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Draft FCR Reserving Guidance Note

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Draft GN on Technical Reserving

FEBRUARY – version 1e

     CONTENTS
1.     Introduction                                                                           2
1.1.    Classification                                                                       2
1.2.    Abstract                                                                             2
1.3.    Application                                                                          2
1.4.    Legislation or Authority                                                             2
1.5.    Author                                                                             232
1.6.    Version                                                                              3
2.     Reserve estimates                                                                      4
2.1.    Components                                                                           4
2.2.    Data issues                                                                          4
2.3.    General Methodology                                                                  6
2.4.    Obtaining central estimates and prescribed margins                                   7
2.5.    Changes in the valuation model/Basis changes                                         8
2.6.    Use of case estimates                                                              898
2.7.    Inflation                                                                            9
2.8.    Discounting                                                                         10
2.9.    Expenses                                                                            10
2.10.   Gross / net of reinsurance and other recoveries                                     11
3.     Technical Requirements                                                         121312
3.1. Consistency Between Outstanding Claims and Premium Liabilities                   121312
3.2. Prescribed Margins                                                               121312
3.2.1. Fundamentals                                                                   121312
3.2.2. Stochastic claim experience models                                             121312
3.2.3. Economic parameters                                                            131413
3.2.4. Practical Considerations                                                       131413
4.     Other issues                                                                   141514
4.1. Run-off / wind-up basis                                                          141514
4.2. Materiality                                                                      141514
4.3. Reasonableness of Major results                                                  141514
5.     Glossary                                                                       161716
Appendix A: References on Reserving Methodology and Stochastic Reserving
                   Techniques                       20
20




                                          Page 1        13/10/201218/05/200718/05/200707/05/2007
1. Introduction

  1.1. Classification

         Compliance with this professional guidance note is best practice during the
         transition period of 1 July 2006May 2007 to 31 December 2007 and mandatory
         thereafter for Actuaries preparing estimates of technical reserves including
         prescribed margins under the envisaged FSB's regulations for the purpose of
         certified models.

  1.2. Abstract

         The objective of this guidance note is to provide assistance to Fellow members
         of ASSA in determining a just value of the insurance reserves, including
         prescribed margins of a short-term insurance company for statutory purposes.

  1.3. Application

         Approved certified aActuaries performing a reserving function in terms of the
         envisaged FSB's regulations for the purpose of a certified model, and other
         Actuaries who are directors or senior employees of short-term insurance
         companies. Further references to the “actuary” in this document will be taken
         to mean an “approved certified actuary”

         A certified model is required if an insurer decides to deviate from the FSB’s
         stipulated formula and margins. If a certified model is used for reserves and
         margins, it must apply to the insurer’s entire technical reserves and margins,
         and not just selected parts. The margins of the Minimum Capital Requirement
         may not be reduced if the margins in the certified reserving model are greater
         than the FSB prescribed margins.                                                       Comment [LP1]: This may change in the light
                                                                                                of the FSB's proposal for a modular approach

         Note that reserves for published financial reporting may differ from the
         reserves calculated for statutory purposes. Reserves in the published
         financials must comply with South African Accounting standards, particularly
         AC 141.

         The Short-term Insurance Act 53 of 1998, it's Schedules, the envisaged Board
         Notice and this ASSA guidance note on reserving would apply in conjunction,
         but in the following order of priority: firstly the Short-term Insurance Act,
         secondly the Regulations to the Short-term Insurance Act, thirdly the
         envisaged Board Notice and fourthly this ASSA guidance note on reserving.


  1.4. Legislation or Authority

         The envisaged FSB changes to regulations, with requirements prescribed in a
         Board Notice format.

  1.5. Author

         The ASSA Short term insurance committee.




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1.6. Version

      Version 0.0 effective from XYZ.




                                    Page 3   13/10/201218/05/200718/05/200707/05/2007
2. Reserve estimates
  2.1. Components

  1. The reserve components include the premium liabilities and the outstanding claim
     liabilities. Outstanding claim liabilities relate to all claims incurred prior to the
     valuationcalculation date, whether or not they have been reported to the insurer.
     Premium liabilities are future claim payments arising from future events insured
     under existing policies, assessed on a prospective basis.

  2. Outstanding claim liabilities include outstanding reported claims and claims
     incurred but not reported. Claims liabilities would incorporate:
     -      case reserves
     -      provision for future development on known claims (incurred but not enough              Formatted: Indent: Left: 0.5", Hanging: 0.5"
            reported)
     -      reopened claims reserve
     -      provision for claims incurred but not reported
     -      claims handling expenses

  3. The Premium Liabilities relate to future claim payments arising from future
     exposure under existing policies for which premiums have already been accounted
     for. The value of the Premium Liabilities must include an amount in respect of the
     internal expenses that the insurer expects to incur in administering the policies and
     settling the relevant claims. The Premiums Liabilities are to be determined on a
     fully prospective basis; both net and gross of expected reinsurance recoveries.
     The approach outlined in this Guidance Note differs from the Prescribed Method,
     which does not take into account the specific claims experience on the underlying
     business, provided it is not loss-making.

  4. Projections of future claims arising from unexpired risks may lead to a required
     additional unexpired risk reserve, if future premiums will not cover future claims
     and expenses including commission.

  2.2. Data issues

  5. The actuaryactuary is required to take all reasonable measures to ensure that the
     data used for a valuation of technical provisions is appropriate and sufficient for
     the specified purpose of the valuation.

  6. The actuaryactuary should take reasonable steps to verify the consistency,
     completeness and reliability of the data collated, against the company’s financial
     records. The actuaryactuary should discuss the completeness, accuracy and
     reliability of the data with the company’s auditor. The actuaryactuary should
     include in the written report on the valuation of the liabilities a description of the
     measures taken to investigate the validity of the data, and should outline the
     results of those data checks, including any areas of concern, or areas where the
     actuary has had to rely on a third party to verify the data..

  7. The actuaryactuary should be familiar with the characteristics of the insurance
     processes and claim processes that may materially affect the estimation of the
     insurance liabilities. If the actuary is not employed directly by the insurer he or she
     should take all reasonable steps to obtain a satisfactory amount of information on
     these processes. This may include familiarity with:


                                         Page 4         13/10/201218/05/200718/05/200707/05/2007
       a. The nature of coverage, including any unusual term and conditions of
          contracts;
       b. The underwriting strategy and the nature and mix of risks underwritten;
       c. The benefits payable under policy terms or by virtue of legislation, including
          deductibles and limits;
       d. The reinsurance arrangements, including any special or unusual features
          of reinsurance agreements that might affect reinsurance recoveries;
       e. The claim management philosophies, rules and guidelines, and the
          company’s practices in setting case estimates;
       f. Any monitoring reports that the insurer prepares of its claim and
          underwriting guidelines.

8. The actuaryactuary should also be familiar with economic, technological, medical,
   environmental, regulatory and social changes and trends within the broader
   community that may affect the value of the insurance liabilities. The actuaryactuary
   should also be aware that there might be changes in data quality or interpretation
   when staff turnover affects key positions, where personnel have a central role in
   the preparation of accounts or other relevant data.

9. It is the actuaryactuary’s responsibility to take all reasonable steps to ensure that
   the data gives an appropriate basis for estimating the insurance liabilities. This
   includes the insurer’s own experience and claim experience data, but should
   extend to industry data, where the insurer’s own data is not sufficient to reduce
   uncertainty to an acceptable level. Where even industry data is sparse, it may be
   necessary to rely, to a greater or lesser extent, on subjective assessment. The
   appropriate compromise between the cost of better data and the benefit, in terms
   of more reliable estimation, is a matter for actuarial judgement, which should take
   into account the materiality of the reduction in uncertainty that might result.

10. The actuaryactuary should consider obtaining data at the most basic transactional
    level, rather than working from data that have already been summarised or
    aggregated. This should enable the actuaryactuary to better understand the data,
    and to identify data anomalies and seek appropriate rectification, or allow for errors
    or anomalies in the calculation of the liabilities.

11. The degree to which the actuaryactuary relies upon the data provided by the
    company or upon earlier or later testing of the data by the company’s auditors, and
    the resulting limitations that this places on the reliability of the actuaryactuary’s
    conclusions, should be commented on in the report.

12. In order to meet reporting deadlines, the actuaryactuary may be asked to value
    insurance liabilities as at a date prior to the valuation date prior to the reporting
    date. In such circumstances, the following approaches are considered to be
    acceptable:
        a. The valuation may be undertaken at an earlier date, and the resulting
           estimates subsequently updated to the valuation date.
        b. The valuation models may be derived from data at an earlier date, and
           subsequently applied to data at the valuation date.
        c. In either case, the actuaryactuary must consider experience between the
           earlier date and the valuation date, and make such adjustments as
           considered necessary. The actuaryactuary should refer in the report on the
           extent of any additional uncertainty created by the approach adopted.




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2.3. General Methodology

13. The estimation of liabilities may require the subdivision of the data into groups of
    claims exhibiting similar characteristics. In the determination of appropriate
    subdivisions, a balance must be found between homogeneity and statistical
    reliability. The organisation of data by accident, reporting and underwriting year
    needs to be appropriate to the nature of the business, and should be disclosed.

14. The claim experience should be analysed with respect to the development over
    time of claims or cohorts of claims. Depending on the availability and reliability of
    the data, analysis should include some or all of:

   -       the claim frequency relative to some measure of exposure, for example
           number of policies, employees, wages, or total sum insured;
   -       the rate of reporting claims;
   -       the rate of settlement;
   -       the development of payments;
   -       the adequacy of case estimates;
   -       the incidence of large claims;
   -       the overall pattern of claim occurrence over the duration of the policy
           period;
   -       other analyses relevant to the circumstances.

15. The experience should normally be analysed on a gross of recoveries basis.
    Analysis of the reinsurance and other recovery experience should be appropriate
    to the circumstances. In some situations it may be more appropriate to analyse
    the experience net of reinsurance and/or other recoveries. Separate estimates of
    recoverable amounts may still have to be made. In making such judgments, the
    actuaryactuary should be aware that the net valuation result would often be the
    most important.

16. Analysis of experience should take into account any special features including, but
    not limited to, developments or trends in the experience such as changes in
    deductibles, aggregate limits, claim handling procedures, the mix of business
    within the portfolio, changes in legislation and the impact of large claims paid and
    outstanding. The analysis should investigate any trends in the development of the
    experience, particularly those from causes other than inflation. The actuary should
    take all reasonable steps to obtain the relevant information regarding these
    developments and trends.

17. Selection of the most appropriate valuation model to estimate the liabilities is the
    responsibility of the actuaryactuary. The actuaryactuary may investigate more
    than one model before arriving at an estimate. The model or models should take
    into account the available data, the nature of the portfolio, and the results of
    analyses of experience. Appendix A of this document provides reference to
    actuarial literature on current reserving methodologies.

18. Selection of the claims experience assumptions should have regard to the
    valuation model and analyses of the experience. These assumptions should allow
    for trends in the claim experience, changes in underwriting, alterations of policy
    terms and assumptions about reinsurance or other recoveries.

19. Value Added Tax is normally excluded from claims reserves, consistent with the
    accounting treatment of premiums and claims.



                                      Page 6         13/10/201218/05/200718/05/200707/05/2007
2.4. Obtaining central estimates and prescribed margins

20. The best estimate must be intended to be the mean of the underlying probability
    distribution. This requirement extends to all the actuarial valuations of general
    insurance liabilities.

21. Quantifiable trends (as explained in 16 above) must be recognised in the best
    estimate.

22. The approved actuaryactuary is required to determine the best estimate of the
    liability and to recommend a valuation margin which, when added to the best
    estimate, gives a provision intended to secure a 75% probability of adequacy.

23. Initially, this must be done separately for outstanding claims and unexpired risks
    for each valuation unit, taken in isolation. In a separate step, the best estimates
    and valuation margins are added together and the sum of the valuation margins is
    reduced by a diversification benefit such that the overall margin, for the reporting
    entity, meets the 75% adequacy test.

24. If the combined portfolio adequacy cannot be determined, then each valuation unit
    must be 75% adequate / sufficient.

25. When determining the prescribed margin the actuaryactuary needs to consider the
    items listed below. Caution should be exercised inwhen assuming a low degree of
    correlation, in the absence of experiential evidence.

       a.   Diversification benefit and correlations between classes
       b.   Independent variation
       c.   Systemic uncertainty
       d.   Top down or bottom up approaches are acceptable. Where a top-down
            approach is taken, prescribed margins will need to be allocated between
            valuation units

26. While many actuaries may find it helpful to do so, it is not necessary to form an
    explicit view as to the shape of the underlying probability distribution, either for a
    particular valuation unit or of the aggregate liability. However, Wwhat is required is
    a view as to the mean and the 75th percentile, separately for outstanding claims
    and unexpired risks for each valuation unit, and in aggregate and, in cases where
    the overall uncertainty is likely to be highly skew, the standard deviation and
    kurtosis.

27. Where an explicit probability distribution is not used, it is important to recognise
    that many general insurance probability distributions are positively skewed. That
    is, there is often a wider spread of larger (absolute) values than of smaller values.
    As a result, the mean is usually greater (in absolute value) than either the mode or
    the median. There is a natural tendency, in informal estimation, to use the most
    probable value. This can lead to underestimation. In such situations the
    actuaryactuary should consider using the mean plus one standard deviation as a
    guideline for the 75th percentile.

28. The estimated uncertainty for each valuation unit should normally make the
    appropriate allowance for reinsurance, including both the reduction in uncertainty




                                       Page 7         13/10/201218/05/200718/05/200707/05/2007
          inherent in the reinsurance terms and the diminution in this reduction on account of
          the risk of reinsurance failure1. See also section 2.10 Gross / net.

      29. Where a reinsurer is in default, or known to be at serious risk of default, however,
          such reinsurances should be reported on explicitly, rather than as a component of
          the net liability. Other asset risks should not be allowed for in determining the
          liability prescribed margin for FSB valuations, since they are reported on and
          allowed for elsewhere.

      30. An approximation to an assumption or method is acceptable provided it does not
          materially affect the overall result. A difference is material if it is significant in the
          context of the purpose for which the advice is given. The actuaryactuary should
          choose a standard of materiality that should reasonably satisfy each anticipated
          user of the advice.

      2.5. Changes in the valuation model/Basis changes

      31. The valuation model and assumptions shouldneed to reflect the actuaryactuary’s
          interpretation of the data available at the current valuation date.

      32. Where the actuaryactuary has a prior valuation as a starting point, the
          actuaryactuary needs to comment on the new data that has emerged between the
          valuations in the context of previous valuation models / assumptions. This could be
          by reference, for example, to an analysis of expected versus actual outcomes.

      33. Where the new data available at the current valuation date is credible and
          suggests a change in approach and/or assumptions from the previous valuation,
          the actuaryactuary needs to discuss the impact on the valuation
          model/assumptions adopted.

      34. The actuaryactuary should also consider and comment on external issues that
          may change the credibility such as:
             a. Changes of the mix of business of the insurer
             b. Changes in processing claims or premiums (for example, administrative
                delays, changes to case estimation procedures)
             c. Identified systems issues (new systems or changes to systems)
             d. Changes in underwriting
             e. Changes in reinsurance arrangements
             f. Changes in the economic and legal environment

      35. The actuaryactuary should quantify and explain effects of material changes in
          valuation model and basis since the previous valuation.


      2.6. Use of case estimates

      36. Where case estimates are used as a component of the liabilities, the
          actuaryactuary needs to determine how they relate to what is likely to be paid out.
          The following should be considered when doing this:
              a. Given sufficient historical data, standard actuarial techniques can be used
                  to quantify this relationship, provided that the basis of estimation has not
                  been changed.

1
    Contact Australia to confirm that they mean the credit risk for reinsurance recoveries.


                                                 Page 8          13/10/201218/05/200718/05/200707/05/2007
       b. In the absence of such data, the actuaryactuary should form a view on the
          relationship by consulting with people responsible for estimates. Care,
          however, is needed in interpreting such information.
       c. The actuaryactuary should adjust the estimates to reflect best estimates,
          not best -case or worst-case scenarios.
       d. Making allowance for inflation and discounting where applicable and
          material.
       e. Including salvage, subrogation in a consistent manner in estimates.
       f. Whether estimation procedures (or even key personnel) have changed. In
          this case a subjective estimate of the change may be required until
          experience emerges.
       g. All available information, including information obtained after the valuation
          date.
       h. Effect of large claims on the relationship of ultimate payment to initial
          estimates.
       i. Effect of reinsurance programmes on estimates and relationship to paid.
       j. Possible nominal estimates entered on administration systems that will not
          lead to payments.
       k. Materiality                                                                             Formatted: Bullets and Numbering


37. When considering case estimates Ffor long tailed business the actuaryactuary
    needs to:
       a. Consider the additional data credibility requirements.
       b. Ensure that extra care is taken to understand the business and estimation
           processes.

2.7. Inflation

38. Liabilities should include an allowance for the impact on future claim payments of
    wage inflation, price inflation, court decisions or other economic or environmental
    causes.

39. Explicit allowance for inflation is required if past inflation has been unstable or if
    future inflation rates are expected to differ from past inflation rates.

40. If inflation is allowed for explicitly, then it is usual to convert past historical
    payments into values as at the date of calculation. Allowance must then be made
    for future claim inflation. In doing this, it may be useful to separate claim escalation
    into standard inflation and superimposed inflation.

41. Analysis of past claim escalation should form a basis for the assumptions
    regarding future claim escalation.

42. Standard inflation and sources of information
       a. Standard inflation is not specific to an insurer’s portfolio. It is an external
          factor operating in the economy at large. As such, it is appropriate to refer
          to publicly available information.
       b. Sources of inflation indices are the Stats SA (CPI and other indices) and
          economists’ forecasts
       c. The inflation index used in the claims escalation analyses should be
          relevant to the particular class of business considered.

43. Superimposed inflation




                                        Page 9         13/10/201218/05/200718/05/200707/05/2007
       a. Unlike standard inflation, superimposed inflation is specific to an insurer’s
          portfolio. It follows that an assessment of superimposed inflation should
          derive ideally from analyses of the insurer’s own claim statistics.
       b. The following factors should be considered in allowing for superimposed
          inflation:
           Volatility and uncertainty, particularly for small portfolios
           Influence of judicial decisions (e.g. in personal injury claims)
           In cases where data is sparse or variable, industry-wide analyses may
               be helpful

2.8. Discounting

44. Discounting should be applied if it will make a material impact to the best
    estimate reserving result. As a general guideline, when the discounted mean
    term of liabilities is expected to exceed four years, then reserves should be
    discounted.

45. The following factors should be considered in arriving at an appropriate
    discount rate:
        a. Expected future investment return expected on a portfolio of assets
           appropriate to the liabilities, bearing in mind the term, nature and
           currency of the liabilities.
        b. The rate of return on specific matching assets. It is normally presumed
           that as far as possible, insurance liabilities are matched by fixed interest
           investments and cash, rather than securities and creditors. The
           matching portfolio assumed should be consistent with that assumed in
           the calculation of the Minimum Capital Requirement asset charge.
        c. Yields on fixed interest securities;
        d. An allowance for tax
        e. Allowance for default risk

46. When discounting is applied, results should be disclosed both before and after
    discounting.


2.9. Expenses

47. Claims reserves should incorporate an allowance for future claims handling
    expenses. This allowance may be separated into allocated and unallocated
    expenses. Premium reserves should incorporate an allowance for future policy and
    claim administration expenses.

48. In allowing for expenses, the following should be considered:
        a. Whether expenses are included in the data being analysed, and the
            corresponding impact on development ratio’s.
        b. Historic expense analyses, including claims expenses as a percentage of
            gross payments
        c. Distortions in past expense analyses due to large claims or unsuitable
            methodology
        d. Stability of past and future claims and expenses within each portfolio, by
            type and age of claim
        e. Materiality of the expense assumptions within the context of the overall
            liability estimate



                                     Page 10        13/10/201218/05/200718/05/200707/05/2007
        f.   Allowance for increasing (or decreasing) expenses per policy for a closed
             portfolio


2.10.        Gross / net of reinsurance and other recoveries

49. Both outstanding claims and premium liabilities should be estimated on both gross
    and net basesof reinsurance and other recoveries, and separately for each line of
    business. Amounts recoverable should be split between reinsurance and other
    recoveries (eg. salvages).

50. The bases used to estimate gross and net liabilities should be estimated on a
    consistent basiswith each other.

51. In many circumstances, it may be appropriate to use the model for estimating the
    gross liabilities as the starting point for development of the model for estimating
    reinsurance recoveries.

52. Where reinsurance arrangements embrace risks from more than one class of
    business (for example, “whole account” or multi-line covers), the actuaryactuary
    may need to allocate an adjustment between liability classes. A consistent
    approach should be taken from year to year.

53. For premium liabilities, the unearned premium approach may be applied to
    produce either a gross or a net value. When adjusting from a net to gross value or
    vice-versa, the following should be considered:
        a. For proportional reinsurance and sharing agreements, consider the
           average proportion retained.
        b. For non-proportional reinsurance, the simplest approach is to add back a
           fraction of the unearned non-proportional reinsurance premium. This
           requires an assessment of the expense and profit margins contained in
           those premiums.
        c. Where reinsurance is written on an events occurring basis, allow for future
           reinsurance premiums for the unexpired period after the current
           reinsurances expire; the expected cost of reinsurance claims under both
           current and future reinsurances; and other recoveries, including sharing,
           salvage, subrogation, third party recoveries.




                                      Page 11       13/10/201218/05/200718/05/200707/05/2007
3. Technical Requirements
  3.1. Consistency Between Outstanding Claims and Premium Liabilities

  54. The assumptions and methods for valuing outstanding claims and premium
      liabilities should be consistent. Where they are not, the actuaryactuary should
      explain reasons for the differences. Furthermore assumptions for claim frequency,
      gross average claim size and gross loss ratios for premium liabilities should be
      consistent with each other.

  55. In both outstanding claims and premium liabilities, explicit allowance for
      reinsurance and other recoveries, such as third party recoveries, salvage and
      subrogation needs to be made. Appropriate adjustment to this allowance for the
      risk of non-recovery of these assets is required.


  3.2. Prescribed Margins


     3.2.1. Fundamentals

  56. The prescribed margin is defined as the excess of the technical provision over the
      best estimate.

  57. The prescribed margin will be determined, such that the provision is adequate to
      meet the associated liability with 75% confidence. The formulation of the
      prescribed margin is manifestly stochastic and its determination will require a
      stochastic model of the claim experience to which the technical provision relates.

  58. In formulating a stochastic model, it is sometimes necessary to separate out claim
      experience specific to the portfolio under consideration, from external economic
      influences, such as inflation and discount rates.

     3.2.2. Stochastic claim experience models

  59. Annexure A provides references to actuarial literature giving additional guidance
      on stochastic reserving techniques. Where simulation methods are applied, the
      number of runs should be sufficient to ensure simulation stability, and should be
      disclosed (or variance reduction techniques be applied).

  60. Some of these models (for example, Mack’s stochastic chain ladder) explicitly
      produce estimates of no more than the first two moments of liability. Others (for
      example GLM based models and bootstrapping) which are conceptually able to
      give the distribution in full detail may require prohibitively extensive computation to
      produce this level of detail.

  61. In cases where only the first two moments of liability are estimated, it will be
      necessary to supplement these with an assumption as to the form of the
      probability distribution of liability, if the estimates are to be converted into the
      confidence limit required to produce a prescribed margin.




                                         Page 12        13/10/201218/05/200718/05/200707/05/2007
   3.2.3. Economic parameters

62. The actuaryactuary must conduct sensitivity analyses for all economic parameters
    used in the valuation of the insurance liabilities.

   3.2.4. Practical Considerations

63. The actuaryactuary should base estimates of uncertainty on an insurer’s own data
    as much as possible. However, not all insurers, especially relatively new insurers
    or smaller insurers, have data that is adequate for this. Consequently, it may be
    necessary to rely, at least in part, on industry research studies. Such studies
    should not be used blindly. Most insurers have features, which suggest that
    industry parameters should be modified.

64. Uncertainty can be broadly divided into:

       a) Independent variation, which operates at the individual claim level and is
          uncorrelated; and

       b) Systemic (also called systematic) variation, which operates at the valuation
          unit level and affects all claims similarly. Typical sources of systemic
          variation are economic, social and climatic factors.

65. There is always a diversification benefit when the independent variation from
    different valuation units is combined. However, for systemic variation, the extent
    of any diversification benefit depends on the extent to which the same sources of
    systemic variation apply across different valuation units. If the dominant source of
    systemic variation is the same, then normally no diversification benefit from
    systemic variation should be assumed.




                                     Page 13         13/10/201218/05/200718/05/200707/05/2007
4. Other issues
  4.1. Run-off / wind-up basis

  66. In the case where the insurer is in run-off/wind-up, the actuaryactuary must
      consider the run-off expenses and should allow for this additional liability when
      setting up the liabilities. This liability must be shown separately for allocated and
      unallocated loss adjustment expenses and other expenses incurred in the event of
      wind-up.

  67. The actuaryactuary has to consider whether or not an allowance is required for
      reinsurance recovery write-off in the event of wind-up. Any decision made in this
      regards must be justified.

  68. Appropriate allowance needs to be made for non-reinsurance recoveries as it may
      not be as successful as in normal going concern conditions to recoup all the
      recoveries.

  69. The actuaryactuary must consider the impact of costs arising from normal
      operations increasing as a percentage of income, or even claim reserves.

  4.2. Materiality

  70. Materiality guidelines refer to acceptable margins for errors.

  71. The materiality criteria applied by the Approved actuaryactuary should be
      consistent with those applied by management and approved by the company’s
      auditors.

  72. When considering materiality, the following factors should be taken into
      account:
      a. Statistical significance of the estimates
      b. Purpose for which the estimates are required (in this case, estimation of
         reserves and solvency), and other potential uses
      c. The cumulative impact of items disregarded on the grounds of immateriality
      d. How the uncertainty of results is to be communicated

  4.3. Reasonableness of Major results

  73. Before signing off on the actuarial report, the actuaryactuary should ensure that
      the results obtained from the actuarial valuation are reasonable, both in
      aggregate and for each valuation unit within the insurer’s total portfolio.

  74. Reasonableness should be assessed in relation to:
         a. comparable results for that valuation unit in the previous year;
         b. development in the valuation unit over the inter-valuation period;
         c. the experience of the valuation unit since the previous valuation;
         d. changes in economic assumptions, particularly investment and inflation
            assumptions
         e. changes to the actuarial model
         f. any industry results or benchmarks



                                        Page 14        13/10/201218/05/200718/05/200707/05/2007
75. A useful reasonability check is an analysis of the movement in the actuarial
    valuation reserves since the previous valuation. The actuaryactuary should be
    satisfied that differences between the previous valuation result and the present
    result can be explained in terms of the experience in the intervening period and
    changes in the valuation model and assumptions.

76.If during the performance of this analysis, the valuation of any particular                 Formatted: Bullets and Numbering
    material class appears to be inconsistent with the value of the class at the
    previous valuation, or the differences cannot be satisfactorily explained, the
    actuaryactuary needs to further investigate the reasons why the unexpected
    differences arise in order to be satisfied that the cause is not an error in the
    valuation calculations.

77.76.    The actuaryactuary should compare the results to the results under the               Formatted: Bullets and Numbering
   Prescribed method required by the Regulations, although detailed explanations
   of deviations will not be required.




                                     Page 15        13/10/201218/05/200718/05/200707/05/2007
5. Glossary
                                                                           A
Actuaries ............................................................................................................................................. 2
      An actuaryactuary is a professional trained in evaluating the financial implications of
      contingency events. In the context of insurance, these skills are, for example, often used in
      establishing premiums, technical provisions and capital levels.
additional unexpired risk reserve ........................................................................................................ 4
      The amount set aside in addition to unearned premiums with respect to risks to be borne by
      the insurer after the end of the reporting period.
Approved actuaryactuary .................................................................................................................. 14
      An appropriately qualified actuaryactuary who has applied and received approval from the
      Financial Services Board to engage in the development of certified - or internal models.


                                                                           B
basic transactional level ...................................................................................................................... 5
      Considering financial transactions individually rather than aggregated or summarised.
best estimate...................................................................................................................... 6, 7, 8, 9, 12
      When considering an estimate, the best estimate is taken to be an estimate that neither
      overstates nor understates the expected outcome. As a result, it can be considered in a
      statistical sense as the mean of the distribution.


                                                                           C
claims handling expenses.............................................................................................................. 4, 10
      Expenses associated with the recording and settlement of claims.
closed portfolio ................................................................................................................................. 10
      When no new business may be added to a portfolio.
credible data ....................................................................................................................................... 8
      When data is worthy of confidence due to its applicability, validity or volume.


                                                                           D
degree of correlation ........................................................................................................................... 7
      The extent to which a change in one variable causes an automatic change in the correlated
      variable.
discounted mean term of liabilities ................................................................................................... 10
      The weighted average term of liabilities, where the weights used are the present values of
      cashflows associated with each term.
diversification benefit ................................................................................................................... 7, 13
      When combining classes of business, diversification benefits arise since it is unlikely that
      worst-case outcomes for each risk will occur at precisely the same time.


                                                                           I
Independent variation ................................................................................................................... 7, 13
      Independent variation operates at the individual claim level. By definition, independent
      variation is uncorrelated and always gives rise to a diversification benefit.
industry data........................................................................................................................................ 5
      Aggregated or consolidated information for insurers.



                                                                     Page 16                  13/10/201218/05/200718/05/200707/05/2007
                                                                           L
long tailed business .............................................................................................................................9
      Insurance business whose uncertainty about the amount and timing of claims payments
      typically takes more than one year to resolve.


                                                                           M
materiality criteria .............................................................................................................................14
      The methods, procedures or rules used to assess materiality.
Minimum Capital Requirement .................................................................................................... 2, 10
      Is the minimum amount of solvency capital required and varies between supervisory
      jurisdictions.


                                                                           O
Outstanding claim liabilities ............................................................................................................... 4
      The expected claim payments to be made after the valuation date, in respect of claims
      occurring on or before the valuation date.


                                                                           P
policy and claim administration expenses ........................................................................................ 10
      The expected expenses relating to claims and policy maintenance in future.
Premium liabilities ..............................................................................................................................4
      The value of claim payments to be made after the valuation date, in respect of claims
      occurring arise after the valuation date in respect of premium written on or before the
      valuation date.
prescribed margins ..............................................................................................................................2
      The amount necessary to increase the sufficiency of liabilities to the 75% level of sufficiency.
Prescribed method ............................................................................................................................15
      The rules, regulations, methods, procedures and calculations applicable by default to insurers
      when demonstrating solvency to the Financial Services Board.
probability distribution of liability .................................................................................................... 12
      The distribution or spread of calculated liability amounts, together with their associated
      likelihood of occurrence.


                                                                           R
recoveries ........................................................................................................ 4, 5, 6, 7, 10, 11, 12, 14
      The expected amounts to be recovered by an insurer in respect of particular claims. A
      distinction can be made between reinsurance recoveries and non-reinsurance recoveries
      (salvage, subrogation, sharing agreements, etc).
reinsurance failure ..............................................................................................................................7
      A failure of reinsurers to pay their part of the overall liabilities (or incurred claims) evaluated
      on a gross basis.
reporting date ...................................................................................................................................... 5
      A point in time at which the insurer reports on its financial position.
Risk ............................................................................................................................................... 1, 12
      The uncertainty of future outcomes in relation to that expected. In particular, an increased
      uncertainty is interpreted to imply more risk.




                                                                     Page 17                   13/10/201218/05/200718/05/200707/05/2007
run-off ............................................................................................................................................... 14
      When an insurer will write no new business, but continue to operate with underwritten
      insurance contracts until the end of existing policies’ term.
run-off expenses................................................................................................................................14
      All expected expenses likely to be incurred in running off the portfolio.


                                                                            S
sensitivity analyses ...........................................................................................................................13
      Assessing the change in result when varying the inputs to a model or calculation.
standard inflation ................................................................................................................................9
      Standard inflation is inflation measured by a published index, where a link between such
      inflation and claim payments is believed to be present.
superimposed inflation........................................................................................................................ 9
      Superimposed inflation is the difference between total claim escalation and standard inflation.
Systemic uncertainty ........................................................................................................................... 7
      A correlated uncertainty where the degree of correlation varies between business classes.
      Some sources of systemic uncertainty are only relevant to a single class, but most affect more
      than one class.


                                                                           T
technical reserves ................................................................................................................................2
      The amount set aside to meet all liabilities arising out of insurance contracts, including claims
      provision (whether reported or not), provision for unearned premiums, provision for
      unexpired risks and other liabilities.


                                                                           U
underlying probability distribution ................................................................................................. 6, 7
      The distribution or spread of outcomes for a random variable.
unexpired risks ................................................................................................................................4, 7
      Risks underwritten by the insurer in the current year, but for which coverage extends beyond
      the valuation date.


                                                                           V
valuation date .............................................................................................................................. 5, 8, 9
      A point in time at which an actuarial valuation is performed. The valuation date is usually the
      same as the reporting date.
valuation model ...................................................................................................................... 1, 5, 6, 8
      All the methods, procedures and calculations used in an actuarial valuation.
valuation unit .......................................................................................................................... 7, 13, 14
      A valuation unit is a line of business, a part of a line of business, a group of lines of business
      or a group of parts of lines of business, which is treated as a single entity for the purposes of
      the actuarial valuation.




                                                                           W
wind-up ......................................................................................................................................... 1, 14
      When insurer intends ceasing all business activities and eventually returning its licence.




                                                                     Page 18                   13/10/201218/05/200718/05/200707/05/2007
                                                              Numerical
75% probability of adequacy .............................................................................................................. 7
      Is the 75th percentile of a distribution and represents the value for which there is a probability
      of exceedence of 25%.




                                                               Page 19                13/10/201218/05/200718/05/200707/05/2007
Appendix A: References on Stochastic Reserving Techniques                                          Formatted: Indent: Left: 0"



England P.D. and Verral R.J – Stochastic Claims Reserving in General Insurance

England P.D. and Verral R.J – Analytic and Bootstrap estimates of prediction errors in
claims reserving

England P.D. and Verral R.J – A flexible framework for Stochastic Claims Reserving

Mack, T. – Measuring the Variability of Chain Ladder Reserve Estimates

                                                                                                   Formatted: English (South Africa)
                                                                                                   Formatted: Normal




                                         Page 20        13/10/201218/05/200718/05/200707/05/2007

				
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