French working group on Best Estimate: Main conclusions

French working group on Best Estimate: Main conclusions FinReq meeting 17 September 2007

Agenda • The French BE working group • BE Valuation: main points • Proxies • Ultimate loss • Expenses • Discounting and Reinsurance • French best practice update • Appendix

The French B.E. working group • Composed of • 2 supervisors • 3 actuaries from International Companies • 5 members of big French Mutuals (GEMA/ACME) • 2 members of medium sized Mutuals (ROAM/AISAM) • 1 auditor • 1 consultant • Meetings from December 2006 to September 2007 to write a best estimate report containing: • French Best practice update • Proxies proposals • The first draft has been published on 7 September 2007, to get the comments of the whole French actuarial profession by mid October

B.E. valuation: main points • The report is based on the assumption of reserves by accident year • IFRS phase 2 current work is nevertheless heading towards a definition of underwriting year as the basis • The 10th July directive states that “The best estimate corresponds to the expected present value of future cash flows, taking into account all the cash in and out flows (adjusted for inflation), required to settle the (re)insurance obligations over their lifetime, including all expenses, future discretionary bonuses, embedded financial guarantees and contractual options.” • Using an automatic method for lobs other than very short tail could lead to wrong conclusions • Preference for deterministic methods which can be easily tailored and adjusted to take into account • Missing/partial data • Underwriting conditions / product specificities • Claims handling • Reinsurance • External factors (law, economic, inflation, roe…)

B.E. valuation: main points (2) • 3 steps to calculate the best estimate of liabilities: • Calculate the undiscounted gross ultimate (incl. subrogations) • Take into account reinsurance • Discount this amount • Main data needs: triangles (origin*development) for • Premiums: written and earned premiums • Claims: paid, subrogations, incurred, claims number, with a difference between large and attritional claims (better to have undiscounted reserves than discounted ones) • Expenses: Ulae, brokerage, administrative, … • Reinsurance issues • Straight forward for proportional insurance • Difficult to estimate for XL. Possible to use the net/gross accounting reserves ratio (acceptable proxy) • Discounting • Possible to use a central discount rates curve with “standardized” development patterns (low correlations) • Assumption that all future payments are made by mid-year is more prudential than end of year assumption

Proxies for ultimate loss • To be used only if there is insufficient data collected within the company • Market references should be defined at country level on the basis of a market study performed by Control Authorities, Institute of Actuaries or Insurers Federations • If no market references available • No acceptable straightforward method available (ratios could lead to not prudent situations) • Best possibility might be to “Blank” the technical result (calculate the reserve in order to have a result set to 0) • Pros: easy to implement, leads to no undue profits • Cons: Does not take into account claims reality, neither pricing margins/insufficiencies

Proxies for ultimate loss (2) • If market average costs available • Projection of claims number (less volatile and generally quicker to develop) • Ultimate numbers * market average costs (adjusted for inflation) would lead to an ultimate loss • Cons: could only applies to few lobs with low unitary cost volatility • If Claims frequency available • Based on their own experience of the average costs, the insurers could then estimate ultimate loss (product of Market claims frequency * policy nb * average cost) • Cons: difficult to define robust claims frequencies at market level

Proxies for ultimate loss (3) • If market development patterns available • Combine market development patterns with a Chain ladder-type method to project ultimates • Usable for claims and premiums • Pros: • Can be used when no data is available. Progressively, market loss development factors, based on a large amount of market data, can be replaced by the company’s own experience • Very efficient on long tail business (even for medium sized and big companies) • Takes into account the nature of the products/guarantees • Cons: • Difficult to release a robust market calibration? • one of the most appropriate solutions?

Proxies for ultimate loss (4) • If market Loss ratios are available • Use of exposure-based methods (eg Bornhuetter-Ferguson) • Pros: • Interesting option to model most recent exercises insufficiently developed (even for medium-big companies) • Takes into account market conditions • Cons: need of other data (eg development patterns) • Proxy on Cat/Large loss • A market loss for each catastrophe/large claim could be defined at country level • The company would then calculate its loss proportionally to its market share of the loss • Pros: • Simple and quick to implement • Cost of the market loss evaluation (using high technologies) shared • Cons: • Does not take into account real exposure to the claim and portfolio specificities • All cat losses cannot be evaluated easily at market level

Proxy for expenses • “New York” method • Calculation of ratio R = Expenses / (gross claims + subrogations) • R is then applied to: • X% to claim by claim reserves (eg X=50%) • 100% to ibnr • Pros: simple to implement • Cons: expenses are supposed to be proportional to reserves (which is not always true)

Other proxies • Discounting • 2 options: • Use of market development patterns • Use of a simple undiscounted duration defined at market level for each Lob • Reinsurance • Use of ratio Ceded reserves / Accounting reserves, with or without ibnr

French best practice update • A French actuarial best practice for non life reserves per lob had been published in 2004 by the French institute of actuaries • The French working group has updated this “best practice” and used it to taylor proxies proposals to each and every lob • The Lobs are: • Motor damage / Motor damage liability • Motor corporal liability • Transport • Fire / Property damage • General liability • Assistance • Legal expenses • “Construction” / Decennial liability • Natural events • Caution / Credit • Inward reinsurance

French best practice update:Example (General liability)

Appendix • Aims at explaining briefly the reserving exercise basis for companies who do not have experienced actuaries • It deals with • Actuarial bases • How to take into account • Tendencies • Dispersion • Volatility • Irregular trends (including inflation) • Incomplete data • Large claims • Construction • Claims, premiums and expenses projections

French working group on Best Estimate: Main conclusions