International Reserving Issues Chandu C. Patel, FCAS, MAAA Casualty Loss Reserve Seminar September 17-18, 2008

2 International Reserving Issues Agenda  International claims process  F/X Effects  Financial Reporting

3 International Claims Process  Geographic, cultural, legal and currency issues make for a challenging environment  Geographic – loss adjusting process in a foreign country will be different. The speed at which information is gathered and communicated is generally slower.  Cultural – language barriers may exists; what is compensable will vary – for example, when I was working on estimating reserves in Italy, I was told that relatives that witnessed an accident need to be compensated for pain and suffering (of watching the accident) as well  Legal – where a trial takes place can vary. Based on the legal environment of the country that the claim is tries in, outcomes may be unexpected  Currency – If there is a considerable gap between the accident date and the date at which the loss is settled, changes in F/X rates can have a significant impact on the amount of loss in corporate currency.

4 International Claims Process An example of a large claim from the Tsunami event dated December 26,  Large cement plant located in Banda Aceh, Indonesia  The event led to a total loss of the cement factory owned by a French conglomerate

5 Tsunami, Total Loss to Cement Plant, Indonesia, Asia. Picture of Plant before Tsunami struck

6 Lafarge Cement Factory before the Tsunami

7 Tsunami, The time the Tsunami struck Banda Aceh, Indonesia.

8 And after the Tsunami…total devastation

9 Another scary example of the power of this Tsunami

10 Tsunami Claim  Date of Loss – Dec 26, 2004  Initial Loss Estimate based on available policy limits for EQ events = 50M Euro  F/X Rates on Dec 31, 2004 I Euro = USD  Initial Loss Estimate based on original F/X rate = 68M USD  First payment made in July 2005; F/X rate 1 Euro = USD  Second payment made in April 2006; F/X rate 1 Euro = USD  The insured went to court in France in 2007  In January 2008, the court found that the EQ sub-limit (or any other sub-limit such as Flood) does not apply.  New total compensable amount = 88M Euro plus interest and costs (50M Euro was already paid as of this point in time); F/X rate 1 Euro = USD  New total loss = 131M USD  Total increase in loss due to legal proceedings = 76%  Total increase in loss due to F/X = 9%

11 F/X Effects  Impact on loss development  Loss triangles stated in corporate currency will be subject to fluctuations based on changes in F/X rates  Payments will be made at historic currency rates; case reserves will be stated at current rates  Decreasing currency strength will lead to higher loss development factors and the reverse will be true for increasing currency strength  It is difficult to separate true development from F/X effects  A couple of ways to deal with this: ￚ Use local currency to do reserve triangles and selections ￚ Convert entire triangle to corporate currency using current F/X rates  Particularly challenging in multi-currency domain since a large number of triangles have to be generated or a large amount of data has to be converted every quarter.

12 Financial Reporting  Financial Reporting, including the role of actuaries  Income fluctuations can result from changes in F/X rates  Profit or Loss from a foreign subsidiary can be amplified based on fluctuations in F/X rates  Value of a foreign subsidiary can fluctuate based on changes in F/X rates  Loss development tables within the SEC disclosures (10K) will be impacted ￚ It is permissible to adjust the development for impact of F/X rates  Role of the actuary in reserve process can vary. The US has a framework that has evolved over a period of time – the same is not true in all jurisdictions.  “Preferred” methods used for reserving can vary. I find that “Chain-Ladder” and triangulation is a clear favorite in the US. Actuaries abroad tend to use more theoretical approaches.