Insurance and Reinsurance
Reserving in Overseas Markets
Peter A. Royek
Toa Reinsurance Company of America
Casualty Loss Reserve Seminar
Scottsdale, Arizona
September 13, 1999
Birth of a Session
• “Affiliate” Membership & “Mutual
Recognition”
• One Actuary’s Recent Experience with
“Overseas” Markets
– Japan
– Canada
Broad Overview of Session
• General Discussion of Differences
Involving Reserving Among World Markets
• Insurance and Reinsurance Reserving in the
United Kingdom
General Discussion of Differences Involving
Reserving Among World Markets
• Dimensions for Differentiation
• International Reserving Example
Dimensions for Differentiation
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Methods
Reserve Categories
Data
Accounting Rules
Role of the Actuary
Methods (or the lack thereof)
• Japan
– Strict formula for IBNR calculation
• Automobile
– Earned Premium for current year X 3%
• Personal Accident, Liability, and WC
– Earned Premium for current year X 8%
• All Other Lines
– 0
– Need for change in the future?
• Europe (Outside the UK)
– Tendency toward a more theoretical, statistical
approach
Methods (or the lack thereof)
• Others
– Argentina
• Automobile “IBNR”
– Italy
• New Requirement for IBNER
– Brazil
• New IBNR Requirement
• Clearly “Standard” Methods are Not
Currently Used in these Markets
Rate Inadequacy => Reserve Inadequacy
Two Companies Writing the “Same” Risk
• Company A - Charges Tariff Rate
– Premium = 1,000
– IBNR = 80 (8% x 1,000)
• Company B - Deviates Off Tariff Rate
– Premium = 700
– IBNR = 56 (8% x 700)
Reserve Categories
• Premium Deficiency Reserve - Canada
– Amount by which UPR is insufficient to cover
future loss and expense, liability (if any) must
be posted
– Appointed Actuary must opine on the adequacy
– Similar to Unexpired Risk Reserve in the UK
– GAAP adjustment in the US
Reserve Categories
• Contingency (or Extraordinary Loss)
Reserve - Japan
– Pre-event loss fund with strict rules for build-up
and draw-down
– Coming to the US? See next session - “TaxExempt, Pre-Event Catastrophe Reserves, in the
Wind?”
Reserve Categories
• Equalization Reserve - Germany
– Can be used for smoothing of results
– Like “Topside” or “Corporate” reserves in US
companies?, but NOT a separate statutory item
– Somewhat like Extraordinary Loss Reserve due
to the tax-free feature of these reserves, but
NOT the strict rules to build-up or draw-down
Data
• Benchmarks
– Not as publicly-available as in the U.S.
• AM Best,RAA,etc
– “Private” collections do exist
• Consultants
• Companies
– Canada
• Some industry data for Auto
• Runoff exhibit in Annual Return NOT by LOB,
unlike Schedule P
– Japan
Data
• Other Issues
– Not enough data
• How to reserve for small or incidental foreign
exposure with lack of benchmarks?
• Even if no statutory requirement for IBNR, may
need to reserve for US Annual Statement purposes
– Too much data
• A “stew” of otherwise-heterogeneous data in a
single reserving class
– Due to credibility concerns or ceding company reporting?
Accounting Rules
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Tax Rates
Basis for Accounting
Different Statutory Statement Items
Fiscal Year/Reporting Frequency
Accounting Rules
Tax Rates on Underwriting Income
• Japan - 30%
– Recent History
• 1998 - 34.5%
• 1990 through 1997 - 37.5%
• 1989 - 40%
• United Kingdom - 30%
Accounting Rules
Tax Rates on Underwriting Income
• USA - 35%
• Canada - 29.12% Federal, plus ...
– Combined Federal + Provincial Rates
• Manitoba - 46.12%
• Ontario - 44.62%
• Quebec - 38.27 (for “Active/eligible” Companies)
Accounting Rules
Basis for Accounting
• Differences when comparing to US Statutory or
US GAAP Accounting
– Example: Valuation of Assets in Japan
• Impacts the calculation of “Surplus”
• Due to change to “market-based” valuation in 2000/2001
• Companies are making US GAAP Adjustments
– Some previously-mentioned items go away
– Allows for level comparison of companies
Accounting Rules
Different Statutory Statement Items
• Examples:
– Premium Deficiency Reserves
– Extraordinary Loss Reserves
– Runoff Exhibit in Canadian Annual Return
Accounting Rules
Fiscal Year/Reporting Frequency
• Accounting year-end dates
– Japan - 3/31
– Australia - 6/30
• In some markets, results are reported (and
IBNR is calculated) only at fiscal year-end
Role of the Actuary
• Canada
– Best Estimate
• The “minimum” to be carried by the company
• Margins above are disclosed
• Contrast these with the US
– Codification/Best Estimate Reserving coming to the US?
– Discounting/PFADs
• Discounting only allowed by OSFI for AB
• CIA requires reserves be discounted and a Provision for
Adverse Deviation (PFAD) be added
– Discounted Reserve + PFAD must be >(or =) Company Carried
Role of the Actuary
• Canada (continued)
– DCAT
• Companies operating in Canada now subject
– Opining on Premium Liabilities
Role of the Actuary
• Japan
– Duties of the Actuary listed in “Insurance
Business Law”
– No Actuarial Judgment in Reserving
– Now a Need for Rating Expertise
– “Actuarial Full Employment Act”?
International Reserving Example
Introduction
• The “same” piece of business
(Treaty/Certificate/Policy) will be run
through 4 different scenarios in 3 different
jurisdictions
• The effects of local reserving rules and tax
rates will be run against the same
underwriting results
International Reserving Example
“Simplifications”
• Each company writes only this one account
– IBNR thus allocated to this account
• Investment Income
– Simplified Investment Income calculation,
meant only to show that II will vary due to the
effect of reserve rules + tax rates on cash
available for investment
– No variation of investment yield by country
– No variation between tax rates on investment
income and tax rates on underwriting income
International Reserving Example
“Simplifications”
• All premium is earned in the first year
– No UPR at year end > No “Premium Liability”
Issues
• Discounting for US tax purposes is NOT
performed
International Reserving Example
Framework
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LOB = Auto
Premium = 1,000 units
Expenses = 250 units, all paid on 1st day
Expense Ratio = 25%
Investment yield = 5%
Ultimate Loss Ratio = 70%
– “Reasonable Range” (for US) is (65%,75%)
• Account closed after 5 years
– Account history in years 1 through 5
• Payment pattern - 100,100,200,200,100
• Case reserves held at year-ends - 100,100,100,50,0
International Reserving Example
Framework
• Taxes paid at year end on annual
underwriting + investment income
• Investment income calculated on average
cash funds held (oversimplified in this
example)
• Over- or Under-reserving (where
applicable) is adjusted in year 5
International Reserving Example
Framework
• All scenarios will produce an underwriting
income of 50
• All scenarios will produce a loss ratio of
70%, and expense ratio of 25%, and a
combined ratio of 95%
• Net Income and Cash are the items which
will vary
International Reserving Example
Scenarios
• Japan
– IBNR = 30 at Year 1
• Released after Year 1 as
all premium is earned
– Tax rate = 30%
International Reserving Example
Scenarios
• Canada
– Company sets loss
ratio to the Best
Estimate of 70%
– IBNR is held to
achieve 70% until final
settlement
– Tax rate used is
Federal + Ontario
provincial rate =
44.62%
International Reserving Example
Scenarios
• USA #1
– Company sets loss
ratio to the high end of
the range - 75%
– IBNR is held to
achieve 75% until final
settlement
– Tax rate = 35%
International Reserving Example
Scenarios
• USA #2
– Company sets loss
ratio to the low end of
the range - 65%
– IBNR is held to
achieve 65% until final
settlement
– Tax rate = 35%
International Reserving Example
Results
• Japan
– IBNR lowest Year 1, then 0
– Takes largest underwriting
profit & pays most tax in
Year 1. Takes largest U/W
losses next 3 years
– Overall pays least taxes
(lowest rate)
– Overall makes least II (while
paying overall least taxes,
paid a lot in Year 1)
– Total Net Income = 60.04
International Reserving Example
Results
• Canada
– Sets loss ratio to the
“correct”70%, incurs all
loss in Year 1
– Earns II between the two
US scenarios as it holds
reserve level between the
two
– Overall pays most taxes
(highest rate)
– Total Net Income = 51.65
International Reserving Example
Results
• USA #1
– Company sets high loss
ratio 75%
– Takes underwriting gain
in Year 5 with downward
adjustment
– Most NI & tax in Year 5
– Overall makes the most II
as it holds more reserves
longer
– Total Net Income = 62.31
International Reserving Example
Results
• USA #2
– Company sets loss ratio 65%
– Takes underwriting loss in
Year 5 with upward
adjustment
– Least NI & tax in Year 5
– II greater only than Japan
– Total Net Income = 59.98
International Reserving Example
“Conclusion”
• The differing reserving rules and tax rates
among jurisdictions do impact the results of
the “same” account. However:
– Factors that were “simplified”or ignored in this
example will affect the magnitude and can
affect the comparative magnitude of the results
– Factors that can vary from those in this example
will also affect the magnitude and can also
affect the comparative magnitude of the results