Signing Actuaries Forum 7 th November 2017 Catherine Scullion and Taraash Gautam, Lloyd s
Agenda Current Lloyd s work Oversight and market trends 2016 YE SAO Feedback 2017 YE SAOs Summary 2
Reserving matters Largest: Item on the balance sheet Single cause of historic failures in US P&C industry Cause of Central Fund hits (even post Equitas) Contributor to underwriting results since 2004 Key linkage with capital and pricing Subject to regulator and rating agent scrutiny Lloyd's Asset Stack Technical provisions FAL Central Signing Actuaries are a key part of oversight 3
Casualty reserves You knew this was coming 4
Casualty Reserves What we have learnt Thematic reviews are useful But it is too easy for Syndicates to think that market issues don t apply to them Specifics are important More targeted questions approaching this year-end Some granularity inconsistency but the broad conclusions are relevant The levels of reserve sign-off need to provide robust challenge Signing Actuaries NEDs Lloyd s requirements need to stand firmly behind these MS9 updates to require particular board scrutiny on use of assumptions with an unproven track record SAO results to be considered in reserve setting Consistent communication from Lloyd s at a variety of levels 5
Wide range of oversight metrics and processes employed at Lloyd s Top down Qualitative: Market level issues and PMD/claims monitoring Quantitative: Market level projections, allocation to syndicate Syndicate level reserve adequacy Quantitative: Quarterly movements, large losses, benchmark levels Qualitative: SAO and AFR reporting; Minimum standards compliance SAO: Statement of Actuarial Opinion; AFR: Actuarial Function Report Bottom Up 6
Oversight top down Thematic reviews Cyber Motor Ogden Casualty recent years Syndicate allocations Allocate surplus to syndicate/class year Adjust for Reserve strength Compare to held and best estimate 7
NED Training Focus on Reserve materiality by class Links between pricing and reserving Trends over time but also included: Actual versus expected is this reflected in estimates? Independent sign off processes SAOs Uncertainty in assumptions Margins only count them once! Slides available on Lloyd s Valuation of Liabilities page 8
Significant exposures to long-tailed lines 100% 90% 80% 70% Accident & Health 60% 50% 40% 3 4 5 Aviation Casualty FinPro Casualty Other Casualty Treaty Energy 30% Marine Property (D&F) 20% Property Treaty 10% 6 Specialty Other 0% Premium 2016 Reserves (OS + IBNR) Casualty classes reserves being longer-tailed are disproportionate to premium volumes 9
History tells us plans (and reserves) are usually wrong 10
History tells us plans (and reserves) are usually wrong 9 pts WARNING : The scale is large 11
MI Business planning assumptions For years of account early in development actuarial methods need an assumption on expected performance of the business Often based on business planning Particularly material for Casualty lines (where early experience is minimal) Picture 2017 year-end Business plan 2015 64% 2016 62% 2017 60% 2018? Reduction justified in business planning. Class focuses on niche lines to get rate increases Reduction justified in business planning. Class is marginal and subject to significant reunderwriting 12
MI - Another A V E: Bridging analysis for market shows lower 2014 ULR This is the gap we asked the market to bridge 2012 GGULR (2012 y/e) AvE during 2013 Change in basis during 2013 2012 GGULR (2013 y/e) AvE during 2014 Change in basis during 2014 2012 GGULR (2014 y/e) 2013 GGULR (2013 y/e) AvE during 2014 Change in basis during 2014 2013 GGULR (2014 y/e) 2014 GGULR (2014 y/e) 13
MI - Explained by rate improvements exceeding inflation, and underwriter actions 2012 GGULR (2012 y/e) AvE during 2013 Change in basis during 2013 2012 GGULR (2013 y/e) AvE during 2014 Change in basis during 2014 2012 GGULR (2014 y/e) 2013 GGULR (2013 y/e) AvE during 2014 Change in basis during 2014 2013 GGULR (2014 y/e) 2014 GGULR (2014 y/e) 14
MI Estimates over time How wrong we ve been in the past is a guide to where we should be now! 15
MI Business planning assumptions Business plan One year later Two years later Three years later 2015 64% 66% 68% 68% 2016 62% 65% 67% 2017 60% 66% 2018? Business performance is adverse compared to plan This is the progression the reserving exercise needs to explain Business mix/focus and underwriting actions are not having the expected effect Credit for these actions should not be taken in reserving assumptions unless there is strong reasoning to support their affect Questions that should be answered: How have business planning assumptions been used in reserving work? How has performance compared to plan? 16
MI Business planning assumptions If a plan has required aspirational/unproven assumptions on change the suitability of these for reserving should be considered separately and in context of latest position of recent years Latest position 2015 68% 2016 67% 2017 66% 2018 60% 2018 based on plan assumption, not historical outcome. Not realistic given actual performance of other years. 17
Oversight top down Thematic reviews Casualty recent years Cyber Motor - Ogden Syndicate allocations Allocate surplus to syndicate/class year Adjust for Reserve strength Compare to held and best estimate 18
Signing Actuary's 2016 YE (Loss Ratio) Reserve Oversight What to expect More detailed discussion on assumptions and movements Should these have been anticipated based on existing feedback loops? Explicit identification and explanation of any change in reserving basis 200.0% 180.0% 160.0% 140.0% 120.0% Signing Actuary's 2016YE loss ratio versus minimum expected given most recent AvE Selected ULR higher than AvE suggested No expectation that any assumptions are provided/approved by Lloyd s Targeted NED focus Consistency of basis, especially in light of adverse experience Access to actuarial 100.0% 80.0% 60.0% 40.0% 20.0% Selected ULR lower than AvE suggested 0.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 160.0% 180.0% 200.0% AvE + Signing Actuary's 2015YE (Loss Ratio) 19
Reserve Oversight Business planning and reserving We ve said this a lot of times We still get questions Let s try something different You re feeling a bit under the weather today and go to the doctor tomorrow You have a chest infection so she gives you some antibiotics A few months later you re on a quiet night out to celebrate SAO report submissions (incorporating all Lloyd s feedback) You fall down the steps of Jamie s Wine Bar and the next day have some trouble moving your arm You could go to the doctor but you have some leftover antibiotics If something works once, it doesn t mean it can be repurposed! If a plan has required aspirational/unproven assumptions on change, the suitability of these for reserving should be considered separately and in context of latest position of recent years 20
Agenda Current Lloyd s work Oversight and market trends 2016 YE SAO Feedback 2017 YE SAOs Summary 21
2016 YE SAOs Start in the usual place 22
2016 YE SAOs Different trends across the range 23
2016 YE SAOs And report areas More excellent scores, more meets requirements Unacceptable is just that, and will be returned 24
2016 SAOs and SAO reports Overall: consistent, high standard of SAO reports Scores of poor will be addressed with the Signing Actuary Pro-activity expected with scores of poor First year that SPAs have been reviewed These have some particular feedback points Third year that feedback is provided for one-third of reports Order so far will not necessarily be followed in next cycle Ad-hoc reviews of Syndicates are undertaken whenever information is relevant All reviewed for any reserving concerns 25
2016 YE Reports Qualitative feedback What we said last year all still applies Highlight syndicate specific considerations Draw attention to key assumptions/uncertainty Comment on how experience has been responded to Does not need to be exhaustive, needs to be explanative We expect you to be particularly interested in deteriorations Links between methods used Informed use of benchmarks 26
2016 YE Reports Qualitative feedback What we didn t mean Highlight syndicate specific considerations Draw attention to key assumptions/uncertainty Put Key Assumptions in an unreferenced appendix Comment on how experience has been responded to Does not need to be exhaustive, needs to be explanative We expect you to be particularly interested in deteriorations Exhaustive detail on the claims incurred, not the why Links between methods used Informed use of benchmarks More detailed descriptions of methods, more general descriptions of uncertainty 27
2016 YE Reports - SPAs First year included in three year review cycle, scores (at times much) lower than average SPAs Standalone reports need to cover specifics Carve-outs need to be thought about E.g. Data consistency checks Is a separate report optimal VoL now clarifies this is not required Either combined standalone: Material to SPA/host Clear description of SPA operation Specific considerations/uncertainties for SPA 28
Agenda Current Lloyd s work Oversight and market trends 2016 YE SAO Feedback 2017 YE SAOs Summary 29
Some old ranges (To avoid a lot of emails) Year of Account Market Average 25th Percentile 75th Percentile 2009 & prior 1.5% 0.5% 1.7% 2010 1.2% 0.6% 1.7% 2011 1.9% 0.6% 2.0% 2012 1.3% 0.6% 1.9% 2013 1.3% 0.6% 1.8% 2014 1.3% 0.9% 1.8% 2015 1.3% 0.6% 1.8% 2016 1.3% 0.6% 1.7% Overall 1.4% 0.7% 1.7% Understanding relative position is more important than being at a certain point in the range movements will be questioned 30
And some new ones SAO sign-off on this item for 2017 year-end 31
2017 YE VoL New in 2017 Net of reinsurance profit in unearned premium Net of reinsurance profit in unearned provisions limited to percentage provided by signatory Potential impact on QSR submission limited to Signing Actuary s estimate Applied in aggregate (across years of account) Cannot be offset against margin on earned claims Premium to be considered is the net net UPR on a GAAP basis ENIDs and unincepted business not in scope Proportion consistent for mid-year submissions Get in touch if you anticipate this will cause an issue All of this is similar to existing use of earned margin 32
2017 YE VoL New in 2017 - FAQs Q:Is this valid given Solvency II premium treatment? A:It does not involve Solvency II premium. Q:Can we offset any unearned load with an earned margin increase A:This is visible to us and if submitted in this way we d expect it to have been visible, reasoned and signed off by your board 33
2017 YE VoL Unearned profit example (QSR 210) QSR line item millions Elimination of 100% unearned premium reserve (UPR) requirement (net of RI UPR) (line 2) 10 Elimination of deferred acquisition cost (DAC) (net of RI DAC) (line 3) (3) Net premium provision - net future claims cost incepted (including ALAE and ULAE) (new line 8) (6) Additional expenses not included under UK GAAP (line 10) (1) Split of previous line 8 which included incepted and unincepted ULAE on premium provision should not be included within this line SAO Sign Off net net 1 + (line 8/ (line 2 + line3) 1 + (6) / ( 10 + (3) ) = 14% Adjust at source Use Other Adjustments Line Provide a comment 34
2017 YE VoL Other updates Life format and timing to be consistent with non-life Valuation in accordance with UK GAAP (and FRS 103) Opinions using VoL templates Opinion and report deadlines No change to opinion wordings Report copies: one paper and one electronic required Template updates to add clarity Evidence of consideration of Signing Actuary appointment (rotation) USTF opinions will require a Practising Certificate from 2018YE 35
2017 YE VoL Ogden Lloyd s will not prescribe an approach or rate to use We will collect information and may provide challenge Position will be reviewed if there is a change in rate Approach taken should be clearly communicated and justified Legislation on process of future rate-setting has been drafted Subject to pre-legislative scrutiny by Justice Committee last week Requires Government to legislate to be in force Once in force, timescales and process for review are set Note: Legislation does provide for the possibility of multiple discount rates 36
Large loss wordings We had gotten used to saying historic lows 2015 Year End 2016 Year End Event Wording 3 Wording 4 Wording 3 Wording 4 Ogden rate change 0 0 6 1 Other 6 0 7 0 WTC 2 0 2 0 Hurricane Sandy 1 0 1 0 Aggregated Wording 0 1 1 0 Total 9 1 17 1 37
Large loss wordings - Reminder Arose after WTC If Signing Actuaries need to provide information on material uncertainty Which may otherwise have resulted in difficulty providing an unqualified opinion Allow Lloyd s to understand uncertainties to the market as a whole Wordings provide a structure for the application of judgement: They do not replace it! Resources: IFoA large loss advisory note (WTC WP Paper) GIRO presentations following KRW 38
Large loss wordings - Reminder WORDING 3 The company/syndicate has material exposure to the Large Loss. This increases the uncertainty of the syndicate s total reserves, but does not increase that uncertainty [in an adverse direction] significantly beyond the normal range of uncertainty for insurance liabilities at this stage of development. WORDING 4 The syndicate has material exposure to the Large Loss. The ultimate amounts of these claims are subject to a great deal of uncertainty which, combined with their total size, increases the level of uncertainty for the total reserves of the company/syndicate significantly beyond the normal range of uncertainty for insurance liabilities at this stage of development. We require quantified justification of the level of uncertainty to be provided along with these wordings 39
Large loss wordings What we d like to see Justification Net reserve movement expected in a realistic adverse scenario How this scenario has been determined and quantified Range of scenarios, if relevant/informative Clarity Choice of wording (no hybrids) Year of account clearly identified Aggregation Materiality may vary with this Should be considered if this is an appropriate level to consider the uncertainty Proportionality Use where uncertainty is material Other uncertainties have a place elsewhere in the report They are not a catch-all 40
Large loss wordings What we wouldn t like to see Ranges which are meaninglessly narrow or wide Unquantifiable No quantification for Syndicate exposure Just benchmarks/market considerations Maximum possible loss only (if not relevant) Aggregate wordings without clearly identifying the losses that have been aggregated Covered in margin Specific quantification of best estimate and margin Especially when adopting estimates 41
Large loss wordings Natural catastrophe ultimate development is another feedback loop 42
2017 YE Technical and Professional standards TASs 100 and 200 in force and applicable to SAOs Judgement Data Assumptions Models Communication We expect you to be aware and compliant with relevant professional standards 43
2017 YE Technical and Professional standards Which of the following are relevant to SAO work? APS X1 APS X2 APS X3 APS G2 44
2017 YE Technical and Professional standards Which of the following are relevant to SAO work? APS X1 Applying standards to actuarial work APS X2 Review of actuarial work APS X3 The Actuary as an expert in legal proceedings APS G2 Actuarial reporting for Lloyd s Syndicates Writing US business 45
2017 YE Technical and Professional standards APS X2: Which of the following are required to be considered when assessing the extent of appropriate work review: A:Complexity B:Public Confidence C:Regulator expectation 1. B and C 2. All of the above 3. A and B 46
2017 YE Technical and Professional standards APS X2: Which of the following are required to be considered when assessing the extent of appropriate work review: A:Complexity B:Public Confidence C:Regulator expectation 1. B and C 2. All of the above 3. A and B 3.: Regulator expectation not explicitly outlined, though may be a factor if they are an intended user of the report 47
2017 YE - SAO Submission Dates Submission Deadline US Trust Fund SAOs 14 February 2018 Worldwide SAOs 15 February 2018 SAO Template 16 February 2018 SAO Reports 29 March 2018 Please submit two copies of the SAO report One of which must be a hard copy, one electronic WW SAOs and Reports to Catherine Scullion, Market Reserving and Capital, Lloyd s, One Lime Street, EC3M 7HA Submit electronic copies to SAOReports@lloyds.com 48
Agenda Current Lloyd s work Oversight and market trends 2016 YE SAO Feedback 2017 YE SAOs Summary 49
Summary Signing Actuaries are a key function for reserve oversight Expect more specific discussions Quality of the 2016 year-end SAOs continues to be high Still room for improvement Extension to use of 2017 year-end SAO work Unearned provisions All Signing Actuaries should be clear on the Professional and Technical Standards Not relating to SAOs Upcoming seminar on 7 th Dec including AFR feedback (with PRA) 50
Questions/Comments