Insurance and Reinsurance Reserving in Overseas Markets

1
Insurance and Reinsurance Reserving in Overseas
Markets

• Peter A. Royek
• Toa Reinsurance Company of America
• Casualty Loss Reserve Seminar
• Scottsdale, Arizona
• September 13, 1999

2
Birth of a Session

• Affiliate Membership Mutual Recognition
• One Actuarys Recent Experience with Overseas
  Markets
• Japan
• Canada

3
Broad Overview of Session

• General Discussion of Differences Involving
  Reserving Among World Markets
• Insurance and Reinsurance Reserving in the United
  Kingdom

4
General Discussion of Differences Involving
Reserving Among World Markets

• Dimensions for Differentiation
• International Reserving Example

5
Dimensions for Differentiation

• Methods
• Reserve Categories
• Data
• Accounting Rules
• Role of the Actuary

6
Methods (or the lack thereof)

• Japan
• Strict formula for IBNR calculation
• Automobile
• Earned Premium for current year X 3
• Personal Accident, Liability, and WC
• Earned Premium for current year X 8
• All Other Lines
• 0
• Need for change in the future?
• Europe (Outside the UK)
• Tendency toward a more theoretical, statistical
  approach

7
Methods (or the lack thereof)

• Others
• Argentina
• Automobile IBNR
• Italy
• New Requirement for IBNER
• Brazil
• New IBNR Requirement
• Clearly Standard Methods are Not Currently Used
  in these Markets

8
Rate Inadequacy gt Reserve InadequacyTwo
Companies Writing the Same Risk

• Company A - Charges Tariff Rate
• Premium 1,000
• IBNR 80 (8 x 1,000)
• Company B - Deviates Off Tariff Rate
• Premium 700
• IBNR 56 (8 x 700)

9
Reserve Categories

• Premium Deficiency Reserve - Canada
• Amount by which UPR is insufficient to cover
  future loss and expense, liability (if any) must
  be posted
• Appointed Actuary must opine on the adequacy
• Similar to Unexpired Risk Reserve in the UK
• GAAP adjustment in the US

10
Reserve Categories

• Contingency (or Extraordinary Loss) Reserve -
  Japan
• Pre-event loss fund with strict rules for
  build-up and draw-down
• Coming to the US? See next session -
  Tax-Exempt, Pre-Event Catastrophe Reserves, in
  the Wind?

11
Reserve Categories

• Equalization Reserve - Germany
• Can be used for smoothing of results
• Like Topside or Corporate reserves in US
  companies?, but NOT a separate statutory item
• Somewhat like Extraordinary Loss Reserve due to
  the tax-free feature of these reserves, but NOT
  the strict rules to build-up or draw-down

12
Data

• Benchmarks
• Not as publicly-available as in the U.S.
• AM Best,RAA,etc
• Private collections do exist
• Consultants
• Companies
• Canada
• Some industry data for Auto
• Runoff exhibit in Annual Return NOT by LOB,
  unlike Schedule P
• Japan

13
Data

• Other Issues
• Not enough data
• How to reserve for small or incidental foreign
  exposure with lack of benchmarks?
• Even if no statutory requirement for IBNR, may
  need to reserve for US Annual Statement purposes
• Too much data
• A stew of otherwise-heterogeneous data in a
  single reserving class
• Due to credibility concerns or ceding company
  reporting?

14
Accounting Rules

• Tax Rates
• Basis for Accounting
• Different Statutory Statement Items
• Fiscal Year/Reporting Frequency

15
Accounting Rules Tax Rates on Underwriting
Income

• Japan - 30
• Recent History
• 1998 - 34.5
• 1990 through 1997 - 37.5
• 1989 - 40
• United Kingdom - 30

16
Accounting Rules Tax Rates on Underwriting
Income

• USA - 35
• Canada - 29.12 Federal, plus ...
• Combined Federal Provincial Rates
• Manitoba - 46.12
• Ontario - 44.62
• Quebec - 38.27 (for Active/eligible Companies)

17
Accounting RulesBasis for Accounting

• Differences when comparing to US Statutory or US
  GAAP Accounting
• Example Valuation of Assets in Japan
• Impacts the calculation of Surplus
• Due to change to market-based valuation in
  2000/2001
• Companies are making US GAAP Adjustments
• Some previously-mentioned items go away
• Allows for level comparison of companies

18
Accounting RulesDifferent Statutory Statement
Items

• Examples
• Premium Deficiency Reserves
• Extraordinary Loss Reserves
• Runoff Exhibit in Canadian Annual Return

19
Accounting RulesFiscal Year/Reporting Frequency

• Accounting year-end dates
• Japan - 3/31
• Australia - 6/30
• In some markets, results are reported (and IBNR
  is calculated) only at fiscal year-end

20
Role of the Actuary

• Canada
• Best Estimate
• The minimum to be carried by the company
• Margins above are disclosed
• Contrast these with the US
• Codification/Best Estimate Reserving coming to
  the US?
• Discounting/PFADs
• Discounting only allowed by OSFI for AB
• CIA requires reserves be discounted and a
  Provision for Adverse Deviation (PFAD) be added
• Discounted Reserve PFAD must be gt(or ) Company
  Carried

21
Role of the Actuary

• Canada (continued)
• DCAT
• Companies operating in Canada now subject
• Opining on Premium Liabilities

22
Role of the Actuary

• Japan
• Duties of the Actuary listed in Insurance
  Business Law
• No Actuarial Judgment in Reserving
• Now a Need for Rating Expertise
• Actuarial Full Employment Act?

23
International Reserving ExampleIntroduction

• The same piece of business (Treaty/Certificate/P
  olicy) will be run through 4 different scenarios
  in 3 different jurisdictions
• The effects of local reserving rules and tax
  rates will be run against the same underwriting
  results

24
International Reserving ExampleSimplifications

• Each company writes only this one account
• IBNR thus allocated to this account
• Investment Income
• Simplified Investment Income calculation, meant
  only to show that II will vary due to the effect
  of reserve rules tax rates on cash available
  for investment
• No variation of investment yield by country
• No variation between tax rates on investment
  income and tax rates on underwriting income

25
International Reserving ExampleSimplifications

• All premium is earned in the first year
• No UPR at year end gt No Premium Liability
  Issues
• Discounting for US tax purposes is NOT performed

26
International Reserving ExampleFramework

• LOB Auto
• Premium 1,000 units
• Expenses 250 units, all paid on 1st day
• Expense Ratio 25
• Investment yield 5
• Ultimate Loss Ratio 70
• Reasonable Range (for US) is (65,75)
• Account closed after 5 years
• Account history in years 1 through 5
• Payment pattern - 100,100,200,200,100
• Case reserves held at year-ends - 100,100,100,50,0

27
International Reserving ExampleFramework

• Taxes paid at year end on annual underwriting
  investment income
• Investment income calculated on average cash
  funds held (oversimplified in this example)
• Over- or Under-reserving (where applicable) is
  adjusted in year 5

28
International Reserving ExampleFramework

• All scenarios will produce an underwriting income
  of 50
• All scenarios will produce a loss ratio of 70,
  and expense ratio of 25, and a combined ratio of
  95
• Net Income and Cash are the items which will vary

29
International Reserving ExampleScenarios

• Japan
• IBNR 30 at Year 1
• Released after Year 1 as all premium is earned
• Tax rate 30

30
International Reserving ExampleScenarios

• Canada
• Company sets loss ratio to the Best Estimate of
  70
• IBNR is held to achieve 70 until final
  settlement
• Tax rate used is Federal Ontario provincial
  rate 44.62

31
International Reserving ExampleScenarios

• USA 1
• Company sets loss ratio to the high end of the
  range - 75
• IBNR is held to achieve 75 until final
  settlement
• Tax rate 35

32
International Reserving ExampleScenarios

• USA 2
• Company sets loss ratio to the low end of the
  range - 65
• IBNR is held to achieve 65 until final
  settlement
• Tax rate 35

33
International Reserving ExampleResults

• Japan
• IBNR lowest Year 1, then 0
• Takes largest underwriting profit pays most tax
  in Year 1. Takes largest U/W losses next 3 years
• Overall pays least taxes (lowest rate)
• Overall makes least II (while paying overall
  least taxes, paid a lot in Year 1)
• Total Net Income 60.04

34
International Reserving ExampleResults

• Canada
• Sets loss ratio to the correct70, incurs all
  loss in Year 1
• Earns II between the two US scenarios as it holds
  reserve level between the two
• Overall pays most taxes (highest rate)
• Total Net Income 51.65

35
International Reserving ExampleResults

• USA 1
• Company sets high loss ratio 75
• Takes underwriting gain in Year 5 with downward
  adjustment
• Most NI tax in Year 5
• Overall makes the most II as it holds more
  reserves longer
• Total Net Income 62.31

36
International Reserving ExampleResults

• USA 2
• Company sets loss ratio - 65
• Takes underwriting loss in Year 5 with upward
  adjustment
• Least NI tax in Year 5
• II greater only than Japan
• Total Net Income 59.98

37
International Reserving ExampleConclusion

• The differing reserving rules and tax rates among
  jurisdictions do impact the results of the same
  account. However
• Factors that were simplifiedor ignored in this
  example will affect the magnitude and can affect
  the comparative magnitude of the results
• Factors that can vary from those in this example
  will also affect the magnitude and can also
  affect the comparative magnitude of the results