Reserve Ch1-4

Internal management

An inadequate unpaid claim estimate falsely assume insurer appear to be a stronger position than it really is. This may drive an insurer to reduce its rates, which could cause unable to pay claim arising from the new policies, possibly result in insolvency

A redundant unpaid claim estimate falsely assume insurer appear to be a weaker position than it really is. This may drive an insurer to raise its rates, which could cause to a loss of market share and premium revenue.

Investor

An inadequate unpaid claim estimate falsely assume insurer appear to be a stronger position than it really is. This may drive an investor make inappropriate decisions to invest it, which could cause financial loss to investor

A redundant unpaid claim estimate falsely assume insurer appear to be a weaker position than it really is. This may drive an investor make inappropriate decisions to withdraw money from insurer.

Regulator

An inadequate unpaid claim estimate falsely assume insurer appear to be a stronger position than it really is. This may drive an regulator not get involved until it’s too late to help the insurer to avoid insolvency.

A redundant unpaid claim estimate falsely assume insurer appear to be a weaker position than it really is. This may drive a regulator implement unnecessary regulator action to prevent insolvency.

characteristics to consider when sub-dividing claims

• Coverage: Different types of coverage (e.g., liability vs. property) can have distinct claim patterns.

• Volume of Claim Counts in the group: A sufficient number of claims in each group ensures statistical credibility.

• Reporting Patterns: Some claims are reported immediately, while others take longer, impacting reserving and trend analysis.

• Settlement or Payment Patterns: The time taken to settle claims varies by type and complexity, affecting cash flow and reserve estimates.

• Severity (Average Settlement Value): Higher-severity claims may require different handling and reserving techniques.

• Policy Limit: Claims distributions differ based on policy limits, influencing severity analysis and excess layer pricing.

Large Claims

Actuaries must establish a “large loss threshold” to determine what constitutes a large loss. Actuaries consider the following when establishing the large loss threshold:

• Number of claims over the threshold each year

• Size of claim relative to policy limits

• Size of claim relative to reinsurance limits

• Credibility of internal data regarding large claims

• Availability of relevant external data

CY data

Advantage

• There is no future development. As soon as the CY closes, the data is fixed

• It is readily available

Disadvantages

• It provides no view of loss development.

• It may not reflect the current state of the insurer’s book, as it could be significantly impacted by older claims

AY data

Advantages

• It is easy to achieve and understand

• It becomes reliably estimable sooner than those for a policy or underwriting year

• Tracking claims by accident year is valuable when there is change due to economic or regulatory forces (ex. inflation or law amendment) or major claim events (ex. hurricane) which can influence claims experience

Disadvantages

• There may be a potential mismatch between claims and exposures for insurers

• It includes claims from policies underwritten and priced at more varied times than policy or underwriting year aggregation

PY or UY data

Advantages

• It provides an exact match between claims and exposures/premiums

• It is useful when underwriting or pricing changes occurs (ex. shift from full coverage to large deductible policies, increase in the price charged leading to a change in expected loss ratios)

Disadvantages

• It takes longer for data to mature

• it can make it difficult to understand and isolate the effect of a single large event (ex. hurricane)

Claims reporting and payment patterns, frequency, and severity can all be altered by changes in

• Classes of business written

• Geographical focus

• Policy limits

• Deductibles

• Reinsurance arrangements, including limits and attachment points

• Inflation

• Legal and social environment, such as new court rulings or the implementation of tort reform measures