1. 1 METODOLOGÍAS Y PRÁCTICAS EN RESERVAS TÉCNICAS PARA SEGUROS DE SALUD Y SEGUROS GENERALES LIMA - 31 DE MAYO, 2007 APESEG Presentado por: APESEG & Milliman, Inc. Basic Reserving Concepts ■

2. 2 RESERVING PROCESS Today’s Discussion will center around the actuarial methods that are commonly used worldwide to obtain reasonable estimates for reserves The United States American Academy of Actuaries defines a reasonable reserve as one produced by: ─ Appropriate Methods ─ Reasonable Assumptions

3. 3 RESERVING PRINCIPLES Actuarially Sound ─ Provision based on estimates ─ For defined group of claims ─ Derived from reasonable assumptions ─ Derived from appropriate methods ─ Unpaid amount to settle all claims whether reported or not for which liability exists as of the accounting date Inherent uncertainty in estimation implies that a range of reserves can be actuarially sound

4. 4 RESERVING PROCESS AssumptionsData Methods Reserve Estimates

5. 5 RANGES Because a reserve is an estimate and cannot be known, it has a range In discussing ranges, it is important to be aware the difference between: ─ Range of Reasonable Estimates ─ Range of Possible Outcomes The range of possible outcomes is almost certainly substantially broader than the range of reasonable estimates Methods that will be discussed today will concentrate on reasonable estimates and will not consider the range of possible outcomes

6. 6 CONSIDERATONS Settlement Pattern ─ The length of time it takes for reported claims to be settled affects reserve uncertainty e.g., collision vs liability Development pattern ─ Should be carefully reviewed ─ Impacted by changes in claims practices ─ Impacted by changes in settlement pattern ─ Impacted by discount in case reserves

7. 7 CONSIDERATONS Reinsurance ─ Reserves affected by types of plans and retentions ─ May be appropriate to analyze direct and ceded experience separately ─ Recoverability of reinsurance is important ►Generally addressed outside of reserving process unless reinsurer is insolvent

8. 8 CONSIDERATONS External Influences ─ Judicial environment ─ Regulatory and legislative changes ─ Involuntary market mechanisms ─ Economic influences such as inflation Discounting ─ Usually best to perform analysis undiscounted, then discount the result

9. 9 CONSIDERATONS Frequency and Severity ─ Reserve estimates more accurate for high frequency low severity ─ More extensive analysis required for high severity low frequency

10. 10 DATA – FOR EACH SEGMENT Amounts by Accident/Policy/Underwriting Period and Valuation Date ─ Cumulative Paid Losses ─ Cumulative Paid Loss Expenses ─ Case Loss Reserves ─ Case Expense Reserves ─ Cumulative Reported Claim Counts ─ Cumulative Closed Claims

11. 11 DATA – FOR EACH SEGMENT For Accident Period Analysis ─ Premiums Earned ─ Impact of Rate Changes on Loss Ratio ─ Impact of Underwriting Changes on Loss Ratio

12. 12 DATA - CONSIDERATIONS Homogeneity ─ Similar claims are likely to have similar amounts and similar timelines ─ Group similar claims together, for example ►By line of Business ►By policy limit ►By type of coverage (property vs liability) Volume ─ Each subdivision of data may increase homogeneity, but at a cost of a reduction in volume Law of large numbers suggests that more volume will produce more accuracy There is a trade-off between homogeneity and volume

13. 13 RESERVING SEGMENTS Reserving methods are usually applied to data grouped into segments ─ Segments are based on ►Balance between Homogenity and Volume ►Data availability

14. 14 DATA AVAILABILITY Existing information systems may impose constraints Data must reconcile to insurer’s financial records

15. 15 DATA ORGANIZATION Accident Year – The collection of all claims that have (or will ultimately have) an accident date within a particular year ─ Similarly accident quarter, accident month Can also organize data by Policy Year, Report Year, or Underwriting Year

16. 16 ASSUMPTIONS The Actuary makes the assumptions ─ Implicit – Assumptions which are imbedded in the methods chosen ─ Explicit – Assumptions made by the Actuary based on Experience, Training, Judgment

17. 17 METHODS An algorithm – Series of Steps like a Cookbook used to produce a reserve Each method makes one or more assumptions about the underlying process that was used to produce the data at hand. ─ Implicit Assumptions ─ Rarely completely true Recommended practice – Use more than one method ─ Be sure to understand differences in results ─ Actuary to use judgment to select from indications produced by methods Variation in results from different methods is different than a reasonable range

18. 18 DATA TRIANGLES Representation of data in two dimensions ─ By origin period ─ By valuation date A Common Example ─ Accident Periods are Rows ─ Time from Accident Period are Columns ─ Valuation Dates are Diagonals

19. 19 LOSS DEVELOPMENT TRIANGLE Future Accident Years CY2002 CY2003 CY2004 CY2005 Delay Accident Year CY2006 12 24 36 48 60 72 CY2001 Development Trend Development Trend 2001 2002 2003 2004 2005 2006 Trend Development Trend Development Trend Development Trend