RESERVING FOR REINSURANCE II by benbenzhou

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									    RESERVING
FOR REINSURANCE -II




       SESSION 3-D
1987 LOSS RESERVE SEMINAR
  MINNEAPOLIS, MINNESOTA




                     Regina Berens
                September 10, 1987
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      Good afternoon.         My name is Regina Berens and I work for
Prudential Reinsurance.           My background also includes seven years
at A F I A , w h i c h was f o r m e r l y the A m e r i c a n Foreign Insurance
Association.         For the last eight years I've been doing reserves
on reinsurance, but there are some people out there who could
probably also discuss this subject and will probably have some
different ideas.         You know who you are; please speak up.

                                              First,               we'll      talk       about
                                              classification                 of d a t a .       I
  CLASSIFICATION OF DATA                      assume that everyone has either
                                              b e e n to t h e l a s t r e i n s u r a n c e
                                              session              or   has    had    enough
 •   At a minimum: Pro Rata vs. Excess        experience that they know some
                                              of      the        terminology.             At   a
 •   Annual Statement lines may not be        minimum,                you      should        be
                                              separating your business between
     meaningful
                                              pro        rata         (or   quota     share)
                                              business             and Excess      of L o s s ,
 •   If credible data is available:
                                              which is sometimes referred to
     Working-level Excess vs. High-           by inept secretaries and people
     Layer (e.g.Catastrophe) Excess           who         know        the    business        as
                                              "Excessive Loss".                 Another way
 •   Property vs. Casualty vs. Marine,        to d i v i d e         the data      is to do
     Others                                   F a c u l t a t i v e separately, and I'll
                                              mention that later.
 •   Contracts with credible contract
     year, accident year, etc. data       For   reinsurers,              the    Annual
     vs. those reported on a bordereau    Statement lines of business are
                                          not   necessarily             meaningful.
     basis
                                          Many reinsurance contracts cover
                                          an e n t i r e class          of b u s i n e s s
                                          written by the ceding company,
                                          such as personal lines business.
                                          This    is e s p e c i a l l y     true for
c a t a s t r o p h e reinsurance. Sometimes the ceding c o m p a n y will make
an honest effort to separate the accounts- premium and losses- by
line.           Sometimes premium is not available by line, but losses
are.

          O b v i o u s l y you want to try doing property, versus casualty,
v e r s u s s o m e of the o t h e r s .     Don't worry about splitting auto
liability between personal and commercial, for example, because
you p r o b a b l y won't get m e a n i n g f u l data.  If you have enough data,
you may want to separate your excess business between working-
l e v e l and c a t a s t r o p h e  level, s i n c e you w o u l d e x p e c t t h e m to
d e v e l o p differently.

      Pro rata business, p a r t i c u l a r l y that written on a p o r t f o l i o
basis, may not have experience split by contract year or accident
year--   t h i s is t h e w a y t h e m a r k e t   works.   An a c c o u n t i n g
statement, for example, may simply show a total for outstanding
losses for all five years you've been on the contract.                      It is

                                             529
better     to try and do s o m e t h i n g with         that data separately.

            You m a y want to look at your data on a gross versus net
basis, or gross, r e t r o c e d e d and net.         It's p r o b a b l y m o s t c o m m o n
for c o m p a n i e s to do their a n a l y s i s on a net basis, but it's m o r e
i n t e r e s t i n g to look first at what you took in and then at what
you r e t r o c e d e d out, and then net them against each other.

          Retrocessions                m a y not e v e n be in y o u r d a t a - - s o m e t i m e s
they're on green sheets in the a c c o u n t a n t ' s desk.                   (I know of one
c o m p u t e r s y s t e m sold to r e i n s u r e r s five years ago that didn't do
retrocessions.)                  You should also m a k e sure that any r e t r o c e d e d
data you have is a "mirror image" of the assumed b u s i n e s s it
covers.               This sounds            elementary,     but frequently           a ceded
r e i n s u r a n c e t r a n s a c t i o n will be coded to the c o n t r a c t year of the
r e t r o c e s s i o n agreement, which may not be equal to the c o n t r a c t or
a c c i d e n t year of the assumed b u s i n e s s transaction.                 The same may
be true for line of b u s i n e s s coding.

      In s o m e c o m p a n i e s  certain        reinsurance           contracts           have
specific retrocessions.               In o t h e r w o r d s , y o u m i g h t p u r c h a s e
reinsurance     from several companies covering a single assumed
contract.     That's one c o m p l i c a t i o n .   S o m e t i m e s your r e t r o c e s s i o n s
or ceded r e i n s u r a n c e may cover the whole book-- a c a t a s t r o p h e
cover, for example.             In this case you may find that the p r e m i u m
for this p r o t e c t i o n was taken out of a single line of assumed
business, and not a l l o c a t e d among p r e m i u m on all the b u s i n e s s it
covers.

                                                            One of the first places
      UNDERWRITING QUESTIONS                                 in      your        company
                                                             start asking q u e s t i o n s
                                                                                               to

                                                             is t h e         Underwriting
                                                             Department.                First,
          • Special Contract types-                          there are some c o n t r a c t
              IBNR provision reported                        types             which       will
              Funded covers                                  d i s t o r t the data if not
                                                             analyzed            separately.
              High aggregate deductibles
                                                             Some ceding companies
              "Clean-cut • cancellations                     report               an       IBNR
                                                             provision            with their
           • Rate adequacy changes-yours and                 accounts.               If t h e s e
              the ceding company's                           c o n t r a c t s are written,
                                                             find            out      if    the
           • Availability of pricing data                    suggested               IBNR      is
                                                             booked,            and    to w h a t
                                                             a c c o u n t.            "Funded
                                                             Covers",                     which
                                                             s t a b i l i z e the r e s u l t s
                                                             of the c e d i n g c o m p a n y
by a l l o w i n g them to r e i m b u r s e the reinsurer for a p o r t i o n of the
a d v e r s e loss e x p e r i e n c e over a period of several years, should be
isolated b e c a u s e m u c h of the IBNR could be reimbursed.                       Contracts
with v e r y high a g g r e g a t e d e d u c t i b l e s should also be isolated.
These c o n t r a c t s require that the ceding c o m p a n y absorb claims

                                                  530
which would o r d i n a r i l y be paid under the contract up to a certain
limit-- which could be in the m i l l i o n s of d o l l a r s - - before the
reinsurer is liable.            These contracts could appear "loss-free"
for years.

      Some reinsurance contracts are cancelled on a "clean-cut"
basis, m e a n i n g that the ceding company has taken back the loss
portfolio and the reinsurer is no longer liable for losses on the
contract.          Since  IBNR would  n o t be a n t i c i p a t e d on t h e s e
contracts, they should also be isolated.

          Ask the u n d e r w r i t e r s about price adequacy changes-- both
yours and the ceding company's.                    It is important to know if a
d o u b l i n g of last y e a r ' s p r e m i u m v o l u m e m e a n s y o u r r a t e s h a v e
doubled or your exposure to loss has doubled.                             Ask if data was
provided for pricing the contract-- if this is not an area where
your actuaries          are a c t i v e     (and it s h o u l d be), all k i n d s of
interesting things may fall out of the files.

                                                           The C l a i m s D e p a r t m e n t
                                                           is a n o t h e r          place    to
              CLAIMS QUESTIONS                             stop and ask questions.
                                                           First,           there       is t h e
                                                           classic             question       of
                                                           whether there have been
     • Changes in your company's claim                     any             changes            in
          processing practices                             reserving                practices
                                                           which          might       distort
     • Are adjustments made to reserves                    historical              data.     Ask
          reported by the ceding company?                  also          if       they     make
                                                           adjustments                        on
     • Are claim audits conducted regularly?               individual                     claim
                                                           reserves             reported      by
       •  Do you request periodic reports of               the         ceding         company
          claims falling under the retention for           based                on        their
          aggregate deductible contracts?                  assessment of the case
                                                           and, if so, h o w t h e s e
                                                           adjustments are booked.
                                                           Some large reinsurers
                                                           p e r f o r m periodic claim
                                                           audits               of      ceding
companies.           This gives them information                  on h o w the c e d i n g
company's claim practices are changing.                    You should also ask if
they m a i n t a i n data on losses falling under the ceding company's
retention on contracts with high aggregate deductibles, which can
be u s e d to m o n i t o r y o u r c o m p a n y ' s potential         l o s s e s o n c e the
aggregate retention has been reached.

          The A c c o u n t i n g D e p a r t m e n t can help if you find a b e r r a t i o n s
in the data you can't explain-- p a r t i c u l a r l y if you can pin it
down to a single contract.                           My favorite example, from a former
employer, was a huge claim in an area where no one knew of any
major catastrophes.                     It t u r n e d out that an a c c o u n t had b e e n
r e n d e r e d in I t a l i a n Lira, and the a c c o u n t a n t       (who was in the

                                               531
 London office) coded it as Pounds Sterling.                      Once we got that out
 of the data things didn't look so bad.

      You s h o u l d also ask about " t o p - s h e e t " or " n o n - l e d g e r "
 adjustments-- the ones that get put into the company results but
 for some reason are not in your data.      You should ask about major
 changes to prior accounting periods, which were put through in
 the current period.      If you can't get the historical detail to
 allocate the corrections to the periods where they belong, at
 least get them out of the current results.

                                                         Once         you   have       your
                                                         data,          you    have         to
          BORNHUETTER-FERGUSON                           s e l e c t an a p p r o p r i a t e
                                                         method. The first I'll
                                                         cover              is           the
                                                         Bornhuetter-Ferguson
        • GOOD FOR:                                      method--and                other
             Some working-level excess.                  methods which depend on
             Some pro rata business.                     the          use     of       loss
                                                         triangles.            They are
      •      NOT APPROPRIATE FOR:                        good         for   a    lot       of
             High-level (e.g. catastrophe) business.     things but have some
             Contracts with aggregate deductibles.       serious limitations.
             Pro rata contracts reporting on a           On working-level excess
                                                         business         where there
             bordereau basis.                            aren't           any       major
             Funded covers.                              changes,            you         can
                                                         p r o b a b l y get r e l i a b l e
                                                         results,         taking into
                                                         a c c o u n t the c a v e a t       I
                                                         just          gave     you        on
                                                         talking             to         the
underwriters, accountants, claims people, etc. and making sure
there is nothing messing up the triangle.                  It's good for pro rata
business if you trust the detail by contract year.                              It's not
appropriate for high-level excess business, catastrophe business,
a n y t h i n g w h e r e the r e p o r t i n g is very slow.          As I m e n t i o n e d
before, it's not appropriate for aggregate deductible contracts.

         These methods       are also not appropriate                   for p r o r a t a
contracts reported on a bordereau basis, or for funded covers,
where you could eventually recover many of the losses.                          Another
item to c h e c k is w h e t h e r your u n d e r w r i t e r s have had the good
s e n s e to put a g g r e g a t e l i m i t s on l o s s e s p a y a b l e under the
contracts, in which case a triangulation approach will over-state
your IBNR.

     RAA factors are another popular method for setting reserves
on reinsurance business.   RAA is the Reinsurance Association of
America, and they have been collecting incurred loss experience
by accident year from reinsurers since 1956-- for Excess of Loss
business   only,  separately    for  Auto  Liability,    Medical
Malpractice,  Workers'   Comp., Asbestosis,   General  Liability
excluding Asbestosis, and Casualty not Otherwise Classified.

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                                             Claims-made           experience
                                             was                   requested
                   RAA FACTORS               separately              for      the
                                             first time this year.
                                             Every          two    years,         a
                                             report of incurred loss
   • GOOD FOR:                               t r i a n g l e s and a g e - t o -
      1. Some excess business, particularly  age factors is sent out
         after 2 - 3 years of development    to m e m b e r      companies;
      2. Some pro rata business, if adjust-  copies             are          also
         ments are made for faster reporting available            from RAA's
                                             o f f i c e in W a s h i n g t o n ,
   • NOT APPROPRIATE FOR:                    D.C.           Please       note--
      1. Very high-level excess business     this            is     not         an
                                             endorsement.                     I 'm
      2. Low- volume or immature experience  c o v e r i n g it b e c a u s e RAA
      3. Pro rata business where results     is       one      of    the      few
         are reported on a bordereau basis   s o u r c e s of h i s t o r i c a l
                                             reinsurance           d a t a , and
                                             it is a p o p u l a r source
                                             when         little      else      is
available.     Let's go over the uses and limitations.

          What are RAA factors good for?                    They are good for excess
b u s i n e s s that is c o m p a r a b l e to the u n d e r l y i n g mix of b u s i n e s s and
retentions           in the d a t a .      That's a tricky question, since you
don't necessarily            k n o w w h a t k i n d s of r e t e n t i o n s u n d e r l i e the
e x p e r i e n c e that these c o m p a n i e s have reported.            It's m o r e useful
for       data      with  a few years of development.

     Let's go over an example.              Using the " P e r c e n t a g e of U l t i m a t e
Reported"        curve   f o r 24 m o n t h s   of d e v e l o p m e n t      on G e n e r a l
Liability, the "average" percent reported is 17%.                        Taking the two
sides of the 50% c o n f i d e n c e interval, you could have                      6% or 28%
reported.        Suppose you have $i m i l l i o n in p r e m i u m for this year
and $i00,000 of r e p o r t e d losses after 24 months.                  D e p e n d i n g upon
which of the above factors is appropriate, your u l t i m a t e losses
on $i m i l l i o n   of p r e m i u m could     be $357,000,              $588,000          or
$1,667,000.        And that's just the spread on the 50% c o n f i d e n c e
interval-- it's even wider if you want to use 75%.                              As you can
see from this example, even at two years there's an e x t r e m e l y
wide m a r g i n for error.

          RAA e x p e r i e n c e is now total excess business.                  It m a y in the
future show f a c u l t a t i v e e x p e r i e n c e s e p a r a t e l y - - it was r e q u e s t e d
last year, but neither that nor c l a i m s - m a d e was shown in the last
RAA report, so they may not have gotten a lot of it.                                  It m a y be
s o m e t h i n g you'll have in the future.

          RAA factors m i g h t be a p p r o p r i a t e for pro rata b u s i n e s s if
you've           got experience              by contract         year       and       if y o u m a k e
a d j u s t m e n t s for the fact that r e p o r t i n g is faster.                    They are not
a p p r o p r i a t e for v e r y h i g h - l e v e l excess b u s i n e s s since it p r o b a b l y
is not c o m p a r a b l e to the mix of b u s i n e s s being r e p o r t e d by the
m e m b e r s of RAA.         It's not a p p p r o p r i a t e , u n f o r t u n a t e l y , for low-


                                                  533
f r e q u e n c y or immature e x p e r i e n c e ,      as you saw from the example.
T h i s is u n f o r t u n a t e b e c a u s e t h a t ' s p r o b a b l y w h e n y o u n e e d it
most.           It is not a p p r o p r i a t e  for pro rata b u s i n e s s where you
don't have results by c o n t r a c t year.

          Finally- a big caveat- check your own company reporting
patterns.        You could be g e t t i n g losses in faster either b e c a u s e
y o u ' v e got a d i f f e r e n t mix of b r o k e r e d v e r s u s d i r e c t market, or
maybe your claims department                  is f a s t e r ,     or y o u ' v e g o t l o w e r
retentions.         W h a t e v e r the reason, if your b u s i n e s s is r e p o r t i n g
faster than the general RAA average                      (and you can find that out
j u s t by c h e c k i n g      age-to-age   development           factors),        using RAA
factors to p r o j e c t IBNR can m e a n that y o u ' r e g e t t i n g hit twice.
First, you a l r e a d y have m o r e reported at the e v a l u a t i o n point.
You're then a p p l y i n g tail factors which assume that what y o u ' v e
a l r e a d y got s i t t i n g on your books is still out there with the
IBNR.        That's p r o b a b l y one of the m o s t important reasons that you
have to be cautious.

          One of the things that I n o t i c e d in the new b o o k l e t is that
they've         s h o w n a g r a p h of the p e r c e n t a g e of u l t i m a t e losses
r e p o r t e d from the c u r r e n t study, from five years ago and from ten
years ago -- losses are r e p o r t i n g m o r e slowly, and the curves are
r e a l l y s p r e a d i n g out.   What this means is that you can't assume
1986 after 30 years will look the same as 1956 after 30 years.
So, you have w o n d e r f u l h i s t o r i c a l data but it m a y not reflect
what we're going to see in the future.

          Now we'll go over a few thoughts on r e s e r v i n g for individual
contracts.             First of all, you have to m a k e sure there are valid
reasons           for it.           When I did our last reserve evaluation                        the
underwriters              g a v e m e a l i s t of t h i r t e e n c o n t r a c t s to a n a l y z e
individually.                 H a v i n g learned my lesson from the last reserve
study I looked up individual reports on each treaty and found
that several of them had no p r e m i u m or losses. The u n d e r w r i t e r s
admitted           that these were brand new contracts                          but there were
c e r t a i n r e a s o n s that each c o n t r a c t was unique and they w a n t e d to -
m o n i t o r the e x p e r i e n c e on it.        At that point there w a s n ' t any.
The point is to m a k e sure                   there is a j u s t i f i c a t i o n for s e p a r a t e
analysis           or y o u w i l l d r i v e y o u r s e l f  c r a z y t r y i n g to a n a l y z e
i n d i v i d u a l c o n t r a c t s which could r e a s o n a b l y be included with the
rest of the book.

          M a n y of the m e t h o d s we have reviewed or               d i s c u s s e d can  be
u s e d on i n d i v i d u a l      contracts.         Y o u r e a l l y h a v e to t a k e i n t o
a c c o u n t the c h a r a c t e r i s t i c s of the individual contract.                  You m a y
want to go read the c o n t r a c t and talk to the u n d e r w r i t e r .                        If
y o u ' v e got an e x t r e m e l y large c o n t r a c t you can do loss t r i a n g l e s
on it.           If it is an a g g r e g a t e d e d u c t i b l e contract, ask for losses
under the r e t e n t i o n and do an a n a l y s i s of where your layer will
go.       When y o u ' v e done that, check the results against what y o u ' r e
g e t t i n g on the other c o n t r a c t s in that general group.                          If this
single c o n t r a c t is r u n n i n g a 40% u l t i m a t e loss ratio and similar
c o n t r a c t s are r u n n i n g       around 150%, you have to ask y o u r s e l f if
you r e a l l y b e l i e v e it is that m u c h better, or (in some cases)


                                                   534
that it is that m u c h worse.                      Again, ask about p r i c i n g data.        Many
times actuaries                w e r e i n v o l v e d in p r i c i n g .   You should have
separate actuaries                   i n v o l v e d in p r i c i n g and r e s e r v i n g .   They
should talk to each other -- absolutely.                              It's been useful for me
to ask the p r i c i n g p e o p l e for a file on a p a r t i c u l a r contract,
and the i n f o r m a t i o n t h e r e is o f t e n h e l p f u l .         One r e i n s u r a n c e
a c t u a r y o b s e r v e d that using a c t u a r i e s only for r e s e r v i n g is like
not c a l l i n g a doctor in to see the patient until it's time to
call the coroner.

          I ' ve     already         mentioned        doing   Facultat ive          business
separately,           but we use b a s i c a l l y the same m e t h o d s .     Does anyone
else         have     s p e c i a l m e t h o d s for the t r e a t m e n t of F a c u l t a t i v e
b u s i n e s s in    their c o m p a n y ? (NO RESPONSE.)

                                                                              I also           want    to
     SELECTED ULTIMATE LOSS RATIO                                  discuss                    selected
                                                                   u l t i m a t e loss ratios as
                                                                   a method.                This    is a
       • GOOD FOR:                                                 good               check           for
                                                                   reasonableness                against
            1. Business without credible data;                     any other method.                   If
                immature years.                                    you've            got      immature
            2. A reasonability check on any other                  b u s i n e s s and you don't
                method.                                            k n o w w h e r e it's g o i n g
                                                                   to g o , y o u ' r e better off
      • NOT APPROPRIATE FOR:                                       setting             an     ultimate
            Business where other methods used on                   l o s s r a t i o on it t h a n
            credible data clearly indicate a                       y o u are t r y i n g to u s e
                                                                   some s c i e n t i f i c m e t h o d
            different ultimate loss ratio.
                                                                   on       one        claim.          It
                                                                   almost          sounds         like a
                                                                   d i s a p p o i n t m e n t or a cop
                                                                   out       to       say      --   well
                                                                   let's reserve it to an
ultimate           l o s s r a t i o . B u t for s o m e t h i n g         l i k e an a g g r e g a t e
d e d u c t i b l e contract, it m i g h t be a lot m o r e r e a l i s t i c than just
lumping           it in with the other contracts.

          On t h e o t h e r h a n d , if o t h e r m e t h o d s c l e a r l y i n d i c a t e a
d i f f e r e n t u l t i m a t e loss ratio you s h o u l d n ' t be doing that.               If
y o u ' v e got years and years of c o n t r a c t e x p e r i e n c e that shows that
this kind of b u s i n e s s is 100% u l t i m a t e loss ratio, you don't set
the c u r r e n t year at 60%, just b e c a u s e you hope that this year
will be better.

          When y o u ' r e setting reserves on r e i n s u r a n c e business, Earned
but not R e p o r t e d p r e m i u m (EBNR) is e x t r e m e l y important b e c a u s e
the p r e m i u m c o m i n g in d u r i n g a given c a l e n d a r year m a y apply to
c o v e r a g e p r o v i d e d several years earlier.            EBNR can u s u a l l y be
e s t i m a t e d by the u s e of p r e m i u m d e v e l o p m e n t  triangles, with
u l t i m a t e levels c a l c u l a t e d using the same m e t h o d s applied to loss
triangles.            This should be done s e p a r a t e l y for Pro Rata versus
Excess, and s e p a r a t e l y for Property, C a s u a l t y and Other if enough
e x p e r i e n c e is available.
                                                  535
                                                    EBNR acts as an a d d i t i o n to the
                                                    asset side of the books; it m u s t
                    EBNR                            be        offset     by   an     expense
                                                    p r o v i s i o n and by I B N R on t h i s
                                                    extra premium, using whatever
    •   METHODS                                     m e t h o d s are u s e d to c a l c u l a t e
        1. Earned Premium triangles                 IBNR on r e p o r t e d premium.
        2. By Contract                                         Pay p a r t i c u l a r a t t e n t i o n to
        3. Discuss current year with                 EBNR on the c u r r e n t year, since
           underwriters                              you may be p r o j e c t i n g u l t i m a t e
                                                     levels from very little data; it
    •   IMPLICATIONS                                 should be a r e a s o n a b l e m u l t i p l e
        1. Net out expenses                          of t h e p r i o r         year's         premium
        2. IBNR on EBNR- can create                  v o l u m e . In e f f e c t , y o u m a y be
           "instant • profit/loss                    c r e a t i n g an "instant" p r o f i t or
                                                     loss on the c u r r e n t year if you
                                                     are running at an u l t i m a t e loss
                                                     ratio of 40% or 110%.                        If the
                                                     business         is e x t r e m e l y g o o d or
                                                     bad, errors in the e s t i m a t e of
                                                     ultimate          premium          volume          can
                                                     substantially                    affect            the
                                                     a c c u r a c y of your results.

                                                                  W h a t ' s in the future?         One
                                                          thing that I think we're going
to see is better data from two sources.                                       We're slowly moving
towards better r e i n s u r a n c e systems.                         Most r e i n s u r a n c e systems
seem to have e v o l v e d from a p a t c h w o r k of p r i m a r y c o m p a n y systems
and have grown in r e s p o n s e to s p e c i f i c needs from s p e c i f i c areas.
Now we're               seeing       more       systems         designed        specifically         for
r e i n s u r a n c e . I b e l i e v e also that more c o m p a n i e s have gone through
trying to d e s i g n the p e r f e c t u l t i m a t e system that's going to be
everything               to e v e r y b o d y .    T h e y ' v e f o u n d out t h a t it w a s n ' t
possible             and d e s i g n e d      something         fairly realistic.                I can't
u n d e r e s t i m a t e the importance of good data.

           I think we're also going to see better data from the ceding
c o m p a n i e s , e s p e c i a l l y with changes in the m a r k e t in recent years.
It h a s b e e n e a s i e r to ask for l o s s t r i a n g l e e x p e r i e n c e                 by
c o n t r a c t year, or for the individual claims under the t h r e s h o l d
of an a g g r e g a t e d e d u c t i b l e contract.        It used to be that the data
was " i m p o s s i b l e " to get, or the r e i n s u r e r could obtain it only
after it had lost m i l l i o n s of d o l l a r s on the c o n t r a c t and was
threatening                to sue for b e i n g d e f r a u d e d .  I k n o w of one c e d i n g
c o m p a n y w h i c h f i n a l l y p r o v i d e d a lengthy c o m p u t e r p r i n t o u t of all
of the c l a i m s falling under a large a g g r e g a t e d e d u c t i b l e . It was,
u n f o r t u n a t e l y , p r i n t e d on thermal paper which turned an opaque,
i l l e g i b l e b l u e w h e n e x p o s e d to s u n l i g h t .    I don't think that
h a p p e n s as often now.

          A n o t h e r c h a n g e I see is t h a t b u s i n e s s is b e c o m i n g m o r e
i n t e r n a t i o n a l , which is fascinating.          It is almost inevitable
that when y o u ' r e talking about s p r e a d i n g risk, it m a k e s sense to

                                                  536
                                                 do it on a global basis.                  It's
             THE FUTURE                          been p e r f e c t l y normal for many
                                                 years      for        an     established
                                                 reinsurer        to a s s u m e b u s i n e s s
                                                 from     state-owned            insurance
    •   Better data??                            companies in Romania, Brazil or
        (From ceding companies and               Poland.        E v e n w h e n few o t h e r
         in-house systems)                       services        are     traded     with         a
                                                 particular        country,      they will
    •   More sophisticated techniques            buy    reinsurance           protection.
                                                 Reinsurance is frequently a good
    •   More techniques developed                w a y to get into the m a r k e t             in
        exclusively for reinsurance              those countries.

    •   Business is becoming more         The international part of
        international            the       business        can       be        a
                                 stabilizing       influence--           I've
                                 seen both extremes.            My company
                                 has a nice, sensible,              stable
                                 book of international            business
                                 t h a t 's   not   subject        to     the
                                 vagaries       of t h e U . S . m a r k e t .
                                 Inexperienced          reinsurers         can
                                 also       get    killed         in      the
                                 internat ional                  market--
ironically, it is usually caused by assuming a p o r t f o l i o which
includes U.S. casualty business.

          The companies that are thrown into insolvency by tackling
the i n t e r n a t i o n a l m a r k e t in r e i n s u r a n c e u s u a l l y end up b e i n g
replaced fairly easily, however.                       There is a bank in C a l i f o r n i a
which has decided that the residential m o r t g a g e business is too
risky.        Instead, they're going to put their capital into a joint
v e n t u r e in r e i n s u r a n c e   w i t h a b r o k e r in the L o n d o n m a r k e t - -
writing U.S. c a s u a l t y business on a claims-made basis.                        It should
be interesting to see what happens.

     I think we're also going to end up with more s o p h i s t i c a t e d
techniques, and we're finally getting in more data to play with.
Companies have been in existence for a while and I know there are
a lot of new companies starting up, but some of the e s t a b l i s h e d
ones have i0 to 20 years experience.         You can't throw beautiful,
high technology m e t h o d s at small data bases -- it doesn't work.

     You also have more e x p e r i e n c e d reinsurance actuaries.          You
come into it trying to treat it like primary business and then
you start realizing that it works differently.                    And you start
using different techniques and thinking about it differently.                      I
think a major change includes methods comparable                       to Pre R e ' s
report lag m e t h o d o l o g y . I have not m e n t i o n e d it in this session,
but we still use it and there's a lot published on it.

     In  addition   to m o r e   data,       better       data,      and    more
sophisticated  actuaries,    I t h i n k t h e r e w i l l be m o r e m e t h o d s

                                                 537
suited p a r t i c u l a r l y   to r e i n s u r a n c e   -- e s p e c i a l l y F a c u l t a t i v e   and
Excess of Loss.

     Any ideas or any q u e s t i o n s ?           What do you think about the
future of r e i n s u r a n c e r e s e r v i n g ? It is getting easier or m o r e
complicated?     Does anyone have any q u e s t i o n s ?

Q:    How do you track results                   of past reserve e v a l u a t i o n s ?

R.    BERENS:       It d e p e n d s on the m e t h o d you're using.       For example,
if y o u ' r e using loss d e v e l o p m e n t triangles, take the u l t i m a t e
losses that you come up with after this e v a l u a t i o n by c o n t r a c t
year and c a l c u l a t e what you should have carried as of 12/83 and
1 2 / 8 4 , for e x a m p l e ,     if we k n e w t h e n w h a t we k n o w n o w a b o u t
u l t i m a t e levels.     You can also track your p r e d i c t i o n s of u l t i m a t e
loss ratios, and even average report lags in our case.                            In some
ways y o u ' r e b e g g i n g the question, of course, if you're k e e p i n g
the same method, since your p r e d i c t i o n of what's still out there
on old r e s e r v e s d e p e n d s upon the a c c u r a c y of your method.

          You can also predict losses (either paid, known incurred or
counts) to come in by year in the future when you do a reserve
e v a l u a t i o n to use it as a m o n i t o r i n g tool as e x p e r i e n c e develops.

Q: H o w do y o u set r e s e r v e s             on l o w - f r e q u e n c y ,        high-severity
b u s i n e s s such as e a r t h q u a k e c o v e r a g e ?

R.    BERENS:      In some cases, r e s e r v i n g to an u l t i m a t e loss ratio is
the best.          On that type of b u s i n e s s if you look at your paid loss
t r i a n g l e s or your incurred loss triangles you're not going to
have any data.            One p o s s i b l e way is to do a more s o p h i s t i c a t e d
e x p o s u r e study; I did one on C a r i b b e a n h u r r i c a n e s in 1978, and
someone has done a w i n d s t o r m model recently.                 You get an idea of
y o u r e x p o s u r e if y o u l o o k at p r o p e r t y v a l u e s a l o n g p o s s i b l e
h u r r i c a n e paths, for example.

     We're going from one extreme, which is setting an u l t i m a t e
loss ratio, to the other, which is a f u l l - s c a l e e x p o s u r e study.
On some of these there aren't really any textbook answers.

Q: You m e n t i o n e d i n t e r n a t i o n a l reinsurance. How do you deal with
the issue of ranges in foreign c u r r e n c y e x c h a n g e rates in doing
your a n a l y s i s ?

R. B E R E N S : That's a fun p r o b l e m - - there are a couple of things
you can do.        One is to keep the individual c u r r e n c y d e t a i l - - you
could then set reserves on s p e c i f i c pieces by foreign currency.
U s u a l l y you end up with 5 o n g l e y - C o o k ' s p r o v e r b i a l c o l l e c t i o n of
crumbs.

          W h e n I d i d our i n t e r n a t i o n a l    s t u d y , I had two s e p a r a t e
cases.           One data source c o n v e r t e d all t r a n s a c t i o n s at a single
set of e x c h a n g e rates-- we used the c u r r e n t rate.                       All of the
historical           transactions      were converted                  at the s a m e r a t e and
t h e r e f o r e you d i d n ' t have e x c h a n g e f l u c t u a t i o n s in the data.

                                                       538
Q: But you still have a source of error b e c a u s e y o u ' r e fixing a
set of r e l a t i v i t i e s among c u r r e n c i e s that may not have applied in
the past.

R.    B E R E N S : Yes, you do-- it's not perfect.                 Another m e t h o d used
for the r e s t of the d a t a w a s to a c t u a l l y               r e q u e s t t h a t the
u n d e r w r i t e r s supply to us the d i s t r i b u t i o n of p r e m i u m s and losses
by currency              for major       groups.     (We h a v e v e r y h a r d - w o r k i n g
underwriters.)               We t h e n c a m e up w i t h e x c h a n g e      rate "index"
factors by c o n t r a c t year and by type of business.                         We w e r e then
able to adjust the d e v e l o p m e n t triangles to a c u r r e n t e x c h a n g e -
rate basis.             Again, it's not perfect but it's a way to try and
get the e x c h a n g e f l u c t u a t i o n s out.

Q: How do you adjust                 for c h a n g i n g    retention    levels   in your Excess
book?

R.   BERENS:         When we do our IBNR a n a l y s i s we s e p a r a t e the data
into IBNR groups a c c o r d i n g to the size of the retention.               You're
right-- if you mix them all t o g e t h e r when y o u ' r e c h a n g i n g the
r e t e n t i o n sizes in the contract, you're going to have a mess.

Q: How do you account                    for   premium       not   yet   received   on   in-force
c o n t r a c t s at y e a r - e n d ?

R.     BERENS:        For b u s i n e s s w r i t t e n out of the U.S., we c a l c u l a t e
EBNR using p r e m i u m triangles p e r i o d i c a l l y and then u p d a t e them
m o n t h l y , a c c o r d i n g to changes in p r e m i u m volume.         C h a n g e s in EBNR
go i n t o t h e I B N R f o r m u l a .              Our Canadian       operation          does a
laborious             contract-by-contract                    analysis   of t h e n u m b e r    of
statements             t h a t h a v e b e e n r e c e i v e d and u s e t h a t to e s t i m a t e
p r e m i u m on s t a t e m e n t s not yet received.             It can be done that way,
but in m o s t of our b u s i n e s s it is not n e c e s s a r y to do a c o n t r a c t -
b y - c o n t r a c t analysis.

Q: On     your a g e - t o - a g e factors where you e v e n t u a l l y m u l t i p l y one
times     a n o t h e r t i m e s a n o t h e r to g e t the u l t i m a t e - - h o w do y o u
select     your factor?           Do you take the latest year, or the a v e r a g e
of the     latest three years, or five?

R. BERENS: If I think things h a v e n ' t changed that much, I'll do a
w e i g h t e d average of all the years.             By w e i g h t e d I just m e a n add
up all of the i n c u r r e d l o s s e s r e p o r t e d as of t h r e e y e a r s of
d e v e l o p m e n t - - d i v i d e by all of the incurred losses r e p o r t e d as of
two years of d e v e l o p m e n t on the same years.              If there are changes
in the p a t t e r n s that I can see I may not use all years.                           It
d e p e n d s upon how stable you think the book is.

Q: Now I'm going to get on m y a c t u a r i a l soapbox.       After you pick
the 12-24, 24-36, you m u l t i p l y them together. When you pick the
average of these factors you pick a w e i g h t e d average, right?          I
argue that if y o u ' r e going to, use a g e o m e t r i c average.

        Let's use an e x t r e m e s i t u a t i o n which           is not true to life but

                                                           539
it i l l u s t r a t e s the point I'm making.                  Suppose y o u ' r e d e a l i n g with
two years of experience.                     One factor indicated .5 and the other
indicated 2. I'm going to use the average of these two factors to
m u l t i p l y the other factors that have been selected the same way.
The g e o m e t r i c a v e r a g e to me is the only one to use b e c a u s e if I
m u l t i p l y 2 times .5 I get i, and the square root of 1 is i.                                If I
add the two factors together I get 2.5 and the a r i t h m e t i c average
is 1.25.             I think that's wrong.            I think that when y o u ' r e talking
about numbers that you're e v e n t u a l l y going to m u l t i p l y together
you cannot use an a r i t h m e t i c average.                     I've used an e x t r e m e and
u n r e a l i s t i c s i t u a t i o n just to i l l u s t r a t e this.

COMMENT  F R O M AUDIENCE: Of course, that introduces a bias b e c a u s e
the geometric       average  is a l w a y s lower than the arithmetic
average.

Q: Do you ever             look at trends               in th a g e - t o - a g e   factors?

R. B E R E N S : One of the things we a c t u a l l y have the c o m p u t e r do is
a linear r e g r e s s i o n on the factors.                  It's kind of r i d i c u l o u s if
y o u ' v e g o t o n l y t h r e e a g e - t o - a g e f a c t o r s for t h a t p a r t i c u l a r
p o i n t of d e v e l o p m e n t .    S o m e t i m e s r e s u l t s are w a y out of the
b a l l p a r k and s o m e t i m e s they are close to what we have selected.
It's one of those things I look at and never use.

Q: How do you h a n d l e r e t r o s p e c t i v e p r e m i u m a d j u s t m e n t s ?

R.BERENS:        If they aren't e x p e c t e d to be substantial, they're                              just
treated as part of the EBNR.                           On our d o m e s t i c treaty book               they
a c t u a l l y do a s e p a r a t e c o n t r a c t - b y - c o n t r a c t analysis.

Q: Do you h a n d l e or do you                  separate         the    sliding-scale          commission
r e s e r v e s on top of those?

R. B E R E N S : No, we d o n ' t h a n d l e t h a t e x p l i c i t l y                 but    it    could
p r o b a b l y be done i n d i v i d u a l l y for large contracts.

Q:      How         do       you    calculate             IBNR        recoverable               from   your
r e t r o c e s s i o n a i r e s for p u r p o s e s    of c o m p l e t i n g S c h e d u l e F?

R.    B E R E N S : P r a c t i c a l l y all of our r e t r o c e s s i o n s are to one single
f a c i l i t y and p a r t i c i p a t i o n is spread out p r e t t y thinly among m a n y
c o m p a n i e s . We a c t u a l l y keep the p r e m i u m s s e p a r a t e on b u s i n e s s
t h a t is c e d e d to t h i s f a c i l i t y ,        so we c a n set up s e p a r a t e
r e s e r v e s for it, we can do a s e p a r a t e a n a l y s i s and we know what
IBNR w e ' r e c a r r y i n g on that b u s i n e s s by r e t r o c e s s i o n a i r e .

Q: How do you p r e p a r e S c h e d u l e s 0 and P of the Annual S t a t e m e n t
using typical r e i n s u r a n c e data?
R. B E R E N S : S c h e d u l e s O and P are a pain for r e i n s u r e r s - - I know,
I've done it.              You can u s u a l l y separate out Excess b u s i n e s s by
line and by year and we put that on S c h e d u l e s O and P that way
for the State of New York.                 I think we're now going to have to do
this c o u n t r y w i d e .      Up to now, for our r e p o r t i n g to Delaware, we
allocated        all our e x p e r i e n c e     on a s s u m e d reinsurance     to the

                                                            540
"Reinsurance"         line on S c h e d u l e O.

          Where we're r e q u i r e d to report pro rata b u s i n e s s by year, as
for New York, we a l l o c a t e it j u d g m e n t a l l y based on the data we
have.         S c h e d u l e s O and P are not an exact science for reinsurers.
We really               d o o u r b e s t b u t it w a s n ' t really designed   for
r e i n s u r a n c e companies.

Q: Has a n y t h o u g h t b e e n g i v e n to i n c l u d i n g a n o t h e r c o l u m n on
S c h e d u l e O or P that would a c t u a l l y show an u n d e r w r i t i n g year
premium, or u l t i m a t e p r e m i u m ?

R. BERENS:  Does anyone know of                         any    thought     in    that    direction?
That's been a c h r o n i c problem.

COMMENT: Maybe            you     could       re-state         past   years'      premium        as    it
develops.

R. B E R E N S :    That's one approach.                  I think        the    idea of       another
column being added to the annual                         statement       for    ultimate      premium
e s t i m a t e s is a good one.

Q: If loss e x p e r i e n c e on prior years shows adverse d e v e l o p m e n t
but r e t r o s p e c t i v e p r e m i u m r e c e i v e d b e c a u s e of that d e v e l o p m e n t is
coded to the current year, y o u ' r e o v e r - s t a t i n g the loss ratio for
the old year and u n d e r - s t a t i n g it for the current year.

R. B E R E N S :   Y o u ' r e r i g h t - - and a n o t h e r e x a m p l e is a s t o p - l o s s
c o n t r a c t where you might be c o v e r i n g b u s i n e s s that the ceding
c o m p a n y wrote over the last ten years.                   For c o v e r i n g d e v e l o p m e n t
t h a t o c c u r s in the c u r r e n t y e a r , y o u g e t the p r e m i u m in the
current year.             You can either d e c i d e to code the losses back to
the years where they happened, which then makes those years look
bad b e c a u s e you have adverse e x p e r i e n c e and no p r e m i u m to cover
it-- or you put all the loss d e v e l o p m e n t in the current year
which m a k e s it look like the incurred losses are d e v e l o p i n g at a
h o r r i b l e rate.

Q: T h e l a s t s p e a k e r          was talking            about  the        importance   of
e v a l u a t i n g the s o l v e n c y of r e i n s u r e r s by looking        at their Annual
Statements.

R. B E R E N S : I have a paper I'm going to write on that someday!           I
w a s n ' t there when he d i s c u s s e d that-- I was in here trying to
figure out how to work the slide projector.                    Yes, the Annual
S t a t e m e n t is a s t a r t i n g point but sometimes, for reinsurers, the
data just d o e s n ' t fit into the little boxes we have to put it in.

        Any m o r e q u e s t i o n s   or c o m m e n t s ?

        Thanks     for your p a r t i c i p a t i o n - -      you were a great audience.

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