Cycle survival kit II

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Cycle survival kit II
The Actuarial Profession making financial
sense of the future

• Working party members
• Philip Archer-Lock Ian
  HilderStuart Brown Steven Fisher
  David Simmons Richard Doman Kevin Wenzel
  (Chairman)

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Agenda

• Recap on work from last year
• Update of some results
• Report on further investigations

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Recap

• What do we mean by the reserving cycle?

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Recap
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Recap

• Conclusions we came to
• There is a reserving cycle in the UK
• Apparently correlated with the underwriting cycle
• Actuarial methods can generate cycles
• Rating indices understate size of the
  underwriting cycle

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Update

• This year focus solely on Motor Liability
• FSA data updated to 2002 year end
• Data provided by Standard Poors Systhesis

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Further investigations

• How long for the cycle to flatten?
• Impact on total reserves?
• Is it a few isolated companies?
• Impact of claims inflation?
• Further investigations of the chain ladder.

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How long for the cycle to flatten?
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How long for the cycle to flatten

• It takes several years
• Some years get worse before getting better.

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Impact on total reserves?
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Impact on total reserves

• Previous graphs shown by origin years
• Impact on a company is mixture of all past origin
  years
• some overstated
• some understated

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Isolated companies?
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Isolated companies?

• So not an isolated company on motor,
• what about other lines of business?

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Impact of claims inflation?
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Claims inflation

• Is claims inflation driving the cycle?
• Implicit chain ladder assumption of future
  inflation being an average of past inflation
• Try hypothetical data with RPI inflation

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Claims inflation

• Changing levels of inflation affect the results
  of methods we use
• Not the sole cause of a cycle but could be a
  contributing factor
• ACPC or inflation adjusted methods?

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Further investigation of the chain ladder
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Further investigation of the Chain Ladder

• The chain ladder method reflected the cycle seen
  in the company figures
• Did it under / over estimate for the same origin
  and development years as the companies?
• If so, why did it turn out to be wrong?
• Could we have seen the problem at the time?

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Could we have seen the problem?

• The problem was a change in (future) development
  pattern.
• Are there differences in the past patterns that
  could have predicted this?
• One possible diagnostic was to consider
  paid/incurred

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Third Party Liability
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Third Party Liability
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Motor
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Further investigations of the chain ladder

• The pattern changing for groups of years is
  causing this chain ladder cycle
• Random noise can make paid to incurred ratios a
  weak diagnostic

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Overall Conclusions

• There is a UK reserving cycle
• It lasts for several years
• Applies to individual origin years and aggregate
  reserves
• It is exhibited consistently over major companies
  in the market
• Changing claims inflation may be a cause
• At market level it is difficult to identify
  detailed causes

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Challenges

• We dont have a solution to the reserving cycle
  today
• Internal analysis of individual company data may
  help
• Onus is on individual actuaries to consider the
  issues raised
• Encourage actuaries to monitor the long term run
  off of their reserves not just this time vs
  last time
• We hope GRIT will give consideration to some of
  these issues