Insurance & Reinsurance Reserving in the UK
Paul Gates, Lane Clark & Peacock
Casualty Loss Reserving Seminar, 9/18/2000
Outline of Talk
• Lloyd’s & the London market
• Actuarial involvement - the what and how
• Current issues for actuaries
• Problems in London - past and present
• Example - reprise
Lloyd’s and the London Market
• What is the London market?
• What is Lloyd’s?
Lloyd’s
• Insurance and reinsurance market at 1 Lime St, City of London
• Society of individual and corporate members (Names)
• Individuals generally have unlimited liability
• Corporates have limited liability
Lloyd’s - players
• Broker Market
• Syndicates– active underwriter
• Managing Agents
0
50
100
150
200
250
2000 1999 1998
Syndicates
Managing Agents
Brokers
Corporate v Individual Statistics
02000
4000
6000
8000
10000
12000
14000
2000 1999 1998
Corporate Capital($m)
Individual Capital($m)
0
1000
2000
3000
4000
5000
6000
7000
2000 1999 1998
CorporateMembers
Individual Members
Lloyd’s - key points• Began 1688 - Mr Lloyd’s coffee house
• Marine clubs
• Pre-eminent marine and non-marine insurance marketplace
• Reconstruction & renewal in early 1990s– Equitas – corporate capital
• Controls / safeguards– regulated by Government at market level– Central Fund
Lloyd’s - Split of Business
Marine20%
Non-marine54%
Aviation10%
Motor16%
Features of Lloyd’s• Funded accounting
– 3 year ventures
• Reinsurance to close (RITC)
• US Trust Funds– CRTF– SLTF– LATF
• Solvency requirements– actuarial opinions
London Market
• Insurance companies
• Reinsurance companies
• Brokers
• Claims specialists
• Global market, although heavy involvement with Lloyd’s
• Certain centres of underwriting eg LUC
• Actuaries
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
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
Actuarial Involvement
• 30 years ago - nothing!
• Lloyd’s– growing market for actuaries– statutory role– RITC / solvency– managing agents
• strategic role
• research & analysis
– Equitas
Actuarial Involvement
• London market– Growing market– Pricing roles– Reserving roles– No statutory requirement– Although for US-owned companies…..– Underwriting
Actuaries at Lloyd’s• Opinions
– Lloyd’s solvency– US Trust Funds– Reports at 31 December each year– 1993 onwards only- prior years to Equitas
• “Reasonable provision”
• “Greater than or equal to best estimate”
Actuaries at Lloyd’s• Key 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 ??
Actuaries in the London Market
• Reserving role comprises:– Year-end reserving– Quarterly reserving– Treaty monitoring and analysis– Profitability analysis– Feedback to underwriters / pricing actuaries
Actuarial Techniques
• Constrained by data
• Chain ladder
• Bornhuetter Ferguson
• Stochastic methods– bootstrapping
• Curve fitting (tail estimation)
• Graphical approaches
Information Issues• Paucity of data
– no market bodies for reference purposes– development history– small portfolios
• Poor treaty information– paid losses only– information on exposures (lack of)– cash calls– underlying classes not clear
Actuarial Guidance
• Institute of Actuaries– Issues Guidance Notes– Covers statutory roles
• US requirements (GN33,GN18)• Lloyd’s (GN20)• Friendly societies (GN32)
– Writing actuarial reports (GN12)– “How to”
• Network of actuaries (GIRO)
Current Issues for Actuaries (some)
• Poor results• Involvement with forecasting of results• Statutory sign-off for companies• Discounting• Actuarial sign-off of RITC?
– covering asset and liability elements– equity between Names– stochastic (DFA) model
Problems in London - early 1990s• APH
• LMX Spiral
• Other latent claims
• Series of disasters
• Poor rating / lack of control
Asbestos Pollution & Health Reserving• Data issues
– old risks, complex inter-relationships, insolvencies– information by underwriting year not useful
• Techniques– Detailed exposure methods (share of market)– Average cost per claim– Simulation – Survival ratios– Graphical methods– Court awards critical (win factors)
Equitas
• Clean start for ongoing syndicates
• Start up– 1992 & prior liabilities– assessing premium to take on risk
• Current activity– payments and reserving– commutations
0
2
4
6
8
10
12
14
$bn
Surplus
Gross outstanding
Net outstanding
Problems in London - 2000• Compensation culture • New latent claims?• Series of disasters
– windstorms– tornadoes– earthquakes– hailstorms– explosions– satellites– aviation losses
Problems in London - 2000
• Insolvencies
• Capital withdrawal
• Poor results– poor rating?– loadings
• Lack of reinsurance / retrocession coverage
• Forecasting
Meanwhile, back at 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%
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 = 63
• Scenario 2– High loss ratio thus higher reserves set in year 1 – Release of reserves in year 5– Net income = 68
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