Insurance

1
Insurance Reinsurance Reserving in the UK

• Paul Gates, Lane Clark Peacock
• Casualty Loss Reserving Seminar, 9/18/2000

2
Outline of Talk

• Lloyds the London market
• Actuarial involvement - the what and how
• Current issues for actuaries
• Problems in London - past and present
• Example - reprise

3
Lloyds and the London Market

• What is the London market?
• What is Lloyds?

4
Lloyds

• Insurance and reinsurance market at 1 Lime St,
  City of London
• Society of individual and corporate members
  (Names)
• Individuals generally have unlimited liability
• Corporates have limited liability

5
Lloyds - players

• Broker Market
• Syndicates
• active underwriter
• Managing Agents

6
Corporate v Individual Statistics
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Lloyds - key points

• Began 1688 - Mr Lloyds coffee house
• Marine clubs
• Pre-eminent marine and non-marine insurance
  marketplace
• Reconstruction renewal in early 1990s
• Equitas
• corporate capital
• Controls / safeguards
• regulated by Government at market level
• Central Fund

8
Lloyds - Split of Business
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Features of Lloyds

• Funded accounting
• 3 year ventures
• Reinsurance to close (RITC)
• US Trust Funds
• CRTF
• SLTF
• LATF
• Solvency requirements
• actuarial opinions

10
London Market

• Insurance companies
• Reinsurance companies
• Brokers
• Claims specialists
• Global market, although heavy involvement with
  Lloyds
• Certain centres of underwriting eg LUC
• Actuaries

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Classes of Business

• Motor (Auto)
• UK very large, not much US
• Casualty (Liability)
• US, UK, other countries
• DO, EO (including actuaries), Public Liability
  Workers comp
• Aviation
• airlines, satellites, airports, light aircraft

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Classes of Business

• Marine
• hull, cargo, LMX
• Energy
• rig, onshore
• Property
• direct, facultative, risk XL, catastrophe
• US, UK, Europe, Japan,worldwide
• Whole account XL
• Finite risk

13
Actuarial Involvement

• 30 years ago - nothing!
• Lloyds
• growing market for actuaries
• statutory role
• RITC / solvency
• managing agents
• strategic role
• research analysis
• Equitas

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Actuarial Involvement

• London market
• Growing market
• Pricing roles
• Reserving roles
• No statutory requirement
• Although for US-owned companies..
• Underwriting

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Actuaries at Lloyds

• Opinions
• Lloyds solvency
• US Trust Funds
• Reports at 31 December each year
• 1993 onwards only- prior years to Equitas
• Reasonable provision
• Greater than or equal to best estimate

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Actuaries at Lloyds

• Key Areas
• Reinsurance bad debt
• of recoveries outstanding and reinsurance IBNR
• covering insolvency and dispute
• Reinsurance run-off costs
• losses occurring versus risks attaching
• Claims handling expenses
• indirect costs as related to past claims -
  project
• Y2K ??

17
Actuaries in the London Market

• Reserving role comprises
• Year-end reserving
• Quarterly reserving
• Treaty monitoring and analysis
• Profitability analysis
• Feedback to underwriters / pricing actuaries

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Actuarial Techniques

• Constrained by data
• Chain ladder
• Bornhuetter Ferguson
• Stochastic methods
• bootstrapping
• Curve fitting (tail estimation)
• Graphical approaches

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Information Issues

• Paucity of data
• no market bodies for reference purposes
• development history
• small portfolios
• Poor treaty information
• paid losses only
• information on exposures (lack of)
• cash calls
• underlying classes not clear

20
Actuarial Guidance

• Institute of Actuaries
• Issues Guidance Notes
• Covers statutory roles
• US requirements (GN33,GN18)
• Lloyds (GN20)
• Friendly societies (GN32)
• Writing actuarial reports (GN12)
• How to
• Network of actuaries (GIRO)

21
Current Issues for Actuaries (some)

• Poor results
• Involvement with forecasting of results
• Statutory sign-off for companies
• Discounting
• Actuarial sign-off of RITC?
• covering asset and liability elements
• equity between Names
• stochastic (DFA) model

22
Problems in London - early 1990s

• APH
• LMX Spiral
• Other latent claims
• Series of disasters
• Poor rating / lack of control

23
Asbestos Pollution Health Reserving

• Data issues
• old risks, complex inter-relationships,
  insolvencies
• information by underwriting year not useful
• Techniques
• Detailed exposure methods (share of market)
• Average cost per claim
• Simulation
• Survival ratios
• Graphical methods
• Court awards critical (win factors)

24
Equitas

• Clean start for ongoing syndicates
• Start up
• 1992 prior liabilities
• assessing premium to take on risk
• Current activity
• payments and reserving
• commutations

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Problems in London - 2000

• Compensation culture
• New latent claims?
• Series of disasters
• windstorms
• tornadoes
• earthquakes
• hailstorms
• explosions
• satellites
• aviation losses

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Problems in London - 2000

• Insolvencies
• Capital withdrawal
• Poor results
• poor rating?
• loadings
• Lack of reinsurance / retrocession coverage
• Forecasting

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Meanwhile, back at the example...

• All assumptions as before
• Requirements - at least best estimate
• First scenario - best estimate (70)
• Second scenario - more conservative (80)
• UK corporate tax rate 30

28
Example continued

• Scenario 1
• Take loss in first year - using correct loss
  ratio
• IBNR held until year 5 so that 70 L/R
• Net income 63
• Scenario 2
• High loss ratio thus higher reserves set in year
  1
• Release of reserves in year 5
• Net income 68