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Loss Reserving in Mexico

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Prevision and Catastrophic Reserves. Role of the Actuary. Final Comments. 3 ... Prevision and Catastrophic Reserves ... – PowerPoint PPT presentation

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Title: Loss Reserving in Mexico


1
Loss Reserving in Mexico
  • Eduardo Esteva
  • Minneapolis, Minnesota
  • September 18, 2000

2
Index
  • Background of IBNR Estimation in Mexico
  • Methodology
  • Accounting Rules
  • Data
  • Prevision and Catastrophic Reserves
  • Role of the Actuary
  • Final Comments

3
Background of IBNR Estimation in Mexico
  • In 1991 the Government began the deregulation of
    the Insurance Market.
  • This allowed the companies more flexibility in
    some areas.
  • E.g. relatively easy approval of technical notes
    for any product that the companies wanted to sell.

4
Background of IBNR Estimation in Mexico
  • The rules regulating IBNR reserves had existed
    for a long time, but it was not until 1994 that
    the National Insurance and Surety Commission
    implemented the rules for estimating the IBNR
    Reserve.
  • The Commission has chiefly been concerned with
    the solvency of the Insurance Companies.

5
Background of IBNR Estimation in Mexico
  • The rules for the IBNR Reserve were part of the
    beginning of a deregulated Insurance Sector.
  • For the first time a Company could choose a
    methodology for a reserve that must be approved
    by the Commission and did not need to follow a
    rule prescribing how to calculate the reserve,
    like the unearned premium reserve.

6
Background of IBNR Estimation in Mexico
  • The Company needs the approval of the Commission
    to use or to make any change to the technical
    note to calculate the IBNR Reserve.
  • In the case of a change, there is also a
    requirement for a study on the impact of the
    change, including an analysis of the change by an
    external appointed actuary.

7
Background of IBNR Estimation in Mexico
  • For the creation of the reserves the companies
    had to book at least 50 of the amount of the
    reserve by December 1996 and 100 by December 1997

8
Methodology
  • Each Company may select its own methodology to
    estimate the reserve, but it needs to be
    mechanical.
  • It can use different methods, but it must
    determine a rule for selecting all the factors
    and the ultimate loss amounts. (e.g. a
    volume-weighted average of the methods)

9
Methodology
  • Concerning this constraint, it is not possible to
    make any selection of patterns or ultimate
    amounts, the only exception is the selection of
    the tail factor.
  • Also, if the results include a series of
    report-to-report factors that go down and then
    up, the actuary must adjust the series.
  • (e.g. if we have 1.2, 1.1, 1.15, the 1.1 must be
    adjusted)

10
Methodology
  • At this moment the Commission does not allow the
    companies to have a negative IBNR Reserve, the
    reserve must be set equal to zero.
  • It is not usual that a company estimates the IBNR
    Reserve net of Salvage and Subrogation.
  • The insurance sector in general only uses
    the incurred loss development method, rather than
    both the paid and incurred methods.

11
Accounting Rules
  • In Mexico there are some differences in the
    accounting rules compared to the USA, that can
    affect the amount of the IBNR Reserve. Some of
    the more important differences are as follows

12
Accounting Rules
  • Reinsurance
  • The Proportional contracts are the only ones
    considered as ceded premium, and the Non
    Proportional contracts are considered in the
    acquisition cost.
  • For this reason, the net IBNR Reserve is
    typically only net of proportional contracts,
    booking a reserve net of the non proportional
    contracts is subject to approval by the
    commission.

13
Accounting Rules
  • In Mexico there is not Case Reserve for ALAE and
    there are not any ULAE Reserves for the day to
    day claims. These are considered to be
    operational or claim costs for the company and
    must be paid by the cash flow of the company.
  • The only required loss expense reserve is for
    ALAE related to the IBNR claims.

14
Accounting Rules
  • In general you do not use the IBNR Reserve if you
    have a claim that is IBNR, you only adjust the
    reserve at the end of the accounting period.

15
Data
  • The information concerning the IBNR (Loss
    triangles) has been requested by the Commission
    on a quarterly basis since 1994 for paid claims
    and since 1997 for incurred claims.
  • This information is requested separately by
  • LOB.
  • Liability and Non Liability within the LOB.
  • Currency (National and foreign)

16
Data
  • On an annual basis other information has been
    required by the Commission since 1994, with some
    adjustments in 1997.
  • The required report is similar to Schedule P, but
    one of the big differences is that the premium
    that is reported is the premium written in the
    year and not the earned premium.

17
Data
  • Up to now the information reported by the
    companies is not available to the public or the
    insurance companies or consulting firms. We are
    not sure if and when it will be publicly
    available.

18
Prevision and Catastrophic Reserves
  • Prevision Reserve
  • The purpose of this reserve is to have a
    liability in case the company has a significant
    deviation in loss ratio.
  • The reserve is part of the Risk Based Capital and
    it is increased by a percentage of the written
    premium from the company.

19
Prevision and Catastrophic Reserves
  • Catastrophic Reserve
  • This reserve is a liability created, at the
    moment, based on Earthquake risk.
  • This reserve is created net of reinsurance
    generally calculated using a model that takes
    into consideration the geographic location of the
    building and other factors.

20
Prevision and Catastrophic Reserves
  • For the release of these reserves, the Company
    needs approval from the Commission and also must
    make a program to constitute it again.

21
Role of the Actuary
  • Background
  • In Mexico an Actuary receives a degree in the
    University after studying between 4 and 5 years
    and needs to have an official governmental
    document as a professional credential.
  • To be an appointed actuary, one must complete
    some additional requirements set by the
    Commission, including some professional exams or
    a special approval from the National College of
    Actuaries.

22
Role of the Actuary
  • The Commission requires that the technical note
    describing the estimation of the IBNR reserve
    should be sent with the approval of an Actuary.
  • In case of a modification of the technical note,
    it should also be presented with the approval of
    an external appointed actuary.

23
Role of the Actuary
  • Each year, not later than 28 of February, each
    company must present to the Commission an
    external actuarial opinion for all the reserves.
    This report is signed by the appointed actuary.

24
Final Comments
  • It is clear, that up to now the rules for the
    estimation of the IBNR Reserve are not very
    flexible. There is also a lack of knowledge of
    the methods that actuaries should use to
    calculate and evaluate the reserves, inside the
    companies by the appointed actuaries and in the
    insurance sector.

25
Final Comments
  • This lack of knowledge allows the Commission to
    make strict rules, but it is sure, if the
    actuaries in Mexico learn and have more
    experience with the valuation of the Loss Reserve
    that the regulation can become more flexible.
    Currently the Commission is open to analyze any
    case and may give special treatment if the
    company and its appointed actuary can justify it.

26
Final Comments
  • The National College of Actuaries is working to
    better prepare the actuaries, so that
    collectively we will be better able to perform
    loss reserve analyses.
  • Also, our profession in Mexico is developing a
    continuing education structure.

27
Final Comments
  • As a final note it can be interesting to know
    that in Mexico the Life LOB can have a
    significant IBNR Reserve. Also, we do not have at
    this moment very long tails compared with other
    countries in North America, the longest tails can
    be in transport and in credit life or life for
    governmental workers.
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