technical reserves required

[mattt78]

Can someone confirm if the below two statements are correct? In particular I'm not clear on when we need a UPR, and whether UY accounting and funded accounting are the same thing.

1. When using AY accounting we will have the following technical reserve types:
(a) o/s reported claims reserve
(b) IBNR & IBNER claims reserves
(c) re-opened claims reserve
(d) claims handling expense reserve
(e) UPR + AURR (if required)
(f) cat and/or equalisation reserves possibly (if not considered part of free reserves)

2. When using UY accounting or funded accounting we will have all of the above except for a UPR + AURR.

 

[iActuary]

(1) is generally correct, but whether or not catastrophe and/or equalisation reserves are allowed will depend on the regulation as this would obviously defer the profits to be declared. You can park this item (if you really want to set this up) either in free reserves or technical reserves if regulation allows.

(2) is not correct. The key thing is to see if our portfolio still consists of any unexpired risks. As long as there is unexpired exposures, we will need UPR and AURR (if any). The reason why no UPR and AURR were set up in the 3-year funded accounting in the note is because we assume there is no more unexpired risks as at the end of 3 years.

In summary, (1) is for expired exposures whereas (2) is for unexpired ones.

There are two types of accounting: Annual (i.e. valuation is done on an accident year basis) and Funded (i.e. valuation is done on an underwriting year basis).

 

[mattt78]

In summary, (1) is for expired exposures whereas (2) is for unexpired ones.
.

I understood you until this sentance (quoted above) - surely its the other way round?

Let me try again:

AY Accounts - I agree - we have all reserve types

3 year funded accounts - I think we agree - after 3 years we assume there will be no unexpired risks, so if we assume accounts are only produced after 3 years then we don't need a UPR (or AURR). Right?

UY Accounts - I'm still confused - I think my confusion is due to the fact that i'm just not clear if this is just another way of referring to 3 year funded accounts, or if they're something different. What is the difference? Do we need a UPR?

 

[TD1986]

I always thought that:

(1) is for expired exposures because at the end of the Accident Year, all accidents that have occurred, have done so in the past year, and any yet to occur (in the next year) will by definition fall into the next AY. Therefore you can't have anything unexpired at the end of the AY.

(2) is for unexpired exposures because at the end of the UY it's likely there will be policies open into the next year - unexpired.

I always thought a three year funded account was a type of accounting based on Underwriting Year, but Underwriting Year accounts aren't necessarily three year funded, unless it says so.

So if there's a question about UY accounts, I assume UPR and AURR. If three year funded, I assume all risks are expired by the end of the third year, so no UPR or AURR.

I may be wrong...

 

[mattt78]

I always thought that:

(1) is for expired exposures
(2) is for unexpired exposures

I don't know quite what you mean by "for expired exposures". Can we just stick to which reserves are required for which types of accounts?

Let me try again:

So you think AY accounts won't have a UPR (or AURR) since all premium is earned by the end of the year, as there can be no more accidents in that year. So you need no UPR, but you will need an IBNR reserve. Is that right? That makes sense to me.

For UY accounts it depends when you're doing the accounts - are you doing them at the end of 1 year? at the end of 1 year you'll need a UPR, because there is still future exposure, and unexpired policies, and you'll also need some IBNR. Right?

For 3 year funded accounts you assume you're only dong the accounts at the end of 3 years, so no UPR required, and only a little IBNR. Right?

 

[TD1986]

So you think AY accounts won't have a UPR (or AURR) since all premium is earned by the end of the year, as there can be no more accidents in that year. So you need no UPR, but you will need an IBNR reserve. Is that right? That makes sense to me.

Yes - nothing is unearned, but lots may not be reported, so need IBNR reserve.

For UY accounts it depends when you're doing the accounts - are you doing them at the end of 1 year? at the end of 1 year you'll need a UPR, because there is still future exposure, and unexpired policies, and you'll also need some IBNR. Right?

Yep - at any point in the year you'll need UPR and IBNR.

For 3 year funded accounts you assume you're only dong the accounts at the end of 3 years, so no UPR required, and only a little IBNR. Right?

Yes I agree with this too. I think assuming one year policies, everything has to be earned by the end of the second year, so no UPR. We'd need IBNR.

..That's how I've understood it anyway, I hope it's right!

 

[Ian Senator]

Not quite, TD1986.

For AY accounts, you generally have a UPR at the year-end, since there will be policies written during the year but are as yet unexpired. This is because AY accounts look at business earned during the year. If the premiums are too low, you may also have an AURR to cover this deficiency of future premiums to cover future claims (UPR+AURR=URR), even though the accidents are occurring in the future.

3-year UY accounts (aka funded accounts) don't have a UPR/AURR/URR at the end of the three years as long as all policies are expired (which they will be if they're only one year long). If you analyse 3-year accounts at the end of each year, and you estimate that you'll ultimately make a loss, the chances are that you have to make a capital injection (equivalent to setting up an AURR) at that stage - depending on the legislation/territory. Note, however, that not all funded accounts are 3-year - you can also get n-year funded accounts where n is anything greater than or equal to one!

IBNR is needed regardless of which types of accounts you're using.

So matt78's original list is pretty much spot on.
Hope this helps
Ian

 

[TD1986]

Thanks Ian!

 

[mattt78]

technical reserves accounts

ok, thanks Ian

So i take it underwriting year accounts and funded accounts are the same thing. And if a question refers to 'underwriting year accounts', we should assume we're dealing with 3 year accounts (i.e. n=3)?

 

[Ian Senator]

So i take it underwriting year accounts and funded accounts are the same thing.

Yes.

And if a question refers to 'underwriting year accounts', we should assume we're dealing with 3 year accounts (i.e. n=3)?

Probably, but not necessarily. Lloyd's use 3-year funded accounts for internal purposes. But the examiners have in the past examined 1-year UY accounts (a long time ago).