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International Reserving Issues

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

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  1. International Reserving Issues Chandu C. Patel, FCAS, MAAA Casualty Loss Reserve Seminar September 17-18, 2008

  2. International Reserving Issues Agenda • International claims process • F/X Effects • Financial Reporting

  3. 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.

  4. 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

  5. Tsunami, Total Loss to Cement Plant, Indonesia, Asia. Picture of Plant before Tsunami struck

  6. Lafarge Cement Factory before the Tsunami

  7. Tsunami, The time the Tsunami struck Banda Aceh, Indonesia.

  8. And after the Tsunami…total devastation

  9. Another scary example of the power of this Tsunami

  10. 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%

  11. 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.

  12. 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.

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