UK General Insurance Companies are their reserves too low or too high - PowerPoint PPT Presentation

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UK General Insurance Companies are their reserves too low or too high

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UK General Insurance Companies are their reserves too low or too high? ... general business of UK-licensed insurers (net) for 5 most recent accident years ... – PowerPoint PPT presentation

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Title: UK General Insurance Companies are their reserves too low or too high


1
UK General Insurance Companies are their
reserves too low or too high?
  • Stephen Diacon, Paul Fenn and Chris OBrien
  • Nottingham University Business School
  • Centre for Risk and Insurance Studies
  • Copies can be obtained from stephen.diacon_at_notting
    ham.ac.uk

2
Acknowledgement
  • This work is part of a project on loss reserve
    errors undertaken at the Centre for Risk and
    Insurance Studies
  • Financial support from the Research Committee of
    the Faculty and Institute of Actuaries is
    gratefully acknowledged.

3
Outline
  • Introduction
  • Accuracy over- or under-reserving, time patterns
  • Loss reserves and loss errors ( actual
    expected)
  • Reserve error motivation
  • Data and evidence
  • Conclusions

4
Introduction
  • The research has two main tasks
  • To estimate calendar-year net reserve errors for
    UK one year general business in year t, based
    on discounted net claims paid in years t1 to t5
    and claims o/s in t5
  • To investigate why reserve errors differ between
    companies and over time.
  • Note Reserve errort actual-expectedt, so a
    negative figure represents over-reserving

5
Average Reserve Errors as Initial Reserve1405
company/years, 1985-1996
6
Average (Discounted) Reserve Errors
7
Independent Insurance Company1985-1994
8
Loss reserves and reserve errors
  • Loss reserves OCR IBNR
  • Focus on loss reserves in calendar year t
    generated from accident years t, t-1, t-4
  • Reserve error PV(cash settlement on these
    accident years in t1 to t5, plus reserve _at_
    calendar year t5) (current estimate _at_ calendar
    year t). Discounted using return on British
    Government 5-year gilt stock
  • Element of subjectivity in the estimation.
    Depends on information available in year t.

9
Reserve error motivation
  • Estimation error and prudence
  • To smooth performance over time
  • To improve current or future performance and
    reduce taxes
  • To improve solvency picture
  • Managerial factors

10
Data
  • Data from the Regulatory Returns for general
    business of UK-licensed insurers (net) for 5 most
    recent accident years (ie t, t-1, .., t-4)
  • So methodology looks forward for up to 10 years
    after the initial accident year, but cannot
    detect reserve errors arising after t10
  • Focus is on aggregate calendar year net reserve
    for all lines, not accident year gross reserve
    by line
  • Sample selection positive gross premium in year
    t, and no restructuring t1 to t5
  • Unbalanced panel data for 202 different
    companies, 1985-1996

11
Histogram of discounted reserve errors by
company/year
12
Histogram of discounted reserve errors by
company
13
Evidence, 1985-1996
  • Average discounted reserve error approximately
    -22 of initial estimated reserve and -17 of
    capital
  • Average undiscounted reserve errors approximately
    -8 of initial reserve
  • The distribution is skewed, with 79 of companies
    over-reserving (ie negative errors)
  • Almost half of all companies over-reserved by at
    least 20

14
Further Evidence
  • First-order autocorrelation in reserve errors
    this years errors depend on last years!
  • Positive short-run relationship between net
    profits and reserve errors, ie high profits in
    year t are associated with under-reserving in
    that year
  • Positive short-run relationship between current
    solvency and reserve errors, ie high capital
    levels in year t are associated with
    under-reserving in that year

15
Conclusions
  • Weighted average reserve error 22.3 of initial
    estimated reserve
  • Two-thirds of over-reserving arises from
    non-discounting
  • Autocorrelation of reserve errors (what does this
    imply for estimating efficiency?)
  • In the short run, under-reserving is associated
    with higher net profits and higher solvency
    margins.
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