The management of uncertainty in a general insurance company

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Although a 1987 Institute paper by this Working Party certainly did not say all that could be said on the subject of solvency, from a statutory or supervisory perspective, the Working Party felt that the focus of attention should move to the broader issue of financial strength, the long term financial well-being of an insurance company. Statutory solvency and Companies Act solvency can be regarded as subsets of this broader concept. For statutory solvency considerations, new business may be assumed to cease, either immediately, or after a short period of continued business. The central concern is with the adequacy of the assets to meet the liabilities in this context. Although we allowed in our 1987 paper for the possibility of two years' new business, little attention was paid to the underlying rationale for the assumption made about the claim ratios achieved on this business, whether the business could be written on such a basis and whether it was consistent with the assumed rate of growth. Business was assumed to cease after two years and then run off; no attempt was made to look at the financial results that would be implied for such a company or what would happen if it were allowed to write business on a continuing basis.These are some of the questions to which the Solvency Working Party has turned in the third phase of its work, since 1987.