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The CAS Spring meeting 2006 International Reserving Practices(GS4) Loss Reserving in Japan Junji FURUKI FIAJ The Institute of Actuaries of Japan.

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Presentation on theme: "The CAS Spring meeting 2006 International Reserving Practices(GS4) Loss Reserving in Japan Junji FURUKI FIAJ The Institute of Actuaries of Japan."— Presentation transcript:

1 the CAS Spring meeting 2006 International Reserving Practices(GS4) Loss Reserving in Japan Junji FURUKI FIAJ The Institute of Actuaries of Japan

2 2 Agenda Non-life market in Japan Regulation and Accounting Loss reserving (before revisions) Loss reserving (after revisions) Role of Actuaries

3 the CAS Spring meeting 2006 International Reserving Practices(GS4) Non-life market in Japan

4 4 World premium volume ranking #CountryPV(US$Mln)WT(%) 1United States603, Germany106, Japan105, United Kingdom105, France65, Italy46, Canada40, Spain32, Netherlands27, Australia23, World1,395, Swiss Re, sigma No.2/2005

5 5 Non-life insurers in Japan #CompanyDNP(JP\Bln)WT% 1Tokio M & Nichido2, Sompo Japan1, Mitsui Sumitomo1, Nippon Koa Nissay Dowa Aioi Nisshin Fuji Kyoei Secom620.7 Total of domestic insurers8, Hoken Kenkyujo, Insurance 2005 License# Domestic23 Foreign15

6 6 Operating Lines LinesDNP(JP\Bln)(Saving type) Voluntary Automobile3,532(8) Compulsory Automobile1,190 Personal accident1,496(865) Fire1,475(364) General liability386 Marine & Inland transit270 Movables comprehensive116(0) Workers Compensation71(6) Pecuniary42(2) Contractors37 Others148 Total8,763(1,246) Hoken Kenkyujo, Insurance 2005

7 7 Assets ItemAmt (JP\Bln)WT(%) Cash and eq.2, Bonds9, Stocks9, Foreign securities4, Other securities Loans2, Real estate1, Other assets2, Total assets32, GIAJ, Fact Book 2005

8 8 Liabilities & Equities ItemAmt (JP\Bln)WT(%) Underwriting Reserves22, (Outstanding Loss Reserves)(2,844.6)(8.7) (Premium Reserves)(19,869.9)(61.1) (Others)(-) Other Liabilities3, Total Liabilities25, Equities6, Total Liabilities & Equities32, GIAJ, Fact Book 2005

9 the CAS Spring meeting 2006 International Reserving Practices(GS4) Insurance Regulation and Accounting

10 10 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

11 11 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

12 12 Ongoing changes Program for Further Financial Reform FSA’s initiative; 2004~2006 From Pre Review to Post Monitoring Improve in the corporate governance International standard-setting activities IAIS IASB

13 13 Insurance Accounting SAP = GAAP SAP / ruled in IBLs TAP / Special Taxation Measures Law Toward IFRS? GIAJ Studying IFRS4 phase II

14 14 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

15 the CAS Spring meeting 2006 International Reserving Practices(GS4) Loss reserving (prior revisions)

16 16 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

17 17 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

18 18 Prior loss reserves - IBNR formulae IBNR reserve takes greater amount between… Personal Accident WC Medical, Nursing General Liability Life Re Overseas Travel Current year’s earned premium ×8% An average of run off results in relation to Case reserves Current year’s earned premium ×3% BILPDL PDMisc. Automobile

19 19 Prior loss reserves - features Exposures has been NOT excessive Not synchronized with Profit Cycle (JP\Bln; +addition, -release) GIAJ, Fact Book 2005

20 the CAS Spring meeting 2006 International Reserving Practices(GS4) Loss reserving (post revisions)

21 21 New loss reserves - stables Recognition of reserves Case reserve IBNR reserve Estimation of Case reserve Case estimate

22 22 New loss reserves - changes IBNR reserves shall be estimated by actuarial and statistical method (principle) Screening for short cut calculations of IBNR reserves

23 23 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 unit’s paid loss / All paid loss Statistical method Formula method <90% >=90%<1% >=1%

24 24 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.

25 25 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

26 26 Claims Development Long-tailed lines Automobile, General Liability and Personal Accident Disclose past five years Accident year Loss reserves and paid loss at the end of the accident year One year later Two years later Three years later Four years later702 Estimate of cumulative loss Cumulative payments Loss reserves Example of the Claims development triangle (unit arb.)

27 27 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 Fiscal year Beginning loss reserves Accidents incurred in previous periods Run off results Paid lossLoss reserves △ △5△ △5△ Example of the Run off results (unit arb.)

28 the CAS Spring meeting 2006 International Reserving Practices(GS4) Role of Actuaries

29 29 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

30 30 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”

31 31 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

32 the CAS Spring meeting 2006 International Reserving Practices(GS4) Thank you for listening


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