Actuarial Involvement in UK Insurance & Reinsurance Reserving

1. Insurance & Reinsurance Reserving in the UK Paul Gates, Lane Clark & Peacock Casualty Loss Reserving Seminar, 9/18/2000

2. Outline of Talk • Lloyd’s & the London market • Actuarial involvement - the what and how • Current issues for actuaries • Problems in London - past and present • Example - reprise

3. Lloyd’s and the London Market • What is the London market? • What is Lloyd’s?

4. Lloyd’s • Insurance and reinsurance market at 1 Lime St, City of London • Society of individual and corporate members (Names) • Individuals generally have unlimited liability • Corporates have limited liability

5. Lloyd’s - players • Broker Market • Syndicates • active underwriter • Managing Agents

6. Corporate v Individual Statistics

7. Lloyd’s - key points • Began 1688 - Mr Lloyd’s coffee house • Marine clubs • Pre-eminent marine and non-marine insurance marketplace • Reconstruction & renewal in early 1990s • Equitas • corporate capital • Controls / safeguards • regulated by Government at market level • Central Fund

8. Lloyd’s - Split of Business

9. Features of Lloyd’s • Funded accounting • 3 year ventures • Reinsurance to close (RITC) • US Trust Funds • CRTF • SLTF • LATF • Solvency requirements • actuarial opinions

10. London Market • Insurance companies • Reinsurance companies • Brokers • Claims specialists • Global market, although heavy involvement with Lloyd’s • Certain centres of underwriting eg LUC • Actuaries

11. Classes of Business • Motor (Auto) • UK very large, not much US • Casualty (Liability) • US, UK, other countries • D&O, E&O (including actuaries), Public Liability Workers comp • Aviation • airlines, satellites, airports, light aircraft

12. Classes of Business • Marine • hull, cargo, LMX • Energy • rig, onshore • Property • direct, facultative, risk XL, catastrophe • US, UK, Europe, Japan,worldwide • Whole account XL • Finite risk

13. Actuarial Involvement • 30 years ago - nothing! • Lloyd’s • growing market for actuaries • statutory role • RITC / solvency • managing agents • strategic role • research & analysis • Equitas

14. Actuarial Involvement • London market • Growing market • Pricing roles • Reserving roles • No statutory requirement • Although for US-owned companies….. • Underwriting

15. Actuaries at Lloyd’s • Opinions • Lloyd’s solvency • US Trust Funds • Reports at 31 December each year • 1993 onwards only- prior years to Equitas • “Reasonable provision” • “Greater than or equal to best estimate”

16. Actuaries at Lloyd’s • Key Areas • Reinsurance bad debt • % of recoveries outstanding and reinsurance IBNR • covering insolvency and dispute • Reinsurance run-off costs • losses occurring versus risks attaching • Claims handling expenses • indirect costs as related to past claims - project • Y2K ??

17. Actuaries in the London Market • Reserving role comprises: • Year-end reserving • Quarterly reserving • Treaty monitoring and analysis • Profitability analysis • Feedback to underwriters / pricing actuaries

18. Actuarial Techniques • Constrained by data • Chain ladder • Bornhuetter Ferguson • Stochastic methods • bootstrapping • Curve fitting (tail estimation) • Graphical approaches

19. Information Issues • Paucity of data • no market bodies for reference purposes • development history • small portfolios • Poor treaty information • paid losses only • information on exposures (lack of) • cash calls • underlying classes not clear

20. Actuarial Guidance • Institute of Actuaries • Issues Guidance Notes • Covers statutory roles • US requirements (GN33,GN18) • Lloyd’s (GN20) • Friendly societies (GN32) • Writing actuarial reports (GN12) • “How to” • Network of actuaries (GIRO)

21. Current Issues for Actuaries (some) • Poor results • Involvement with forecasting of results • Statutory sign-off for companies • Discounting • Actuarial sign-off of RITC? • covering asset and liability elements • equity between Names • stochastic (DFA) model

22. Problems in London - early 1990s • APH • LMX Spiral • Other latent claims • Series of disasters • Poor rating / lack of control

23. Asbestos Pollution & Health Reserving • Data issues • old risks, complex inter-relationships, insolvencies • information by underwriting year not useful • Techniques • Detailed exposure methods (share of market) • Average cost per claim • Simulation • Survival ratios • Graphical methods • Court awards critical (win factors)

24. Equitas • Clean start for ongoing syndicates • Start up • 1992 & prior liabilities • assessing premium to take on risk • Current activity • payments and reserving • commutations

25. Problems in London - 2000 • Compensation culture • New latent claims? • Series of disasters • windstorms • tornadoes • earthquakes • hailstorms • explosions • satellites • aviation losses

26. Problems in London - 2000 • Insolvencies • Capital withdrawal • Poor results • poor rating? • loadings • Lack of reinsurance / retrocession coverage • Forecasting

27. Meanwhile, back at the example... • All assumptions as before • Requirements - “at least best estimate” • First scenario - best estimate (70%) • Second scenario - more conservative (80%) • UK corporate tax rate =30%

28. Example continued • Scenario 1 • Take loss in first year - using correct loss ratio • IBNR held until year 5 so that 70% L/R • Net income = 63 • Scenario 2 • High loss ratio thus higher reserves set in year 1 • Release of reserves in year 5 • Net income = 68