General Insurance Convention 1991

Capital allocation. - Brickman, Simon J; Bride, Martin; Hitchcox, Andrew N; Jones, Stephen Michael; Larner, Kenneth P W; Green, Peter A G. 69 pages.
No explicit terms of reference were given for the Working Party but these have been taken as follows:
1. To consider the reasons for the allocation of capital of an Insurance/Reinsurance company between product lines or portfolios of risks written by that company.
2. To review the effectiveness of the methods available for allocating capital and to identify the key factors that affect the allocation and over time.
Inevitably these lead into many related issues and widen the subject matter considerably, particularly into the realm of solvency levels required to support the writing of each class of business. This is considered outside of the scope of the working party as it falls more naturally into the working party dealing with solvency. Therefore we have considered only relative capital allocation on the assumption that the capital in total will support the business written in the period.
In addition to avoiding the question of the absolute level of solvency, the working party has focused more on capital allocation to support the risk inherent in underwriting activities of the company rather than others such as those arising from investment policy exchange rates and security of reinsurers.
In some circumstances, the risk in these other activities can be of a similar level, if not more than the underwriting activities. We also explored the general framework for considering the risks from whatever source.

Claims made. - Czapiewski, Colin J W; Craighead, David H. 3 pages.
There is a considerable vacuum in the knowledge of insurance personnel in the area of claims coverage. Both actuaries and non-actuaries too often do not appreciate the significant difference that a change in claims coverage can mean to a policy.
A paper detailing the problems related to this topic is desperately needed. The change from occurrence based to claims made (generally for professional indemnity contracts and specifically for USA Medical Malpractice business in the mid-1980's) is causing problems with data development, and so many actuaries are not dealing with the change properly.

Claims run-off patterns update. - Hinton, Peter H; Macnair, Andrew J; Buchanan, Carol A. 49 pages.
The attached tables update those presented to the General Insurance Study Group (GISG) in October 1990, by including data from the 1989 returns in their calculation. The methodology derives from the report of the working party on claims run-off patterns presented to GISG in October 1989.
Following comments at GISG in 1990, two changes have been made. For the inflation adjusted chain ladder (IACL) and average claim (AVC) methods we have reverted to our previous assumption that future inflation at 8% (10% was assumed for the 1990 tables) is implicit in companies' estimates of outstandings. The run-off patterns for comprehensive and non- comprehensive motor are now distinct for the first 6 years (5 years in 1990) of the run-off (years 0-5). For later years (except for five companies which distinguished comp and non-comp prior to 1981), a common run-off pattern has been used.

Financial reinsurance. - Clark, Peter K; Duncan, Frederick; Hitchcox, Andrew N; White, Martin G. 96 pages.
Financial reinsurance is a growing phenomenon, as illustrated by the (known) growth in premiums written by financial reinsurers. Current annual premiums are estimated to be in the order of $5Bn per annum. It arises out of the desire of insurers to introduce an element of control into their reported results whether to smooth, enhance or reduce profits; and out of the skill of reinsurers in designing contracts which minimise the risk of significant loss to the reinsurers. There are many commercial pressures on insurers which encourage them to consider purchasing financial reinsurance, and in current market conditions one particularly important need is to obtain reinsurance cover to continue the previous level of gross writing.
The primary mechanism of financial reinsurance is fairly easy to understand. By utilising the differences in tax or regulatory rules in different jurisdictions, the result is to effect a change - or to set up a means whereby a change can be controlled in the future - in the reinsured's balance sheet/revenue account without commensurately altering the underlying economic reality.
It is not true to say that there is never any real insurance element to a financial reinsurance contract. There may be elements of risk transfer, especially when the contract is marketed as filling a gap in cover in a difficult conventional market. However, it will usually be found on examination that such cover is only a small part of the contract, the potential downside (but admittedly also the upside) to the reinsurer is very limited, and its price may be high when the effects of compound interest are taken into account.

Latent claims. - Czapiewski, Colin J W; Boulton, Roger J; Clarke, Harold E; Craighead, David H; James, Dewi E; Michaelides, Nicholas; Pickton, Haidee P E; Rice, Hugh; White, Martin G. 69 pages.
The report produced by the working party for the 1990 GISG Conference in Newquay described many salient features of latent claims. These claims, that effectively lie dormant for many years then emerge to terrify insurers (and reinsurers), were shown to cause severe problems for accurate reserving and indeed the quantum had the potential to cause financial ruin to the entire insurance industry.
This paper follows up on some of the topics raised in last year's paper and also investigates new aspects of latent claims.

Medical expenses insurance [copies of slides]. 35 pages.

Motor rating: direct writers. 14 pages.
A recent development within the UK personal insurances market, and especially the private car market, has been the establishment and rapid growth of a number of insurers selling direct to policyholders, i.e. without any form of intermediary. Direct writers are commonly perceived as posing a serious competitive threat to other insurers.
Is it the case that direct insurers have been particularly successful in selecting "good" (i.e. profitable) business, while charging highly competitive premium rates? If so, to what may this success be attributed, and is the success likely to continue? What are the implications for other insurers?
Opinions differ regarding answers to the above questions. In this workshop an attempt will be made to examine such questions and perhaps to dispel a few myths. Some extracts from DTI Returns will be shown.

Pecuniary loss. Export and trade credit insurance. - Akers, Peter J; Ball, Angus; Barlow, Caroline; Button, Andrew D; Delbridge, T Paul; Joseph, Bryan R P; Leigh, Julian C T; Masters, Graham A. 97 pages.
In 1990 the Pecuniary Loss Working Party presented a paper to the General Insurance Convention which covered mortgage indemnity insurance. Several areas of possible further investigation were highlighted. This year the working party has endeavoured to pursue these, and to investigate other aspects of pecuniary loss insurance. In the event, only one aspect of mortgage indemnity has been pursued - that of building a model to assist in the pricing of and reserving for this type of business.
What constitutes pecuniary loss is not clearly defined. We have taken it to mean any insurances which mitigate financial loss - the inability to collect from one's debtors or the obligation to fulfil a guarantee or warranty. These do not necessarily fall into the DTI accounting class for miscellaneous financial loss, while we would not regard all business so classified as our province. For example consequential loss insurance would more sensibly be reviewed by a group looking at commercial fire. Two other areas have also been investigated this year. A report on creditor insurance has been prepared, which gives what we hope is a full introduction to this type of insurance.
The last two subjects which have been tackled are trade indemnity and export credit insurance.

Protection & indemnity clubs. - Smith, P D. 16 pages.
P & I Clubs were one of the insurance industry's best kept secrets. Although they have been in existence for over 100 years, insuring 90% of the free world's shipping, they were rarely in the news until the last two years. The majority of Clubs have recently suffered total claims far exceeding the estimates on which they based their Calls (Club terminology for premiums). Some of the deficits have fallen on the shipowners - the Club members - but a large amount has hit the London Market via reinsurance. Much has been written about the resulting "P & I Crisis", but very little has been published about how the Clubs and their reinsurers got into the positions they did: whether they could have been foreseen, what lessons they have learned etc.

Report of the Working Party on Equalization Reserves. - Hooker, Nigel D; Barlow, Caroline; Green, Peter A G; Larner, Kenneth P W; Michaelides, Nicholas; Morgan, Kathryn A. 42 pages.
This paper is largely a reintroduction to the subject which was last tackled by the General Insurance Study group eleven years ago. We do, however, raise questions here which are topical at the present time. However, we have found it impossible to answer all the questions here. Therefore there are many problems left for future working parties to grapple with. In addition, we have looked at current market practice, and in particular at the impact of the 1990 Credit Insurance Regulations, through a market survey which we carried out in July of this year. We also studied qualitatively some of the effects of different equalization reserve mechanisms by means of a simulation model.

Report of the Working Party on Europe. - Abbott, William M; Akers, Peter J; Akhurst, Ron B; Joseph, Bryan R P; Larner, Kenneth P W; Levay, Edward J; Moliver, Michael R; Moyle, Keith M; Orros, George C; Tripp, Michael H. 61 pages.
The work of the working party on Europe for GISG last year concentrated on the two major aspects which were felt, at the time, to be of particular interest to actuaries, namely:-
- the implications of recent major Directives affecting, or likely to affect, non-life insurance and non-life actuarial practice; and
- a comparative study of current actuarial aspects of European markets and practices, involving extensive overseas research.
It was decided, last year that it would be appropriate for the working parties endeavours to continue. The Framework Directive and the Accounts Directive have, at the time of writing, still not completed the process of Community review to which they are being subjected. However, it has been possible for the working party to comment upon the latest drafts, identifying some of the issues which arise for general insurance actuaries. It was thought that many of the issues behind the Framework Directive could be identified by conducting a study into "forum shopping". It was found that the number and complexity of issues arising made significant change in the short term unlikely but the issues would be very real for a new venture (perhaps for a European bank moving into insurance) or for American or Japanese entrants.
Given the changes which have been occurring across Europe in the distribution of Life and Pensions products and the appalling results of many carriers, it is perhaps surprising that the changes in distribution of general insurance products has been relatively modest to-date. An attempt has been made to identify the emerging trends across the community for the distribution of personal lines general insurance products: the working party look forward to hearing more about these trends from overseas delegates to the conference or from those UK actuaries with overseas experience.

Reserving problems encountered in general liability business in the USA. - Alff, Gregory N. 20 pages.
Actuaries in the U.K. have, no doubt, personally encountered or been shocked by great losses caused by upward development in U.S. general liability reserves, especially products liability. Don't feel alone. Many U.S. insurance executives badly miscalculated the reserves and pricing necessary for general liability as the line grew rapidly into a major line of business beginning with the "products liability crisis" in 1974 and continuing through the 1980's.
The goal of this discussion and paper is to share examples and data collected from seventeen years personal involvement in general liability reserving in the U.S. Perhaps some of what is presented will be useful as a point of reference and help the reader avoid underestimating loss development and avoid analysis pitfalls into which many have fallen.

Statistical motor rating. - Brockman, Michael J. 8 pages.
In this workshop I would like to discuss the role of the statistical approach to motor rating.
I have used these techniques for over nine years with considerable success in a number of different organisations including both Companies and Lloyds' syndicates. The success is measured by improved profitability. Improved profitability is extremely important to all organisations operating in a market where it is currently questionable whether the returns likely to be achieved justify the capital invested.

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