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

2. 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.

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

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

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

6. 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

7. 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

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

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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

17. Questions