Uncovering the Mysteries of the Insurance Cycle. Reserving Cycle: Reserving Cycle:

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1 Uncovering the Mysteries of the Insurance Cycle Jessica Leong, FCAS, FIAA, MAAA Lead Casualty Specialty Actuary Reserving Cycle: What is the Reserving Cycle? Do our estimates take it into account? What can we do about it? Reserving Cycle: What is the Reserving Cycle? Do our estimates take it into account? What can we do about it? 2 1

2 Reserving Cycle 12 3 Reserving Cycle Reserving Cycle

3 Reserving Cycle 48 6 Reserving Cycle 60 7 Reserving Cycle

4 Reserving Cycle 84 9 Reserving Cycle Reserving Cycle

5 Reserving Cycle Reserving Cycle Individual Companies Ultimate Loss Booked Company A beta Reserving Cycle Individual Companies Company B beta

6 (d) / Booked ULR(1) Booked ULR ( 1.25 Reserving Cycle vs Incurred Chainladder Incurred Chainladder Workers Compensation Cycle 15% (d) / Booked ULR(1) Booked ULR ( % 11% 9% 7% 5% 3% Inflatio on % % Workers Compensation Cycle + Medical Inflation (d) / Booked ULR(1) Booked ULR ( Medical Inflation 13% 11% 9% 7% 5% 3% Inflatio on % 17 6

7 Reserving Cycle: What is the Reserving Cycle? Do our estimates take it into account? What can we do about it? Reserving Cycle: What is the Reserving Cycle? Do our estimates take it into account? What can we do about it? 19 Company A Distribution of Homeowners Reserve as of 12/ $45 million, at the 91 st percentile Reserve $m 20 7

8 51 Companies Percentiles Company A 91% Company B 10% Company C 75%.... Company AA 53% Company AB 30% 21 Ideal Histogram of the Percentiles Number of Companies th 20-40th 40-60th 60-80th th Percentiles 22 Homeowners as of 12/ Percentile Histogram Number of Co ompanies th 20-40th 40-60th 60-80th th Percentile 23 8

9 Reserving Cycle 24 Reserving Cycle 25 Homeowners AY, 1997,, 1999,, 2001,, 2003 Percentile Histogram Number of Companies Percentile Buckets 26 9

10 Why are our distributions too narrow? Reserve risk split into two: systemic risk independent risk 27 Why are our distributions too narrow? Reserve risk split into two: systemic risk independent risk Models only cover independent risk, not systemic risk 28 Measuring Independent Risk 29 10

11 Measuring Independent Risk 30 Measuring Independent Risk 31 Measuring Independent Risk 32 11

12 Measuring Independent Risk 33 but not Systemic Risk! Reserving Cycle: What is the Reserving Cycle? Do our estimates take it into account? What can we do about it?

13 Reserving Cycle: What is the Reserving Cycle? Do our estimates take it into account? What can we do about it? 36 What can we do about this? 37 Option

14 Option 1 39 Option 1 40 Option

15 1.40 Is it possible to predict future CPI? 15% % Ultimate Loss Booked % 9% 7% 5% Inflatio on % % Is it possible to predict future CPI? 15% Ultimate Loss Booked Medical CPI 13% 11% 9% 7% 5% Inflatio on % % 43 Option

16 Measuring Independent Risk 45 Measuring Independent Risk 46 Measuring Independent Risk 47 16

17 Measuring Independent + Systemic Risk 48 Measuring Independent + Systemic Risk 49 Measuring Independent + Systemic Risk 50 17

18 Reserve Risk without Systemic Risk Reserve $m 51 Reserve Risk with Systemic Risk Reserve $m 52 Reserve Risk with and without Systemic Risk Reserve $m 53 18

19 Indicated Capital without Systemic Risk $38 $53 $15 Reserve $m 54 Indicated Capital with Systemic Risk $38 $61 $23 50% increase in capital Reserve $m Reserving Cycle: What is the Reserving Cycle? Do our estimates take it into account? What can we do about it? Jessica Leong, FCAS, FIAA, MAAA Lead Casualty Specialty Actuary

20 Reserving Cycle 57 Confidentiality / Disclaimer The document is intended to be used for informational purposes only and solely in connection with a Casualty Actuarial Society presentation. While the information contained herein is based on sources that are believed to be reliable, makes no warranties or representations, express or implied, as to the accuracy, reliability or completeness of this information and it should be understood to be general insurance/reinsurance information only. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such. Please consult your insurance/reinsurance advisors with respect to individual coverage issues. Statements concerning tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal or regulatory advice, which we are not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas. Readers are cautioned not to place undue reliance on any historical, current or forward-looking statements. undertakes no obligation to update or revise publicly any historical, current or forwardlooking statements, whether as a result of new information, research, future events or otherwise. The trademarks and service marks contained herein are the property of their respective owners. 58 (d) / Booked ULR(1) Booked ULR ( Reserving Cycle vs Underwriting Cycle (xho) 1.25 Ultimate Loss Ratio* 115% 105% 95% 85% 75% 65% Ultimate Los ss Ratio % 59 20