Loss Reserving in Mexico

1
Loss Reserving in Mexico

• Eduardo Esteva
• Minneapolis, Minnesota
• September 18, 2000

2
Index

• Background of IBNR Estimation in Mexico
• Methodology
• Accounting Rules
• Data
• Prevision and Catastrophic Reserves
• Role of the Actuary
• Final Comments

3
Background of IBNR Estimation in Mexico

• In 1991 the Government began the deregulation of
  the Insurance Market.
• This allowed the companies more flexibility in
  some areas.
• E.g. relatively easy approval of technical notes
  for any product that the companies wanted to sell.

4
Background of IBNR Estimation in Mexico

• The rules regulating IBNR reserves had existed
  for a long time, but it was not until 1994 that
  the National Insurance and Surety Commission
  implemented the rules for estimating the IBNR
  Reserve.
• The Commission has chiefly been concerned with
  the solvency of the Insurance Companies.

5
Background of IBNR Estimation in Mexico

• The rules for the IBNR Reserve were part of the
  beginning of a deregulated Insurance Sector.
• For the first time a Company could choose a
  methodology for a reserve that must be approved
  by the Commission and did not need to follow a
  rule prescribing how to calculate the reserve,
  like the unearned premium reserve.

6
Background of IBNR Estimation in Mexico

• The Company needs the approval of the Commission
  to use or to make any change to the technical
  note to calculate the IBNR Reserve.
• In the case of a change, there is also a
  requirement for a study on the impact of the
  change, including an analysis of the change by an
  external appointed actuary.

7
Background of IBNR Estimation in Mexico

• For the creation of the reserves the companies
  had to book at least 50 of the amount of the
  reserve by December 1996 and 100 by December 1997

8
Methodology

• Each Company may select its own methodology to
  estimate the reserve, but it needs to be
  mechanical.
• It can use different methods, but it must
  determine a rule for selecting all the factors
  and the ultimate loss amounts. (e.g. a
  volume-weighted average of the methods)

9
Methodology

• Concerning this constraint, it is not possible to
  make any selection of patterns or ultimate
  amounts, the only exception is the selection of
  the tail factor.
• Also, if the results include a series of
  report-to-report factors that go down and then
  up, the actuary must adjust the series.
• (e.g. if we have 1.2, 1.1, 1.15, the 1.1 must be
  adjusted)

10
Methodology

• At this moment the Commission does not allow the
  companies to have a negative IBNR Reserve, the
  reserve must be set equal to zero.
• It is not usual that a company estimates the IBNR
  Reserve net of Salvage and Subrogation.
• The insurance sector in general only uses
  the incurred loss development method, rather than
  both the paid and incurred methods.

11
Accounting Rules

• In Mexico there are some differences in the
  accounting rules compared to the USA, that can
  affect the amount of the IBNR Reserve. Some of
  the more important differences are as follows

12
Accounting Rules

• Reinsurance
• The Proportional contracts are the only ones
  considered as ceded premium, and the Non
  Proportional contracts are considered in the
  acquisition cost.
• For this reason, the net IBNR Reserve is
  typically only net of proportional contracts,
  booking a reserve net of the non proportional
  contracts is subject to approval by the
  commission.

13
Accounting Rules

• In Mexico there is not Case Reserve for ALAE and
  there are not any ULAE Reserves for the day to
  day claims. These are considered to be
  operational or claim costs for the company and
  must be paid by the cash flow of the company.
• The only required loss expense reserve is for
  ALAE related to the IBNR claims.

14
Accounting Rules

• In general you do not use the IBNR Reserve if you
  have a claim that is IBNR, you only adjust the
  reserve at the end of the accounting period.

15
Data

• The information concerning the IBNR (Loss
  triangles) has been requested by the Commission
  on a quarterly basis since 1994 for paid claims
  and since 1997 for incurred claims.
• This information is requested separately by
• LOB.
• Liability and Non Liability within the LOB.
• Currency (National and foreign)

16
Data

• On an annual basis other information has been
  required by the Commission since 1994, with some
  adjustments in 1997.
• The required report is similar to Schedule P, but
  one of the big differences is that the premium
  that is reported is the premium written in the
  year and not the earned premium.

17
Data

• Up to now the information reported by the
  companies is not available to the public or the
  insurance companies or consulting firms. We are
  not sure if and when it will be publicly
  available.

18
Prevision and Catastrophic Reserves

• Prevision Reserve
• The purpose of this reserve is to have a
  liability in case the company has a significant
  deviation in loss ratio.
• The reserve is part of the Risk Based Capital and
  it is increased by a percentage of the written
  premium from the company.

19
Prevision and Catastrophic Reserves

• Catastrophic Reserve
• This reserve is a liability created, at the
  moment, based on Earthquake risk.
• This reserve is created net of reinsurance
  generally calculated using a model that takes
  into consideration the geographic location of the
  building and other factors.

20
Prevision and Catastrophic Reserves

• For the release of these reserves, the Company
  needs approval from the Commission and also must
  make a program to constitute it again.

21
Role of the Actuary

• Background
• In Mexico an Actuary receives a degree in the
  University after studying between 4 and 5 years
  and needs to have an official governmental
  document as a professional credential.
• To be an appointed actuary, one must complete
  some additional requirements set by the
  Commission, including some professional exams or
  a special approval from the National College of
  Actuaries.

22
Role of the Actuary

• The Commission requires that the technical note
  describing the estimation of the IBNR reserve
  should be sent with the approval of an Actuary.
• In case of a modification of the technical note,
  it should also be presented with the approval of
  an external appointed actuary.

23
Role of the Actuary

• Each year, not later than 28 of February, each
  company must present to the Commission an
  external actuarial opinion for all the reserves.
  This report is signed by the appointed actuary.

24
Final Comments

• It is clear, that up to now the rules for the
  estimation of the IBNR Reserve are not very
  flexible. There is also a lack of knowledge of
  the methods that actuaries should use to
  calculate and evaluate the reserves, inside the
  companies by the appointed actuaries and in the
  insurance sector.

25
Final Comments

• This lack of knowledge allows the Commission to
  make strict rules, but it is sure, if the
  actuaries in Mexico learn and have more
  experience with the valuation of the Loss Reserve
  that the regulation can become more flexible.
  Currently the Commission is open to analyze any
  case and may give special treatment if the
  company and its appointed actuary can justify it.

26
Final Comments

• The National College of Actuaries is working to
  better prepare the actuaries, so that
  collectively we will be better able to perform
  loss reserve analyses.
• Also, our profession in Mexico is developing a
  continuing education structure.

27
Final Comments

• As a final note it can be interesting to know
  that in Mexico the Life LOB can have a
  significant IBNR Reserve. Also, we do not have at
  this moment very long tails compared with other
  countries in North America, the longest tails can
  be in transport and in credit life or life for
  governmental workers.