International Insurance Reserving An Ocean of Difference

International Insurance Attitudes Legal Environments Income Tax Laws Evaluation Dates Nationalism

Issues Currency Conversion/ Devaluation Data Differences Environmental & Toxic Tort

International Issues The UK Perspective Peter Copeman PricewaterhouseCoopers

The UK Perspective Developments in the UK market Lloyd’s - an update Actuarial involvement - including Lloyd’s opinions Differences in operating environment Differences in accounting basis International standardisation

UK Market Developments Consolidation of insurance industry High level of M&A activity Lloyd’s corporate capital Emergence (and dominance?) of a few major players Foreign ownership Soft market Increases in UK bodily injury awards

Equitas Equitas established on 4 September 1996 Reinsured 1992 and prior year liabilities of Lloyd’s syndicates Largest ever reinsurance transaction Proportionality conditions Transition from syndicates to one company

Equitas - changes Centralised claims handling Administration being rationalised Managing assets and liabilities

Changes in Lloyd’s Capital Base Capital requirements for individual “names” increasing Contribution of “names” to central fund increasing (0.6%  1.5% of premiums) Introduction of risk-based capital Future of unlimited liability names? General expectation that corporate capital share will increase

Lloyd’s Capital Base

Lloyd’s Ownership and structural changes Development of Integrated Lloyd’s Vehicles (“ILVs”) US influence [50% + US/Bermuda ownership] Future of “annual venture” under consideration Currently Lloyd’s self-regulated Lloyd’s to be regulated by new Financial Services Authority in the future

Actuarial involvement at Lloyd’s Historically quite limited Recent expansion of involvement –“problems of the past” –Equitas –Pressure from capital providers –Checks and balances for underwriters Part of professionalism drive Pricing involvement developing

Actuarial opinions at Lloyd’s Opinions for syndicates writing US business Submitted to NAIC and New York Insurance Department Net reserves (total) US situs trust funds 31 December 1996

Actuarial opinions at Lloyd’s UK solvency opinion for Corporation of Lloyd’s > “best estimate” for UK solvency “reasonable” for NAIC/NYID Each economic entity (year) has separate opinion 31 December 1997

Actuarial opinions at Lloyd’s UK opinion extended to include:- –Bad debts –ULAE Year 2000 comment required Practising certificate to be introduced (effective ) 31 December 1998

Different Operating Environments “Subscription market” - risks shared widely But, trends towards convergence and larger “lines” Central administration Historically, data poor…… but improving Underwriter was king, now somewhat more balanced London Market (incl. Lloyd’s)

Different Accounting Basis Lloyd’s syndicates and some London Market companies on “funded” basis Funded basis of accounting –result deferred for 3 years –data reported on an underwriting year basis Conversion to US GAAP now required more often - can be a difficult task

Conversion to US GAAP Data may not be immediately available Requires different way of thinking for syndicates/companies financial information required on accident year basis, split by underwriting year and currencies

Conversion to US GAAP Identification of earnings patterns Need for proper assessment of “open years” Different conditions for “transfer of risk” on reinsurance Various other differences of accounting treatment

Acquisition of London Market/ Lloyd’s Companies Rapid changes in mix of business Changes in underwriters Opportunistic use of “cheap” reinsurance Complex reinsurance programmes Whole account covers Unusual risks Quality of data/management information What to watch out for !

International Insurance Reserving: Some Practical Issues Mark Scully Tillinghast-Towers Perrin

Overview of Presentation Data issues –Exchange rates –Varying definitions of a triangle –Clean-cut business Latent claim exposures Approach to reserving in Germany Reserving standards in Europe

Exchange rate movements distort loss development data Comparable to excessive inflation Occur whenever triangles contain data –in different underlying currencies and –converted at historical exchange rates Possible solutions are: –separate triangles by currency or –conversion using a single exchange rate if development is similar or volume too low to analyze separately

An Example of the Distorting Effect of Exchange Rate Changes Business written in two countries: UK and Country A Each country writes in local currency Loss development features of business are identical in both countries

Cumulative Paid Losses and LDFs: UK Business in Sterling

Cumulative Paid Losses and LDFs: Country A Business in Currency A

Historical Exchange Rates: Currency A per Pound Sterling

Data Converted at Historical Exchange Rates Distorts LDFs

Conversion at a Single Exchange Rate Removes this Distortion

Exchange Rates: Final Observations Actuaries not in business of predicting future exchange rates Important to match liabilities with assets in same currency

Loss Development Triangles Must be Exactly Defined “Moving triangles”, where claims are coded to year of original notification/cession French construction liability business has three possible dimensions are possible (year of construction, accident year, report year) German triangles often split data into two report year cohorts: –Accident year = Report year –Accident year < Report year (“late” claims)

“Clean Cut” Accounting year business cannot be analyzed in Triangles An underwriting year is typically reinsured after 1 to 7 years into the current U/W year Common in Europe with short tailed reinsurance business When the cedent is in runoff, business reverts to normal U/W years develop down not across the triangle

Material latent claim exposures have not yet emerged outside the US Some asbestos claims in UK (through employers liability policies) Large potential exposure to asbestos claims in France Key latent claim risk is to U.S. exposures (e.g., through foreign subsidiaries, reinsurance)

Material latent claim exposures have not yet emerged outside the US Some asbestos claims in UK (through employers liability policies) Large potential exposure to asbestos claims in France Key latent claim risk is to U.S. exposures (e.g., through foreign subsidiaries, reinsurance)

Claims Reserving in Germany Minimal actuarial involvement (e.g., typically no annual review) IBNR is formula driven; judgmental adjustments made to (large) case reserves –distorts incurred triangles Industry is over-reserved in the aggregate

German runoff gains appear to correlate with accident year loss results Note: Runoff gain = Favorable development on prior loss reserves (here as % of premium)

German reserve levels vary substantially by segment (and company)

Reserving Standards in Europe Currently no statutory requirement, minimal actuarial involvement Stimuli for change: –European solvency regulations –National tax authorities Actuarial organizations involved Direction/Solution not yet clear but it’s “on the radar screen”

International Insurance Reserving An Ocean of Difference