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September 2020 Q1

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Hi,

This question asks about determining the reserves for individual and group IP contracts. The solution includes reserves such as 'outstanding claims reserve', 'claims in transit' and 'equalisation/cat reserves'. Usually these reserves are required under short-term contracts, but IP is a long-term contract. Are these included since the question asks for reserves for group contracts as well, and these are annually renewable so they are short term?

If the group IP element was removed from the question, I assume active life reserves, claim reserves and option reserves would be the only ones required?

Thanks!
 
Hi,

Good question!

You're right that the solution also includes short-term reserves because of the group IP policies (which are sold as annually renewable contracts). But I think we could include more than the three you list if we restricted it to individual IP. We would still need IBNR and I don't see why claims in transit and claims in DP reserves wouldn't be needed too.

Also, the less product/policy-specific reserves could also be held (claims expenses, equalisation, investment mismatch and reinsurer default).

The only ones that I would restrict to short-term (ie group) business are UPR and URR ...

I hope that helps!

Anna
 
Thank you Anna, that is very helpful!

Just one other question on this - the notes mention chain ladder method as an approach to determine outstanding claims for PMI, whereas this solution suggests using a DCF approach. Is it the case that chain ladder methods are only used for PMI and DCF would be used for IP/LTCI due to the long term nature of the claims?

And there would be no outstanding claim reserve for CI as claims are a lump sum?

Thanks again! :)
 
Yes, the chain ladder method is generally used for short-term business.

And that's correct for the lack of existence of an outstanding claims reserve for CI too.
 
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