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Reinsurance Reserving

Discussion in 'SP7' started by entact, Mar 2, 2014.

  1. entact

    entact Very Active Member


    I'm studying for ST7 and I'm a little stuck in the topic of outwards reinsurance reserving. The core reading provides details of 5 methods of reserving for reinsurance from the perspective of a direct insurer. The methods covered include 'gross less net', 'application of standard techniques to reinsurance data', 'use of appropriate factors' etc.

    My first question is why a direct insurer needs to reserve for reinsurance recoveries? I get why an insurer would need to reserve for future claims but since the reinsurance premium is know and recoveries are a positive cash flow , where does the need to reserve apply?

    My second question relates to the methods covered. The detail given in the core reading is very concise and does not give examples illustrating the various approaches. I've looked through past exam questions (of which there is only 1), Aset, questions bank etc. and there's nothing in the way of a clear explanation of the approach through an example. Does anyone know any resources that might illustrate by way of examples the various methods of outwards reinsurance reserving.

    There is an article called 'reinsurance reserving' by Michael Radtke in the 'Encyclopedia of Actuarial Science' published in 2006 but I don't have access to it - does anyone know of any good resources in this area as I'm pretty lost! Thank you in advance.
  2. td290

    td290 Ton up Member

    On your first question:
    1. Reinsurance premiums are not necessarily known in advance for a number of reasons, e.g. adjustment premiums, reinstatement premiums, swing rating, etc.
    2. Depending on the accounting rules, reinsurance recoveries may be regarded as a deduction from the technical provisions or entered on the assets side. Either way, the value of the cashflow is uncertain and needs to be estimated in order to construct the financial statements.

    On the second question, I'm not sure what questions you're hoping the illustration will clear up. I think the part of the Core Reading you're referring to is simply suggesting that you obtain an estimate of future reinsurance recoveries using standard methods, e.g. chain ladder, Bornhuetter-Ferguson, etc. and then obtain the net liabilities by deducting the reinsurance recoveries from the gross.
  3. entact

    entact Very Active Member

    The core reading references 5 different approaches to estimating reinsurance reserves and gives advantages/disadvantages to each. An example of each approach would be very helpful as if you don't work in the area a description of an approach is not enough to really hammer the point home. A numerical example I find always helps.
  4. Katherine Young

    Katherine Young ActEd Tutor Staff Member

    I have to agree with td290 with your second question. The Core Reading gives a description of each of the 5 methods, and I wouldn't recommend over-complicating them - they're not that technical:
    • Project the reinsurance data using standard techniques (eg triangles), to get ultimate reinsurance recoveries.
    • Derive the gross reserves and the net reserves separately, eg by projecting triangles. Then subtract the net reserves from the gross reserves to give an estimate of future reinsurance recoveries.
    • Derive the gross reserves. Apply selected net to gross ratios to arive at the net reserves.
    • Project every loss individually and feed it through the reinsurance program.
    • Project the large losses individually, and feed them through the reinsurance program.

    Is there anything about the descriptions above that you don't understand? Perhaps if you tell us where you're confused we could give you some more help?
  5. indexo

    indexo Active Member

    How do you differentiate these method among statistical method, factor-based, and individual- based approaches?
  6. Darren Michaels

    Darren Michaels ActEd Tutor Staff Member

    The first two in the bullet point list are statistical methods, eg chain ladder projections. The third bullet point approach is a factor-based approach and the last two are are case-by-case (or individual projection) methods.

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