Insurance & Reinsurance Reserving in the UK Paul Gates, Lane Clark & Peacock Casualty Loss Reserving Seminar, 9/18/2000

Outline of Talk Lloyd’s & the London market Actuarial involvement - the what and how Current issues for actuaries Problems in London - past and present Example - reprise

Lloyd’s and the London Market What is the London market? What is Lloyd’s?

Lloyd’s 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

Lloyd’s - players Broker Market Syndicates –active underwriter Managing Agents

Corporate v Individual Statistics

Lloyd’s - key points Began Mr Lloyd’s 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

Lloyd’s - Split of Business

Features of Lloyd’s Funded accounting –3 year ventures Reinsurance to close (RITC) US Trust Funds –CRTF –SLTF –LATF Solvency requirements –actuarial opinions

London Market Insurance companies Reinsurance companies Brokers Claims specialists Global market, although heavy involvement with Lloyd’s Certain centres of underwriting eg LUC Actuaries

Classes of Business Motor (Auto) –UK very large, not much US Casualty (Liability) –US, UK, other countries –D&O, E&O (including actuaries), Public Liability Workers comp Aviation –airlines, satellites, airports, light aircraft

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

Actuarial Involvement 30 years ago - nothing! Lloyd’s –growing market for actuaries –statutory role –RITC / solvency –managing agents strategic role research & analysis –Equitas

Actuarial Involvement London market –Growing market –Pricing roles –Reserving roles –No statutory requirement –Although for US-owned companies….. –Underwriting

Actuaries at Lloyd’s Opinions –Lloyd’s 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”

Actuaries at Lloyd’s 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 ??

Actuaries in the London Market Reserving role comprises: –Year-end reserving –Quarterly reserving –Treaty monitoring and analysis –Profitability analysis –Feedback to underwriters / pricing actuaries

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

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

Actuarial Guidance Institute of Actuaries –Issues Guidance Notes –Covers statutory roles US requirements (GN33,GN18) Lloyd’s (GN20) Friendly societies (GN32) –Writing actuarial reports (GN12) –“How to” Network of actuaries (GIRO)

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

Problems in London - early 1990s APH LMX Spiral Other latent claims Series of disasters Poor rating / lack of control

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)

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

Problems in London Compensation culture New latent claims? Series of disasters –windstorms –tornadoes –earthquakes –hailstorms –explosions –satellites –aviation losses

Problems in London Insolvencies Capital withdrawal Poor results –poor rating? –loadings Lack of reinsurance / retrocession coverage Forecasting

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%

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