Loss Reserving in Japan

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Loss Reserving in Japan

• Junji FURUKI FIAJ

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Agenda

• Non-life market in Japan
• Regulation and Accounting
• Loss reserving (before revisions)
• Loss reserving (after revisions)
• Role of Actuaries

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Non-life market in Japan
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World premium volume ranking
Country PV(USMln) WT()
1 United States 603,018 43.2
2 Germany 106,261 7.6
3 Japan 105,587 7.6
4 United Kingdom 105,241 7.5
5 France 65,811 4.7
6 Italy 46,728 3.4
7 Canada 40,232 2.9
8 Spain 32,311 2.3
9 Netherlands 27,064 1.9
10 Australia 23,714 1.7
World World 1,395,218 100.0
Swiss Re, sigma No.2/2005
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Non-life insurers in Japan
Company DNP(JP\Bln) WT
1 Tokio M Nichido 2,143 24.5
2 Sompo Japan 1,626 18.6
3 Mitsui Sumitomo 1,626 18.6
4 Nippon Koa 892 10.8
5 Nissay Dowa 381 10.2
6 Aioi 943 4.3
7 Nisshin 168 4.2
8 Fuji 368 2.7
9 Kyoei 234 1.9
10 Secom 62 0.7
Total of domestic insurers Total of domestic insurers 8,763 100.0
License
Domestic 23
Foreign 15
Hoken Kenkyujo, Insurance 2005
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Operating Lines
Lines DNP(JP\Bln) (Saving type)
Voluntary Automobile 3,532 (8)
Compulsory Automobile 1,190
Personal accident 1,496 (865)
Fire 1,475 (364)
General liability 386
Marine Inland transit 270
Movables comprehensive 116 (0)
Workers Compensation 71 (6)
Pecuniary 42 (2)
Contractors 37
Others 148
Total 8,763 (1,246)
Hoken Kenkyujo, Insurance 2005
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Assets
Item Amt (JP\Bln) WT()
Cash and eq. 2,349.5 7.2
Bonds 9,386.5 28.8
Stocks 9,100.2 28.0
Foreign securities 4,496.3 13.8
Other securities 674.7 2.1
Loans 2,853.9 8.8
Real estate 1,255.9 3.9
Other assets 2,418.9 7.4
Total assets 32,536.1 100.0
GIAJ, Fact Book 2005
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Liabilities Equities
Item Amt (JP\Bln) WT()
Underwriting Reserves 22,714.5 69.8
(Outstanding Loss Reserves) (2,844.6) (8.7)
(Premium Reserves) (19,869.9) (61.1)
(Others) (-) (-)
Other Liabilities 3,232.0 9.9
Total Liabilities 25,946.6 79.7
Equities 6,589.5 20.3
Total Liabilities Equities 32,536.1 100.0
GIAJ, Fact Book 2005
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Insurance Regulation and Accounting
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Insurance Regulation

• Financial Services Agency (FSA)
• Insurance Business Law (IBL)
• Enforcement Regulations
• Official Notifications
• Supervisory Guidelines
• Other laws
• Law concerning non-life insurance rating
  organization
• Automobile liability security law
• Law concerning earthquake insurance

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Change of Regulation

• Former IBLs (before 1996)
• Tight administrative frameworks
• Uniformity in terms pricing (personal lines)
• Revised IBLs (enacted 1996)
• Solvency margin scheme
• Personal lines Rating relaxations
• and other deregulations

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Ongoing changes

• Program for Further Financial Reform
• FSAs initiative 20042006
• From Pre Review to Post Monitoring
• Improve in the corporate governance
• International standard-setting activities
• IAIS
• IASB

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Insurance Accounting

• SAP GAAP
• SAP / ruled in IBLs
• TAP / Special Taxation Measures Law
• Toward IFRS?
• GIAJ Studying IFRS4 phase II

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Recent revisions of SAP

• FY2005
• New calculation methods of UP and Cat reserve for
  risks of natural disasters
• FY2006
• Statistical estimation of IBNR reserve
• Future cash flow analysis test
• FY2007
• Stress test Liability adequacy test on medical
  and nursing care products

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Loss reserving (prior revisions)
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Prior loss reserves - Recognition

• Two items
• Case reserve outstanding loss
• IBNR reserve not yet not enough
• Reinsurance deduction
• Estimated amount to be collected from reinsurance
  can be deducted
• Allocated unpaid loss adjustment expenses are
  included

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Prior loss reserves - Estimation

• Case reserve
• Case estimate
• IBNR reserve
• Target lines and applicable formulae were placed
  in the Official Notification
• Tax Code permits IBNR reserve for all lines and
  provides similar formulae

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Prior loss reserves - IBNR formulae

• IBNR reserve takes greater amount between

An average of run off results in relation to Case
reserves
Current years earned premium 3
vs
Current years earned premium 8
An average of run off results in relation to Case
reserves
vs
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Prior loss reserves - features

• Exposures has been NOT excessive
• Not synchronized with Profit Cycle

(JP\Bln addition, -release)
GIAJ, Fact Book 2005
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Loss reserving (post revisions)
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New loss reserves - stables

• Recognition of reserves
• Case reserve
• IBNR reserve
• Estimation of Case reserve
• Case estimate

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New loss reserves - changes

• IBNR reserves shall be estimated by actuarial and
  statistical method (principle)
• Screening for short cut calculations of IBNR
  reserves

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Screening of IBNR Reserves
Domestic direct
Foreign direct
Domestic reinsurance
Foreign reinsurance
Tail length measure Paid loss incurred in recent
two years / All paid loss
Materiality measure The units paid loss / All
paid loss
1
2
lt90
gt1
gt90
lt1
Statistical method
Formula method
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Reserving method

• Formula method
• An average of run off results in relation to Case
  reserves
• Incurred loss/12 for assumed business
• Statistical method
• Not stated in IBLs
• Chain-Ladder, Bornhuetter-Ferguson, etc.

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Disclosure of Loss Reserves

• IAIS supervisory standard No.9
• Standard On Disclosures Concerning Technical
  Performance And Risks For Non-life Insurers And
  Reinsurers (Oct. 2004)
• In the past balance sheet
• Net presentation
• Gross and reinsurance items ? the note
• FY2006 or later, we will provide
• Claims development and
• Run off Results

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Claims Development

• Long-tailed lines
• Automobile, General Liability and Personal
  Accident
• Disclose past five years

Example of the Claims development triangle (unit
arb.)
Accident year 1997 1998 1999 2000 2001
Loss reserves and paid loss at the end of the accident year 680 790 823 920 968
One year later 673 785 840 903
Two years later 692 776 845
Three years later 697 771
Four years later 702
Estimate of cumulative loss 702 771 845 903 968
Cumulative payments 695 572 396 232 90
Loss reserves 7 199 449 671 878
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Run off Results

• All businesses except CALI and EQ
• The run off results is the difference between
• the loss reserves at the beginning of the period,
  and
• the sum of the paid loss during the year on
  account of claims incurred in previous years and
  the loss reserves at the end of the year for such
  outstanding claims

Example of the Run off results (unit arb.)
Fiscal year Beginning loss reserves Accidents incurred in previous periods Accidents incurred in previous periods Run off results
Fiscal year Beginning loss reserves Paid loss Loss reserves Run off results
1999 50 40 ?90
2000 110 60 55 ?5
2001 120 60 55 5
2002 120 65 60 ?5
2003 120 60 50 10
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Role of Actuaries
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Role of actuaries (prior revisions)

• There was little role in loss reserves
  estimations
• Case reserves were case estimate
• IBNR reserves were ruled by IBLs
• Actuaries laid weight rather on premium reserves
  of long-term policies

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Role of actuaries (post revisions)

• Active role in estimation
• Statistical and actuarial estimation of IBNR
  reserves
• Expanded appointed actuary system
• to verify appropriateness of loss reserves
• to submit the actuarial opinion to the board of
  directors
• to follow actuarial practice standards prepared
  by the designated corporation

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The practice standards for the appointed
actuaries

• Standards for Non-life actuaries
• IAJ launched the working group to draft the
  practice standards in 2005
• Topics
• Loss reserves, policyholder dividend, future cash
  flow analysis
• Principle basis

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Thank you for listening

• http//www.actuaries.jp http//www.sompo-japan.co.
  jp