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2653 results in General statistics and probability

Page 40 of 133

  • 5 - Reserving in Practice

  • David Hindley
  • Book:
    Claims Reserving in General Insurance
    Published online:
    27 October 2017
    Print publication:
    26 October 2017, pp 320-345

  • Summary

    Introduction

    The main purpose of this chapter is to summarise a number of key generic aspects of reserving in practice. It is designed mainly for the practitioner who is new or relatively new to reserving, although some of the content may also be helpful to more experienced practitioners when they are reviewing their overall reserving process.

    This chapter builds on the various other practical aspects of reserving covered in other chapters. For example, some of the practical details of applying specific reserving methods are covered in Chapters 3 and 4 for deterministic and stochastic methods respectively. Chapter 6 also covers a number of reserving topics that may be relevant to applying methods in practice, such as the use of Actual vs Expected methodology and discounting.

    Inevitably, in any reserving exercise there will be points of detail that depend, for example, on the nature of the business being analysed and the purpose of the exercise. Chapter 7 summarises some of this detail for a selected range of specific contexts, such as UK Motor and US Workers’ Compensation.

    Hence, many of the chapters have material which is relevant to reserving in practice. Together, this content refers to the “art” of reserving, to supplement the other parts of the book, which focus more on the “science” of reserving; reserving work in practice will typically involve both of these aspects.

    In Chapter 1, a reserving exercise was summarised as having four key stages – Background, Data, Analysis and Reporting–with brief details being provided on each of these stages. The current chapter provides some additional practical details of selected aspects of each of these stages. The first two stages – Background and Data – have already been covered in earlier chapters in sufficient detail, so this chapter only includes relevant additional points, to help put these stages in the context of the overall reserving process. The Analysis stage is covered in several sections, relating to various aspects of this stage of the process, which forms the core of most reserving exercises.

    The focus in this chapter is on using deterministic methods to derive a point estimate of the reserves, for example, for financial reporting purposes.

  • 7 - Reserving in Specific Contexts

  • David Hindley
  • Book:
    Claims Reserving in General Insurance
    Published online:
    27 October 2017
    Print publication:
    26 October 2017, pp 410-464

  • Summary

    Introduction

    This chapter provides details of selected key features of reserving in a range of specific contexts. For each territory/class considered, matters such as a description of the class, data types and example reserving methods are given. The drafting of this chapter has taken into account input from individuals or firms who have particular knowledge and experience in each of the relevant areas, as noted in the acknowledgements in Section 1.6. The generic matters that are relevant to all reserving exercises, such as understanding the business, checking the data and using homogeneous data groupings, are not repeated here, as they are already covered in the earlier chapters. Similarly, the generic points related to the application of individual reserving methods are also not repeated here, as they are covered in the description of each method in the relevant chapters.

    The purpose of collating these details is to give some preliminary information in relation to reserving in the relevant contexts. For each context, it is assumed that themain purpose of the reserving exercise is to determine a point estimate of the reserves for financial reporting purposes. Partly as a consequence of this, the reserving methods referred to are mostly deterministic in nature. In practice, stochastic methods are also likely to be used for some purposes in a number of the different contexts. Where more than one reserving method is mentioned, it is common in most contexts for the final selected results to be based on a combination of different methods, which may vary across the cohorts, as explained in general terms in Section 5.7.

    This chapter is not intended to be an instruction manual for the application of the reserving methods described in the earlier chapters, and does not represent any form of recommended approach, guidance or actuarial/professional standard. In practice, for each territory/class there will be many variations and additional detail beyond that described here, which in most cases will be learned through several years of practical experience. Furthermore, in some cases, the application of reserving methods will differ from that described here, perhaps significantly so, due to the specific circumstances.

    The various subdivisions of data given for each territory/class are not mutually exclusive and combinations of them may often be used in practice.

  • 1 - Introduction

  • David Hindley
  • Book:
    Claims Reserving in General Insurance
    Published online:
    27 October 2017
    Print publication:
    26 October 2017, pp 1-15

  • Summary

    The process of claims reserving is at the core of the financial management of general insurance organisations. It determines what is held on the balance sheet for claims that are not yet settled, affects the premiums that are charged and impacts on the capital that is held to support the solvency of the organisation. Thus, the selection of appropriate reserving methodologies and assumptions, and the application to practical situations, often with imperfect data, are of critical importance to the operations of an insurance organisation. This book has been designed for both those who are relatively newto the subject of reserving in general insurance, and for experienced practitioners who want a single reference source on the subject. It is also anticipated that it will be of interest to those wanting to develop new reserving techniques.

  • To produce a comprehensive description of both the theory and practice of claims reserving in general insurance. Although there are already a large number of papers and books on this subject, I have always felt that creating a single reference work covering a wide range of reserving topics would be of benefit to those new to the subject and to experienced practitioners, partly to help avoid the reinvention of previously developed approaches that I have seen occur several times during my career (by others and myself). Although most reserving is nowcarried out in bespoke or proprietary reserving software, which will usually have associated user guides and manuals, this book is intended to supplement those sources by covering a variety of reserving topics and techniques, the latter of which may not all be implemented in the relevant software products.

  • To provide those who wish to advance the more theoretical aspects of reserving with a clear and thorough description of the many practical issues that frequently occur when applying reserving methods in the real world. My hope is that, by doing this, more effective new approaches can be developed in future which make appropriate allowance for these practical issues, which in turn should encourage their wider application. In so doing, this should improve the reliability of reserve estimates and assist with understanding the uncertainty surrounding those estimates.More accurate reserve estimates should lead to fairer insurance/reinsurance premiums and to more reliable financial statements, both of which must be in the public interest.

  • 2 - Data

  • David Hindley
  • Book:
    Claims Reserving in General Insurance
    Published online:
    27 October 2017
    Print publication:
    26 October 2017, pp 16-39

  • Summary

    Introduction

    The main purpose of this chapter is to describe the types of data that are used for estimating claims reserves, using one or more of the methods described in Chapters 3 and 4. In this context, claims reserves are assumed to represent case reserves plus IBNER and IBNR, as defined in Section 1.1. The data that are needed for estimating categories of reserves other than claims reserves (e.g. reinsurance bad debt or unallocated loss adjustment expenses) and for certain specific types of claim (e.g. latent claims) or business are covered in Chapters 5 and 7.

    The term “data” as used here is intended to mean both quantitative and qualitative information – in effect, any type of information that is used as part of the reserving process. However, since most reserving methods are applied to quantitative information, this chapter focuses on that type of data. Nevertheless, collation of qualitative information is an essential part of any reserving exercise, and so reference is also made to that type of data, with further details in general terms being given in Chapter 5 and in specific contexts in Chapter 7.

    After first introducing the claims development and data triangle concepts, the remainder of this chapter gives a description of the different types of reserving data, followed by some further details related to data triangles, and then a discussion of the important topic of grouping and subdivision of reserving data. The chapter concludes with some examples of the common data quality issues encountered in practice. A more complete understanding of these issues and of other data-related practical points is best achieved when considered in the context of the application of the key reserving methods, which are described in Chapters 3 and 4. This is also partly why some of the detailed data topics related to specific methods are dealt with in these later chapters, rather than in this chapter, which focuses on more generic data topics. Hence, readers who are new to reserving may need to re-read this chapter after gaining at least an initial understanding of the key reserving methods.

Page 40 of 133