Non-Life Loss Reserving Practices and Documentation IAIS – ASSAL Training Seminar April 29, 2009 David Oakden

Canadian Requirements Discounting Required Margins Similar to IFRS 4 Proposal Actuarial Opinion Required Actuarial Report Filed with Regulator While I plan to keep my remarks general, I am a Canadian and I have worked in Canada for most of my life. Therefore my remarks will be coloured by the way we do things in Canada. I think that this slide sets out the three biggest differences. I think that Canada and Australia are the only major countries which discount non life reserves. Many developed countries now require an actuarial opinion but Canada requires that the actuary file a report with the regulator. Other countries only require that the report be available for audit. My remarks today are based on our instructions to Appointed Actuaries which are available on our web site.

Report Outline Introduction Opinion Executive Summary Company Overview Data Overview Unpaid Claims Premium Liabilities Exhibits and Appendices

Introduction Company Date Name and contact information of the Actuary Purpose/Scope of the report

Opinion Compare carried provisions with Actuary’s estimate Summary of the results for the different business segments showing how the total provision is derived

Executive Summary Summary of key results Accident year vs calendar year Unusual losses or significant concerns Comment on development of prior years’ losses Discuss changes in methods and their financial impact Disclose any departure from accepted actuarial practice

Company Overview Ownership and Management Business Reinsurance Especially changes Business Lines of business Underwriting policies Claims policies Reinsurance Description of all significant treaties covering several years Ideally covering all years which have unpaid claims

Overview of Data Sources of data Verification procedures Reliance on others Accountants Other actuaries Completeness of data Non reviewed business segments

Unpaid Claims To meet Canadian Requirements we need: Undiscounted Unpaid Claims Selection of Payment Patterns Selection of Interest Rate Selection of Margins I will restrict my comments to the undiscounted unpaid claims Canada is one of the few countries that requires discounted unpaid claims for non-life insurance. If the current IFRS proposal is accepted discounting will become a requirement for all countries following IFRS. For now I will restrict my comments to the undiscounted provisions.

Undiscounted Unpaid Claims Gross Ceded Net Two of the above provisions are calculated and the third obtained by simple arithmetic Practices vary depending on the data, lines of business and reinsurance We have no preference but all provisions must be reasonable You could calculate the gross and ceded provisions and get the net by subtraction or you could calculate the net and ceded provisions and get the gross provision by addition. Some actuaries calculate the ceded as the difference between gross and net but this can lead to strange results. E.g. negative provisions.

Undiscounted Unpaid Claims Considerations Frequency/severity trends Policy or coverage changes Change in reinsurance Change in reporting or payment of claims Changes in case reserving practices Regulatory changes I do not plan to comment on actuarial methods but most methods assume that the historical data is predictive of future experience. Where there have been changes this will not be the case and the actuary needs to take these into account very carefully.

Claims Expenses Internal or Unallocated External or Allocated Usually estimated using the paid to paid ratio and the assumption that 50% of the expense is incurred when the claim is reported External or Allocated Can be included with the claims data or reviewed separately For internal claims expense the ratio of paid claims to paid losses is used to calculate the provision for claims expenses. Usually half of this ratio is applied to the case reserves and the full ratio is applied to the IBNR. Other methods are used and many of them are preferable. For external claims expense most Canadian actuaries combine the expense and indemnity data I believe that this is the practice in most of the world with the exception of the US where claims expense is often calculated separately.

Undiscounted Unpaid Claims Favourable/unfavourable development We require 5 years of data by line and in total We encourage actuaries to show 10 years This is a very valuable tool for the supervisor The actuary should comment on the reasons for the development and changes made to address any relevant issues This is the first thing I look at when I review a report, in some cases it is the only thing I look at. I remember one company with a 10 year development triangle where every number showed adverse development. It did not take me long to conclude that they were likely underreserved.

Premium Liabilities Balance Sheet Presentation Unearned Premiums Deferred Acquisition Expenses Other assets/liabilities Premium Deficiency Actuary’s Calculation Expected losses & expenses on policies in force Premium adjustments on policies and reinsurance Commission adjustments including agent/broker profit commissions The actuary must make sure that the unearned premiums less deferred acquisition expenses are large enough to pay expected losses and expenses on the policies in force. If they are not then the deferred acquisition expenses must be reduced and/or a premium deficiency established. This can be a significant concern for multi-year policies such as extended warranties and residual value policies.

Other Liabilities Self-Insured Retentions Subrogation and Salvage Other Assets/Liabilities In many cases these provisions are included as part of the unpaid claims. It is important for the supervisor to know what items are included in the Actuary’s review.

External Review Procedures External Auditor Actuarial Specialist External Reviewer Once every 3 years Actuary should discuss the status of any recommendations make in past reviews

Questions