Insurance liabilities and reinsurance assets
Calculation of IBNR and claims development
Amlin adopts a consistent process in the calculation of an adequate provision for insurance claim liabilities. The overriding aim is to establish reserves which are expected to be at least adequate and that there is consistency from year to year. Therefore the level of reserves are set at a level above the actuarial'best estimate' position. However, there is a risk that, due to unforeseen circumstances, the reserves carried are not sufficient to meet insurance claim liabilities reported in future years on policy periods which have expired.
Process and methodology
The reserving process commences with the proper recording and reporting of claims information which is made up of paid and notified or outstanding claims. For our London Market business information is received through Xchanging (the London Market bureau) and, in the case of our UK commercial business and service companies, directly from policyholders. Claims records are maintained for each class by the underwriting year to which the policy incepts. For notified or outstanding claims a case reserve is established based on the views of underwriting management and claims managers, using external legal or expert advice where appropriate. This reserve is expected to be sufficient to meet the claim payment when it is finally determined. For some classes of business, particularly liability business, settlement may be several years after the initial notification of the claim, as it may be subject to complexities or Court action. Underwriters and claims staff are responsible for setting case reserves for outstanding claims. For claims received from Xchanging, the market reserve is generally set by the leading underwriter but there are circumstances on larger claims where Amlin will post higher or lower case reserves than those notified. These cases are explained and discussed in reserving review.
To establish a provision for incurred but not reported ('IBNR') claims, the businesses' underwriting and claims teams use their experience and knowledge of the class of business to estimate the potential future development of each class for every year of account. The development period varies by class, by method of acceptance and is also determined by the deductible of each policy written. For casualty business the policy form will determine whether claims can be made on a claims made (as advised) or as a losses occurring (determined by date of loss) basis. This has a significant impact on the reporting period in which claims can be notified. In setting the IBNR provision estimates are made for the ultimate premium and ultimate gross claims value for each underwriting year. Allowance is then made for anticipated reinsurance recoveries to reach a net claim position.
To assist with the process of determining the reserves, triangulation statistics for each class are produced which show the historical development of premium, as well as paid and incurred losses, for each underwriting year, from inception to the date of review. Each class triangulation is also independently analysed by the internal actuarial team using actuarial software as appropriate. The aim of the actuarial exercise is to produce 'best estimate' ultimate premium and claims amounts which can be compared to the figures proposed by divisional management. Meetings are held in which executive management, actuarial staff and business management discuss claims issues and analyse the proposed and independently generated reserves to conclude the provision to be carried. These provisions are also reviewed annually by external actuaries who examine the work carried out and opine on the sufficiency of reserves.
Areas of uncertainty
The reserves established can be more or less than adequate to meet eventual claims arising. The level of uncertainty varies significantly from class to class but can arise from inadequate case reserves for known large losses and catastrophes or from inadequate provision for IBNR. The impact on profit before tax of a 1% variation in the total net claims reserves would be £11.0 million (2004: £7.9 million).
Large loss case reserves are determined through careful analysis of the individual claim, often with the advice of legal advisers. Liability claims arising from events such as the 11 September 2001 terrorist attacks in the United States is an example of a case where there continues to be some uncertainty over the eventual value of claims.
Property catastrophe claims such as earthquake or hurricane losses can take several months or years to develop as adjusters visit damaged property and agree claim valuations. Until all the claims are settled it requires an analysis of the area damaged, contracts exposed and the use of models to simulate the loss against the portfolio of exposure in order to arrive at an estimate of ultimate loss to the Company. There is uncertainty over the adequacy of information and modelling of major losses for a period of several months after a catastrophe loss. Account should also be taken of factors which may influence the size of claims such as increased inflation or a change in law.
The long tail liability classes for which a large IBNR has to be established represent the most difficult classes to reserve because claims are notified and settled several years after the expiry of the policy concerned. This is particularly the case for US liability written on a losses occurring basis. The use of historical development data adjusted for known changes to wordings or the claims environment is fundamental to reserving these classes. It is used in conjunction with the advice of lawyers and third party claims adjusters on material single claims.
In the course of reserving the businesses provide a reserve for future events occurring to the existing portfolio. These provisions are removed in order to reflect GAAP accounting practice.
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