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What's included in your calculated reserves?

J

jensen

Member
Hi

I think I'm fairly ok working with claim triangulations, but I am having trouble making sense of the reserves calculated, specifically what is included in the reserve calculated, ie: does it include IBNR, or IBNER? or both?

Are there any tips to recognise this? Example, is it correct to say that if I used paid claims only, the reserves calculated excludes IBNR? or if I have used incurred claims, then the reserves calculated includes IBNER? :confused:

Thanks.
 
inclusion of IBNR/IBNER in claims triangles

Certainly paid claims cannot include any IBNR or IBNER. (Obviously you can't pay a claim that hasn't been reported, and I don't think you're not going to pay an amount greater than that reported.)

I'm not so sure you can make any assumption about IBNR or IBNER from the word incurred though - can someone else clarify that one.....?
 
mattt78 said:
Certainly paid claims cannot include any IBNR or IBNER. (Obviously you can't pay a claim that hasn't been reported, and I don't think you're not going to pay an amount greater than that reported.)

I'm not so sure you can make any assumption about IBNR or IBNER from the word incurred though - can someone else clarify that one.....?
Click to expand...

I think that jensen is asking about the reserves (i.e. future development) calculated from triangles of paid or incurred claims, not reserves contained in the actual triangle data. (Is that right?)

With both paid claims and incurred claims triangles, development occurs due to two effects:
  1. Claims being notified to the insurer
  2. Amounts due to notified claims changing

The first item covers pure IBNR, and the second item covers IBNER. Therefore, if you have either a paid or an incurred claims triangle, on either an accident period or an underwriting period basis, the future development of the triangle (the 'reserves') represents

  • Outstanding claims + pure IBNR + IBNER for a paid claims triangle
  • pure IBNR + IBNER for an incurred claims triangle

NB This doesn't apply to a triangle on a notification period basis because claims that are notified in the future go into future origin cohorts (unlike the other two bases).

At the risk of adding more confusion :eek: there are methods to calculate pure IBNR and IBNER separately. For instance, projecting claims numbers and average claim amounts (either paid or incurred) separately. Suppose you've got claim numbers and average incurred claims triangles, and you project each of these to ultimate. Then:

  • Latest claim numbers * latest average incurred claim amount = latest total incurred claim amount (a)
  • Latest claim numbers * ultimate average incurred claim amount = total ultimate claim amount in respect of notified claims (b)
  • Ultimate claim numbers * ultimate average incurred claim amount = total ultimate claim amount in respect of all incurred claims, whether notified yet or not (c)

Then

  • (c) - (b) = pure IBNR (because the difference is future claim numbers * ultimate average incurred claim amount)
  • (b) - (a) = IBNER (because the difference is future development of claims already notified)

Sorry for the length of the post but HTH!
 
Hi Bodhisattva and matt

Thanks for the detailed explanation! :)

May I ask, if the 'Outstanding Claims' component of the calculated reserves via paid triangles is in respect of reported or un-reported claims? This is where I get confused between this O/S Claim and IBNER.

As for the other methods you described for estimating IBNER and IBNR separately, I did something similar (someone briefly described it to me and I sort of fiddled around it so it's not exactly perfect) but will relook into it based on your description.
 
Not quite right folks.

Here's a summary.

It doesn't matter whether you use paid or incurred data, your reserves will include the same components.

The only thing which affects what is included in the reserves is which origin period you use: ie underwriting year / accident year / reporting year.

So the elements included for each cohort is:

RY
● reserve for outstanding reported claims only

AY
● reserve for outstanding reported claims
● reserve for IBNR claims

UY
● reserve for outstanding reported claims
● reserve for IBNR claims
● reserve for unexpired risks

All of the 3 cohorts may include:
● IBNER
● claims handling expenses
● reopened claims reserve
● recoveries from salvage and reinsurance
if these are included in the past data.


As to your final question Jensen:

The "outstanding claims reserves" is basically all unpaid claims (ie ultimate - paid). I quite agree that it feels ambiguous because we would also say "outstanding claims" when referring to case estimates (ie reported unpaid claims"). Just try to think of IBNER as "movements in case estimates", after all, claims can settle for more / less than expected.

Kind regards,

Katherine.
 
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Thanks Katherine

In regards to the methods quoted by Bodhisattva to calculate the IBNR and IBNER separately, are these valid?
 
Hi Jensen,

These methods look reasonable, but you should make sure you understand the shortcomings of any method you use. For example, one shortcoming I would be wary of with the methods below is that the average ultimate claim size includes notified and IBNR claims, which would distort (b).

From an exam perspective, there are many methods to calculate components of the reserves and you shouldn't have to remember any specific ones apart from the obvious ones in the Course Notes (CL, BF etc). There used to be others to calculate IBNR in Subject ST3, including the delay table method and a simple proportion method, but these don't get much coverage now in Subject ST7.

The key thing is to be able to comment on the advantages and disadvantages of any particular method and to understand the assumptions underlying them.
 
If you want to evaluate the IBNER, you should use the Report Year triangle rather than the Accident Year triangle, just like in the Claims-made policy pricing.
The Report Year triangle tells you what the IBNER is, and the Accident Year tells us gross IBNR including both the pure IBNR and the IBNER, also partial payments and reopened payments.
 
Hi Katherine and All,

I am confused as to what to use as development periods. When triangulating, i used settlement date (i.e accident year on the vertical column and settlement year as the horizontal column). Would the result of this be different from using accident year against notification against notification dates?
 
What do you mean? How do you have development years for each reported year?

All claims notified in 2010 as at year end 2010 will be same as
All claims notified in 2010 as at year ended 2011 and so on ..
 
To get the development year, you subtract the loss date from settlement date or notification date. So for example, a claim with loss date 2009 and settlement date 2009 would have development year 0, whilst loss date 2009 and settlement date 2010 would have development year 1 etc.

My question now is, if i replace settlement date with notification date in the illustration above, what would be the difference in the results (using paid claims data)
 
Katherine Young said:
Not quite right folks.

Here's a summary.

It doesn't matter whether you use paid or incurred data, your reserves will include the same components.

The only thing which affects what is included in the reserves is which origin period you use: ie underwriting year / accident year / reporting year.

So the elements included for each cohort is:

RY
● reserve for outstanding reported claims only

AY
● reserve for outstanding reported claims
● reserve for IBNR claims

UY
● reserve for outstanding reported claims
● reserve for IBNR claims
● reserve for unexpired risks

All of the 3 cohorts may include:
● IBNER
● claims handling expenses
● reopened claims reserve
● recoveries from salvage and reinsurance
if these are included in the past data.


As to your final question Jensen:

The "outstanding claims reserves" is basically all unpaid claims (ie ultimate - paid). I quite agree that it feels ambiguous because we would also say "outstanding claims" when referring to case estimates (ie reported unpaid claims"). Just try to think of IBNER as "movements in case estimates", after all, claims can settle for more / less than expected.

Kind regards,

Katherine.
Click to expand...
Hi

so when we talk about outstanding claims that are part of incurred- are these all claims that have started being paid or can they be claims even that haven’t been paid and have been reported? mom getting confused as to what this outstanding and the outstanding in ‘outstanding claim reserves for AY and RY mean? Do these mean estimates for all reported claims that haven’t started being paid while the outstanding in incurred is estimates for all reported claims that have been paid?
 
Last edited by a moderator:
The reported outstanding claims that are part of incurred claims triangles can relate either to claims that have started to be paid or claims in respect of which nothing has been paid to date.
 
Thanks Darren! Just a follow up on this. From what Katherine mentioned above was the reserves for each Type of year:

1. if we look at q1 April 11ii, we are told to calculate the IBNR (pure IBnr and ibner)and the mark scheme does this by subtracting the ultimate - latest incurred position- wouldn’t this be wrong as it would include reserve for unexpired risks as it’s a UW triangle- wouldn’t we have to change to AY triangle?

As I’ve seen for some questions it’ll say we don’t want the non Reported part of risks so we need to work in AY and then adjust ?
 
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