Insurance & Reinsurance Reserving in the UK

Paul Gates, Lane Clark & Peacock

Casualty Loss Reserving Seminar, 9/18/2000

Outline of Talk

• Lloyd’s & the London market

• Actuarial involvement - the what and how

• Current issues for actuaries

• Problems in London - past and present

• Example - reprise

Lloyd’s and the London Market

• What is the London market?

• What is Lloyd’s?

Lloyd’s

• Insurance and reinsurance market at 1 Lime St, City of London

• Society of individual and corporate members (Names)

• Individuals generally have unlimited liability

• Corporates have limited liability

Lloyd’s - players

• Broker Market

• Syndicates– active underwriter

• Managing Agents

0

50

100

150

200

250

2000 1999 1998

Syndicates

Managing Agents

Brokers

Corporate v Individual Statistics

02000

4000

6000

8000

10000

12000

14000

2000 1999 1998

Corporate Capital($m)

Individual Capital($m)

0

1000

2000

3000

4000

5000

6000

7000

2000 1999 1998

CorporateMembers

Individual Members

Lloyd’s - key points• Began 1688 - Mr Lloyd’s coffee house

• Marine clubs

• Pre-eminent marine and non-marine insurance marketplace

• Reconstruction & renewal in early 1990s– Equitas – corporate capital

• Controls / safeguards– regulated by Government at market level– Central Fund

Lloyd’s - Split of Business

Marine20%

Non-marine54%

Aviation10%

Motor16%

Features of Lloyd’s• Funded accounting

– 3 year ventures

• Reinsurance to close (RITC)

• US Trust Funds– CRTF– SLTF– LATF

• Solvency requirements– actuarial opinions

London Market

• Insurance companies

• Reinsurance companies

• Brokers

• Claims specialists

• Global market, although heavy involvement with Lloyd’s

• Certain centres of underwriting eg LUC

• Actuaries

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

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

Actuarial Involvement

• 30 years ago - nothing!

• Lloyd’s– growing market for actuaries– statutory role– RITC / solvency– managing agents

• strategic role

• research & analysis

– Equitas

Actuarial Involvement

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

Actuaries at Lloyd’s• Opinions

– Lloyd’s solvency– US Trust Funds– Reports at 31 December each year– 1993 onwards only- prior years to Equitas

• “Reasonable provision”

• “Greater than or equal to best estimate”

Actuaries at Lloyd’s• Key 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 ??

Actuaries in the London Market

• Reserving role comprises:– Year-end reserving– Quarterly reserving– Treaty monitoring and analysis– Profitability analysis– Feedback to underwriters / pricing actuaries

Actuarial Techniques

• Constrained by data

• Chain ladder

• Bornhuetter Ferguson

• Stochastic methods– bootstrapping

• Curve fitting (tail estimation)

• Graphical approaches

Information Issues• Paucity of data

– no market bodies for reference purposes– development history– small portfolios

• Poor treaty information– paid losses only– information on exposures (lack of)– cash calls– underlying classes not clear

Actuarial Guidance

• Institute of Actuaries– Issues Guidance Notes– Covers statutory roles

• US requirements (GN33,GN18)• Lloyd’s (GN20)• Friendly societies (GN32)

– Writing actuarial reports (GN12)– “How to”

• Network of actuaries (GIRO)

Current Issues for Actuaries (some)

• Poor results• Involvement with forecasting of results• Statutory sign-off for companies• Discounting• Actuarial sign-off of RITC?

– covering asset and liability elements– equity between Names– stochastic (DFA) model

Problems in London - early 1990s• APH

• LMX Spiral

• Other latent claims

• Series of disasters

• Poor rating / lack of control

Asbestos Pollution & Health Reserving• Data issues

– old risks, complex inter-relationships, insolvencies– information by underwriting year not useful

• Techniques– Detailed exposure methods (share of market)– Average cost per claim– Simulation – Survival ratios– Graphical methods– Court awards critical (win factors)

Equitas

• Clean start for ongoing syndicates

• Start up– 1992 & prior liabilities– assessing premium to take on risk

• Current activity– payments and reserving– commutations

0

2

4

6

8

10

12

14

$bn

Surplus

Gross outstanding

Net outstanding

Problems in London - 2000• Compensation culture • New latent claims?• Series of disasters

– windstorms– tornadoes– earthquakes– hailstorms– explosions– satellites– aviation losses

Problems in London - 2000

• Insolvencies

• Capital withdrawal

• Poor results– poor rating?– loadings

• Lack of reinsurance / retrocession coverage

• Forecasting

Meanwhile, back at 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%

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 = 63

• Scenario 2– High loss ratio thus higher reserves set in year 1 – Release of reserves in year 5– Net income = 68