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Discounting

Discounting

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Discounting

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  1. Discounting The Appointed Actuary Seminar Presenter: Patricia Hladun September 20, 2004

  2. Topics • The Move to Discounting • Annual Return Results • Unpaid Claims and Loss Ratio Analysis Exhibit • Sample Review – 10 Companies • Some Filing Guidelines

  3. The Move to Discounting Discounting for P&C companies policy liabilities came into effect Jan 1, 2003 Historical reasons for not allowing discounting: • Short tailed business • Low interest rates • No actuarial requirements (e.g. actuarial report) • Lack of standards of practice • Implicit margin

  4. The Move to Discounting Changes in historical conditions: • Increased litigation • Coverage provided becomes longer tailed and therefore investment income becomes material • Introduction of actuarial requirements by regulators • Development of actuarial standards

  5. The Move to Discounting Reasons for OSFI requiring discounting: • Consistent with OSFI’s reliance approach • Provides a more realistic measure of financial performance • Provides for the explicit determination of margins for adverse deviation • Makes financial reporting practices more consistent with the economic realities • Improves the consistency of Canadian P&C financial reporting

  6. The Move to Discounting Changes to Actuarial Reports: • Opinions are not qualified anymore • New CIA educational note was developed (regarding the runoff of unpaid claims on a discounted basis) • Appendix II was removed and the Unpaid Claims and Loss Ratio Analysis Exhibit was added

  7. The Move to Discounting Changes to the Annual Return: • Policy liabilities are on a discounted basis • Page 60.41(run-off on a discounted basis) was added

  8. Annual Return Results Expected Results based on 12/2001: • Net claims liabilities reduced by $350 million: • 1 ½ % of net undiscounted reserves • 8 – 10 points on MCT/BAAT

  9. Annual Return Results Use of prior period adjustment at 12/2002: • Canadian (20.40.04.02) 67 million • Foreign (20.45.04.02)120 million 187 million

  10. Annual Return Results Discounting results at 12/2002: • Net outstanding ¾ of 1% • Capital 1% • MCT/BAAT: • Canadian 1% • Foreign 9% • Total 3%

  11. Annual Return Results Discounting results at 12/2003: • Net outstanding 0.8% • Capital 1.1% • MCT/BAAT: • Canadian 2% • Foreign 10% • Total 4%

  12. Annual Return Results Use of Exhibits 60.40 & 60.41: • 60.40 Net Undiscounted O/S Claims 24,925 m • 60.41 Net Discounted O/S Claims 24,714 m • Change 211 m

  13. Annual Return Results

  14. Unpaid Claims & Loss Ratio Analysis Exhibit • Hard copy was included in the AAR • Electronic copy was to be filed by June 1, 2004

  15. Unpaid Claims & Loss Ratio Analysis Exhibit Problems: • Companies unaware of June 1 deadline • Software problems • Incorrect data formats

  16. Unpaid Claims & Loss Ratio Analysis Exhibit Results: • Co-ordination between Quebec regulator and OSFI • Industry results will most likely be shared • Target release for early December

  17. Unpaid Claims & Loss Ratio Analysis Exhibit Next year: • For 2004, electronic exhibits are due with the Annual Return filing on March 1 or April 15

  18. Sample Review – 10 Companies • 10 of the largest federally regulated companies (8 Canadian and 2 Foreign) • Primary insurers

  19. Sample Review – 10 Companies $ millions Total undiscounted unpaid claims 10,287 Present value of unpaid claims 9,123 Change 1,164 Percentage Change (11.3%)

  20. Sample Review – 10 Companies Discount as % of Undiscounted Auto BI 11.5% Auto PD 3.7% Auto AB 11.3% Auto Physical Damage 1.9% Property – Personal 4.6% Property – Commercial 3.5% Liability 14.4%

  21. Sample Review – 10 Companies Range of change in present values to total undiscounted: • Low: 6.9% • High: 13.4% Differences were mainly due to: • Mix of business • Auto AB

  22. Sample Review – 10 Companies PfAD – Claims • $949 million • 83% of PfAD • Average MfAD is 10.4% • MfAD range is 6.5% to 12.8%

  23. Sample Review – 10 Companies PfAD – Claims • Auto BI • MfAD range: 8.4% to 13.8% • Average MfAD: 11.1% • Auto PD • MfAD range: 2.5% to 7.4% • Average MfAD: 4.7%

  24. Sample Review – 10 Companies PfAD – Claims • Auto AB • MfAD range: 0.4% to 13.7% • Average MfAD: 9.3% • Auto AB (excluding one company) • MfAD range: 6.1% to 13.7% • Average MfAD: 10.4%

  25. Sample Review – 10 Companies PfAD – Claims • Auto Physical Damage • MfAD range: 2.5% to 7.4% • Average MfAD: 4.5% • Personal Property (excl one company) • MfAD range: 2.5% to 9.4% • Average MfAD: 5.2%

  26. Sample Review – 10 Companies PfAD – Claims • Commercial Property • MfAD range: 2.6% to 9.6% • Average MfAD: 6.5% • Liability • MfAD range: 7.4% to 14.3% • Average MfAD: 11.8%

  27. Sample Review – 10 Companies PfAD – Reinsurance • $21 million • 2% of PfAD

  28. Sample Review – 10 Companies PfAD – Interest Rate • $172 million • 15% of PfAD

  29. Sample Review – 10 Companies $ millions Total undiscounted unpaid claims 10,287 Total discounted unpaid claims + PfADs 10,265 Change – Sample of 10 companies 0.2% Change – Industry Total 0.8% Actuarial reserves as % of undiscounted 99.8% Range 98.1% to 101.3%

  30. Some Filing Guidelines