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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 l.jpg

Insurance & Reinsurance Reserving in the UK

Paul Gates, Lane Clark & Peacock

Casualty Loss Reserving Seminar, 9/13/99


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Outline of Talk

  • Actuaries abroad

  • Lloyd’s & the London market

  • Actuarial involvement

  • Problems in London market

  • Current issues

  • UK versus US




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Lloyd’s and the London Market

  • What is the London market?

  • What is Lloyd’s?


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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


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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


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Lloyd’s - the players

  • Individual Names

  • Corporate Names also from 1994

  • Lloyd’s brokers

  • Active underwriter for each Syndicate

  • Managing agents

  • And now actuaries


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Features of Lloyd’s

  • Funded accounting

    • 3 year ventures

  • Reinsurance to close (RITC)

  • US Trust Funds

  • Solvency requirements

    • actuarial opinions


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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


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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


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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


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Customers of Lloyd’s / London

  • Unusual but serious

    • satellites

    • veteran aircraft

    • sporting events

    • other events

    • rogue traders

    • hostile bids


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Actuarial Involvement

  • 30 years ago - nothing!

  • Lloyd’s

    • growing market

    • statutory role

    • RITC / solvency

    • managing agents

      • strategic role

      • research & analysis

    • Equitas


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Actuarial Involvement

  • London market

    • Growing market

    • Pricing roles

    • Reserving roles

    • No statutory requirement

    • Although for US-owned companies…..

    • Underwriting


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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”


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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


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Actuaries in the London Market

  • Reserving role comprises:

    • Year-end reserving

    • Quarterly reserving

    • Treaty monitoring and analysis

    • Profitability analysis

    • Feedback to underwriters / pricing actuaries


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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


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Actuarial Techniques

  • Constrained by data

  • Use of commercial packages

  • Chain ladder

  • Bornhuetter Ferguson

  • Stochastic methods

    • bootstrapping

  • Curve fitting (tail estimation)

  • Graphical approaches


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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!


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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


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Asbestos Pollution and Health

  • London involvement

  • Data issues

    • very old risks

    • complex inter-relationships

    • insolvencies

  • Reserving methods

    • methods

    • data issues


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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


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Equitas

  • Clean start for ongoing syndicates

  • Start up

    • 1992 & prior liabilities

    • assessing premium to take on risk

  • Current activity

    • payments and reserving

    • commutations


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Current Issues in London Market

  • Poor rating

  • Withdrawals / run-offs

  • Catastrophes

    • Georges

    • Sydney hailstorms

  • Poor experience

    • satellite

    • marine (especially XL)

    • autowarranty


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Current Actuarial Issues in UK

  • Year 2000

  • Increasing statutory role

  • Reinsurance run-offs / insolvencies

  • Practising certificates

  • RITC certification

  • Consolidation


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UK / US considerations

  • Differences

    • data

    • certification

    • information gathering organisations

  • Mutual recognition - worldwide

  • Opinions

    • best estimate versus range


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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%


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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