International Reserving Issues and U.S. Actuaries

1
International Reserving Issues and U.S. Actuaries

• 2003 Casualty Loss Reserve Seminar
• September 8, 2003
• Leslie R. Marlo, FCAS, MAAA

2
International Reserving Issues and U.S.
Actuaries

• Focus on Claims Reserves
• European regulations and practice
• Benchmarking and communication
• Common issues in European practice
• Some unique exposures in Europe

3
International Reserving Issues and U.S. Actuaries

• European Regulations and Practice
• European Council directives
• Comprehensive set of directives exist, however
  implementation is not uniform
• Actuarial involvement
• Historically involvement has been minimal
  actuarial role has been increasing
• Audit perspective
• Emphasis has been on solvency

4
International Reserving Issues and U.S. Actuaries

• Background
• Company structure
• Types of business
• Statistical Data Elements
• Actuarial
• Personnel
• Frequency of review
• Level of segmentation
• Methodology and assumptions
• Diagnostic tests
• Financial / Accounting
• Data reconciliations
• Managements best estimate

• Reinsurance
• Program structures
• Analysis of cessions
• Claims
• Procedures
• Communication w/ actuaries
• Operational changes
• Underwriting
• Procedures
• Communication w/ actuaries
• Operational changes

5
International Reserving Issues and U.S. Actuaries

• Benchmarking and Communication
• Must understand companys business and current
  local practices
• U.S. practices not the only right way
• European actuaries have had significant training
• Resistance to change workload
• Patience empathy
• Build Relationships!

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International Reserving Issues and U.S. Actuaries

• Benchmarking and Communication - Complications
• Language Barrier
• Non-English speakers
• English insurance terms
• Jet Lag
• Working Conditions

7
International Reserving Issues and U.S. Actuaries

• Common themes in European Practice
• Common statistical approaches
• Pure IBNR vs. development on known claims
• Lack of industry data
• Direct vs. net analyses
• Emphasis on point estimate
• Assumed reinsurance
• Exchange rates

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International Reserving Issues and U.S. Actuaries
Common Themes in European Practice

• Common Statistical Approaches
• Chain ladder and B-F methods
• Frequency / Severity approach
• Theoretical approaches are appealing

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International Reserving Issues and U.S. Actuaries
Common Themes in European Practice

• Pure IBNR vs. Development on Known Claims
• Common to focus on pure IBNR use of Frequency /
  Severity approach
• Development on known claims might be ignored
• Downward development

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International Reserving Issues and U.S. Actuaries
Common Themes in European Practice

• Lack of Industry Data
• No ISO, NCCI, RAA
• Serious problem for new lines or certain classes,
  e.g. assumed reinsurance
• Sometimes government research bodies publish
  guidelines and statistics

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International Reserving Issues and U.S. Actuaries
Common Themes in European Practice

• Emphasis on Point Estimate
• Most European actuaries agree that a range is
  appropriate but
• Historically ranges have not been calculated
• Ensure that when ranges are produced, they
  produce practical low and high end estimates

12
International Reserving Issues and U.S. Actuaries
Common Themes in European Practice

• Direct vs. Net Analyses
• Direct of reinsurance commonly analyzed
• Assumed reinsurance may be analyzed
• Ceded / net rarely analyzed
• Proportional IBNR easily reviewed
• Non-proportional IBNR usually ignored
  considered good since net will be conservative

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International Reserving Issues and U.S. Actuaries
Common Themes in European Practice

• Assumed Reinsurance
• Underwriting year statistics
• General practice is to record on one-year lag
• Considered better because less estimation
• Must remove one-year lag and convert to accident
  year basis for U.S. GAAP

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International Reserving Issues and U.S. Actuaries
Common Themes in European Practice

• Exchange Rates
• Business written in multiple countries
• Convert historical data to local reporting
  currency
• Projections of future payouts when currency is
  unstable

15
International Reserving Issues and U.S. Actuaries

• Unique Exposures in Europe
• Italian Motor Liability
• Changes in legal and social framework
• No consistent case law
• Typical case by case reserving philosophy
  problematic
• Led to changes in settlement practices

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International Reserving Issues and U.S. Actuaries

• Unique Exposures in Europe
• Swiss Compulsory Accident
• Booking process for annuities regulated
• On surface, inconsistent with U.S. GAAP cost of
  living adjustments not recorded
• Complicated by existence of the Pool
• The Pool provides economic reality