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Introduction to Reinsurance Reserving

Introduction to Reinsurance Reserving. Casualty Loss Reserve Seminar Scottsdale, Arizona - September 13, 1999 Leslie Marlo - Senior Manager KPMG LLP. kpmg. Applications, Complications, and Considerations. Applications Loss Development Method Loss Ratio Method Bornhuetter-Ferguson

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Introduction to Reinsurance Reserving

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  1. Introduction to Reinsurance Reserving Casualty Loss Reserve Seminar Scottsdale, Arizona - September 13, 1999 Leslie Marlo - Senior Manager KPMG LLP kpmg

  2. Applications, Complications, and Considerations • Applications • Loss Development Method • Loss Ratio Method • Bornhuetter-Ferguson • Others kpmg

  3. Applications, Complications, and Considerations • Complications • Parameter estimation very difficult • Data • Other Considerations • Qualitative information kpmg

  4. Loss Development Method Application same as for primary business kpmg

  5. Loss Development Method For non-proportional business, may develop individual losses by layer: kpmg

  6. Loss Development Method • Potential Problems • Selection of LDFs ----> Variability • Tail Estimation • Changes in Exposure • No claims = No IBNR, Large claims = Large IBNR • Paid Development kpmg

  7. Loss Development MethodPotential Problems • Selection of LDFs ----> Variability • Treaty vs. Facultative

  8. Treaty vs. FacultativeHistorical Loss DevelopmentAutomobile Liability

  9. Loss Development MethodPotential Problems • Selection of LDFs ----> Variability • Treaty vs. Facultative • Attachment Point

  10. Impact of Attachment Points on HistoricalLoss DevelopmentAutomobile Liability

  11. Loss Development MethodPotential Problems • Selection of LDFs ----> Variability • Treaty vs. Facultative • Attachment Point • Loss Portfolio Transfers • Commutations • Line of Business Mix • Catastrophes kpmg

  12. Loss Development MethodPotential Problems Tail Estimation kpmg

  13. Loss Development MethodPotential Problems • Tail Estimation • Industry Benchmarks • RAA • ISO/A.M. Best/NCCI with lags • Comparability with your company? • Curve Fitting • Inverse Power Curve: Y = 1 + a(t)-b • Development may never end • Judgment kpmg

  14. Loss Development MethodPotential Problems • Changes in Underlying Exposure • Attachment Points / Limits • Line of Business Mix • Understanding the Data kpmg

  15. Loss Development MethodPotential Problems • Paid Development Method • Not very common for reinsurance reserving • Little data • No industry benchmarks on development • May be appropriate for property or low limit proportional business kpmg

  16. Loss Ratio Method Ultimate loss = Earned Premium x Expected Loss Ratio kpmg

  17. Loss Ratio Method • Useful for new business or immature years • Picking the loss ratio: • Past experience (rate changes, trends) • Underwriting considerations • Market considerations • Adjust for changes in coverage kpmg

  18. Loss Ratio Method • Potential Problems • Ignores actual experience ----> potential for negative IBNR • Premium develops too ----> need to estimate • development technique • underwriter input • Loss Ratio Triangles kpmg

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