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International Reserving Issues. Chandu C. Patel, FCAS, MAAA. Casualty Loss Reserve Seminar September 17-18, 2008. International Reserving Issues. Agenda International claims process F/X Effects Financial Reporting. International Claims Process.
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International Reserving Issues Chandu C. Patel, FCAS, MAAA Casualty Loss Reserve Seminar September 17-18, 2008
International Reserving Issues Agenda • International claims process • F/X Effects • Financial Reporting
International Claims Process • Geographic, cultural, legal and currency issues make for a challenging environment • Geographic – loss adjusting process in a foreign country will be different. The speed at which information is gathered and communicated is generally slower. • Cultural – language barriers may exists; what is compensable will vary – for example, when I was working on estimating reserves in Italy, I was told that relatives that witnessed an accident need to be compensated for pain and suffering (of watching the accident) as well • Legal – where a trial takes place can vary. Based on the legal environment of the country that the claim is tries in, outcomes may be unexpected • Currency – If there is a considerable gap between the accident date and the date at which the loss is settled, changes in F/X rates can have a significant impact on the amount of loss in corporate currency.
International Claims Process An example of a large claim from the Tsunami event dated December 26, 2004. • Large cement plant located in Banda Aceh, Indonesia • The event led to a total loss of the cement factory owned by a French conglomerate
Tsunami, Total Loss to Cement Plant, Indonesia, Asia. Picture of Plant before Tsunami struck
Tsunami Claim • Date of Loss – Dec 26, 2004 • Initial Loss Estimate based on available policy limits for EQ events = 50M Euro • F/X Rates on Dec 31, 2004 I Euro = 1.3644 USD • Initial Loss Estimate based on original F/X rate = 68M USD • First payment made in July 2005; F/X rate 1 Euro = 1.2195 USD • Second payment made in April 2006; F/X rate 1 Euro = 1.2607 USD • The insured went to court in France in 2007 • In January 2008, the court found that the EQ sub-limit (or any other sub-limit such as Flood) does not apply. • New total compensable amount = 88M Euro plus interest and costs (50M Euro was already paid as of this point in time); F/X rate 1 Euro = 1.4851 USD • New total loss = 131M USD • Total increase in loss due to legal proceedings = 76% • Total increase in loss due to F/X = 9%
F/X Effects • Impact on loss development • Loss triangles stated in corporate currency will be subject to fluctuations based on changes in F/X rates • Payments will be made at historic currency rates; case reserves will be stated at current rates • Decreasing currency strength will lead to higher loss development factors and the reverse will be true for increasing currency strength • It is difficult to separate true development from F/X effects • A couple of ways to deal with this: • Use local currency to do reserve triangles and selections • Convert entire triangle to corporate currency using current F/X rates • Particularly challenging in multi-currency domain since a large number of triangles have to be generated or a large amount of data has to be converted every quarter.
Financial Reporting • Financial Reporting, including the role of actuaries • Income fluctuations can result from changes in F/X rates • Profit or Loss from a foreign subsidiary can be amplified based on fluctuations in F/X rates • Value of a foreign subsidiary can fluctuate based on changes in F/X rates • Loss development tables within the SEC disclosures (10K) will be impacted • It is permissible to adjust the development for impact of F/X rates • Role of the actuary in reserve process can vary. The US has a framework that has evolved over a period of time – the same is not true in all jurisdictions. • “Preferred” methods used for reserving can vary. I find that “Chain-Ladder” and triangulation is a clear favorite in the US. Actuaries abroad tend to use more theoretical approaches.