Cycle survival kit II

1. The Actuarial Profession▀ making financial sense of the future Cycle survival kit II Working party members Philip Archer-Lock Ian HilderStuart Brown Steven Fisher David Simmons Richard Doman Kevin Wenzel (Chairman)

2. Agenda • Recap on work from last year • Update of some results • Report on further investigations

3. Recap • What do we mean by the reserving cycle?

4. Recap

5. Recap Conclusions we came to: • There is a reserving cycle in the UK • Apparently correlated with the underwriting cycle • Actuarial methods can generate cycles • Rating indices understate size of the underwriting cycle

6. Update • This year focus solely on Motor & Liability • FSA data updated to 2002 year end • Data provided by Standard & Poor’s Systhesis

9. Further investigations • How long for the cycle to flatten? • Impact on total reserves? • Is it a few isolated companies? • Impact of claims inflation? • Further investigations of the chain ladder.

10. How long for the cycle to flatten?

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20. How long for the cycle to flatten • It takes several years • Some years get worse before getting better.

21. Impact on total reserves?

22. Impact on total reserves • Previous graphs shown by origin years • Impact on a company is mixture of all past origin years: • some overstated • some understated

25. Isolated companies?

30. Isolatedcompanies? So not an isolated company on motor, • what about other lines of business?

35. Impact of claims inflation?

36. Claims inflation • Is claims inflation driving the cycle? • Implicit chain ladder assumption of future inflation being an average of past inflation • Try hypothetical data with RPI inflation

38. Claims inflation • Changing levels of inflation affect the results of methods we use • Not the sole cause of a cycle but could be a contributing factor • ACPC or inflation adjusted methods?

39. Further investigation of the chain ladder

40. Further investigation of the Chain Ladder • The chain ladder method reflected the cycle seen in the company figures • Did it under / over estimate for the same origin and development years as the companies? • If so, why did it turn out to be wrong? • Could we have seen the problem at the time?

43. Third Party Liability Class 7. Incurred as % of 1993 ICL. Data as at 31.12.1993 100 — 1977 90 —1978 — 1979 80 — 1980 — 1981 70 — 1982 60 — 1983 — 1984 50 — 1985 — 1986 40 — 1987 — 1988 30 — 1989 —1990 20 — 1991 — 1992 10 — 1993 — Ultimate 0 0 2 4 6 8 10 12 14 16 18 Development Year

44. Third Party Liability Class 7, Incurred % 1993 ICL, data to 1993 100 90 — 1988 80 — 1989 70 — 1990 60 50 — 1991 40 — 1992 30 — 1993 20 10 — Ultimate 0 0 2 4 6 8 10 12 14 16 18 Development Year

45. Third Party Liability Class 7 Incurred % - 1993 ICL data to year 10 120 — 1988 — 1989 100 — 1990 — 1991 — 1992 80 — 1993 60 40 — Ultimate 20 0 20 24 0 4 8 12 16 Development Year

46. Third Party Liability Class 7 Incurred % - 2002 ICL data to 2002 120 — 1977 — 1978 — 1979 100 — 1980 — 1981 — 1982 — 1983 — 1984 80 — 1985 — 1986 — 1987 — 1988 — 1989 60 — 1990 — 1991 — 1992 — 1993 — 1994 40 — 1995 — 1996 — 1997 — 1998 — 1999 20 — 2000 — 2001 — 2002 — Ultimate 0 0 2 4 6 8 10 12 Development Year

47. Third Party Liability Class 7. Incurred as % 2002 ICL. Data to 31.12.1993 120 — 1988 100 — 1989 80 — 1990 60 — 1991 — 1992 40 — 1993 20 — Ultimate 0 0 2 4 6 8 10 12 14 16 18 Development Year

48. Could we have seen the problem? • The problem was a change in (future) development pattern. • Are there differences in the past patterns that could have predicted this? • One possible diagnostic was to consider paid/incurred %

49. Paid as % of Incurred v Change in ultimate ICL by Development Period Development Period 100% 90% 1 80% 2 70% 3 4 60% 5 Paid / Incurred % 50% 6 40% 7 30% 8 9 20% 10 10% 0% 70% 80% 90% 100% 110% 120% 130% 140% Incurred Chain Ladder Ultimate as % latest ICL ultimate Third Party Liability

50. Paid as % of Incurred v Change in ultimate ICL by Development Period 45% Development Period 40% 35% 1 30% 2 25% 3 Paid / Incurred % Linear (1) 20% Linear (2) 15% Linear (3) 10% 5% 0% 70% 80% 90% 100% 110% 120% 130% 140% Incurred Chain Ladder Ultimate as % latest ICL ultimate Third Party Liability