International Insurance
Reserving
An Ocean of Difference
International Insurance
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Attitudes
Legal Environments
Income Tax Laws
Evaluation Dates
Nationalism
Issues
• Currency Conversion/
Devaluation
• Data Differences
• Environmental & Toxic Tort
International Issues
The 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
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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
$Billions
Liabilities (Net Discounted)
12
10
8
6
4
2
0
10.5
4 Sept. '96
8.7
31 Mar. '97
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
100%
80%
60%
40%
20%
15%
23%
30%
1994
1995
1996
44%
59%
0%
Corporate Members
1997
1998
Individual Members
Lloyd’s
Ownership 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
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“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
31 December 1996
• Opinions for syndicates writing US business
• Submitted to NAIC and New York Insurance
Department
• Net reserves (total)
• US situs trust funds
Actuarial opinions at Lloyd’s
31 December 1997
• UK solvency opinion for Corporation of
Lloyd’s
• > “best estimate” for UK solvency
• “reasonable” for NAIC/NYID
• Each economic entity (year) has separate
opinion
Actuarial opinions at Lloyd’s
31 December 1998
• UK opinion extended to include:– Bad debts
– ULAE
• Year 2000 comment required
• Practising certificate to be introduced
(effective 12.31.99)
Different Operating Environments
London Market (incl. Lloyd’s)
• “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
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
What to watch out for !
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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
International Insurance Reserving:
Some 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 Claims
1993
175
1994
193
1995
212
1996
233
1997
256
315
347
381
419
420
462
508
Report-to-Report Loss Development Factors
1993
1.800
1.333
1.250
1994
1.800
1.333
1.250
1995
1.800
1.333
1996
1.800
Average
1.800
1.333
1.250
525
578
1.133
1.133
595
Cumulative Paid Losses and LDFs:
Country A Business in Currency A
Cumulative Paid Claims
1993
1,125
1994
1,238
1995
1,361
1996
1,497
1997
1,647
2,025
2,228
2,450
2,695
2,700
2,970
3,267
Report-to-Report Loss Development Factors
1993
1.800
1.333
1.250
1994
1.800
1.333
1.250
1995
1.800
1.333
1996
1.800
Average
1.800
1.333
1.250
3,375
3,713
1.133
1.133
3,825
Historical Exchange Rates:
Currency A per Pound Sterling
Year
1993
1994
1995
1996
1997
Exchange
Rate at
End of
Year
1.1
1.2
1.3
1.4
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
1994
1,224
2,139
2,785
3,396
1995
1,259
2,206
2,878
1996
1,302
2,287
1997
1,354
Report-to-Report Loss Development Factors
1993
1.743
1.299
1.217
1994
1.748
1.302
1.219
1995
1.752
1.304
1996
1.756
Average
1.750
1.302
1.218
1.112
1.112
3,669
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
1994
1,018
1,832
2,442
3,053
1995
1,119
2,015
2,686
1996
1,231
2,216
1997
1,354
Report-to-Report Loss Development Factors
1993
1.800
1.333
1.250
1994
1.800
1.333
1.250
1995
1.800
1.333
1996
1.800
Average
1.800
1.333
1.250
1.133
1.133
3,145
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
Runoff (% of Premium)
Accident Year Loss Ratios vs. Runoff Gains
16%
14%
12%
10%
8%
6%
4%
2%
0%
92%
94%
96%
98%
100%
102%
104%
Accident Year Loss Ratio
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)
Direct Writers
Public Law Cos
Mutuals
Others
Low Cost Cos.
Large Stock Cos.
Allianz Family
1995
1996
0% 20% 40% 60% 80% 100% 120% 140% 160%
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
Reserving
An Ocean of Difference