Reserving in Non-Life Insurance Company April 21 st, 2012
Agenda Reserving Seminar a Types of Reserve b Principles and Method of Reserving c Financial Impact of Reserving & Key Ratio 236 d Reserving Trends in India 2
Slide 2 236 Need to add pramod's slides 20005425, 4/19/2012
Types of Reserve in General Insurance
Typical cash-flow of a General Insurer Policyholder pays premium 1 Shareholders funds Commission paid to agent Company puts premium into unearned premium reserve Company earns premium over term of policy Full premium now earned Company pays claims or creates loss reserves to pay unsettled claims Company pays other business expenses 2 Company pays taxes and fees 3 Underwriting profit or loss Notes 1. The excess of assets over liabilities. 2. Overhead costs rent, salaries, etc. 3. Federal, state, local taxes, licenses, and fees. 4. Includes interest, dividends, rents, and realized capital gains. 5. Costs of operating the company s investment program. 6. If underwriting loss exceeds investment gain, there will be a net operating loss. Premium reserves produce 4 Loss reserves produce 6 Shareholders funds produce Investment income Investment income Investment income Net operating income (or loss) Total Investment income Net investment gain (or loss) Investment expenses 5 Dividends to stakeholders Additions to shareholders surplus to support future growth 4
Types of Reserve Unearned Premium Reserve UPR Case Estimates / Reserve Incurred but not reported IBNR Incurred but not enough reported IBNER Premium Deficiency Reserve PDR Catastrophe Reserve Cat Reserve 5
Life Cycle of a Claim Reserve 6 Accident Date Report Date Event: Status: Accident occurs Pure IBNR Accident reported Claims In Transit 6
Life Cycle of a Claim Reserve 7 Recorded Date Accident entered `1,000 Formula Reserve Formula Reserve Individual reserve established as `10,000 Case Reserve 7
Life Cycle of a Claim Reserve 8 Estimate revised `25,000 Case Reserve Settlement agreed `30,000 Case Reserve Development on known claims 8
Life Cycle of a Claim Reserve 9 Payment sent `30,000 Draft clears ` 0 Case Reserve Claim Closed Complications. Claim re-opens `10,00 Case Reserve Re-opened Claims Reserve 9
Life Cycle of a Claim Reserve 10 Settlement agreed `10,000 Case Reserve Payment sent `10,000 Draft clears ` 0 Case Reserve Claim Closed 10
11 Graphical Representation Claims cycle
Principles and Method of Reserving
Principles Actuarially Sound Based on estimates From reasonable assumptions Using appropriate methods Inherent Uncertainty A range can be actuarially sound True value know only after all claims are settled Purpose of Reserving Relative likelihood of estimates Reporting context Financial Management Pricing 13
Methods of Reserving - UPR Uniform Earning Pattern 1/365 th Method 1/24 th Method 1/8 th Method Marine Insurance Specific Cargo Policies Open policies & Open Covers Uneven Earning Pattern Extended Warranty EAR / CAR 14
UPR calculation for EAR / CAR Policy Characteristics Generally more than One year Policy Term Exposure is steadily increasing More commonly used = 1/365 th Method Important to Understand the risk Exposure 15
16 Example of different UPR methodology
Method of Reserving IBNR / IBNER Data Considerations Homogeneity Credibility Trade-Off between above Few Definitions Loss Development Triangles Loss development factor Other data sources / Proxies 17
Understanding Triangles Cumulative Paid Losses ($000 Omitted) Accident Development Stage in Months Year 12 24 36 48 60 72 2001 3,780 6,671 8,156 9,205 9,990 10,508 2002 4,212 7,541 9,351 10,639 11,536 2003 4,901 8,864 10,987 12,458 2004 5,708 10,268 12,699 2005 6,093 11,172 2006 6,962 18
Loss Development Factor Evaluation Interval in Months Accident 72 to Year 12-24 24-36 36-48 48-60 60-72 Ultimate 2001 1.765 1.223 1.129 1.085 1.052??? 2002 1.790 1.240 1.138 1.084 2003 1.809 1.240 1.134 2004 1.799 1.237 2005 1.834 2006 Sample Calculation for Accident Year 2002: 12-to-24 Months 1.790 = 7,541 / 4,212 From the end of the accident year (at 12 months) to the end of the following year (at 24 months), paid losses for 2002 grew 79%. During the next year (from 24 to 36 months), paid losses experienced an additional 24% growth (or development) and so forth. 19
Estimating Ultimate Loss & IBNR/IBNER Cumulative Paid Losses ($000 Omitted) Accident Cumulative Accident Year Paid as of Year End Year 2001 2002 2003 2004 2005 2006 2001 3,780 6,671 8,156 9,205 9,990 10,508 2002 4,212 7,541 9,351 10,639 11,536 2003 4,901 8,864 10,987 12,458 2004 5,708 10,268 12,699 2005 6,093 11,172 2006 6,962 IBNR/IBNER = Ultimate Losses Paid Claims Case Reserve 20
Estimating Ultimate Loss & IBNR/IBNER Ultimate Losses Minus Paid Losses Minus Case Reserves Ultimate Losses Minus Reported Losses Unpaid Losses Minus Case Reserves 21
Different Methods for Estimating IBNR Different Methods Paid / Incurred Claims Triangles Average Cost per claims B-F Evaluation of Different Methods Which estimate is right? Which is best estimate? Application of underlying assumption Stochastic 22
Method of Reserving - PDR Is sum total of expected net claim costs, related expenses and maintenance costs Exceeding the related premium carried forward to the subsequent accounting periods as reserve for unexpired risk. 23
Method of Reserving - PDR Grouping of Products / LoBs Have the same risk characteristics Asset backing the technical reserves are available for each other 24
Financial Impact of Reserving & Key Ratios
Key Performance Measure LossRatio = NetIncurredLoss NetEarned Pr emium ExpenseRatio = Expenses Commission NetWritten Pr emium SolvencyRatio = ShareholdersFund NetEarned Pr emium CombinedRa tio = LossRatio + ExpenseRatio 26
Ratio Pyramid ROE Combined 100% - X Operating Ratio 1 Solvency Ratio Combined Ratio - Investment Income Ratio Expense Ratio + Loss Ratio Commission & Brokerage Expense Ratio Other Acquisition General Expense + + + Ratio Ratio Tax Incurred Ratio 27 27
Reserving Trends in India
Trends Provision as percentage of NEP has gone up to 72% from 65% in case of public sector companies. For Private sector, provision as percentage of NEP has gone down to 58% in FYE 2010 as compared to 66% in FY2006. Given that the premium rates have witnessed reduction in the range of 20% - 90%, the above trends makes us believe the relaxations in the reserving strength To Under reserve is to under-price the risk Warren Buffett 29
Latest Comparative Line of Business Private Sector But One All Significant Private Sector Public Sector Dec-2011 Mar-2011 Mar-2010 Dec-2011 Mar-2011 Mar-2010 Dec-2011 Mar-2011 Mar-2010 Aviation 7% 10% 15% 12% 8% 2% 32% 24% 23% Engineering 30% 29% 24% 12% 12% 8% 8% 9% 10% Fire 20% 18% 18% 8% 7% 6% 9% 12% 11% Health Insurance 70% 92% 89% 70% 83% 72% 56% 48% 49% Liabilities 119% 136% 90% 108% 129% 88% 22% 26% 19% Marine Cargo 27% 29% 30% 19% 17% 18% 11% 12% 9% Marine Hull 59% 69% 52% 8% 8% 5% 7% 12% 14% Motor 54% 43% 38% 61% 48% 43% 9% 8% 6% Others 74% 74% 69% 43% 36% 31% 18% 26% 24% Workmen Compensation 35% 48% 57% 35% 48% 57% Not Given Not Given Not Given Grand Total 52% 45% 41% 52% 43% 36% 11% 12% 10% 30
Any Questions