International Insurance Reserving An Ocean of Difference

International Insurance International Insurance ReservingReserving

An Ocean of Difference

International Insurance

• Attitudes• Legal Environments• Income Tax Laws• Evaluation Dates• Nationalism

Issues

• Currency Conversion/

Devaluation• Data Differences• Environmental & Toxic Tort

International IssuesInternational IssuesThe UK PerspectiveThe UK Perspective

Peter Copeman

PricewaterhouseCoopers

The UK Perspective

• Developments in the UK market• Lloyd’s - an update• Actuarial involvement - including Lloyd’s

opinions• Differences in operating environment• Differences in accounting basis• International standardisation

UK Market Developments

• Consolidation of insurance industry• High level of M&A activity• Lloyd’s corporate capital• Emergence (and dominance?) of a few major

players• Foreign ownership• Soft market• Increases in UK bodily injury awards

Equitas

• Equitas established on 4 September 1996• Reinsured 1992 and prior year liabilities of

Lloyd’s syndicates• Largest ever reinsurance transaction • Proportionality conditions• Transition from 400 + syndicates to one

company

Equitas - changes

• Centralised claims handling

• Administration being rationalised

• Managing assets and liabilities

Liabilities (Net Discounted)

10.58.7

0

2

4

6

8

10

12

4 Sept. '96 31 Mar. '97

$Bill

ion

s

Changes in Lloyd’s Capital Base

• Capital requirements for individual “names” increasing

• Contribution of “names” to central fund increasing (0.6% 1.5% of premiums)

• Introduction of risk-based capital• Future of unlimited liability names?• General expectation that corporate capital share

will increase

Lloyd’s Capital Base

Percentage of Total Capacity

15% 23% 30%44%

59%

0%

20%

40%

60%

80%

100%

1994 1995 1996 1997 1998

Corporate Members Individual Members

Lloyd’sOwnership and structural changes• Development of Integrated Lloyd’s Vehicles

(“ILVs”)• US influence [50% + US/Bermuda

ownership]• Future of “annual venture” under

consideration• Currently Lloyd’s self-regulated• Lloyd’s to be regulated by new Financial

Services Authority in the future

Actuarial involvement at Lloyd’s

• Historically quite limited• Recent expansion of involvement

– “problems of the past”

– Equitas

– Pressure from capital providers

– Checks and balances for underwriters

• Part of professionalism drive • Pricing involvement developing

Actuarial opinions at Lloyd’s

• Opinions for syndicates writing US business• Submitted to NAIC and New York Insurance

Department• Net reserves (total)• US situs trust funds

31 December 1996

Actuarial opinions at Lloyd’s

• UK solvency opinion for Corporation of Lloyd’s

• > “best estimate” for UK solvency • “reasonable” for NAIC/NYID• Each economic entity (year) has separate

opinion

31 December 1997

Actuarial opinions at Lloyd’s

• UK opinion extended to include:-– Bad debts

– ULAE

• Year 2000 comment required• Practising certificate to be introduced

(effective 12.31.99)

31 December 1998

Different Operating Environments

• “Subscription market” - risks shared widely• But, trends towards convergence and larger

“lines”• Central administration• Historically, data poor…… but improving• Underwriter was king, now somewhat more

balanced

London Market (incl. Lloyd’s)

Different Accounting Basis

• Lloyd’s syndicates and some London Market companies on “funded” basis

• Funded basis of accounting– result deferred for 3 years

– data reported on an underwriting year basis

• Conversion to US GAAP now required more often - can be a difficult task

Conversion to US GAAP

• Data may not be immediately available• Requires different way of thinking for

syndicates/companies• financial information required on accident

year basis, split by underwriting year and currencies

Conversion to US GAAP

• Identification of earnings patterns• Need for proper assessment of “open years”• Different conditions for “transfer of risk” on

reinsurance• Various other differences of accounting

treatment

Acquisition of London Market/ Lloyd’s Companies

• Rapid changes in mix of business• Changes in underwriters• Opportunistic use of “cheap” reinsurance• Complex reinsurance programmes• Whole account covers• Unusual risks• Quality of data/management information

What to watch out for !

International Insurance Reserving: International Insurance Reserving: Some Practical IssuesSome Practical Issues

Mark Scully

Tillinghast-Towers Perrin

Overview of Presentation

• Data issues– Exchange rates– Varying definitions of a triangle– Clean-cut business

• Latent claim exposures• Approach to reserving in Germany• Reserving standards in Europe

Exchange rate movements distort loss development data• Comparable to excessive inflation• Occur whenever triangles contain data

– in different underlying currencies and– converted at historical exchange rates

• Possible solutions are:– separate triangles by currency or– conversion using a single exchange rate

• if development is similar or• volume too low to analyze separately

An Example of the Distorting Effect of Exchange Rate Changes• Business written in two countries: UK and

Country A• Each country writes in local currency• Loss development features of business are

identical in both countries

Cumulative Paid Losses and LDFs: UK Business in Sterling

Cumulative Paid Claims1993 175 315 420 525 5951994 193 347 462 5781995 212 381 5081996 233 4191997 256

Report-to-Report Loss Development Factors1993 1.800 1.333 1.250 1.1331994 1.800 1.333 1.2501995 1.800 1.3331996 1.800

Average 1.800 1.333 1.250 1.133

Cumulative Paid Losses and LDFs: Country A Business in Currency A

Cumulative Paid Claims1993 1,125 2,025 2,700 3,375 3,8251994 1,238 2,228 2,970 3,7131995 1,361 2,450 3,2671996 1,497 2,6951997 1,647

Report-to-Report Loss Development Factors1993 1.800 1.333 1.250 1.1331994 1.800 1.333 1.2501995 1.800 1.3331996 1.800

Average 1.800 1.333 1.250 1.133

Historical Exchange Rates:Currency A per Pound Sterling

Exchange Rate atEnd of

Year Year

1993 1.11994 1.21995 1.31996 1.41997 1.5

Data Converted at Historical Exchange Rates Distorts LDFs

Cumulative Paid Losses (Total all Business in Sterling)1993 1,198 2,088 2,712 3,299 3,6691994 1,224 2,139 2,785 3,3961995 1,259 2,206 2,8781996 1,302 2,2871997 1,354

Report-to-Report Loss Development Factors1993 1.743 1.299 1.217 1.1121994 1.748 1.302 1.2191995 1.752 1.3041996 1.756

Average 1.750 1.302 1.218 1.112

Conversion at a Single Exchange Rate Removes this Distortion

Cumulative Paid Losses (Total all Business in Sterling)1993 925 1,665 2,220 2,775 3,1451994 1,018 1,832 2,442 3,0531995 1,119 2,015 2,6861996 1,231 2,2161997 1,354

Report-to-Report Loss Development Factors1993 1.800 1.333 1.250 1.1331994 1.800 1.333 1.2501995 1.800 1.3331996 1.800

Average 1.800 1.333 1.250 1.133

Exchange Rates: Final Observations• Actuaries not in business of predicting future

exchange rates• Important to match liabilities with assets in same

currency

Loss Development Triangles Must be Exactly Defined• “Moving triangles”, where claims are coded to

year of original notification/cession• French construction liability business has three

possible dimensions are possible (year of construction, accident year, report year)

• German triangles often split data into two report year cohorts:– Accident year = Report year– Accident year < Report year (“late” claims)

“Clean Cut” Accounting year business cannot be analyzed in Triangles

• An underwriting year is typically reinsured after 1 to 7 years into the current U/W year

• Common in Europe with short tailed reinsurance business

• When the cedent is in runoff, business reverts to normal

• U/W years develop down not across the triangle

Material latent claim exposures have not yet emerged outside the US• Some asbestos claims in UK (through employers

liability policies)• Large potential exposure to asbestos claims in

France• Key latent claim risk is to U.S. exposures (e.g.,

through foreign subsidiaries, reinsurance)

Material latent claim exposures have not yet emerged outside the US• Some asbestos claims in UK (through employers

liability policies)• Large potential exposure to asbestos claims in

France• Key latent claim risk is to U.S. exposures (e.g.,

through foreign subsidiaries, reinsurance)

Claims Reserving in Germany

• Minimal actuarial involvement (e.g., typically no annual review)

• IBNR is formula driven; judgmental adjustments made to (large) case reserves– distorts incurred triangles

• Industry is over-reserved in the aggregate

German runoff gains appear to correlate with accident year loss results

Accident Year Loss Ratios vs. Runoff Gains

0%2%4%6%8%

10%12%14%16%

92% 94% 96% 98% 100% 102% 104%

Accident Year Loss Ratio

Run

off (

% o

f Pre

miu

m)

Note: Runoff gain = Favorable development on prior loss reserves (here as % of premium)

German reserve levels vary substantially by segment (and company)

Ratio of Claim Reserves to Premium (Growth-Adjusted)

0% 20% 40% 60% 80% 100% 120% 140% 160%

Allianz Family

Large Stock Cos.

Low Cost Cos.

Others

Mutuals

Public Law Cos

Direct Writers

1995 1996

Reserving Standards in Europe

• Currently no statutory requirement, minimal actuarial involvement

• Stimuli for change:– European solvency regulations– National tax authorities

• Actuarial organizations involved

• Direction/Solution not yet clear but it’s “on the radar screen”

International Insurance International Insurance ReservingReserving

An Ocean of Difference