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International Reserving: European Regulations & Common Practices

Explore European Council directives, actuarial involvement, audit perspectives & unique European exposures in insurance reserving. Focus on benchmarking, communication challenges, and statistical approaches.

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International Reserving: European Regulations & Common Practices

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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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