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International Reserving Issues and U.S. Actuaries

International Reserving Issues and U.S. Actuaries. 2003 Casualty Loss Reserve Seminar September 8, 2003 Leslie R. Marlo, FCAS, MAAA. International Reserving Issues and U.S. Actuaries. Focus on Claims Reserves European regulations and practice Benchmarking and communication

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International Reserving Issues and U.S. Actuaries

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  1. International Reserving Issues and U.S. Actuaries 2003 Casualty Loss Reserve Seminar September 8, 2003 Leslie R. Marlo, FCAS, MAAA

  2. International Reserving Issues and U.S. Actuaries • Focus on Claims Reserves • European regulations and practice • Benchmarking and communication • Common issues in European practice • Some unique exposures in Europe

  3. International Reserving Issues and U.S. Actuaries • European Regulations and Practice • European Council directives • Comprehensive set of directives exist, however implementation is not uniform • Actuarial involvement • Historically involvement has been minimal; actuarial role has been increasing • Audit perspective • Emphasis has been on solvency

  4. Background Company structure Types of business Statistical Data Elements Actuarial Personnel Frequency of review Level of segmentation Methodology and assumptions Diagnostic tests Financial / Accounting Data reconciliations Management’s best estimate Reinsurance Program structures Analysis of cessions Claims Procedures Communication w/ actuaries Operational changes Underwriting Procedures Communication w/ actuaries Operational changes International Reserving Issues and U.S. Actuaries

  5. International Reserving Issues and U.S. Actuaries • Benchmarking and Communication • Must understand company’s business and current local practices • U.S. practices not the only “right” way • European actuaries have had significant training • Resistance to change; workload • Patience & empathy • Build Relationships!

  6. International Reserving Issues and U.S. Actuaries • Benchmarking and Communication - Complications • Language Barrier • Non-English speakers • “English” insurance terms • Jet Lag • Working Conditions

  7. International Reserving Issues and U.S. Actuaries • Common themes in European Practice • Common statistical approaches • Pure IBNR vs. development on known claims • Lack of industry data • Direct vs. net analyses • Emphasis on point estimate • Assumed reinsurance • Exchange rates

  8. International Reserving Issues and U.S. Actuaries Common Themes in European Practice • Common Statistical Approaches • Chain ladder and B-F methods • Frequency / Severity approach • Theoretical approaches are appealing

  9. International Reserving Issues and U.S. Actuaries Common Themes in European Practice • Pure IBNR vs. Development on Known Claims • Common to focus on pure IBNR – use of Frequency / Severity approach • Development on known claims might be ignored • Downward development

  10. International Reserving Issues and U.S. Actuaries Common Themes in European Practice • Lack of Industry Data • No ISO, NCCI, RAA • Serious problem for new lines or certain classes, e.g. assumed reinsurance • Sometimes government research bodies publish guidelines and statistics

  11. International Reserving Issues and U.S. Actuaries Common Themes in European Practice • Emphasis on Point Estimate • Most European actuaries agree that a range is appropriate but… • Historically ranges have not been calculated • Ensure that when ranges are produced, they produce practical low and high end estimates

  12. International Reserving Issues and U.S. Actuaries Common Themes in European Practice • Direct vs. Net Analyses • Direct of reinsurance commonly analyzed • Assumed reinsurance may be analyzed • Ceded / net rarely analyzed • Proportional IBNR easily reviewed • Non-proportional IBNR usually ignored – considered good since net will be conservative

  13. International Reserving Issues and U.S. Actuaries Common Themes in European Practice • Assumed Reinsurance • Underwriting year statistics • General practice is to record on one-year lag • Considered better because less estimation • Must remove one-year lag and convert to “accident year” basis for U.S. GAAP

  14. International Reserving Issues and U.S. Actuaries Common Themes in European Practice • Exchange Rates • Business written in multiple countries • Convert historical data to local reporting currency • Projections of future payouts when currency is unstable

  15. International Reserving Issues and U.S. Actuaries • Unique Exposures in Europe • Italian Motor Liability • Changes in legal and social framework • No consistent case law • Typical case by case reserving philosophy problematic • Led to changes in settlement practices

  16. International Reserving Issues and U.S. Actuaries • Unique Exposures in Europe • Swiss Compulsory Accident • Booking process for annuities regulated • On surface, inconsistent with U.S. GAAP – cost of living adjustments not recorded • Complicated by existence of the Pool • The Pool provides economic reality

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