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April 2014 1. vi)

S

Sarah Mercer

Member
Hi,

Please could you help with my understanding of this question?

The question is asking for ways to reduce the latent claims reserves on an insurer's balance sheet. I don't understand why adverse development cover and loss portfolio transfers aren't on the answers. Does ADC just reduce the risk of the reserves exceeding the booked reserves, instead of reducing the booked reserves itself? Can a LPT be used to transfer the latent liabilities to another insurer?

I remember these two cropping up a lot in ST7 but haven't seen them much in SA3 - are they implicitly included in the exit solutions chapter under reinsurance or sale of business?

Also do insurers generally discount their latent reserves?

Thanks in advance
 
Does ADC just reduce the risk of the reserves exceeding the booked reserves, instead of reducing the booked reserves itself?
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More specifically it reduces the risk of the reserves exceeding a specified amount, and this amount is often higher than the booked reserves. In any case, as you say, it doesn't reduce the latent claims reserve.

Can a LPT be used to transfer the latent liabilities to another insurer? ... are they implicitly included in the exit solutions chapter under reinsurance or sale of business?
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I think you'd probably have scored marks if you'd talked about LPTs in this question. The problem is, the precise meaning of the term varies. For example, in the first of the links below, LPT is described as a form of reinsurance . In the second link however, LPT is described as an umbrella term, which includes things like Part VII transfers:
So what lesson can we learn from this? I think the first thing to do when tackling an exam question is to identify the Core Reading that's being tested. In this case, the question was clearly asking you to demonstrate your understanding of Chapter 12. Only after discussing this material should you move on to other areas, in this case LPTs.
 
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