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Accounts (Revenue account (Net expenses paid (expenses paid, commission…
Accounts
Revenue account
Net earned premium
Change in UPR
UPR b/f (net of Re)
UPR c/f (net of Re)
NWP
GWP
Re P
Net expenses paid
expenses paid
commission paid
Re commission
Net incurred claims
Net paid claims
Gross claims apid
Re recoveries
Change in o/s CR
o/s CR c/f (net of Re)
o/s CR b/f (net of Re)
increase in DAC
DAC c/f (net of Re)
DAC b/f (net of Re)
Investment income
on technical reserves
Underwriting profit
Insurance profit
Profit & Loss account
Investment income
on free reserves
Tax
Dividends
Pre-tax profit
Post-tax profit
Retained profit
improving account performance
undertake internal reserving analysis
review current pricing structure/models
review large cases
cost/benefit analysis for outwards Re
analysis of backing investments
assessment of capital costs
review of potential accumulations
expense analyses
benchmarking vs. competitors
profitability investigations
Short-term issues
increasing expenses
investigate reasons
identify opportunities to reduce
increasing Re costs
understand why
appropriateness of arrangements
UW performance worsening
bring back to profitability
changes in mix
within classes
as portfolio expands/contracts
between classes
intentional strategy?
deteriorating investment return
compare vs. suitable benchmark
increasing CRs
Ratios
Operational
Net loss ratio
Net claims incurred
Net premiums earned
differences may be due to
classes written
mix of classes
mix within classes
position within UW cycle
occurrence of
catastrophe
large loss
accumulation of claims
internal processes
pricing
UW standards
claims control
reserving method/basis used
type/level of Re
reinsurer failure
discounting
Pros
Allows for investment income
More realistic financial position
Fairer comparison between firms
May be perceived as weak if market practice not to discount
Cons
Long-tailed classes warrant margin
May not be permitted by regulation
Discount rate subjective
claims environment
court settlements
claims inflation
legislative impacts
Net commission ratio
Net commission paid
Written premiums
differences may be due to
sales channel(s) used
source or mix of business
renegotiation of rates
profit-related commissions
depend on volatility of individual risks
estimating volatility
analyse past data
e.g. SD of past LRs
issues
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will differ by
size of risks
claim frequency of business
level of diversification
nature of business
group similar risks
highly subjective
easy to
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derive loss model
apply to specific exposures for each account
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aggregate risks to parameterise
more accurate
significant data requirements
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methods of allowance
stochastic
stress testing
full DFA
subjective margins
Expense ratio
Net expenses paid
Net commission paid
Net written premiums
differences may be due to
acquisition costs
business volumes
to spread fixed costs over
cost reduction initiatives
more complex claims
one-off expenses
recruitment push
redundancy exercise
marketing strategy
set-up cost bias
Combined ratio
Loss ratio
Expense ratio
differences may be due to
inconsistent denominators
Proportion reinsured
= 1 - NWP / GWP
Profitability
Investment return
investment income
current assets
average investments
Profit margin
insurance profit
net earned premiums
Return on capital
pre-tax profit
free reserves at start of year
differences may be due to
underwriting result
investment return achieved
solvency position
Financial strength
Solvency ratio
free reserves
NWP
differences may be due to
capital injection
high premium growth
profitability differences
driven by
claims experience
investment performance
strength of valuation basis
Total assets to total liabilities
Comparing companies
analyse trends over time not single year
calculate for each class separately
may be differences in
business written
policy volumes
policy duration
size of contracts
mix
diversification
earnings profile
underwriting standards
claims control procedures
reserving methods/bases
model used
standard
internal
assumptions used
margins
management risk appetite
actuarial judgement
allowance for IBNR
levels of expenses
one-off events
e.g. catastrophic losses
type/level of Re
investment freedom/mix
inadmissible assets
basis used to value assets
board dividend philosophy
operating environment
accounting rules
legislative requirements
currencies
UW cycle
Reserving cycle
Simplistic capital regimes
Effect of weakened T&Cs
Less conservative approach to case reserving when results worse
investment conditions
target ROCE
Balance sheet
Total assets
Fixed assets
Investments
Other current assets
Re's share of TR
DAC
Total liabilities
Current liabilities
Deferred taxation
Technical reserves
UPR c/f
URR
o/s CR c/f
including IBNER
Triangulation methods
Basic Chain Ladder
Inflation-adjusted chain ladder
Bornhuetter-Ferguson
Average Cost per Claim
Stochastic
Bayesian
Bayesian B-F
Simulation
Bootstrapping ODP
Statistical
Mack model
Other
Normal approximation
Hoerl curves
Negative Binomial
reopened CR
IBNR
claims handling expenses reserve
claims equalisation reserve
AURR
Portfolio transfers
Why transfer?
requires disproportionate
management time
capital
if small % of total business
improve credit rating if viewed unfavourably by rating agencies
purchased as part of acquisition
not reason for transaction
inadequate resources
lack of expertise e.g. due to loss of key underwriter
future regulatory/legal changes
unfavourable outlook
outside risk appetite
aggregation of risk
insolvency
release capital
put to other uses
might get good price i.e. > expd value of business
remove uncertainty e.g. latent claims
reinsurance unavailable/expensive
reduce risk from
aggregations
exchange rate movements
Exit solutions
Run-off to exhaustion
cease to write NB or renewals
avoid further losses
still responsible for administration
need to maintain
business functions
claims handling
IT support
could outsource
staffing levels
difficult to retain staff
time and capital reqd disproportionate
still liable for claims
still required to fulfil
regulatory requirements
reporting requirements
capital requirements
usually employed for limited time
until swifter exit considered
can increase return by sale of
renewal rights
not for London market business
reinsurance assets
website
re-entry easy if desired
simple
cheap
slow for long-tailed business
a large business should have capacity to administer business even when declined to low levels
Reinsurance
fully reinsure all future claims
may not be possible if
aggregate limits
participation clause
have to pay a premium
will be negotiated
may be favourable if
direct business profitable
existing fronting relationship
little administrative involvement possibly
may still administer business itself
making recoveries from reinsurers
easily obtainable
e.g. if business short-tailed
unless
disputed claims
cat claims
low market confidence
regulatory capital assessment necessary
cede profit to reinsurer
won't maximise return
unnecessary if financially strong
lose diversification / synergies
credit risk
cannot be ignored for long-tail liabilities
use secure reinsurer(s)
Commutation
policy cancelled with agreement of both parties
can include
inwards business
can eliminate all exposure in theory
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only certain policies
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outwards business
reinsurers not obliged to agree
no regulatory approval required
negotiation process may be
expensive
time-consuming
difficult if limited bargaining power
e.g. for small company
p/h may not agree
or only high-risk p/h's may agree
anti-selection risk
p/h loses right to make further claims
in respect of
past periods of cover
future cover
but improves their cashflow
may believe amount is generous
consideration paid reduces ROC
reduced capital requirements
admin costs will reduce
lose future investment income
accelerates run-off
costly to organise
may not have in-house expertise
possible to re-enter line
Novation
transfer of rights and obligations
under a contract
from one party to another
no contractual liability remains
complete risk transfer
cover maintained for p/h's
payment made to new insurer
must be negotiated
reduces return for old insurer
attractiveness depends on terms
Considerations
negotiating strength of each party
calculation basis may be prescribed
any conditions attaching to commutation
procedures to be followed once effected
views of regulators
liabilities
length of tail
when claim estimates last reviewed
historical run-off patterns
development of non-large claims to large
closed claims reopened
reporting practice
claims inflation
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expenses
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potential for
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discounting & discount rate
case reserving philosophy
current balances
reinsurance
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quality of data
level of uncertainty e.g. currency risk
legislative changes
may increase future liabilities
effects on
diversification -> CR
solvency
tax situation
strategic reasons e.g. image of company
ease/cost of replacing cover
inconvenience to accepting insurer
any share of portfolio retained
contingency loading
market conditions i.e. competition
requires agreement between
policyholder
old insurer
new insurer
required separately for every policy
difficult
Scheme of arrangement
mass commutation of policies
reputational risk
p/h's cover withdrawn
may impact other lines
flexible as can include
all p/h's
specific group of p/h's
cannot include compulsory insurance
e.g. EL
agreement of all p/h's not needed
specified majority must vote in favour
75% by claim value
50% by no. of p/h's
must be sanctioned by court
speedier route to exit
save on costs
does not optimise return
commutations may be individually estimated
Re's not obliged to pay claims
on commuted policies
expenses likely to be high as
requires input from many parties
disclosure req's are onerous
frees up capital and other resources
Part VII transfer (LPT)
same result as novation
achieves true finality
can be effected for many policies simultaneously
lose all renewal rights
could lose clients due to x-sell
diversification benefits may reduce
will result in
cost savings
capital releases
loss of investment income
potential tax disadvantages
reserves transferred
may have to realise assets at unfavourable time
plus reinsurance asset
no credit risk
p/h consent not required
and no voting mechanism
p/h's entitled to be heard by court
potential reputational risk
may not be permitted e.g. in US
related legislation is onerous
significant public disclosure req.'s
can be used
in connection with M&As
in preparation for scheme of arrangement
for restructuring overseas business
difficult to find willing insurer if
policy volumes are large
potential for latent claims
cover maintained for p/h's
Sale
Whole sale
a buyer needs to be found
deal could be finalised quickly thereafter
both parties need to agree a price
sale price will reflect value of
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achieves finality for seller
cease writing all business
including attractive business
swift entry into market for buyer
PRA permissions already in place
lower costs / regulatory scrutiny
Partial sale
part exposed to latent claim risk
ring-fencing liabilities can be hard
latent claims
bodily injury
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pharmacological treatments
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physical damage
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other examples
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stages of development
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sources of funding for compensation
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impact on profits
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no further compensation may be payable if
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Other assets
to maximise profitability
renewal rights to existing policies
reinsurance assets
Other
increase premiums to drive lapses
manage liabilities down
revaluation of liabilities
improve profitability
Factors influencing choice
reason for exiting e.g.
loss-making
disproportionate time/capital
availability of alternatives
may be limited if insolvent
costs involved
desired level of risk transfer
time to implement
vs. time available
perception of stakeholders
reputational risk
business being exited
relative size
level of uncertainty
compulsory cover?
industry practice
financial strength of insurer
impact on CFs and capital
regulatory/legal factors
tax implications
Why accept transfer?
rapid entry into market
lower costs than writing NB
return business to profitability
diversification benefits -> lower CR
economies of scale -> reduced admin costs
cross-selling opportunities
possible tax advantages
increased negotiating power
whole sale -> obtain company assets
staff
IP
renewal rights
make a profit
Valuation
negotiating strength
initiator of the deal
uncertainty
length of tail
views of regulators
recommendations of overseeing persons
independent experts
Lloyd's
reinsurers (possibly)
Shareholders' net assets
= Free reserves