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Insurance & Reinsurance Reserving in the UK. Paul Gates, Lane Clark & Peacock Casualty Loss Reserving Seminar, 9/13/99. Outline of Talk . Actuaries abroad Lloyd’s & the London market Actuarial involvement Problems in London market Current issues UK versus US. Actuarial numbers worldwide.

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insurance reinsurance reserving in the uk

Insurance & Reinsurance Reserving in the UK

Paul Gates, Lane Clark & Peacock

Casualty Loss Reserving Seminar, 9/13/99

outline of talk
Outline of Talk
  • Actuaries abroad
  • Lloyd’s & the London market
  • Actuarial involvement
  • Problems in London market
  • Current issues
  • UK versus US
lloyd s and the london market
Lloyd’s and the London Market
  • What is the London market?
  • What is Lloyd’s?
lloyd s
Lloyd’s
  • Insurance market
  • Society of individual and corporate members (Names)
  • Individuals have unlimited liability
  • Corporates have limited liability
  • Difference reflected in required solvency margin
lloyd s key points in history
Lloyd’s - key points in history
  • 1688 - a coffee house, owned by Mr Lloyd!
  • Marine clubs
  • Pre-eminent marine and non-marine insurance marketplace
  • Government legislation
  • Disasters of late 1980s / early 1990s
    • reconstruction & renewal
    • Equitas
    • corporate capital
lloyd s the players
Lloyd’s - the players
  • Individual Names
  • Corporate Names also from 1994
  • Lloyd’s brokers
  • Active underwriter for each Syndicate
  • Managing agents
  • And now actuaries
features of lloyd s
Features of Lloyd’s
  • Funded accounting
    • 3 year ventures
  • Reinsurance to close (RITC)
  • US Trust Funds
  • Solvency requirements
    • actuarial opinions
london market
London Market
  • Insurance companies
  • Reinsurance companies
  • Brokers
  • Claims specialists
  • Global market, although heavy involvement with Lloyd’s
  • Certain centres of underwriting eg LUC
  • Actuaries
    • growing field with demand
classes of business
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
classes of business12
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
customers of lloyd s london
Customers of Lloyd’s / London
  • Unusual but serious
    • satellites
    • veteran aircraft
    • sporting events
    • other events
    • rogue traders
    • hostile bids
actuarial involvement
Actuarial Involvement
  • 30 years ago - nothing!
  • Lloyd’s
    • growing market
    • statutory role
    • RITC / solvency
    • managing agents
      • strategic role
      • research & analysis
    • Equitas
actuarial involvement15
Actuarial Involvement
  • London market
    • Growing market
    • Pricing roles
    • Reserving roles
    • No statutory requirement
    • Although for US-owned companies…..
    • Underwriting
actuaries at lloyd s
Actuaries at Lloyd’s
  • Opinions
    • Lloyd’s solvency
    • US Trust Funds
    • RITC?
    • Reports at 31 December each year
    • 1993 onwards only- prior years to Equitas
  • “Reasonable provision”
  • “Greater than or equal to best estimate”
actuaries at lloyd s17
Actuaries at Lloyd’s
  • New 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
    • Professional Guidance
actuaries in the london market
Actuaries in the London Market
  • Reserving role comprises:
    • Year-end reserving
    • Quarterly reserving
    • Treaty monitoring and analysis
    • Profitability analysis
    • Feedback to underwriters / pricing actuaries
which actuaries where
Which actuaries where?
  • Insurance / reinsurance companies
    • mainly in-house, some consultants
  • Lloyd’s
    • managing agents employ actuaries
    • opinions work - consultants
  • Insolvent companies
    • mainly consultants
  • Commutations
    • mixture
actuarial techniques
Actuarial Techniques
  • Constrained by data
  • Use of commercial packages
  • Chain ladder
  • Bornhuetter Ferguson
  • Stochastic methods
    • bootstrapping
  • Curve fitting (tail estimation)
  • Graphical approaches
information issues
Information Issues
  • Poor treaty information
    • paid losses only
    • information on exposures (lack of)
    • cash calls
    • underlying classes not clear
  • No market bodies outside US
  • Small portfolios
  • Multiple currencies
  • Foreign languages!
problems at lloyd s
Problems at Lloyd’s
  • APH
  • LMX Spiral
  • Series of disasters
    • Hurricane Hugo
    • European windstorms 1990
    • Exxon Valdez
    • Piper Alpha
    • Hurricane Andrew
  • Poor rating / lack of control
asbestos pollution and health
Asbestos Pollution and Health
  • London involvement
  • Data issues
    • very old risks
    • complex inter-relationships
    • insolvencies
  • Reserving methods
    • methods
    • data issues
aph reserving
APH Reserving
  • Information by underwriting year no use
  • Court awards critical (win factors)
  • Several techniques
    • Detailed exposure methods (share of market)
    • Average cost per claim
    • Survival ratios
    • Graphical methods
    • Simulation
equitas
Equitas
  • Clean start for ongoing syndicates
  • Start up
    • 1992 & prior liabilities
    • assessing premium to take on risk
  • Current activity
    • payments and reserving
    • commutations
current issues in london market
Current Issues in London Market
  • Poor rating
  • Withdrawals / run-offs
  • Catastrophes
    • Georges
    • Sydney hailstorms
  • Poor experience
    • satellite
    • marine (especially XL)
    • autowarranty
current actuarial issues in uk
Current Actuarial Issues in UK
  • Year 2000
  • Increasing statutory role
  • Reinsurance run-offs / insolvencies
  • Practising certificates
  • RITC certification
  • Consolidation
uk us considerations
UK / US considerations
  • Differences
    • data
    • certification
    • information gathering organisations
  • Mutual recognition - worldwide
  • Opinions
    • best estimate versus range
back to the example
Back to 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%
example continued
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 = 65
  • Scenario 2
    • High loss ratio thus higher reserves set in year 1
    • Release of reserves in year 5
    • Net income = 68
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