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Reinsurance Loss Reserving Problems
- 1. Longer report lags
- 2. Persistent upward development of most claim reserves
- 3. Heterogeneity: Claim reporting patterns di ffer by line, type of contract, cedent, and intermediary
- 4. Industry statistics are hard to use due to heterogeneity
- 5. Reports to reinsurer may be lacking certain information
- 6. Data coding and IT systems problems due to heterogeneity
- 7. Size of adequate loss reserve is larger and more uncertain for reinsurer
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6 Components of Reinsurer's Loss Reserve
- 1. Case reserves reported by the ceding companies
- 2. Reinsurer additional reserves on individual claims
- 3. Actuarial estimate of future development on Components 1. and 2. (IBNER)
- 4. Actuarial estimate of pure IBNR
- 5. Discount for future investment income
- 6. Risk load
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General Procedure for Reinsurance Loss Reserving
- 1. Partition reinsurance portfolio into reasonably homogeneous exposure groups
- 2. Analyze historical development patterns
- a) If possible, consider case reserve development and pure IBNR claims separately
- 3. Estimate future development
- a) If possible, estimate bulk reserves for IBNER and pure IBNR separately
- 4. Monitor and test predictions, at least by calendar quarter
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Important Variables for Partitioning Reinsurance Portfolio into Exposure Groups (In Order of Priority)
- 1. Line of Business
- 2. Type of Contract
- 3. Type of Reinsurance Cover
- 4. Primary Line of Business
- 5. Attachment Point
- 6. Contract Terms
- 7. Type of Cedent
- 8. Intermediary
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Reserve Estimation Methods for Short-Tailed Exposure Categories
- 1. Use percentage of latest-year earned premium
- 2. Use selected loss ratio
- 3. Use chain ladder with accident year data
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Examples of Short-Tailed Exposures
- 1. Treaty property proportional
- 2. Treaty property catastrophe
- 3. Treaty property excess
- 4. Facultative property
- 5. Fidelity proportional
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Examples of Medium-Tailed Exposures
- 1. Treaty property excess higher layers
- 2. Construction risks
- 3. Surety and Fidelity excess
- 4. Ocean and Inland marine
- 5. International property
- 6. Non-casualty aggregate excess
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Examples of Long-Tailed Exposures
- 1. Treaty property excess higher layers
- 2. Construction risks
- 3. Surety and Fidelity excess
- 4. Ocean and Inland marine
- 5. International property
- 6. Non-casualty aggregate excess
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Suggested Reserving Methods for Long-Tailed Exposures
- 1. CL Method
- 2. BF Method
- 3. Stanard-Buhlmann Method (i.e., Cape Cod Method)
- 4. Credibility IBNR Estimates
- 5. Claim Count/Claim Severity Model
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Stanard-Buhlmann Method vs. Bornheutter-Ferguson Method
- 1. Both use an expected loss ratio to apply to premium
- 2. Both use an unreported loss percentage to apply to expected losses
- 3. SB incorporates reported losses for all years into the estimation of the expected loss ratio. BF judgmentally uses separate estimate for each year.
- 4. SB uses EP adjusted for rate level and trend. BF used unadjusted EP.
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Stanard-Buhlmann Formulas for ELR and IBNR
- 1. SB ELR = ∑Rpt Loss / ∑(Adj EP * %Rpt)
- 2. SB IBNR = SB ELR * ∑(Adj EP * [1 - %Rpt])
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