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20/06/2016
1
Casualty Reserving in the Lloyd’s Market Lydia Rhodes
20 June 2016
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
Outline
20 June 2016
1. Are casualty recent years actually under reserved?
2. Why has this happened?
3. What should be done?
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
Some healthy disclaimers..
• Not finger pointing but thought provoking..
• There is a range – not everyone is in the same boat
• Analysis provided is based on the Lloyd’s market data
20 June 2016
20/06/2016
2
Are the most recent years for
Casualty actually under reserved?
20 June 2016 4
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
20 June 2016
ULRs pushing out
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
20 June 2016 6
Driven by strengthening in IBNR
20/06/2016
3
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
20 June 2016 7
And a low initial ULRs for the most recent years
Gross
Earned
ULRs
2009 2010 2011 2012 2013 2014 2015
At 12
months6% 11% 5% 4% 2% 3% 0%
At 24
months 10% 8% 5% 5% 2% 5%
At 36
months 7% 7% 5% 6% 5%
At 48
months 9% 7% 7% 7%
At 60
months 4% 6% 9%
At 72
months 3% 7%
At 84
months 5%
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
20 June 2016 8
Results in ULRs being strengthened..
Gross
Earned
ULRs
2009 2010 2011 2012 2013 2014 2015
At 12
months6% 11% 5% 4% 2% 3% 0%
At 24
months 10% 8% 5% 5% 2% 5%
At 36
months 7% 7% 5% 6% 5%
At 48
months 9% 7% 7% 7%
At 60
months 4% 6% 9%
At 72
months 3% 7%
At 84
months 5%
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
20 June 2016 9
Casualty result driven by reserve releases on the
most recent years
20/06/2016
4
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
Gross
Earned
ULRs
2011 2012 2013 2014 2015
At 12 months 10% 10% 0% 1% 0%
At 24 months 4% 3% 3% 4%
At 36 months 2% 4% 3%
At 48 months 4% 4%
At 60 months 5%
20 June 2016 10
Results on a Solvency 2 best estimate basis
aren’t any better..
How has this come about?
20 June 2016 11
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
The chicken and egg debate!
20 June 2016
Reserving
Underwriting
/ pricing
20/06/2016
5
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
The chicken and egg debate - explained!
20 June 2016 13
Input to pricing
Starting ULR
assumptions for
the pricing model
Input from
pricing:
Use the business
plan as the ULR
for the most
recent years
Input from
reserving
Starting ULR
assumptions for the
pricing model
Input to reserving:
Business plan used
within reserving for
the most recent
years
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
Optimistic business planning…
20 June 2016 14
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
Partly driven by proposed rate changes not being
achieved…
20 June 2016 15
20/06/2016
6
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
Amounts are then used as priors for the most
recent years..
20 June 2016 16
Volume of Premium £10,000,000
Book running
at
Percentage
developed
Business
Forecast ULR
Rate
reduction
'error'
Revised
Business
Forecast ULR
Proposed
Reseves
Corrected
Reserves Understatement
%
Understated
65% 5% 65% 0.5% 65% £6,175,000 £6,206,030 £31,030 0.5%
65% 5% 65% 1.0% 66% £6,175,000 £6,237,374 £62,374 1.0%
65% 5% 65% 2.0% 66% £6,175,000 £6,301,020 £126,020 2.0%
65% 5% 65% 3.0% 67% £6,175,000 £6,365,979 £190,979 3.1%
65% 5% 65% 4.0% 68% £6,175,000 £6,432,292 £257,292 4.2%
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
Rate changes alone do not explain the difference…
20 June 2016 17
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
Reason 2: ‘Actuarial Reserving’ methods do not
typically allow for changes in the business
• Rely on assumptions of ULRs
– Therefore heavily dependent on
underwriter input
– Requires an assumption on
inflation
– And rate change adequacy
20 June 2016 18
• Assume past is a guide to the
future..
– ..Therefore gradual changes in
books are not allowed for
• Change in the retentions
• Changes in policy wording
• Change in the terms and
conditions
• Changes in the location of
risk
20/06/2016
7
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
Gradual shifts in business are harder to identify..
20 June 2016 19
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
And within classes there is also a shift towards
binders
20 June 2016 20
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
Shift towards binders must be allowed for
20 June 2016 21
20/06/2016
8
What should be done?
20 June 2016 22
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
What should be done?
20 June 2016
Option 1 Option 2 Option 3
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
Understand the pricing..
• Spend time with the pricing teams
– Understand how the book is being technically priced
– The difference between technical price and price achieved
• Understand the business they are writing and market conditions
• Ensure this is reflected in the reserving ULRs
20 June 2016 24
20/06/2016
9
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
…to ensure the reserving ULRs are appropriate
• Feedback obtained from the pricing teams is used within the reserving
loss picks
• Changes in the mix of business are reflected in the development
patterns and assumptions used
• Ensure this is reflected in the reserving ULRs…
• …. which are the input to the pricing ULRs
20 June 2016 25
Colour palette for PowerPoint presentations
Dark blue
R17 G52 B88
Gold
R217 G171 B22
Mid blue
R64 G150 B184
Secondary colour palette
Primary colour palette
Light grey
R63 G69 B72
Pea green
R121 G163 B42
Forest green
R0 G132 B82
Bottle green
R17 G179 B162
Cyan
R0 G156 B200
Light blue
R124 G179 B225
Violet
R128 G118 B207
Purple
R143 G70 B147
Fuscia
R233 G69 B140
Red
R200 G30 B69
Orange
R238 G116 29
Dark grey
R63 G69 B72
20 June 2016 26
Expressions of individual views by members of the Institute and Faculty of
Actuaries and its staff are encouraged.
The views expressed in this presentation are those of the presenter.
Questions Comments
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