Practical analysis of Prior Year loss reserve volatility

1
Practical analysis of Prior Year loss reserve
volatility Patrick Grealy FIA
Israel June 2012
2
Overview

• General overview of reserving
• Features of a Reserving System Process
• Characteristics of the Process
• Look at practical example including Stochastic
  Decay Method
• Deterministic v Stochastic
• Future developments

3
Reserving Systems

• System to generate Deterministic Stochastic
  Reserve estimates for use in another Financial
  modeling process ?
• Process driven system for estimating unpaid loss
  and pipeline premiums for insurers and reinsurers
  on a frequent recurring cycle (quarterly?)
• Assess future cash flow expectation from prior
  years business for discounting purposes?
• Assess likely Salvage Subrogation recoveries on
  Claims?
• Generate likely future claims handling expenses?
• Estimate Future claim count and hence Average
  cost per claim
• Consider the impact of future claims in multiple
  currencies?

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Characteristics of Reserving System

• Easy and intuitive interface
• Handle multiple lines of business
• Stochastic and deterministic methods
• Batch import of multiple classes
• Paid Incurred Claims
• Premiums
• Claim Counts
• Salvage Subrogation
• Gross and Net
• Multiple FX
• Correlation
• Integrate ESG Variables

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Stochastic vs Deterministic

• Point estimate versus a range of possible
  outcomes with probability weightings.
• Single number required for main Statutory and
  Regulatory purposes and traditionally what was
  produced.
• Quite an exercise to generate point estimates
• Often quite a number of manual adjustment and
  judgmental selections based on experience
• Gross and Net?
• Often some a priori assumptions used in
  deterministic methods that use pricing and
  exposure assumptions
• Stochastic methods relatively recent body of work
• Stochastic methods open up new opportunities to
  include other drivers of variability such as FX
  and inflation

6
Future Developments?

• Integration of ESG and macro economic variables
• Inclusion of Inflation adjusted methods
• Additional stochastic methods