2021 September Question 2

[Joi]

The Question:
Company J was set up a few years ago as an online-only insurer, selling property and liability insurance to Small-to-Medium Enterprises (SMEs) in the country it operates in. Internet penetration in the country is low , so Company J is considering using two large brokers to sell its insurance policies to better reach its target market. It plans to start offering around 40% of its current business through these two brokers. The Chief Distribution Officer has mentioned that the premium and claims information will be received through quarterly

(i) Describe two possible impacts of the change in distribution channel on the incurred claims information received by Company J’s claims department.

The Answer:
- Claims are increasing in the severity and reducing the frequency (does this mean because broker may do investigation for claim submitted, so lesser small claim submitted?)

- this can cause issues with case reserving in the short/medium term (I don't understand how change in distribution channel cause issues to case reserving in short/medium term?)

- particularly for the liability portfolio where case estimation for long tailed claims can be quite an important element (Again, I don't understand how change in distribution channel cause issues to long tailed claims? Is it because people tend to make latent claims when there's broker help?)

(ii) Discuss the impact of this change in distribution on Company J’s IBNR estimation.

The Answer:
- reporting lags may increase (pure IBNR effect) and settlement lags may increase (IBNER effect) (why settlement lags increase affect IBNER instead of IBNR?)

Thank you.

 

[Darren Michaels]

This question is covered in detail in the ASET, so you might like to purchase that for more information, but here are some brief thoughts:

- Claims are increasing in the severity and reducing the frequency (does this mean because broker may do investigation for claim submitted, so lesser small claim submitted?) Yes potentially, but the main point is that the data is going to be provided in an aggregated bordereaux format, so several individual claims might be combined into one claim amount.

- this can cause issues with case reserving in the short/medium term (I don't understand how change in distribution channel cause issues to case reserving in short/medium term?) same as above, but also the case reserving may now be done by the brokers which may differ to the insurer's historical process.

- particularly for the liability portfolio where case estimation for long tailed claims can be quite an important element (Again, I don't understand how change in distribution channel cause issues to long tailed claims? Is it because people tend to make latent claims when there's broker help?) yes that's possible. It may not just be latent claims though, the brokers may make the SMEs aware of certain contract clauses and thus increase the propensity to claim more generally. The above changes to the case reserves will be more of an issue for long-tailed claims, as the reserving for them is typically more dependent on those amounts in the short-term where very little is paid out initially.

(ii) Discuss the impact of this change in distribution on Company J’s IBNR estimation.

The Answer:
- reporting lags may increase (pure IBNR effect) and settlement lags may increase (IBNER effect) (why settlement lags increase affect IBNER instead of IBNR?) settlement lags relate to the time between when the claim is reported and when it is settled. This means that the claim has already been reported, but that not enough has been reported, ie IBNER.

 

[Joi]

Thank you so much!!