Beyond the horizon. Together.
Lance Moroney
Consulting Actuary
TASK Convention 2015
Non-life working party – the benefits of actuarial reserving
21 October 2015
Agenda
Overview
I
Actuarial reserving
(i)
Opening
(ii)
Results analysis
(iv)
Conclusion
II
Technical reserving items
Closing
Opening
A team member recently asked: “what value does the Actuarial Reserving Function
add to the business?”
Define
the
problem
Monitor
results
Design
a
solution
Professionalism
External environment
Opening
Common reserving focus:
Methodology
•
•
•
•
•
•
BF
Chain Ladder
Benktander
Berquist Sherman
Etc..
…
More pertinent issues
• The loss ratio and its
trend
• Loss ratio drivers (“the
story behind”)
• Reserve result outputs
• Relevant analysis
produced for key
stakeholders in good time
Opening
Further actuarial
reserving objectives:
•
•
•
•
•
•
Data
Methods
Assumptions
Calculate the reserve
Produce the report
Meet guidelines and
regulations
• Auditors
How to achieve: process!
Can be overlooked:
•
•
•
•
Identifying stakeholders
Timelines & preparation
Output and analysis
Achieving broad
understanding of the
result
• Buy-in
• Allowing time for review
and correction
Opening
Result analysis
Benefits from actuarial reserving are achieved by:
Unpacking the underwriting result
Analysing result trends; and
Forecasting the underwriting result
Unpacking the underwriting result: Part 1
Actual
Plan
Claim ratio
61%
60%
Expense ratio
8%
10%
15%
13%
Commission ratio
Combined ratio
84%
83%
Unpacking the underwriting result: Part 2
Actual
6%
Catastrophe
2%
Large
8%
Attritional
Plan
45%
4%
50%
Prior years
6%
Current year
claim ratio
55%
60%
Aggregate claim
ratio
61%
60%
Unpacking the underwriting result
Application
• Reporting of loss ratio for the current accident year, with prior-year claims
impact shown separately
• This should be part of reporting by the Finance team
• Comparison of result to forecast
• Relevant to the Financial Condition Report
• Aligns Actuarial and Finance view of the result. This enables:
 Analysis performed by Actuarial Function can be drawn upon
 Understanding of the result already developed as part of the Actuarial
Reserving Process
 Collaboration of the Finance team with the Actuarial Function
Result trend
Portfolio
PROPERTY
KES '000s
Premium / Claim Summary by Accident Year
31 December 2014
Claims
UwYr
Premium
2009
2010
2011
2012
2013
2014
300 000
400 000
333 000
320 000
350 000
340 000
Total All
Paid
OCR
185 496
0
311 881
0
182 235 3 000
201 351
0
219 625 2 500
136 443 15 000
Reported
IBNR
Ultimate
185 496
311 881
185 235
201 351
222 125
151 443
0
0
0
500
5 600
36 101
185 496
311 881
185 235
201 851
227 725
187 544
2 043 000 1 237 030 20 500 1 257 530
42 201
1 299 731
Loss
Ratio
61.8%
78.0%
55.6%
63.1%
65.1%
Prior
Loss
Ratio
UW
Result
Impact
55.2%
61.8%
78.0%
56.0%
63.0%
62.0%
60.0%
0
0
1 245
(251)
(10 725)
16 456
63.6%
63.9%
6 726
Result trend
Application
• Key exhibit used by the Actuarial Function to present the reserving result
• Pulls the focus away from methodology and focuses key results including:
 Loss ratio for latest accident year
 Loss ratio trend
 Volume trend
 Case reserve trend
 Underwriting result impacts
Forecasting the underwriting result
ABC Insurance Company
Motor
2014 net Loss Ratio
Reinsurance impact
2014 gross Loss Ratio
Catastophe Loss Ratio
Large Loss Ratio
2014 attritional Loss Ratio
Claim inflation
Premium increases
Initiatives
2015 attritional Loss Ratio
Large Loss Ratio
Catastophe Loss Ratio
2015 gross Loss Ratio
Reinsurance impact
2015 net Loss Ratio
2014 Gross premium
2014 Net Premium
2015 Gross premium
2015 Net Premium
60%
1%
59%
2%
3%
54%
3%
-4%
-1%
52%
3%
2%
57%
1%
58%
200 000
150 000
220 000
165 000
Property
55.2%
2%
53%
0%
2%
51%
4%
-3%
-1%
51%
6%
5%
62%
2%
64%
100 000
50 000
110 000
55 000
Marine
50%
3%
47%
0%
4%
43%
3%
-3%
0%
44%
4%
4%
52%
2%
54%
120 000
50 000
132 000
55 000
Engineering
60%
3%
57%
0%
10%
47%
2%
-2%
0%
47%
6%
6%
59%
3%
62%
110 000
20 000
121 000
22 000
Aggregate
57%
2%
55%
1%
4%
50%
3%
-3%
-1%
49%
4%
4%
57%
2%
59%
530 000
270 000
583 000
297 000
Forecasting the underwriting result
Application (Loss Ratio Walk)
• Business planning (including for the Financial Condition Report)
• Allows the projection of the loss ratio in a scientific manner
• Helps to ‘tell a story’ of how the latest year’s result compares to expected
levels
Also can be used for:
• Unpacking past loss ratio trends
• Measuring of result impacts from year-to-year compared to expected level
 Premium increases
 Claims inflation
 Variation in claim types from year-to-year
 Impact of claims initiatives
 Impact of change in business mix
Complete the process
Application
• Result meetings held by Actuarial Function with key business divisions:
 Finance  Risk management  Claims  Underwriting  Pricing
• Two-way feedback
• Key exhibits used to present results
• Exhibits transparent and summarized, with focus on the Loss Ratio
• Similar exhibits considered every year/period
• Embed the actuarial forecast in Business Plan and financial reporting
Conclusion
Actuarial Function has a key role to play in
analysing the underwriting result
Some initiative is needed by the AF to
achieve broader objectives
The example exhibits demonstrate
significant analysis that can be performed
Technical Reserving Issues
The following two topics are considered:
1. Reserve margins
2. Claims provisions
• Not addressed by actuarial guidelines in Kenya
• Actuarial guidelines in South Africa cover these topics
Reserve margins
•
The member may recommend
addition of a margin
•
Depends on adopted reserving policy
•
Guided by purpose of the exercise
Margin
Increase in reserve
Current guidelines in South Africa
Best estimate reserve
The good
• Understand reserve variability
• Assessing extreme outcomes
• Margin held for worse-thanexpected experience
However
• A margin implies a higher
reserve level
Claims provisions
• Provision for direct and indirect
claims handling expenses
Expense provision
Best estimate claims reserve
The good
• Theoretical sense
• Simple calculation
• Guidelines promote
consistency in practice
However
• Can still be
inconsistency in
practice
Increase in reserve
Guidelines in South Africa require:
Closing
I) Benefits of Actuarial Reserving
• Moving focus beyond methodology and reserve level
• Key way in which the Actuarial Function can add value
• Directly applicable to the Financial Condition Report
II) Technical Reserving Issues
• GI reserving guidelines/requirements may evolve over time to address
the technical issues presented today
Thank You
…any Questions?