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Practical analysis of Prior Year loss reserve volatility Patrick Grealy FIA

Practical analysis of Prior Year loss reserve volatility Patrick Grealy FIA. Israel June 2012. Overview. General overview of reserving Features of a Reserving System – Process Characteristics of the Process Look at practical example including Stochastic Decay Method

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Practical analysis of Prior Year loss reserve volatility Patrick Grealy FIA

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  1. Practical analysis of Prior Year loss reserve volatility Patrick Grealy FIA Israel June 2012

  2. Overview • General overview of reserving • Features of a Reserving System – Process • Characteristics of the Process • Look at practical example including Stochastic Decay Method • Deterministic v Stochastic • Future developments

  3. Reserving Systems • System to generate Deterministic & Stochastic Reserve estimates for use in another Financial modeling process ? • Process driven system for estimating unpaid loss and pipeline premiums for insurers and reinsurers on a frequent recurring cycle (quarterly?) • Assess future cash flow expectation from prior years business for discounting purposes? • Assess likely Salvage & Subrogation recoveries on Claims? • Generate likely future claims handling expenses? • Estimate Future claim count and hence Average cost per claim • Consider the impact of future claims in multiple currencies?

  4. Characteristics of Reserving System • Easy and intuitive interface • Handle multiple lines of business • Stochastic and deterministic methods • Batch import of multiple classes • Paid & Incurred Claims • Premiums • Claim Counts • Salvage & Subrogation • Gross and Net • Multiple FX • Correlation • Integrate ESG Variables

  5. Stochastic v’s Deterministic • Point estimate versus a range of possible outcomes with probability weightings. • Single number required for main Statutory and Regulatory purposes and traditionally what was produced. • Quite an exercise to generate point estimates • Often quite a number of manual adjustment and ‘judgmental’ selections based on experience • Gross and Net? • Often some a priori assumptions used in deterministic methods that use pricing and exposure assumptions • Stochastic methods relatively recent body of work • Stochastic methods open up new opportunities to include other drivers of variability such as FX and inflation

  6. Future Developments? • Integration of ESG and macro economic variables • Inclusion of Inflation adjusted methods • Additional stochastic methods

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