Chapter 8 Flashcards
(20 cards)
What is the main objective of the claims reserving process in insurance?
A. To reduce premium levels
B. To provide a competitive advantage
C. To ensure sufficient funds are held for future claims payments
D. To simplify underwriting
Answer: C
Explanation: The claims reserving process ensures that insurers make adequate provision for the eventual cost of claims arising from policies, some of which may not be settled for many years
Which of the following would NOT typically influence the uncertainty of claims reserves?
A. Future litigation outcomes
B. Legislative changes with retrospective impact
C. Stock market performance
D. Changes in claims inflation
Answer: C
Explanation: While many factors influence reserve uncertainty, stock market performance is not a direct factor unless it impacts investment returns used in discounting reserves
Q: What does the term IBNR stand for in claims reserving?
A. Incurred but not reported
B. Insurer-based nominal reserves
C. Initial basic net reserves
D. Insurance-based net risk
Answer: A
Explanation: IBNR (incurred but not reported) refers to estimated claims arising from incidents that occurred before the reporting date but have not yet been reported
Q: What is the main purpose of categorising claims by class of business and development characteristics?
A. To allocate expenses
B. To speed up claims handling
C. To better estimate reserve needs
D. To calculate insurance premiums
Answer: C
Explanation: Grouping claims helps insurers analyse development patterns and estimate reserves more accurately
Q: Which method of reserve estimation combines expected loss ratios with reported claims to form a projection?
A. Loss adjustment method
B. Ogden method
C. Bornhuetter-Ferguson method
D. Aggregate loss method
Answer: C
Explanation: The Bornhuetter-Ferguson method blends prior assumptions (e.g. loss ratios) with actual claims experience to estimate reserves
Q: What is the Ogden rate used for in claims reserving?
A. To estimate investment income
B. To discount lump sum personal injury settlements
C. To project property claim developments
D. To forecast reinsurance recoveries
Answer: B
Explanation: The Ogden rate is used by UK courts to calculate the present value of future care and earnings in personal injury settlements
Flashcard 7
Q: A negative Ogden rate results in:
A. Lower lump sum payments
B. Higher lump sum payments
C. More reinsurance recoveries
D. Lower reserve requirements
Answer: B
Explanation: A lower (or negative) Ogden rate increases the size of lump sum settlements because the assumed investment return is lower
Flashcard 8
Q: What does IBNER refer to in reserving?
A. Incurred but not enough reserved
B. Insurance-based nominal expense reserves
C. Incurred but not efficiently reported
D. Internal basis of net expense reporting
Answer: C
Explanation: IBNER stands for incurred but not enough reported, referring to underestimations in case reserves of reported claims
Flashcard 9
Q: What does a “favourable claims run-off” indicate?
A. Claims are increasing over time
B. Reserves were set too low
C. Actual claim costs were lower than expected
D. The company reduced premiums too much
Answer: C
Explanation: A favourable run-off suggests that the claims provision was more than adequate, and actual incurred claims were less than reserved
Flashcard 10
Q: Who is ultimately responsible for approving the claims reserving policy in an insurer?
A. Underwriting manager
B. Actuarial team
C. Board of directors
D. Claims handlers
Answer: C
Explanation: The board typically sets the reserving policy and ensures that it reflects a prudent approach to setting aside funds for claims
Q: Why is accurate claims reserving particularly important for long-tail lines of business?
A. Premiums are collected over many years
B. Claims are paid immediately
C. Claims are settled over a long period
D. Reinsurance is not available
Answer: C
Explanation: Long-tail business involves claims that may take many years to be reported and settled, so reserving must anticipate long-term costs
Flashcard 12
Q: What is the key risk in under-reserving claims liabilities?
A. Paying too much tax
B. Declaring excessive profits
C. Declining investment returns
D. Increasing premium income
Answer: B
Explanation: If reserves are underestimated, reported profits may be artificially inflated, potentially leading to inadequate capital and regulatory issues
Flashcard 13
Q: What is a common approach used to model development patterns for claims reserving?
A. Linear regression
B. Chain ladder method
C. Claims inflation tracking
D. Portfolio theory
Answer: B
Explanation: The chain ladder method estimates future claims based on historical development trends, particularly useful for IBNR calculations
Flashcard 14
Q: Which class of insurance typically exhibits short-tail claims development?
A. Employers’ liability
B. Motor insurance
C. Medical malpractice
D. Professional indemnity
Answer: B
Explanation: Motor insurance claims are generally reported and settled quickly, so they are considered short-tail
Flashcard 15
Q: What reserve type would account for a reported claim that has yet to be fully settled?
A. IBNR
B. Unearned premium reserve
C. Case reserve
D. Risk margin
Answer: C
Explanation: A case reserve is held for known claims where the full settlement amount is not yet finalised
Flashcard 16
Q: What is meant by “claims triangulation”?
A. Grouping claims by region
B. An actuarial pricing technique
C. Analysis of claims by accident year, development year, and reporting year
D. Estimating reserves for reinsurance
Answer: C
Explanation: Claims triangulation helps to visualise and analyse the development of claims over time to inform reserving decisions
Flashcard 17
Q: How does claims inflation affect the reserving process?
A. It simplifies forecasting
B. It is ignored in long-tail classes
C. It increases the reserves required
D. It only applies to property insurance
Answer: C
Explanation: Claims inflation, including general and superimposed inflation (e.g. legal costs), increases future claims costs, requiring higher reserves
Flashcard 18
Q: What is superimposed inflation in the context of claims reserving?
A. Increase in inflation due to currency devaluation
B. Unexpected inflation from social, legal or regulatory changes
C. The inflation caused by mispriced policies
D. Premium inflation from broker commissions
Answer: B
Explanation: Superimposed inflation arises from factors beyond normal price inflation, such as increased court awards or regulatory reforms
Flashcard 19
Q: Which regulatory requirement influences insurers to hold sufficient reserves?
A. The FCA’s Treating Customers Fairly initiative
B. The ABI guidelines on policy wordings
C. Solvency II
D. Consumer Duty
Answer: C
Explanation: Under Solvency II, insurers must maintain sufficient technical provisions, including prudent claims reserves, to meet obligations to policyholders
Flashcard 20
Q: What key principle must actuaries follow when advising on claims reserves?
A. Aggressiveness in discounting reserves
B. Financial optimisation
C. Prudence and professionalism
D. Maximisation of underwriting surplus
Answer: C
Explanation: Actuaries must act with professionalism and prudence, especially due to the uncertainty and judgement involved in claims reserving
