Flashcards in Chapter 8 - Claims Reserving Deck (56):
Give 7 reasons why there is uncertainty in setting an appropriate reserve for claims
1. Legislation changes having a retrospective impact on existing claims
2. Future claims payment patterns differing from historical experience
3. Claims such as stress and disease emerging from risks written many years ago
4. Cases of latent exposures such as asbestos (e.g up to 40 years)
5. Outcome of litigation on existing claims
6. Failure to recover reinsurance
7. Unanticipated changes in claims inflation
The claims reserving process is to?
Ensure an appropriate provision is set for the eventual cost of claims arising on policies written
An accurate view on the required level of claims provision is needed to measure...
Changes in the amount to set aside has a direct impact on...
Explain the fundamental accounting concept which is the accruals concept
Transactions are recognised when they occur
When considering which claims should be accounted for in an accounting period, there is a requirement to...
Estimate all claims arising from incidents in the year, whether the claims have been reported or not
If the amount set aside for claims is too little, in laters years...
Company's financial position can be negatively affected
Explain about IBNR, but not calculation
Based on using claims patterns from prior years up to the balance sheet date. These are then used to estimate the number of claims expected to be reported after the balance sheet date with incident dates prior to the balance sheet date.
How is IBNR calculated?
From multiplying the number of such claims by average cost of claims. If claim numbers are stable the IBNR increased by claims inflation each year.
IBNER is concerning what usually and how
Incurred but not enough reported. Liability claims are for example going to be understated, one reason is that it's hard to predict which will develop into high cost claims. Estimates can be made on a portfolio basis, and this is when IBNER is used when referring to these claims.
Unearned premium reserves are examined to test...
That amounts set aside are at least adequate to cover the expected cost of claims.
If an unearned premium reserve is deemed inadequate what will be set up as a liability in the accounts?
An unexpired risk provision
Why do insurance companies and reinsurance companies need to maintain adequate reserves?
To meet their liabilities at any one time
Information on claims is usually gathered by what type of year and why?
Incident year (also called accident year) because premiums are earned up to the last day of the accounting period and for profitability purposes this needs to be matched to incidents that give rise to a claim up to the same day.
The PRA also require claims to be reported by...
Information on claims is generally collected by...
Class of business e.g, property, motor, liability etc
Within each class of business e.g property, claim statistics will be grouped into categories depending on...
How claims develop for each class
In deciding the categories to use in regards to collecting claims information for each class of business, these will be...
- length of tail (being the time from the incident date through to advice and payment)
-expected claims pattern
-expectation of a surplus or deficit in the run off of claims
-average claim values
Why when categorising claims for classes of business e.g motor, would you have split motor injury and motor damage?
Damage can be settled a lot quicker than the injury side of things.
As a rule of thumb, liability claims are separated from...
Property damage claims
Large claims will be extracted from claims statistics and assessed...
For each claim development category for each class of business the following statistics are usually collected by incident year:
- number of claims reported
- number of nil claims
- total value of paid claims
- total value of the outstanding case estimate of claims at the period end
Projections are typically performed from the claims development...
It is common to use a range of ???? When projecting the total cost of claims
Why would a methodology that underestimates the total cost of claims still be of use?
May be used to help set a minimum value in the range of estimates
Claims methodologies that do not take into account an improving trend may be used to set an...
If there are unusual claims trends, analysts will seek explanations from ...
Underwriters or account managers to understand claim development patterns
Give 4 main claim methodologies
1. Projection of paid claims
2. Projection of incurred claims
3. Loss ratio method
Explain the projection of paid claims method
This is the simplest method. Claims given for incident year or report year are analysed to see how they develop to the ultimate value. If subsequent incident or report years can be assumed to follow a similar pattern then we have a simple estimate of the claims. E.g if 3 earlier accident years show that at the end of development year 2 this has proven to be 92% of the claim, then the figure can be grossed up to see 100% of the figure that should be reserved. The figure may have to altered for inflation costs. (These are perhaps best for property)
What is the projection of incurred claims method?
Defined simply as the addition of the paid claims and the case reserves. Brings together the most that is clearly known to date about how the claims are developing on the business in question. Basically looking at what's already been paid and what is still outstanding ( the reserves) this method will also be adjusted for inflation ( likely best for liability )
What are some disadvantages of the projection of incurred claims method?
Settled claims can be reopened, initial reserves may not be that accurate and claims handling procedures may change.
What is the loss ratio method?
Not usually used on its own. Relationship between claims to premiums. By expressing claims as a percentage of premiums. Once payment of claims is complete then ratio can be used with certainty. It is seen as a natural way of summing up the result as a single figure. Problem is that most recent years will not be fully developed so cannot contribute properly to it. 3 years old or more can be used and then applied to the earlier less developed years.
What is the bornhuetter-Ferguson method?
Combination of the loss ratio method and either the paid claims method or incurred claims method. The paid claims or incurred claims help towards knowing what is already know, and then a more general estimator like the loss ratio method is combined to help towards predicting the future. By adding these parts together, it is the most reliable estimate we can get for overall losses and hence for required reserves.
What is the average cost of claims method?
When claim amounts paid or incurred are divided by the relevant number of claims, an average cost per claim results. This average cost can be projected as the claim amounts themselves, and once with a separate projection for the number of claims it will yield the new estimate for the ultimate loss.
What is exposure based method?
Used for long tail liability claims such as latent claims like asbestos, pollution and health hazard exposures where there is high levels of uncertainty.
Ultimately, who is responsible for deciding the amount to set aside for claims?
When deciding the claims reserving policy, this will usually be headed by...
Chief financial officer.
The team preparing the estimates for the claim reserves is likely to be headed by?
Actuary or someone with actuarial skills
How often are claims reviewed?
Monthly for most volatile claims and quarterly for the rest of the portfolio
Who will be involved in meetings regarding the amount to set aside for claims?
Claims reserving specialists, account manager, underwriters, pricing specialists and the person responsible for claims handling. Recommendations will be made to the executive team and the executive team will make recommendations to the board.
The amounts set aside for claims will allow for...
Some companies ???? Long tail claims. If they do this they must...
Discount long tail claims. They must explain this in their policy for discounting claims in the accounts.
What are discounted claims?
Claims where the amount set aside is reduced by the investment income expected to be earned in the future on the investments supporting the claims.
Why do company's employ external actuaries to review the amount set aside for claims on a regular basis?
To increase confidence in the investors and external analysts that the provision is fairly stated.
The accuracy for the amount set aside for claims is likely to be judged by the...
Claims run off
The run off in the year is the incurred cost during the year on the amount set aside for claims at the start ...
Of the year. Hence it will be the opening provision less the closing provision for the same claims adjusted by claims payments made.
Investors and external analysts will form an opinion on the adequacy of the amount to set aside for claims in the latest set of accounts based on the...
Run-off of the most recent years
If the run-off of a company has been adverse in previous years, analysts such as rating agencies may believe...
The amount set aside for claims is inadequate
If there is a favourable run off, it is not unusual to expect the amount set aside for claims in the latest accounts will ...
Also produce favourable run-off in the future
On what is the IBNR calculation based?
Extrapolation of the pattern of claims reported in prior years and up to the balance sheet date. The prior year patterns are used to estimate the number of claims expected to be reported after the balance sheet date with incident dates prior to the balance sheet date. The total value of IBNR is calculated from multiplying the number of such claims by the average cost of claims.
State briefly what an unexpired risk provision is
An amount set up as a liability in the accounts if an assessment of the unearned premium reserve is deemed to be inadequate to cover the expected cost of claims
What are the factors that will be considered when deciding how to categorise claims statistics for the purposes of determining the appropriate amount to set aside for claims?
Regards will be paid to;
-length of tail (being the time from the incident date through to advice and payment)
-expected claims pattern
-expectation of a surplus or deficit in the run off of claims
-average claim values
True or false. The standard projection of paid claims method would be suitable for estimating the total claims on a household property account?
True or false. The standard inflation adjusted projection of incurred claims method would be suitable for estimating the total claims on a commercial motor account, where there have been recent changes to the claims handling process to reflect changes in legislation.
False because the reserves are likely going to be affected in line with the changes in legislation.
True or false. The loss ratio method uses the most recent incident year to establish the loss ratio to be projected forwards.
False. The loss ratio method looks at older years and uses this information in regards to less developed newer years.