Introduction to Reinsurance Reserving Casualty Loss Reserve Seminar Washington, D.C. September 23, 2002 Bruce D. Fell, FCAS, MAAA Am-Re Consultants, Inc

Introduction toReinsurance Reserving

Casualty Loss Reserve Seminar

Washington, D.C.

September 23, 2002

Bruce D. Fell, FCAS, MAAA

Am-Re Consultants, Inc.

2Am-Re Consultants, Inc.

Agenda

• Reinsurance Contract Types• Data Grouping Dimensions• Differences Between Reinsurance and Primary

that affect Loss Reserving• Applications, Complications, and Considerations


Agenda




Reinsurance Contract Types

• What Policies Are Insured?• Mechanics of the Cover



• What Policies Are Insured?– Facultative Reinsurance

• Generally covers one insured/policy

• The one insured/policy is known to the reinsurer at inception

– Treaty Reinsurance• Covers multiple insured/policies which fit treaty specifications

• These multiple insured/policies are unknown at inception but become known to the reinsurer during the treaty term



• Mechanics of the Cover– Proportional Reinsurance

• “Follows the Fortunes” of the reinsured company– First-dollar sharing of premium and loss between the parties

• Reinsurer’s relative participation is pre-determined• Examples:Quota Share, Surplus Share

– Excess Reinsurance• Responds when a loss, group of losses, or a loss ratio exceeds

a set figure• Reinsurer’s relative participation is NOT pre-determined, but

depends on the size of the loss or loss ratio• Examples:Per Risk, Per Occurrence, Aggregate

– Others


Agenda




Data Grouping Dimensions

• Accident Year vs Underwriting Year (or “Losses Occurring” vs “Risks Attaching” or “Policies Incepting”)

• Casualty vs Property• Treaty vs Facultative• Excess vs Proportional

• Broker vs Direct



• Accident Year vs Underwriting Year (or “Losses Occurring” vs “Risks Attaching” or “Policies Incepting”)– Accident Year allows for easiest application of standard

techniques

• Premium fixed as of December 31

• Population of claims fixed at December 31 as well, though many may be unknown

• May not always be an option for reinsurance



• Accident Year vs Underwriting Year (or “Losses Occurring” vs “Risks Attaching” or “Policies Incepting”)– Underwriting Year is often used in reinsurance,

especially for proportional contracts

– This is problematic as an UY can cover two policy years and three calendar years for losses

• The current UY as of 12 months is “incomplete”


The "Incomplete Underwriting Year"

1/1/2001 1/1/2002 1/1/2003 1/1/2004

<---Accident Year 2001--->

<----------------Underwriting Year 2001------------------>

Can cover policies incepting during this period

<---------------------------------Underwriting Year 2001--------------------------------->

Can cover losses occurring during this period

Explanation: Underwriting Year 2001 encompasses any treaties written by the reinsurer in 2001. If these treaties cover "Risks Attaching“ or “Policies Incepting” during the treaty period. Underwriting Year 2001 can theoretically span two years and three accident years (assuming 12-month underlying policies and 12-month treaties, otherwise the exposure period could be even longer).

As of December 31, 2001, Underwriting Year 2001 is “incomplete”. Using standard loss development techniques with factors derived from the past underwriting years will overstate the development of Underwriting Year 2001. Historical development after 12 months includes losses on exposures earned after 12 months of an underwriting year. Provision for these losses should not be included in reserves at the December 31, 2001 accounting date.

<---Accident Year 2002---><---Accident Year 2003--->

Sample Time Line



• Casualty vs Property– Casualty business generally has a longer development tail

– Line of business (LOB) detail is often not available to the reinsurer, but if it is you might want to further subdivide by LOB as different LOBs may develop differently



• Treaty vs Facultative– These display different development patterns, all else

equal



• Excess vs Proportional– Should be separated from each other

• Different development patterns• Possible reserve adequacy mix

– Excess case reserves are generally reviewed by reinsurer’s claim department, which may use ACRs to make case reserve adequacy more consistent among the claims

– Proportional case reserves are generally booked as reported by the reinsured company without review

– Subdivide Excess further, if possible by type of layer - low, high, catastrophe, etc, as these exhibit different development patterns as well


Data Grouping Dimensions• Broker vs Direct

– Reinsurers obtain business from ceding companies either directly from that company or through a broker

– In the case of “broker” business, the data flows through the broker as well - reports are submitted to the reinsurer periodically (monthly, quarterly, or some other increment)

– Because of this, there should be less of a reporting lag for “direct” business than for “broker” business - all else equal

– Therefore, it should be expected that the development patterns differ


Agenda




Differences Between Reinsurance and Primary that affect Loss Reserving

• Reporting Lag/Development Lag

• Data

• Increased Variability

• Tailor-Made or Atypical Contracts or Features

• “Accumulation of Issues”



• Reporting Lag/Development Lag– Primary losses develop faster than reinsurance losses if

only due to the time it takes for information to reach the reinsurer

– Proportional business (“broker”): Accounts are often not due to the reinsurer until 30-90 days after the close of the quarter

• It is then possible that losses that the ceding company books in calendar year “X” will be realized and booked by the reinsurer in calendar year “X+1”. The same loss will be in two different triangle “cells”



• Reporting Lag/Development Lag– Excess business: Reporting lag compounds with development

lag• The reinsurer is not notified immediately of the loss• The losses do not “hit” the reinsurer’s data until they exceed the

threshold established in the Excess reinsurance contract• Example:

– Primary company has $400,000 excess of $100,000 per risk reinsurance cover

– Loss occurs in Year 1, reserved for $25,000– Year 3, reserve increased to $50,000, reinsurer is verbally notified that this

loss MAY eventually reach their contract– Year 5, reserve increased to $150,000, reinsurer incurs loss, loss “hits”

triangles 4 years after it did for the primary company


Primary vs. ReinsurerHistorical Loss Development

Workers Compensation

0%10%

20%30%40%50%

60%70%80%

90%100%

1 2 3 4 5 6 7 8 9 10

Report Period (Year)

Per

cen

tage

of

Ult

imat

e

Primary

Reinsurer

Reproduction of RAA 2001 Historical Loss Development Study GraphPrimary Company Data Source: A.M. Best Company



• Reporting Lag/Development Lag– Premium Estimates

• Premium estimates are needed in reinsurance more than for primary insurance

• Reserves must be set against premium earned/exposed as of the accounting date

• Reporting lag can cause large earned premium amounts to be unreported to the reinsurer as of the accounting date

• This creates a need for premium to be estimated and for losses to be calculated that are associated with this premium



• Data– Quantity

• The “infinite” detail of primary company data is often lost when reported to reinsurers as data gets “collapsed” along several dimensions

– Accident dates not reported

– Lines of business not reported

• Industry benchmarks by line of business or accident year can thus be difficult to use



• Data– Quality

• Quality of data affected by “varied quantity”:– Some ceding companies report more detail to reinsurers than

do others

– As reinsurance data for reserving is organized at the level of common detail in terms of reported data fields, this has an impact on the quality of the analysis



• Increased Variability– Primary insurers purchase reinsurance (among other

reasons) to make their results less variable (ie from catastrophes)

– Reinsurer data is subject to this reinsured variation

– Depending on the type of reinsurance cover, reinsurer data may BE this variation


Primary Experience Gross of Reinsurance

0

20

40

60

80

100

120

140

160

180

1990 1991 1992 1993 1994

Losses (in $ millions)


Primary Experience Net of Reinsurance

0

20

40

60

80

100

120

140

160

180

1990 1991 1992 1993 1994



Reinsurance Experience

0

20

40

60

80

100

120

140

160

180

1990 1991 1992 1993 1994




• Tailor-Made or Atypical Contracts or Features– Many (possibly large) reinsurance contracts have

features that affect the way their experience will develop vis-à-vis other contracts with which they would otherwise be grouped

• Examples: Stop loss arrangements, loss corridors, sunset clauses, etc



• “Accumulation of Issues”– Each primary insurer faces issues such as changing reserve

adequacy, changing settlement patterns, etc– These issues affect that company’s loss reserving data, and

the primary company reserving analyst has tools to neutralize the effects of these on the reserving data

– Reinsurance loss reserving data is an accumulation of the data of primary companies each of which may have these issues

– This adds a further complication to the reinsurance loss reserving process

Documents

Introduction to Reinsurance Reserving Casualty Loss Reserve Seminar Washington, D.C. September 23, 2002 Bruce D. Fell, FCAS, MAAA Am-Re Consultants, Inc