General Insurance Convention 1981
Dublin, 1981
Inflation. - Healy, Gerald P N. 8 pages.
When an underwriter considers a revision of premium rates for a particular class of business he is forced, either implicitly or explicitly, to make a number of assumptions regarding the future progress of the account. If he were able accurately to predict each of the relevant variables he would be able to assess exactly the eventual profit or loss that would emerge. Unfortunately many of these assumptions are subject to considerable variability and these uncertainties form the principal reason for the maintenance of solvency reserves. In recent times in the UK one of the most far reaching of these assumptions has concerned inflation. This directly affects claim costs and expenses and less directly the level of reserves and the return on investments. This note examines the problems of assessing inflation and the extent and significance of the potential errors in its estimation.
Investment Risks Working Party. - Thomson, Andrew K; Cooper, Susan M; Craighead, David H; Devitt, E R F; Hartley, Stewart; Harvey, Roger M; Williams, E David. 33 pages.
An insurance company must maintain sufficient reserves and provisions to cover the following risks: Technical Risks; Investment Risks and Other Risks. There were three working parties, each one concentrating on one of the above three categorisations. The position of reinsurers should be considered as well as direct insurers. Bearing in mind the impact of inflation on all the risks described above, each working party considered the steps which the management of the company should take to assess the magnitude of each risk and the reserve which should be maintained to cover such risks, either singly or in combination.
It is for subsequent consideration as to how the company should consider whether the actual reserves are sufficient to cover all the above risks, bearing in mind the need to avoid building margin upon margin.
Reinsurance and other aspects. Solvency Working Party. - Alting von Geusau, Bob J J; Hart, David M; Gillott, Nigel R; Hunter, Ray J; Lockett, Janet E; Lyons, Graham E; Mellor, Chris; Wilkinson, Richard C. 19 pages.
The subject of reinsurance and particularly its solvency aspects is a most appropriate one for study at the present time in view of the generally agreed weakness of the world reinsurance market. This is fairly typically summed up in the following quotation from a recent insurance publication.
"It is not easy to get the world reinsurance industry to agree on anything. But one point on which mast senior people in the industry are in accord is that sooner or later and quite probably sooner, there is going to be a massive crash in the industry that will wipe out a lot of the newer and smaller names in the reinsurance field and badly hurt some of the larger ones as well"ยท
Clearly, if such a crash occurs, it will be more than just reinsurers who are affected.
Risk theory and the determination of solvency. - Sanders, David E A. 10 pages.
The use of Risk Theory in General Insurance goes back an extremely long way. Barrows (1835) distinguished between the probability of a building catching fire and the amount consumed by fire once it had started. The general principles were used in life assurance models by Dormoy (1878). In 1903, Lundberg, in a doctoral thesis at Uppsala University, introduced the general concepts which have become established under the general title of Risk Theory.
Solvency margins and the underwriting cycle. - Sanders, David E A. 31 pages.
Work on the effect of the underwriting cycle and solvency appear to have been minimal in the past.
It is clear that from various factors, there is little to link underwriting cycles with solvency, except, perhaps, the first. What this note intends to show is that there is an underwriting cycle of specific form closely linked with the solvency of the Company, and this is effected by competition, and the fact that solvency margins are related to premiums, which in themselves, may be inadequate.
Solvency margins. Technical risks. The adequacy of premium reserves. - Clarke, Martin G. 12 pages.
Compared with the outstanding claims reserve, the potential for insolvency caused by factors affecting premium reserves is perhaps minor, though an awareness of their effects is no doubt valuable as far as obtaining an overall picture of a company's solvency is concerned. It is not impossible to envisage certain circumstances where the points described in this note become relevant though they may be unlikely or such that the adequacy of a company's premium reserves is the least of the company's worries at the time!
Of interest, would be the extent to which various companies investigate the factors discussed either formally or informally. To what extent do/should such consideration form a regular part of the financial management of insurance companies and therefore carry over into any independent investigation of solvency. Or is it sufficient to examine them only occasionally or not at all but to be aware merely of the general financial effect of the environment in which insurance companies operate?
Trends in the underlying parameters. - Ryan, John P. 7 pages.
When the management of a company is about to set its premium rates for the following year, an estimate of the likely parameters that go towards the make up of the premium rates will have to be made. These parameters include claims frequency, claims cost, expenses, and interest income. Here we are just considering the basic premium ignoring other factors. At its disposal, the management should have several years of basic data available. What is required is to have as good an estimate of the parameters as possible with the resulting outcome differing by pure random variation. It is not enough just to average the last few years or even longer and take the resulting figure as the one required. Some consideration should be given to the underlying trends or bias in certain directions in these parameters. A trend in any one of the parameters may be observed by considering several years data and a decision will be made on which direction this trend will take, whether by an explicit allowance or by simply doing nothing at all and lagging behind the trend.
Working Party on Solvency Margins. Technical risks. - Trayhorn, Mark E. 12 pages.
The main risk that we are concerned with here is the possibility of a trading loss arising because one or more elements in the premium basis turn out to be inaccurate.
Two cases may be distinguished:-
- Where the premium rates are adequate but losses arise from short-term fluctuations
- Where the premium rates are wrong.
An interesting question at this point is how a particular company can tell which of the two positions it is in when a loss actually arises but we shall return to this later. For the time being we shall deal with the easier of the two cases.