnity costs).
Portfolio improvements (better underwriting).
What role does the Chief Financial Officer (CFO) play in claims reserving?
The CFO is responsible for overseeing the reserving process and ensuring compliance with accounting standards.
What does a negative (adverse) run-off indicate?
The original reserve was too low, and additional funds were needed to settle claims.
What does a positive (favourable) run-off indicate?
The original reserve was higher than necessary, meaning fewer funds were needed to settle claims.
Why might a company choose to discount its claims reserves?
To reflect expected investment returns on assets held to pay future claims.
Why is an accurate view of claims provisions essential?
It helps measure underwriting profitability and supports effective business planning.
What is IBNER (Incurred But Not Enough Reported)?
Claims that have been reported, but their estimated costs are expected to increase over time.
What data is needed for reserving different categories of claims?
Number of reported claims
Number of nil claims
Total paid claim values
Total outstanding case estimates
Name three uncertainties affecting claim reserves.
Legal changes, claims inflation, Ogden rate fluctuations.
What is IBNER?
Incurred But Not Enough Reported – refers to underestimated reported claims.
What does IBNR stand for and why is it important?
Incurred But Not Reported – estimates unreported claims from past incidents.
How does the Ogden rate impact claims?
A lower rate increases compensation payouts; higher rate reduces them.
Which method is best for recent years with little claim data?
Loss ratio method or Bornhuetter-Ferguson.
Who is ultimately responsible for deciding how much to set aside for insurance claims?
The board of directors.
What role do external actuaries play in the reserving process?
They review reserves to provide confidence to regulators, investors, and analysts.
