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French working group on Best Estimate: Main conclusions FinReq meeting 17 September 2007
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2 Agenda The French BE working group BE Valuation: main points Proxies Ultimate loss Expenses Discounting and Reinsurance French best practice update Appendix
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3 Agenda The French BE working group BE Valuation: main points Proxies Ultimate loss Expenses Discounting and Reinsurance French best practice update Appendix
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4 The French B.E. working group Composed of 2 supervisors 3 actuaries from International Companies 5 members of big French Mutuals (GEMA/ACME) 2 members of medium sized Mutuals (ROAM/AISAM) 1 auditor 1 consultant Meetings from December 2006 to September 2007 to write a best estimate report containing: French Best practice update Proxies proposals The first draft has been published on 7 September 2007, to get the comments of the whole French actuarial profession by mid October
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5 Agenda The French BE working group BE Valuation: main points Proxies Ultimate loss Expenses Discounting and Reinsurance French best practice update Appendix
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6 B.E. valuation: main points The report is based on the assumption of reserves by accident year IFRS phase 2 current work is nevertheless heading towards a definition of underwriting year as the basis The 10th July directive states that “The best estimate corresponds to the expected present value of future cash flows, taking into account all the cash in and out flows (adjusted for inflation), required to settle the (re)insurance obligations over their lifetime, including all expenses, future discretionary bonuses, embedded financial guarantees and contractual options.” Using an automatic method for lobs other than very short tail could lead to wrong conclusions Preference for deterministic methods which can be easily tailored and adjusted to take into account Missing/partial data Underwriting conditions / product specificities Claims handling Reinsurance External factors (law, economic, inflation, roe…)
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7 B.E. valuation: main points (2) 3 steps to calculate the best estimate of liabilities: Calculate the undiscounted gross ultimate (incl. subrogations) Take into account reinsurance Discount this amount Main data needs: triangles (origin*development) for Premiums: written and earned premiums Claims: paid, subrogations, incurred, claims number, with a difference between large and attritional claims (better to have undiscounted reserves than discounted ones) Expenses: Ulae, brokerage, administrative, … Reinsurance issues Straight forward for proportional insurance Difficult to estimate for XL. Possible to use the net/gross accounting reserves ratio (acceptable proxy) Discounting Possible to use a central discount rates curve with “standardized” development patterns (low correlations) Assumption that all future payments are made by mid-year is more prudential than end of year assumption
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8 Agenda The French BE working group BE Valuation: main points Proxies Ultimate loss Expenses Discounting and Reinsurance French best practice update Appendix
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9 Proxies for ultimate loss To be used only if there is insufficient data collected within the company Market references should be defined at country level on the basis of a market study performed by Control Authorities, Institute of Actuaries or Insurers Federations If no market references available No acceptable straightforward method available (ratios could lead to not prudent situations) Best possibility might be to “Blank” the technical result (calculate the reserve in order to have a result set to 0) Pros: easy to implement, leads to no undue profits Cons: Does not take into account claims reality, neither pricing margins/insufficiencies
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10 Proxies for ultimate loss (2) If market average costs available Projection of claims number (less volatile and generally quicker to develop) Ultimate numbers * market average costs (adjusted for inflation) would lead to an ultimate loss Cons: could only applies to few lobs with low unitary cost volatility If Claims frequency available Based on their own experience of the average costs, the insurers could then estimate ultimate loss (product of Market claims frequency * policy nb * average cost) Cons: difficult to define robust claims frequencies at market level
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11 Proxies for ultimate loss (3) If market development patterns available Combine market development patterns with a Chain ladder-type method to project ultimates Usable for claims and premiums Pros: Can be used when no data is available. Progressively, market loss development factors, based on a large amount of market data, can be replaced by the company’s own experience Very efficient on long tail business (even for medium sized and big companies) Takes into account the nature of the products/guarantees Cons: Difficult to release a robust market calibration? one of the most appropriate solutions?
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12 Proxies for ultimate loss (4) If market Loss ratios are available Use of exposure-based methods (eg Bornhuetter-Ferguson) Pros: Interesting option to model most recent exercises insufficiently developed (even for medium-big companies) Takes into account market conditions Cons: need of other data (eg development patterns) Proxy on Cat/Large loss A market loss for each catastrophe/large claim could be defined at country level The company would then calculate its loss proportionally to its market share of the loss Pros: Simple and quick to implement Cost of the market loss evaluation (using high technologies) shared Cons: Does not take into account real exposure to the claim and portfolio specificities All cat losses cannot be evaluated easily at market level
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13 Proxy for expenses “New York” method Calculation of ratio R = Expenses / (gross claims + subrogations) R is then applied to: X% to claim by claim reserves (eg X=50%) 100% to ibnr Pros: simple to implement Cons: expenses are supposed to be proportional to reserves (which is not always true)
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14 Other proxies Discounting 2 options: Use of market development patterns Use of a simple undiscounted duration defined at market level for each Lob Reinsurance Use of ratio Ceded reserves / Accounting reserves, with or without ibnr
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15 Agenda The French BE working group BE Valuation: main points Proxies Ultimate loss Expenses Discounting and Reinsurance French best practice update Appendix
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16 A French actuarial best practice for non life reserves per lob had been published in 2004 by the French institute of actuaries The French working group has updated this “best practice” and used it to taylor proxies proposals to each and every lob The Lobs are: Motor damage / Motor damage liability Motor corporal liability Transport Fire / Property damage General liability Assistance Legal expenses “Construction” / Decennial liability Natural events Caution / Credit Inward reinsurance French best practice update
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17 French best practice update: Example (General liability)
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18 Agenda The French BE working group BE Valuation: main points Proxies Ultimate loss Expenses Discounting and Reinsurance French best practice update Appendix
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19 Appendix Aims at explaining briefly the reserving exercise basis for companies who do not have experienced actuaries It deals with Actuarial bases How to take into account Tendencies Dispersion Volatility Irregular trends (including inflation) Incomplete data Large claims Construction Claims, premiums and expenses projections
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