Math 490 Casualty Actuarial Mathematics

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Math 490 Casualty Actuarial Mathematics

• Fall 2009
• University of Illinois at Urbana-Champaign
• Professor Rick Gorvett
• Session 6 Loss Reserving III
• September 10, 2009

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Agenda

• Accounting issues
• Statement of Loss Reserving Principles

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Accounting Issues Ralph BlanchardJune
2003CAS Study Note
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Purpose of Accounting

• To provide information regarding the operations
  and condition of a company, to one or more groups
  of users
• Possible users include
• Capital markets (investors and creditors)
• Internal management and employees
• Taxing authorities
• Government and regulators

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Characteristics of GoodAccounting Information

• Understandable to the target audience
• Relevant to the decision-making process
• Reliable representative and complete
• Comparable and consistent across time and
  across companies/industries
• Unbiased including appropriate disclosures
• Cost-benefit effective cost reasonable in
  relation to benefit

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Types of Financial Reports

• Balance sheet
• Income statement
• Statement of cash flows
• Notes and disclosures

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Balance Sheet

• Snapshot of Financial Position
• at a Specified Date
• Assets
• Liabilities
• Net Worth or Shareholders Equity
• NW A-L
• Par value of common stock
• Additional paid-in capital
• Retained earnings

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Income Statement

• Summary of operations over a period of time
• Revenues
• Expenses
• COGS
• General / administrative
• Debt interest
• Taxes
• Earnings or Profits ( Revenues - Expenses)

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Income Statement (cont.)

• Operating Revenue minus Operating Expenses
• Operating Income
• /- Other Income / Expenses
• EBIT
• - Interest Expense
• EBT
• - Income Taxes
• Net Income

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Income Statement (cont.)

• Net Income
• - Preferred Stock Dividends
• Earnings Applicable to Common Stock
• - Common Stock Dividends
• Net Income After Interest, Taxes, and Dividends

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Types of Accounting Rules

• GAAP
• Generally Accepted Accounting Principles
• Going-concern framework
• Statutory / Regulatory
• E.g., statutory accounting for U.S. insurers
• Solvency focus
• Liquidation or run-off perspective
• Tends to be conservative on asset and liability
  valuations
• Tax accounting

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Some Accounting Issues

• Fair value vs historical cost
• Fair value market value
• Historical cost original cost, with amortization
  or depreciation
• Revenue recognition
• Written (up-front) vs earned (as coverage is
  provided) premium recognition
• Liquidation vs going-concern
• Solvency / regulatory vs on-going enterprise focus

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Loss Reserving Principles Statement of
Principles RegardingProperty and CasualtyLoss
and Loss Adjustment Expense Reserves(Adopted by
CAS in May 1988)
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Document Includes Three Parts

• Definitions
• E.g., of a loss reserve
• Principles
• By which loss reserves should be analyzed and
  determined
• Considerations
• Possible things to be taken into account when
  determining loss reserves

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Principles

• An actuarially sound loss reserve derived from
  reasonable assumptions and appropriate actuarial
  methods
• The uncertainty inherent in the estimation of
  required provisions for unpaid losses or loss
  adjustment expenses implies that a range of
  reserves can be actuarially sound
• The most appropriate reserve within a range of
  actuarially sound estimates depends on both the
  relative likelihood of estimates within the range
  and the financial reporting context in which the
  reserve will be presented.

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Considerations

• Understanding the trends and changes affecting
  the data base is a prerequisite to the
  application of actuarially sound reserving
  methods. A knowledge of changes in underwriting,
  claims handling, data processing, and accounting,
  as well as changes in the legal and social
  environment, affecting the experience is
  essential to the accurate interpretation and
  evaluation of observed data and the choice of
  reserving methods.

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Considerations Issues

• Homogeneity and credibility
• Data availability
• Emergence patterns
• Settlement patterns
• Development patterns
• Frequency and severity
• Reinsurance
• Etc etc etc