Reinsurance to close

Document description

This paper follows on from the work presented in the Institute of Actuaries' sessional paper entitled 'The Lloyd's Reinsurance to Close Process'. In particular, after discussing the way in which reinsurance to close (RITC) premiums are currently set, it considers the implications of the introduction of an actuarial sign-off of the RITC. Any actuarial sign-off on RITC reserves would need to be on the basis that the reserves were reasonable rather than on the basis that they were adequate. The paper discusses the implications of this for the various stakeholders at Lloyd's. Using the results from a reserving questionnaire, it also considers the consistency between different actuaries in assessing a reasonable provision. The paper then discusses the appropriate risk margin that should be included in the RITC premium. It considers a number of methods for measuring the variability of claim reserves and includes results to demonstrate the level of consistency between them. It also discusses the issues that need to be considered when setting the risk margin. An assumption that is currently often made by syndicates is that the need for a risk margin is offset by a decision not to discount the reserves. The paper investigates the extent to which such an assumption is appropriate. The paper discusses the variability seen both between different actuaries' reserve estimates and between the different methods for measuring the variability of claim reserves. It concludes with some comments on the implications of this variability. Since many of the issues considered in this paper are of equal relevance outside the area of Lloyd's RITC, it is hoped that it will also be of value to general insurance practitioners working outside the Lloyd's market.