CHAP 17
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What is a potential issue associated with relying on past experience in the reserving process, according to the text?

  • Past data can lead to underestimating reserves in a hard market.
  • Past data can lead to underestimating reserves in a soft market. (correct)
  • Past data can lead to overestimating reserves in a soft market.
  • Past data can lead to overestimating reserves in a hard market.

    • What is a key characteristic of a 'hard market' in the underwriting cycle?

  • Insurers experience low profit margins.
  • Insurers experience high profit margins. (correct)
  • Insurers experience increased competition.
  • Insurers exit the market.

    • Which of the following is NOT mentioned in the text as a factor influencing the length of the underwriting cycle?

  • Company's reputation and financial strength. (correct)
  • Investment conditions.
  • Economic conditions.
  • Competition in the market.

    • What is the main point of the text regarding the influence of the underwriting cycle on claims development?

    <p>The underwriting cycle can impact claims development patterns, requiring careful consideration and adjustments. (C)</p> Signup and view all the answers

    What should be done when there is adverse experience in claims development?

    <p>Carefully analyze the situation to identify potential causes and adjust reserves accordingly. (D)</p> Signup and view all the answers

    What is the suggested approach to dealing with unexpected developments in claims development?

    <p>Avoid changing assumptions too frequently, especially in response to short-term fluctuations. (C)</p> Signup and view all the answers

    What is the main purpose of reviewing past estimates and methods for claims development?

    <p>To identify areas for improvement and enhance future estimations. (D)</p> Signup and view all the answers

    What is the potential consequence of insurers entering the market in a hard market?

    <p>Increased competition leading to lower premiums. (D)</p> Signup and view all the answers

    What is a potential drawback of using rate indices when deriving initial expected loss ratios for reserving?

    <p>Rate indices are typically only available for renewal business, potentially neglecting differences between new and renewed business. (C)</p> Signup and view all the answers

    Why is it important to understand the inflationary allowance in rate indices?

    <p>It avoids double-counting inflation when calculating loss ratios. (D)</p> Signup and view all the answers

    What factor should be considered when using rate indices in reserving, especially in the London Market?

    <p>Changes in commission rates over time. (D)</p> Signup and view all the answers

    What is a key aspect of ILF curves that can affect the accuracy of rate indices?

    <p>They may not fully reflect changes to claim profiles, affecting rate index accuracy. (B)</p> Signup and view all the answers

    Which statement accurately describes the potential challenges with using rate indices for reserving?

    <p>Rate indices can be affected by the subjectivity of information used in their construction and may fail to fully remove claims trends. (D)</p> Signup and view all the answers

    Why is it essential to assess the reasonableness of reserving results in light of the underwriting cycle?

    <p>To prevent underestimation or overestimation of the insurer's liabilities. (B)</p> Signup and view all the answers

    Which of the following factors can skew a selected rate index?

    <p>A small number of policies with above or below average rate changes. (C)</p> Signup and view all the answers

    What should an actuary consider when using a rate index to derive initial expected loss ratios?

    <p>The underlying long-term trend in the cost of claims. (A)</p> Signup and view all the answers

    What is a diagnostic used for in actuarial analysis?

    <p>To test and verify the underlying methodology and assumptions (C), To identify areas of the portfolio to be examined more closely (D)</p> Signup and view all the answers

    What does the diagnostic "IBNR divided by premium" indicate?

    <p>The accuracy of the claims reserving process (C)</p> Signup and view all the answers

    Which of the following situations could lead to inconsistencies in the diagnostic "IBNR divided by premium"?

    <p>A change in the premium rating structure (C)</p> Signup and view all the answers

    What does the "ultimate loss ratio" diagnostic indicate?

    <p>The overall financial performance of the insurance business (D)</p> Signup and view all the answers

    What are some potential causes for changes in the "ultimate loss ratio" diagnostic?

    <p>All of the above (D)</p> Signup and view all the answers

    Why is it important to consider an actuary's experience when analyzing results?

    <p>Experience provides an implicit benchmark for expected results (B)</p> Signup and view all the answers

    Why is it important to seek help from a more experienced actuary when an actuary's experience is limited or not typical?

    <p>All of the above (D)</p> Signup and view all the answers

    How can peer review help in actuarial analysis?

    <p>All of the above (D)</p> Signup and view all the answers

    What are some factors that can lead to changes in net to gross claim ratios?

    <p>Changes in the amount of business being retained or ceded by the insurer. (A), Changes in the mix of non-proportional and proportional reinsurance cover. (B), Changes in the underlying gross experience. (C)</p> Signup and view all the answers

    In the context of proportional reinsurance, what should we expect to see in terms of premium and paid/incurred claims ceded to reinsurers?

    <p>The ceded amount should be equal to the proportional share. (C)</p> Signup and view all the answers

    What is a key diagnostic tool for evaluating reserving assumptions?

    <p>Comparing assumed future development patterns with past development patterns. (A)</p> Signup and view all the answers

    What is the purpose of examining cumulative claims development as a proportion of estimated ultimate claims for a given origin cohort?

    <p>To identify areas needing further investigation regarding differing cohort performance. (C)</p> Signup and view all the answers

    Which of the following is NOT a factor considered when examining a run-off triangle for calendar-year distortions?

    <p>The number of claims settled in each development year. (D)</p> Signup and view all the answers

    What does a diagonal in a run-off triangle with a bias towards 'high' development factors potentially indicate?

    <p>The insurer is underestimating its ultimate claims. (B)</p> Signup and view all the answers

    Which of the following is an example of a change in policy terms that could affect net to gross claim ratios?

    <p>A decrease in the deductible amount of the policy. (A)</p> Signup and view all the answers

    What is the main purpose of using net of reinsurance to gross of reinsurance ratios?

    <p>To verify the accuracy of reinsurance recoverables. (A)</p> Signup and view all the answers

    Which of the following is NOT an internal influence on claims development patterns?

    <p>Catastrophes (D)</p> Signup and view all the answers

    What is a key reason why the distribution of final claims outcomes is often positively skewed?

    <p>The potential for an increase in aggregate claims (adverse development) usually exceeds the potential for a reduction in aggregate claims (favorable development) (C)</p> Signup and view all the answers

    What is the primary implication when claims development patterns exhibit significant volatility?

    <p>The estimates for future claims are likely to be unreliable (C)</p> Signup and view all the answers

    Which of the following is NOT a factor that could lead to favorable claims development?

    <p>More complex claims with longer reporting and settlement delays (D)</p> Signup and view all the answers

    What is a possible reason why an accumulation of claims due to a single event, such as a hurricane, might slow down claims development?

    <p>The event may cause a surge in new claims, overwhelming the claims handling capacity (A)</p> Signup and view all the answers

    What is a possible example of a factor that could contribute to adverse claims development?

    <p>A change in the experience leading to more complex claims with longer reporting and settlement delays (D)</p> Signup and view all the answers

    What is the primary purpose of comparing claims development patterns across different classes of business?

    <p>To identify potential areas where claims handling procedures may need to be improved (D)</p> Signup and view all the answers

    What is a crucial aspect of understanding the reasons behind differences in claims development patterns for each origin year?

    <p>Ensuring that the underlying assumptions used in claims development models are valid (B)</p> Signup and view all the answers

    What is the primary purpose of reviewing changes in loss ratios within a reserving analysis?

    <p>To assess the accuracy of the reserving process and highlight areas of potential concern. (A)</p> Signup and view all the answers

    Which of the following is NOT a potential factor influencing changes in loss ratios?

    <p>Changes in insurance regulation. (A)</p> Signup and view all the answers

    When examining loss ratios, what should be excluded to avoid a distorted picture?

    <p>Claims that are significantly larger than typical claims. (D)</p> Signup and view all the answers

    Why is it significant to consider the granularity of data when analyzing loss ratios?

    <p>To identify trends and patterns that might be obscured by aggregating too much data. (C)</p> Signup and view all the answers

    What is a monotonically decreasing function in the context of loss ratios?

    <p>A function where the loss ratio decreases steadily with the age of the claims cohort. (D)</p> Signup and view all the answers

    How can premium rate movements be accounted for when analyzing loss ratios?

    <p>By adjusting underlying premiums to reflect the impact of rate changes. (D)</p> Signup and view all the answers

    Why is it important to consider the availability of premium estimates when analyzing ultimate loss ratios?

    <p>To calculate the ultimate loss ratios as a percentage of the appropriate measure of exposure. (B)</p> Signup and view all the answers

    Which of the following is a potential reason for inconsistencies in loss ratios reported for different claims cohorts?

    <p>The use of different reserving methods for different cohorts. (A)</p> Signup and view all the answers

    Study Notes

    Assessment of reserving results

    • Reserving result analyses are crucial for assessing the reasonableness of reserving exercise results
    • Factors to consider when assessing the reasonableness of results include the methodology and assumptions used in the reserving exercise
    • Diagnostics are used to assess the reasonableness of reserving exercise results
    • Typical diagnostics commonly used to assess the reasonableness of results include analysis of experience over time.
    • Analysis of experience in the context of a reserving exercise factors are critical.
    • Alternative results, and professional issues in resolving them, should be addressed in reserving exercises.
    • Analyzing the results of a reserving exercise is vital to determine if the figures are justifiable.
      • The methodology and assumptions used must be appropriate.

    Introduction

    • Assessing the reasonableness of the reserving calculation outcome is crucial for actuaries
    • Actuaries must examine the reserving calculation methodology and assumptions to ensure they are justifiable.
    • Diagnostics and experience analysis can aid in this process
    • The results of reserving exercises should be analyzed to determine their reasonableness.

    Assessing the results of a reserving exercise

    • Assessing the reasonableness of reserving exercise results is a critical stage in the reserving process.
    • Two key questions to ask in this assessment are:
      • Are the results reasonable?
      • Are the results supported by analysis of emerging experience?
    • Actuaries often conduct an "Actual versus Expected" exercise to compare current experience with expected experience since the last review.
      • This helps assess the assumptions appropriateness.
    • Anchoring error (over-reliance on previous methods and assumptions) must be avoided.
    • Changes in methodology or assumptions, their reasons, and impact on results are critical.

    Approaches to analysing the results

    • Applying diagnostic tests to check reasonableness is essential.
    • Analysis of emerging experience is another vital approach.
    • Balancing thorough analysis with time-efficiency is crucial
    • Assessing the entirety of the exercise for reasonableness is important
    • An actuary’s experience provides an implied benchmark for expected results.
    • Factors like the expected frequency of specific events, or range for a particular diagnostic, should be considered.
    • Actuary experience may be limited and not typical of the entire population, careful consideration is needed accordingly.
    • Peer review from more experienced actuaries can be helpful to examine methodology and assumptions.

    Diagnostics

    • Diagnostics are used to test and verify underlying methodologies and assumptions.
    • Diagnostics often check results or data to determine if experience is consistent with assumptions.
    • Diagnostics provide high-level reasonableness checks or pinpoint areas for further examination.
    • These diagnostics include IBNR divided by premium, and ultimate loss ratios to aid in analysis of results.
    • Analyzing unusual diagnostic features requires investigation into underlying reasons and appropriate action.

    Loss ratios

    • Review the potential changes in loss ratios (paid, outstanding, IBNR, incurred, and ultimate).
    • Changes in premium rating strength should be noted
    • Examine sources of uncertainty, inconsistencies in modeling assumptions, or errors in reserving process.
    • Compare loss ratios to premiums and claims indices or benchmarks (e.g., paid and incurred ratios or external benchmarks) for reasonableness. Early detection of trends is important.
    • This diagnostic evaluates case estimate strength.
    • An increasing trend (paid/incurred or case/incurred) might indicate weakened case estimates.
    • The converse (increasing case/incurred) could suggest improved case estimates
    • Changes in business (underlying trends, settlement patterns) and large loss settlements should be considered when interpreting these ratios.

    Ratio of IBNR to case estimates

    • This is helpful for more mature claims cohorts where IBNR is primarily about IBNER.
    • It provides insights into outstanding claims and uncertainty.

    Survival ratios

    • Survival ratios indicate how long an IBNR or reserve estimate is likely to last.
    • Analysis should be conducted using multiple averaging periods (e.g., 1-year, 3-year) of paid or incurred claims data to avoid periods of exceptionally high or low claims activity.
    • Comparing survival ratios to similar portfolios or market benchmarks can be insightful.

    Claim frequency and average cost per claim diagnostics

    • This is used when claim count information is available.
    • Trends in frequency and severity can be highlighted using these diagnostics.
    • Unusual features (high average claims cost or unusual claims count changes) should be investigated
    • Comparing average claim size to a maximum claim value can be helpful.

    Development pattern diagnostics

    • Comparing the assumed future development with past development patterns is important.
    • Splitting data by origin cohort and development period can reveal valuable insights.
    • Cumulative development is useful.
    • Using triangles can highlight issues with development factors and trends over time.
    • Unusually high or low figures in rows or columns of figures should be investigated.
    • Unusually low figures on a diagonal can signal underlying issues with claims settlement.
    • Changes over time in development trends should be identified and understood.

    Stability of development pattern

    • Assess if development patterns are reliable.
    • Evaluate if appropriate alternative approaches are necessary for unpredictable patterns.
    • Understand the potential for adverse development exceeding favourable development.
    • Investigate whether sufficient tail potential beyond historical development is incorporated.

    Claim development versus premium development

    • Comparing claim development with premium development helps assess potentially inconsistent trends or errors.
    • Earned premiums should typically develop faster than incurred claims.
    • Comparing to benchmarks (e.g., industry, similar portfolios) can offer valuable context.
    • Assess the quality and relevance of any residual data for patterns or anomalies.

    Analysis of emerging experience

    • Monitoring emerging experience is crucial for effective actuarial control.
    • Evaluate how well past decisions handled changing environments and risks.
    • Reasons for revisiting previous decisions (e.g. new information, changed circumstances) should be identified.
    • Report any deviations from expectations to key stakeholders.
    • Decisions regarding estimates and assumptions, and the reasons behind why differences exist, should be communicated.

    The underwriting cycle

    • Understanding the underwriting cycle (hard/soft market cycles) can be useful.
    • Identifying trends and potential issues in claims development is important.
    • Allowing explicitly for the underwriting cycle in reserving methods is vital.
    • Assessing whether the model sufficiently accounts for the underwriting cycle effects.

    Comparison to other estimates

    • Comparing reserving estimates from different sources (actuaries or internal stakeholders) is essential to identify potential issues.
    • Understanding rationale behind alternative estimates helps in identifying and resolving discrepancies.
    • Comparing to benchmarks or market data can aid in identifying factors that may lead to differing results.
    • Different data sources or methodologies may lead to differing reserves and comparisons.

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    SP7 17 Assessment of Reserving Results PDF

    Description

    This quiz focuses on the assessment of reserving results and their reasonableness. It covers crucial factors such as methodology, assumptions, and diagnostics used in the reserving exercise. Additionally, it highlights the importance of analyzing experience over time and addressing alternative results.

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