Chapter 13: Reasons for estimating reserves and different reserving bases Flashcards Preview

Actuarial F103 - General Insurance > Chapter 13: Reasons for estimating reserves and different reserving bases > Flashcards

Flashcards in Chapter 13: Reasons for estimating reserves and different reserving bases Deck (15)
Loading flashcards...
1
Q

9 Reasons for assessing a general insurer’s liabilities

A

To determine liabilities:
— for demonstrating supervisory solvency
— for internal management accounts
— for published accounts

  • to provide information to management on business performance by area
  • to estimate claims costs for premium rating
  • to value an insurer for sale or purchase
  • to negotiate a commutation for the buyer or seller
  • to transfer a book of business
  • to ascertain tax liabilities
  • to check reasonableness/adequacy of reserves
  • to test the adequacy of case estimates
2
Q

Define ‘reserving basis’

A

the methodology and assumptions chosen in a reserving exercise.

3
Q

Considerations when setting reserving bases for:
Published accounts (4)

A

The legislation and accounting principles governing the preparation of those accounts in the territory concerned:

  • Whether the accounts are to be prepared on a GOING concern basis?
  • Whether the accounts are required to show a TRUE and fair view.
  • Whether reserves are required to be assessed as BEST estimates or on some other basis.
  • Whether reserves are required to be DISCOUNTED, and if explicit risk margins need to be held.
4
Q

Considerations when setting reserving bases for:
Tax purposes

A

Depends on the tax regulations in the relevant country.

Tax authorities may penalise an insurer when it is found to have over-reserved and therefore paid less tax.

5
Q

Considerations when setting reserving bases for:
Management accounts

A

The aim is likely to produce expected values of the future experience, based on realistic assumptions.

Management may also wish to have figures produced on alternative bases or scenarios.

6
Q

Considerations when setting reserving bases for:
Sale or purchase

A

A starting point for negotiations is the liabilities shown on the balance sheet.

A purchases will want a more prudent view compared to the vendor.

7
Q

Considerations when setting reserving bases for:
Commutation

A

Similar to sale and purchase, but also consider:
- the effect on reinsurance recoverability
- the relative strategic / commercial importance of the commutation between the two parties
- the actual / perceived financial strength of parties

8
Q

Commutation

A

The finalisation of an outstanding liability by payment of an agreed amount.

9
Q

Reserving methodologies are likely to vary according to (7)

A
  • the PURPOSE of the reserving exercise.
  • CLASS OF BUSINESS, in particular the timing of the run-off of the liabilities
  • the TYPES OF CLAIM that have been incurred or may be expected to occur
  • the key factors that determine the development of claims
  • the extend and quality of the available DATA
  • the AGE of the business
  • HISTORICAL trends and patterns
10
Q

What extra information can be gained from modelling IBNER and pure IBNR separately?

A

We can determine whether a change in our required outstanding claims reserve is due to an increase in the number of claims reported, or due to prudence / optimism in our original case estimate assumptions.

11
Q

State how an actuarial report could communicate uncertainty (4)

A
  • giving a RANGE, measure of the value at risk or other statistical calculation
  • showing the NUMERICAL consequences of changes in assumptions
  • presenting the outcomes of SCENARIOS, possibly including extreme scenarios
  • DESCRIBING the uncertainty and explaining why it has not been quantified.
12
Q

Considerations regarding DISCOUNTING when reserving

A

Discounting makes allowance for investment income.

By deciding whether to discount reserves, we should consider whether discounting is allowed by regulation.

If allowed, regulation might specify a discount rate.

13
Q

If not specified, then the discount rate needs to be determined based on (3)

A
  • currency of liabilities
  • nature of liabilities and assets
  • risk-free yield curve at the valuation date.
14
Q

14 main items or topics to be included in the scope of an aggregate report on the technical provisions of an insurance entity

A
  • PURPOSE of the report and to whom it is addressed
  • a statement of whether the results are the outcome of a planning exercise, a valuation exercise, or some other exercise
  • a statement of which TAS the report complies with
  • an indication of any material EVENTS that HAPPENED since the effective date of the data
  • a description of the DATA used and the source of the data
  • a description of any material uncertainty over the ACCURACY of the data and how this has been allowed for
  • a summary of the ASSUMPTIONS used and the rationales behind these
  • a description of any other material MATTERS relating to the work
  • the nature and extent of any material UNCERTAINTY in the work / results
  • the METHODS and measures used in any calculations
  • the nature and timing of any CASHFLOWS being calculated
  • a description of any PROBABILITIES
  • a comparison with PREVIOUS WORK
  • a PROJECTION OF RESULTS at future points in time
15
Q

When communicating the uncertainty of the results, an actuary should: (7)

A
  • explain what has been allowed for the best estimate, and what has not
  • ensure stakeholders understand the level of uncertainty
  • comment on the uncertainty in the context of the scope and purpose
  • emphasise the bigger issues
  • emphasise the unusual issues
  • avoid MISUNDERSTANDINGS
  • be consistent with VOCABULARY used by other professionals, and explain terms