International Insurance Reserving

1. International Insurance Reserving An Ocean of Difference

2. International Insurance • Attitudes • Legal Environments • Income Tax Laws • Evaluation Dates • Nationalism

3. Issues • Currency Conversion/ Devaluation • Data Differences • Environmental & Toxic Tort

4. International IssuesThe UK Perspective Peter Copeman PricewaterhouseCoopers

5. The UK Perspective • Developments in the UK market • Lloyd’s - an update • Actuarial involvement - including Lloyd’s opinions • Differences in operating environment • Differences in accounting basis • International standardisation

6. UK Market Developments • Consolidation of insurance industry • High level of M&A activity • Lloyd’s corporate capital • Emergence (and dominance?) of a few major players • Foreign ownership • Soft market • Increases in UK bodily injury awards

7. Equitas • Equitas established on 4 September 1996 • Reinsured 1992 and prior year liabilities of Lloyd’s syndicates • Largest ever reinsurance transaction • Proportionality conditions • Transition from 400 + syndicates to one company

8. Equitas - changes • Centralised claims handling • Administration being rationalised • Managing assets and liabilities

9. Changes in Lloyd’s Capital Base • Capital requirements for individual “names” increasing • Contribution of “names” to central fund increasing (0.6% è 1.5% of premiums) • Introduction of risk-based capital • Future of unlimited liability names? • General expectation that corporate capital share will increase

10. Lloyd’s Capital Base

11. Lloyd’sOwnership and structural changes • Development of Integrated Lloyd’s Vehicles (“ILVs”) • US influence [50% + US/Bermuda ownership] • Future of “annual venture” under consideration • Currently Lloyd’s self-regulated • Lloyd’s to be regulated by new Financial Services Authority in the future

12. Actuarial involvement at Lloyd’s • Historically quite limited • Recent expansion of involvement • “problems of the past” • Equitas • Pressure from capital providers • Checks and balances for underwriters • Part of professionalism drive • Pricing involvement developing

13. Actuarial opinions at Lloyd’s 31 December 1996 • Opinions for syndicates writing US business • Submitted to NAIC and New York Insurance Department • Net reserves (total) • US situs trust funds

14. Actuarial opinions at Lloyd’s 31 December 1997 • UK solvency opinion for Corporation of Lloyd’s • > “best estimate” for UK solvency • “reasonable” for NAIC/NYID • Each economic entity (year) has separate opinion

15. Actuarial opinions at Lloyd’s 31 December 1998 • UK opinion extended to include:- • Bad debts • ULAE • Year 2000 comment required • Practising certificate to be introduced (effective 12.31.99)

16. Different Operating Environments London Market (incl. Lloyd’s) • “Subscription market” - risks shared widely • But, trends towards convergence and larger “lines” • Central administration • Historically, data poor…… but improving • Underwriter was king, now somewhat more balanced

17. Different Accounting Basis • Lloyd’s syndicates and some London Market companies on “funded” basis • Funded basis of accounting • result deferred for 3 years • data reported on an underwriting year basis • Conversion to US GAAP now required more often - can be a difficult task

18. Conversion to US GAAP • Data may not be immediately available • Requires different way of thinking for syndicates/companies • financial information required on accident year basis, split by underwriting year and currencies

19. Conversion to US GAAP • Identification of earnings patterns • Need for proper assessment of “open years” • Different conditions for “transfer of risk” on reinsurance • Various other differences of accounting treatment

20. Acquisition of London Market/ Lloyd’s Companies What to watch out for ! • Rapid changes in mix of business • Changes in underwriters • Opportunistic use of “cheap” reinsurance • Complex reinsurance programmes • Whole account covers • Unusual risks • Quality of data/management information

21. International Insurance Reserving: Some Practical Issues Mark Scully Tillinghast-Towers Perrin

22. Overview of Presentation • Data issues • Exchange rates • Varying definitions of a triangle • Clean-cut business • Latent claim exposures • Approach to reserving in Germany • Reserving standards in Europe

23. Exchange rate movements distort loss development data • Comparable to excessive inflation • Occur whenever triangles contain data • in different underlying currencies and • converted at historical exchange rates • Possible solutions are: • separate triangles by currency or • conversion using a single exchange rate • if development is similar or • volume too low to analyze separately

24. An Example of the Distorting Effect of Exchange Rate Changes • Business written in two countries: UK and Country A • Each country writes in local currency • Loss development features of business are identical in both countries

25. Cumulative Paid Losses and LDFs: UK Business in Sterling

26. Cumulative Paid Losses and LDFs: Country A Business in Currency A

27. Historical Exchange Rates:Currency A per Pound Sterling

28. Data Converted at Historical Exchange Rates Distorts LDFs

29. Conversion at a Single Exchange Rate Removes this Distortion

30. Exchange Rates: Final Observations • Actuaries not in business of predicting future exchange rates • Important to match liabilities with assets in same currency

31. Loss Development Triangles Must be Exactly Defined • “Moving triangles”, where claims are coded to year of original notification/cession • French construction liability business has three possible dimensions are possible (year of construction, accident year, report year) • German triangles often split data into two report year cohorts: • Accident year = Report year • Accident year < Report year (“late” claims)

32. “Clean Cut” Accounting year business cannot be analyzed in Triangles • An underwriting year is typically reinsured after 1 to 7 years into the current U/W year • Common in Europe with short tailed reinsurance business • When the cedent is in runoff, business reverts to normal • U/W years develop down not across the triangle

33. Material latent claim exposures have not yet emerged outside the US • Some asbestos claims in UK (through employers liability policies) • Large potential exposure to asbestos claims in France • Key latent claim risk is to U.S. exposures (e.g., through foreign subsidiaries, reinsurance)

34. Material latent claim exposures have not yet emerged outside the US • Some asbestos claims in UK (through employers liability policies) • Large potential exposure to asbestos claims in France • Key latent claim risk is to U.S. exposures (e.g., through foreign subsidiaries, reinsurance)

35. Claims Reserving in Germany • Minimal actuarial involvement (e.g., typically no annual review) • IBNR is formula driven; judgmental adjustments made to (large) case reserves • distorts incurred triangles • Industry is over-reserved in the aggregate

36. German runoff gains appear to correlate with accident year loss results Note: Runoff gain = Favorable development on prior loss reserves (here as % of premium)

37. German reserve levels vary substantially by segment (and company)

38. Reserving Standards in Europe • Currently no statutory requirement, minimal actuarial involvement • Stimuli for change: • European solvency regulations • National tax authorities • Actuarial organizations involved • Direction/Solution not yet clear but it’s “on the radar screen”

39. International Insurance Reserving An Ocean of Difference