Loss Reserving in Japan

1. The Institute of Actuaries of Japan Loss Reserving in Japan Junji FURUKI FIAJ

2. Agenda • Non-life market in Japan • Regulation and Accounting • Loss reserving (before revisions) • Loss reserving (after revisions) • Role of Actuaries

3. Non-life market in Japan

4. World premium volume ranking Swiss Re, sigma No.2/2005

5. Non-life insurers in Japan Hoken Kenkyujo, Insurance 2005

6. Operating Lines Hoken Kenkyujo, Insurance 2005

7. Assets GIAJ, Fact Book 2005

8. Liabilities & Equities GIAJ, Fact Book 2005

9. Insurance Regulation and Accounting

10. Insurance Regulation • Financial Services Agency (FSA) • Insurance Business Law (IBL) • Enforcement Regulations • Official Notifications • Supervisory Guidelines • Other laws • Law concerning non-life insurance rating organization • Automobile liability security law • Law concerning earthquake insurance

11. Change of Regulation • Former IBLs (before 1996) • Tight administrative frameworks • Uniformity in terms & pricing (personal lines) • Revised IBLs (enacted 1996) • Solvency margin scheme • Personal lines Rating relaxations …and other deregulations

12. Ongoing changes • Program for Further Financial Reform • FSA’s initiative; 2004~2006 • From Pre Review to Post Monitoring • Improve in the corporate governance • International standard-setting activities • IAIS • IASB

13. Insurance Accounting • SAP = GAAP • SAP / ruled in IBLs • TAP / Special Taxation Measures Law • Toward IFRS? • GIAJ Studying IFRS4 phase II

14. Recent revisions of SAP • FY2005 • New calculation methods of UP and Cat reserve for risks of natural disasters • FY2006 • Statistical estimation of IBNR reserve • Future cash flow analysis & test • FY2007 • Stress test & Liability adequacy test on medical and nursing care products

15. Loss reserving (prior revisions)

16. Prior loss reserves - Recognition • Two items • Case reserve … outstanding loss • IBNR reserve … not yet & not enough • Reinsurance deduction • Estimated amount to be collected from reinsurance can be deducted • Allocated unpaid loss adjustment expenses are included

17. Prior loss reserves - Estimation • Case reserve • Case estimate • IBNR reserve • Target lines and applicable formulae were placed in the Official Notification • Tax Code permits IBNR reserve for all lines and provides similar formulae

18. BIL PDL Automobile PD Misc. General Liability Personal Accident WC Life Re Medical, Nursing Overseas Travel Prior loss reserves - IBNR formulae • IBNR reserve takes greater amount between… Current year’s earned premium ×3% An average of run off results in relation to Case reserves vs An average of run off results in relation to Case reserves Current year’s earned premium ×8% vs

19. Prior loss reserves - features • Exposures has been NOT excessive • Not synchronized with Profit Cycle (JP\Bln; +addition, -release) GIAJ, Fact Book 2005

20. Loss reserving (post revisions)

21. New loss reserves - stables • Recognition of reserves • Case reserve • IBNR reserve • Estimation of Case reserve • Case estimate

22. New loss reserves - changes • IBNR reserves shall be estimated by actuarial and statistical method (principle) • Screening for short cut calculations of IBNR reserves

23. Screening of IBNR Reserves Domestic direct Foreign direct Domestic reinsurance Foreign reinsurance Tail length measure Paid loss incurred in recent two years / All paid loss 1 Materiality measure The unit’s paid loss / All paid loss 2 <90% >=1% >=90% <1% Formula method Statistical method

24. Reserving method • Formula method • An average of run off results in relation to Case reserves • Incurred loss/12 for assumed business • Statistical method • Not stated in IBLs • Chain-Ladder, Bornhuetter-Ferguson, etc.

25. Disclosure of Loss Reserves • IAIS supervisory standard No.9 • “Standard On Disclosures Concerning Technical Performance And Risks For Non-life Insurers And Reinsurers” (Oct. 2004) • In the past balance sheet… • Net presentation • Gross and reinsurance items  the note • FY2006 or later, we will provide… • Claims development and • Run off Results

26. Claims Development • Long-tailed lines • Automobile, General Liability and Personal Accident • Disclose past five years Example of the Claims development triangle (unit arb.)

27. Run off Results • All businesses except CALI and EQ • The run off results is the difference between… • the loss reserves at the beginning of the period, and • the sum of the paid loss during the year on account of claims incurred in previousyears and the loss reserves at the end of the year for such outstanding claims Example of the Run off results (unit arb.)

28. Role of Actuaries

29. Role of actuaries (prior revisions) • There was little role in loss reserves estimations • Case reserves were case estimate • IBNR reserves were ruled by IBLs • Actuaries laid weight rather on premium reserves of long-term policies

30. Role of actuaries (post revisions) • Active role in estimation • Statistical and actuarial estimation of IBNR reserves • Expanded appointed actuary system • to verify appropriateness of loss reserves • to submit the actuarial opinion to the board of directors • to follow actuarial practice standards prepared by the “designated corporation”

31. The practice standards for the appointed actuaries • Standards for Non-life actuaries • IAJ launched the working group to draft the practice standards in 2005 • Topics • Loss reserves, policyholder dividend, future cash flow analysis… • Principle basis

32. Thank you for listening http://www.actuaries.jp http://www.sompo-japan.co.jp