1. Insurance & Reinsurance Reserving in the UK Paul Gates, Lane Clark & Peacock Casualty Loss Reserving Seminar, 9/13/99

2. Outline of Talk Actuaries abroad Lloyd’s & the London market Actuarial involvement Problems in London market Current issues UK versus US

3. Actuarial numbers worldwide

5. Lloyd’s and the London Market What is the London market? What is Lloyd’s?

6. Lloyd’s Insurance market Society of individual and corporate members (Names) Individuals have unlimited liability Corporates have limited liability Difference reflected in required solvency margin

7. Lloyd’s - key points in history 1688 - a coffee house, owned by Mr Lloyd! Marine clubs Pre-eminent marine and non-marine insurance marketplace Government legislation Disasters of late 1980s / early 1990s –reconstruction & renewal –Equitas –corporate capital

8. Lloyd’s - the players Individual Names Corporate Names also from 1994 Lloyd’s brokers Active underwriter for each Syndicate Managing agents And now actuaries

9. Features of Lloyd’s Funded accounting –3 year ventures Reinsurance to close (RITC) US Trust Funds Solvency requirements –actuarial opinions

10. London Market Insurance companies Reinsurance companies Brokers Claims specialists Global market, although heavy involvement with Lloyd’s Certain centres of underwriting eg LUC Actuaries –growing field with demand

11. Classes of Business Motor (Auto) –UK very large, not much US Casualty (Liability) –US, UK, other countries –D&O, E&O (including actuaries), Public Liability Workers comp Aviation –airlines, satellites, airports, light aircraft

12. Classes of Business Marine –hull, cargo, LMX Energy –rig, onshore Property –direct, facultative, risk XL, catastrophe –US, UK, Europe, Japan,worldwide Whole account XL Finite risk

13. Customers of Lloyd’s / London Unusual but serious –satellites –veteran aircraft –sporting events –other events –rogue traders –hostile bids

14. Actuarial Involvement 30 years ago - nothing! Lloyd’s –growing market –statutory role –RITC / solvency –managing agents strategic role research & analysis –Equitas

15. Actuarial Involvement London market –Growing market –Pricing roles –Reserving roles –No statutory requirement –Although for US-owned companies….. –Underwriting

16. Actuaries at Lloyd’s Opinions –Lloyd’s solvency –US Trust Funds –RITC? –Reports at 31 December each year –1993 onwards only- prior years to Equitas “Reasonable provision” “Greater than or equal to best estimate”

17. Actuaries at Lloyd’s New Areas –Reinsurance bad debt % of recoveries outstanding and reinsurance IBNR covering insolvency and dispute –Reinsurance run-off costs losses occurring versus risks attaching –Claims handling expenses indirect costs as related to past claims - project –Y2K –Professional Guidance

18. Actuaries in the London Market Reserving role comprises: –Year-end reserving –Quarterly reserving –Treaty monitoring and analysis –Profitability analysis –Feedback to underwriters / pricing actuaries

19. Which actuaries where? Insurance / reinsurance companies –mainly in-house, some consultants Lloyd’s –managing agents employ actuaries –opinions work - consultants Insolvent companies –mainly consultants Commutations –mixture

20. Actuarial Techniques Constrained by data Use of commercial packages Chain ladder Bornhuetter Ferguson Stochastic methods –bootstrapping Curve fitting (tail estimation) Graphical approaches

21. Information Issues Poor treaty information –paid losses only –information on exposures (lack of) –cash calls –underlying classes not clear No market bodies outside US Small portfolios Multiple currencies Foreign languages!

22. Problems at Lloyd’s APH LMX Spiral Series of disasters –Hurricane Hugo –European windstorms 1990 –Exxon Valdez –Piper Alpha –Hurricane Andrew Poor rating / lack of control

23. Asbestos Pollution and Health London involvement Data issues –very old risks –complex inter-relationships –insolvencies Reserving methods –methods –data issues

24. APH Reserving Information by underwriting year no use Court awards critical (win factors) Several techniques –Detailed exposure methods (share of market) –Average cost per claim –Survival ratios –Graphical methods –Simulation

25. Equitas Clean start for ongoing syndicates Start up –1992 & prior liabilities –assessing premium to take on risk Current activity –payments and reserving –commutations

26. Current Issues in London Market Poor rating Withdrawals / run-offs Catastrophes –Georges –Sydney hailstorms Poor experience –satellite –marine (especially XL) –autowarranty

27. Current Actuarial Issues in UK Year 2000 Increasing statutory role Reinsurance run-offs / insolvencies Practising certificates RITC certification Consolidation

28. UK / US considerations Differences –data –certification –information gathering organisations Mutual recognition - worldwide Opinions –best estimate versus range

29. Back to the example….. All assumptions as before Requirements - “at least best estimate” First scenario - best estimate (70%) Second scenario - more conservative (80%) UK corporate tax rate =30%

30. Example continued Scenario 1 –Take loss in first year - using correct loss ratio –IBNR held until year 5 so that 70% L/R –Net income = 65 Scenario 2 –High loss ratio thus higher reserves set in year 1 –Release of reserves in year 5 –Net income = 68