Insurance & Reinsurance Reserving in the UK

1. Insurance & Reinsurance Reserving in the UK Paul Gates, Lane Clark & Peacock Casualty Loss Reserving Seminar, 9/13/99

2. Outline of Talk • Actuaries abroad • Lloyd’s & the London market • Actuarial involvement • Problems in London market • Current issues • UK versus US

3. Actuarial numbers worldwide

4. Actuarial numbers worldwide

5. Lloyd’s and the London Market • What is the London market? • What is Lloyd’s?

6. Lloyd’s • Insurance market • Society of individual and corporate members (Names) • Individuals have unlimited liability • Corporates have limited liability • Difference reflected in required solvency margin

7. Lloyd’s - key points in history • 1688 - a coffee house, owned by Mr Lloyd! • Marine clubs • Pre-eminent marine and non-marine insurance marketplace • Government legislation • Disasters of late 1980s / early 1990s • reconstruction & renewal • Equitas • corporate capital

8. Lloyd’s - the players • Individual Names • Corporate Names also from 1994 • Lloyd’s brokers • Active underwriter for each Syndicate • Managing agents • And now actuaries

9. Features of Lloyd’s • Funded accounting • 3 year ventures • Reinsurance to close (RITC) • US Trust Funds • Solvency requirements • actuarial opinions

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

11. 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

12. 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

13. Customers of Lloyd’s / London • Unusual but serious • satellites • veteran aircraft • sporting events • other events • rogue traders • hostile bids

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

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

16. Actuaries at Lloyd’s • Opinions • Lloyd’s solvency • US Trust Funds • RITC? • Reports at 31 December each year • 1993 onwards only- prior years to Equitas • “Reasonable provision” • “Greater than or equal to best estimate”

17. Actuaries at Lloyd’s • New 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 • Professional Guidance

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

19. Which actuaries where? • Insurance / reinsurance companies • mainly in-house, some consultants • Lloyd’s • managing agents employ actuaries • opinions work - consultants • Insolvent companies • mainly consultants • Commutations • mixture

20. Actuarial Techniques • Constrained by data • Use of commercial packages • Chain ladder • Bornhuetter Ferguson • Stochastic methods • bootstrapping • Curve fitting (tail estimation) • Graphical approaches

21. Information Issues • Poor treaty information • paid losses only • information on exposures (lack of) • cash calls • underlying classes not clear • No market bodies outside US • Small portfolios • Multiple currencies • Foreign languages!

22. Problems at Lloyd’s • APH • LMX Spiral • Series of disasters • Hurricane Hugo • European windstorms 1990 • Exxon Valdez • Piper Alpha • Hurricane Andrew • Poor rating / lack of control

23. Asbestos Pollution and Health • London involvement • Data issues • very old risks • complex inter-relationships • insolvencies • Reserving methods • methods • data issues

24. APH Reserving • Information by underwriting year no use • Court awards critical (win factors) • Several techniques • Detailed exposure methods (share of market) • Average cost per claim • Survival ratios • Graphical methods • Simulation

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

26. Current Issues in London Market • Poor rating • Withdrawals / run-offs • Catastrophes • Georges • Sydney hailstorms • Poor experience • satellite • marine (especially XL) • autowarranty

27. Current Actuarial Issues in UK • Year 2000 • Increasing statutory role • Reinsurance run-offs / insolvencies • Practising certificates • RITC certification • Consolidation

28. UK / US considerations • Differences • data • certification • information gathering organisations • Mutual recognition - worldwide • Opinions • best estimate versus range

29. Back to 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%

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 = 65 • Scenario 2 • High loss ratio thus higher reserves set in year 1 • Release of reserves in year 5 • Net income = 68