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International Catastrophe Reserving

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International Catastrophe Reserving – PowerPoint PPT presentation

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Title: International Catastrophe Reserving


1
International Catastrophe Reserving
  • Paul Gates, Platinum Underwriters
  • Casualty Loss Seminar, September 11 2006

2
International Cat Reserving
International Cat Reserving a live experience!
3
Catastrophe Reserving in Europe
  • Legislative background
  • The changing environment
  • Practical issues
  • Assessing catastrophic loss potential
  • Live catastrophe reserving
  • Large versus small catastrophes

4
Legislative Background - Europe
  • A quick tour
  • United Kingdom
  • Germany
  • Switzerland
  • Australia (?!)
  • Pre-funding and post-funding

5
Catastrophe Reserving in the UK
6
Catastrophe Reserving in the UK
  • Regulated by FSA (Financial Services Authority)
  • Tax position supervised by Inland Revenue
  • Equalisation Reserves pre-event
  • Post-event demonstration of reserve requirement
    (tax allowance)

7
Catastrophe Reserving in the UK
  • Equalisation Reserve Calculation
  • Transfers In Out
  • Transfers In
  • Percentage of Net Premiums in Financial Year
  • Transfers Reserve based on Business Groups
  • Transfers Out
  • Abnormal Loss
  • Transfer Limited by Business Group Maxima

8
Equalisation Reserves in the UK
Abnormal loss refers to losses in excess of
above percentages, expressed as percentage of net
written / earned premiums Business Group maximum
expressed as percentage of average net written in
previous 5 years
9
Example of UK Equalisation Reserving
10
Catastrophe Reserving in the UK
  • Post-event Reserving
  • Projection of ultimates
  • Identifying claimant / potential cedants
  • Run-off term
  • Uncertainty v best estimate
  • IBNER
  • Unknown Catastrophe

11
Catastrophe Reserving in Germany
  • Regulated by BAFin (Bundesanstaltfür
    Finanzdienstleistungsaufsicht)
  • Significant Equalisation Reserves
  • Prescribed by formula
  • Applied to transfers in out
  • Related to the standard deviation in last 15
    years
  • To disappear eventually

12
Equalisation Reserves in Germany
  • Based on net premiums
  • Per line of business
  • Compare loss ratio for year with average
  • Prerequisites for establishing reserve
  • Average net premium large enough (gtEur125,000)
  • Standard deviation of loss ratios gt5
  • Combined ratio gt100 at least once in 15 years
  • Limitation for reserve
  • Equals (usually) current net premium standard
    deviation 4.5
  • 3.5 of limit transferred to the reserve pa

13
Catastrophe Reserving in Switzerland
  • Regulated by FOPI Federal Office of Private
    Insurance (also known as BPV/OFAP/UFAP)
  • Equalisation reserves still being utilised
    significantly?
  • Swiss Re.expects its losses reserves related to
    Hurricane Ivan and Typhoon Songda to be
    approximately USD300m before tax.in addition to
    estimated claims of USD 290m before tax for
    Hurricanes Charley FrancesSwiss Re may use
    some of its claims equalisation reserves to
    absorb part of the financial impact of these
    events(Swiss Re news release 24 Sept 2004)
  • Swiss Rewill use equalisation reserves to
    mitigate part of the claims caused by this years
    extraordinary hurricane season (Swiss Re news
    release 2 November 2005)

14
Catastrophe Reserving in Switzerland
  • Equalisation Reserves
  • Give details of determination in business plan
  • Must maintain this methodolodgy
  • No explicit mention in Swiss Insurance Regulation
    Act (no guidelines)
  • Exception for credit insurance
  • To be eliminated?

15
Catastrophe Reserving in Australia
  • Regulated by APRA
  • Best estimate reserving
  • According to actuarial calculation
  • No equalisation reserves
  • No tax allowance

16
Evolution of Catastrophe Reserving
  • Harmonisation of financial regimes (Europe)
  • International Financial Reporting Accounting
    Standards
  • Demise of equalisation reserves?
  • The debate continues
  • Listed companies
  • Consolidated accounts v local reporting
  • Link to solvency requirements
  • Solvency II progressing (risk based assessment in
    Europe)
  • Catastrophic loss key driver of (in)solvency
  • Role of actuaries

17
Catastrophe Reserving in Practice
  • Goldie Re (UK)
  • Assessing loss potential pre-event
  • Link to solvency calculations
  • Live Cat reserving
  • Reserving at year-end
  • Large versus small events

18
Catastrophe Reserving in Practice
  • Assessing Loss Potential (PML)
  • Key zones
  • Exposing cedants
  • Using pricing information
  • Losses per event, per cedant
  • Layers, shares, exchange rates, reinstatement
    terms
  • Also allow for outwards reinsurance
  • Focus on key return periods
  • Forms basis of catastrophic loss element of ICA
    model solvency purposes

19
PML Example
20
PML Example
21
Live Cat Reserving
  • Need for more timely information
  • Shareholders/investors
  • Management
  • Less developed process outside USA
  • No equivalent of NHC
  • More reliant on cat modelling firms (RMS/EQE/AIR)
  • Liaise with brokers and cedants
  • Use PML calculations as basis
  • Link to matching event IDs, issued by modelling
    cos

22
Live Cat Reserving Example
  • Windstorm Erwin
  • 7th to 9th January 2005
  • Affected Northern UK, Northern Germany, Denmark
    and Sweden
  • A years worth of Swedens forestry output
    felled!
  • Information hard to obtain
  • Broker reports
  • News websites
  • Approximately USD 1.75bn of insured loss

23
Live Cat Reserving Example
  • Windstorm Erwin
  • Range of reserve estimates 350,000 to
    25,000,000
  • September 2006 -100 settled, final loss of 2m

24
How year-end reserving might run
  • Large Catastrophes
  • Define threshold
  • Specific projections
  • Allowance for deterioration
  • New cedant notifications
  • Market developments
  • Reporting tail quite swift
  • Small catastrophes
  • Loss ratio for overall portfolio
  • Reporting slower

25
Thank you for your attention
Hurricane Fabian, 2003
pgates_at_platinumre.com
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