General Insurance Convention 1996

Aviation underwriting. - Lyons, Graham E; Archer-Lock, Philip; Czapiewski, Colin J W; English, Andrew B; Hughes, Victoria J; Sayers, Jeffery E. 30 pages.
The Introduction to the Paper summarises the conclusions from discussions held with Aviation underwriters including how rating is done in practice. The question that should be asked is "can actuaries contribute towards placing the rating of aviation on a more proficient basis".
A brief description of the classes of aviation business is given followed by "Underwriting Practice" which describes the slip system which is the main method used for writing Aviation insurance business.
Rating of Aviation insurance is described, firstly in general and then for the main classes giving the rating factors used by the underwriters. Space Risks and Personal Accident are each described in more detail as subjects deserving of special interest.
A study by Sigma is described which investigates the nature of Aviation insurance cycles and provides an econometric forecast. Formulae of rate levels for each of Liability and Hull business are derived.
The paper also includes discussion of the underwriting cycle, the accumulation risk and market statistics for 1994.

Catastrophe modelling [summary only]. 1 page.

Claims run-off patterns update. 80 pages.
The run-off patterns shown in the accompanying tables all relate to claim payments for direct insurance (and facultative reinsurance) business, before allowing for reinsurance recoveries and accounted for on a one-year basis. Four sets of tables are shown for each type of business analysed; they differ only as a result of the methodology used in the analysis.
The tables update those presented to the General Insurance Study Group (GISG) in October 1995, by including data from the 1994 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, and is described in some detail later (paras 35-72).

Correlations between asset variables and liability variables. - Bulmer, J Richard (Chairman) 24 pages.
This was felt to be a fundamental part of the work of the Stochastic Asset Liability Modelling Working Party. Very little work has been done on this in the past although its importance had been recognised in several Institute papers.
As with both the asset and the liability models it was also recognised that there was no right answer. What was important for one project might well be unimportant for another. For many insurance operations inflation might be a factor affecting both sides of the balance sheet. However for some classes of business it might not be important such as LMX spiral business or even certain types of latent claims where the key uncertainty is a legal dispute. However it was felt important to examine all the correlations so that these could be surfaced.
The following is the sub working party report.

Current legal developments affecting financial reporting and reserving for insurance companies. - Taylor, Peter; Young, John. 13 pages.
The purpose of the Workshop is to provide delegates at the Convention with an opportunity to update themselves on current legal developments affecting financial reporting and reserving in the general insurance market.
This is an area that is moving reasonably quickly on several fronts. Whilst the volume of new legislation coming out of Europe has slowed down considerably, there is still important further legislation on the way, in particular in the draft Directive on Insurance Groups. Very few insurance companies will escape its effects, but many have as yet failed to take any active steps to prepare for its arrival.
On the other side, in the Courts, several judgments have recently emerged that will be influential in the manner in which London market companies and Lloyds syndicates, in particular, address their reserving in the future. Delegates will be familiar with many of these; it is impossible to predict which will be the "hottest topics" by the time of the Convention in October.

Developments in household insurance [summary only]. 1 page.

Equalisation reserves. - Harding, R Justyn; Johnson, R Henry; Miranthis, Constantinos; Sondhelm, Peter J; Spence, Alan C; Theaker, David N. 84 pages.
For a number of years, United Kingdom insurance companies have sought the introduction of equalisation reserves on which tax relief would be given. For financial years ending on or after 23 December 1996, this wish will become reality. It is therefore an opportune time to review the scheme which has been implemented by the Insurance Companies (Reserves) Regulations 1996, and to consider the likely effect on companies. This paper reviews the background, legal framework, rules, accounting and taxation aspects. The operation of the rules had they existed historically is examined, and modelling of the future operation of the rules presented. The effect of insurance cycles is considered, and the likely influence on reinsurance is reviewed. The claims event system, which has not been included in the initial scheme, but may be considered as an amendment to the regulations at a later stage, is re-visited. Finally, possible future developments are commented on and the role for the Actuarial profession is discussed.

The future of the motor insurance market. - Charles, John M; Bland, Richard H; Ellis, Philip; Leitch, Kenneth A; Palmer, Adrian G; Wells, Gary G. 42 pages.
The future of the motor insurance market is a potentially vast topic. We decided to limit the scope of this paper to the UK private motor market from an insurer's perspective. We consider the key issues that are likely to have a significant influence in determining which insurers will be successful in future.
The changing shape of distribution is discussed with a summary of the factors affecting the broker and direct writing channels. A comparison of the relative advantages of direct writers and broker insurers is included. This is followed by an outline of marketing issues for a direct writer that covers marketing costs and discussion of various marketing and advertising methods.
The next section provides a review of recent trends in overall market profitability. A brief analysis of the expense ratios of two leading direct writers is used to discuss the relative profitability of direct writers and broker insurers. This is followed by a discussion of the factors that are likely to lead to consolidation in the insurance sector. A discussion of factors affecting claim costs and an outline of current legal developments involving the Ogden tables is included and an actuarial approach to projecting potential Ogden exposures is briefly described. Internal claim management issues relating to large claims are outlined and the opportunities offered by structured settlements are discussed Underwriting developments are discussed in the following section which covers redlining, the potential impact of the Disability Discrimination Act, lifestyle rating and a summary of no claims bonus and its potential future development.
The paper ends with a section on technical analysis that outlines current pricing practice and describes mathematical tools which may be used by actuaries to extend the scope of actuarial work in the motor market. The techniques described are neural networks, genetic algorithms, expert systems, cluster analysis, data mining and spatial analysis. Possible applications are outlined for each technique.

The future of no claims bonus. - Bland, Richard H. 14 pages.
This is a discussion paper for a bonus workshop, to stimulate discussion of practical issues affecting the use of no claims bonus today. There is no discussion of detailed technical issues. The paper initially looks at the present use of bonus and the variations present in the current UK market. It then introduces two different bonus systems similar to those used presently in Europe: one based on similar principles, but with a much longer timescale; and one in which claim penalties are applied by means of higher excess rather than higher premium. Finally the paper considers technical developments currently in progress in the UK and asks whether these may eventually lead to sufficient improvements in the quality and security of direct claim experience rating to render bonus as we know it no longer necessary.

GISMO - General Insurance Stochastic Model Office. Short term modelling for management decisions. - Christofides, Stavros; Cowley, Robert H S; Iloenyosi, Chika; Lowe, Julian A; Smith, Andrew D; Tobey, Dom. 44 pages.
GISMO is a stochastic insurance cash flow model implemented as an Excel 5 spreadsheet. It is intended to provide managers with useful information on the quality, or likely variability, of the key financial figures in their plans and enable them to gauge the impact on these figures from changes in, say, asset mix or catastrophe reinsurance protection. GISMO incorporates an economic model which allows for 'jumps' in the values of the underlying indices. This is a pre-requisite, in our view, in any attempt to model the financial strength of a general insurer. It provides a consistent economic framework for valuing assets and liabilities. It has an option to model the impact of catastrophe type losses both gross and net of a specified amount of traditional catastrophe excess of loss reinsurance.

Guidance on general insurance [copies of slides]. 11 pages.

The impact of Ogden Tables on UK personal injury awards. - Pettengell, Craig T. 5 pages.
Certain classes of insurance. including Motor, Employers Liability and Public Liability, potentially face a dramatic increase in the cost of large claims due to the widespread adoption of the Ogden tables in the assessment of UK Personal Injury Awards. This is likely to affect reserves as well as the profitability of ongoing business.
The workshop will include a presentation of the historical development of this issue, including an update of the current debate, an analysis that was performed to quantify the impact of the tables and a lead in to a discussion.

Lloyd's corporate capital. - Felisky-Watson, Kendra; Byrne, Patrick; Azzopardi, Mark H J; Shaw, Richard A; Perry, Geoff; Ibeson, David C B. 10 pages.
Lloyd's corporate capital is a relatively new concept in the London Market and an unfamiliar one to many people.
This paper gives an overview of the rationale for the introduction of corporate capital, a description of the different types of corporate capital and where the backing comes from, and an indication of the innovative uses of corporate capital by people not traditionally in the Lloyd's market.
In our workshop, we will expand on the innovative future uses corporate capital. We will also discuss how the corporate capital vehicles being setup today differ from the early vehicles. We will also present several "case studies" where we will follow particular corporate capital vehicles from initial setup to their current forms.

Monitoring personal injury compensation. - Carroll, Patrick S. 5 pages.
Various lines of approach to assess trends in settlement awards are considered. These include available studies of what the courts are awarding, statistical information from insurance companies and insurance industry bodies especially the ABI and LIRMA, the impact of Ogden tables in the context of new legal developments likely to make Ogden tables more generally applied, the impact of the report by Lord Woolf, Master of the Rolls, titled Access to Justice and designed to make legal procedures in personal injury cases simpler, less expensive and shorter, information from hospitals and health authorities on trends of accidents and emergencies treated, assessment of inflation that applies to the amounts of settlements, questions of tax and the relative usefulness of commuting annuity settlements and lump sums, and the interface with social security. The aim of this workshop is bring together some assessment of all these influences to gain a perspective of the overall trend. The culture within which insurance claims are being made is changing and the more distinctively actuarial questions such as those of mortality and interest rates are being resolved against this background.

Mortgage indemnity guarantee [summary only]. - Slater, David A. 3 pages.

Neural networks vs GLMs in pricing general insurance. - Lowe, Julian A; Pryor, Louise M. 22 pages.
Neural Networks are often referred to, with awe, as some mysterious representation of the human brain that can "solve" problems. They have also been referred to in previous GISG papers as having potential applications to general insurance pricing or reserving. The purpose of this paper is to remove some of this awe by explaining what Neural Networks are, how they compare with traditional statistical models, and consider what scope there is for their use in general insurance. The paper is in three main sections. The first section describes what Neural Networks are. The second section briefly describes GLMs, and makes a few observations on the practical nitty gritty of using such models. The third section compares the two approaches from a theoretical perspective and with some practical examples based on real general insurance data. Finally, some references to Neural Network software and publications are given for anyone interested in pursuing the topic further. The practical examples presented in this paper are only half finished. The University of Edinburgh's Artificial Intelligence department will be training some Neural Networks with the data during the summer. The results will be compared with some PC-based Neural Network models and the results of traditional modelling techniques in a further paper to be presented at the conference.

Non-triangulation reserving [summary only]. - Smith, Peter. 2 pages.

Pricing in the London Market. Part 2: Practical pricing, non marine market. - Sanders, David E A (Chairman) 34 pages.
Following the paper produced for last year's GISG [5], in which we set out the basis for pricing, the Working Party decided to concentrate on the actual pricing issues. The original paper dealt with two main issues. The first part dealt with the actual pricing formula which may be used to determine a rate. The second part dealt with the control cycle and stochastic profit testing, and the interaction between the rating process and the profit performance of the business. It is proposed that the second part of the paper be expanded into an Institute paper for the 1987/88 session. The working party decided, for the 1996 GISG conference, to concentrate on developing the first part of the paper, namely the formal calculation of the rates.
The original paper dealt with pricing from the "formula" point of view. This forms an appropriate background to the process. The "formula" approach is well documented in the paper, and elsewhere in the various references. What tends to be lacking is the application of these formulated approaches to real life situations.
The problems with rating in the market is that many of the issues relate to the lack of ideal data, an uncertainty of the rating parameters from the underwriter, a changing market and so on. The use of a static formula approach does not necessarily answer these rating question in dynamic and changing conditions.

Reinsurance security. - Sanders, David E A; Byrne, Patrick; Carroll, Patrick S; Day, Simon; Skurnick, David; Townsend, Stephen N; Upson, James R K. 25 pages.
Reinsurance is often the second biggest cost of an insurance company, after claims. The management of this cost is certainly important. What is surprising to find in an insurance company is the lack of attention paid to this cost, both at the strategic and the management level. The reinsurance cost is often an add-in to the business plan, and not necessarily a fundamental part of it. The extent of any reinsurance purchased is often on the basis of the previous years' purchase, with little thought on the value of alternatives, or even whether the programme meets the needs of the insurer in the most efficient way. It is also often placed with reinsurers of various quality, who have run the risk for many years and whose fortunes themselves may have changed radically in a short space of time.
Furthermore, it has been known for insurers to purchase reinsurance that was unlikely ever to be used, (such as when the deductible is above the gross exposure to any loss) due to incompetence or to reduce investors' naive concerns.

Reserve reports and opinions - outward reinsurance. - Hooker, Nigel D; Green, Peter A G; Hart, David M; Slater, David A. 24 pages.
The working party has identified the following as the key issues that arise in the consideration of outwards reinsurance in the context of providing an actuarial opinion on the insurance technical reserves.

1. Bad debts - should actuaries make a decision on which reinsurers to make a provision for? There is a role to play in providing information on recoveries by layer and by probable timing of recovery.
2. Data - what is available and how has it been constructed?
3. Accounting framework - understanding this, especially in relation to the going concern or run-off basis.
4. Market practice and administration of reinsurance - an understanding and appreciation of this.
5. Policy wording and terminology - in particular the interaction of a programme structure.
6. Financial reinsurance.
7. Exhaustion and adequacy - which may require sensitivity tests, and will demand an appreciation of variability.
8. Consistency - in particular, how far can the past be expected to be a guide to the future.
9. Premiums - the fact that these are often loss- or exposure-sensitive.
10. Legal issues and disputes.
11. Diversity of contracts and programme structures - from the large direct composite to the small London Market specialist.
12. Volatility of loss experience - which therefore gives rise to limitations of statistical methods.

Statutory reserve reports and opinions [summary only]. - Duncan, Fred (Chairman); Ryan, John P (Chairman) 4 pages.

Stochastic Asset Liability Modelling Working Party [report]. - Ryan, John P (Chairman) 22 pages.
From the outset the working party assumed that it would not be able to complete its task within a one year time horizon. It would require three years to conclude targets. Consequently this is an interim report. We however provide some food for thought and we would very much welcome any input. The following terms of reference were agreed:
To produce a framework so that an actuary working in the area of Asset Liability Modelling (ALM) can judge their work. Hence the actuary can determine whether their work is in line with current thinking on ALM.
Four sub groups of the working party were set up to undertake the more detailed work: Investment models; Liability models; Correlations between asset variables and liabilities variables; Asset liability modelling techniques and uses.

Stochastic error, parameter error & model error. - Walker, Stephen R. 9 pages.
The subject of error and uncertainty is and always has been a key issue in General Insurance. There is a growing interest in complex models of the claims process and computer models of both assets and liabilities. However, it is important that the degree of error in such models is recognised.
The true uncertainty about the future outcome exceeds greatly that caused purely by random chance, due to errors in the modelling process. It is important that actuaries both communicate and, where possible, quantify such possible errors.
The purpose of this workshop is to discuss some of the issues which may affect the results of a modelling process and to discuss what practical approaches exist to describe the components of uncertainty.

Techniques and uses [Stochastic asset liability modelling]. [copies of slides] - Cumberworth, Martin (Chairman). 7 pages.

An underwriter's view of stress [summary only]. 3 pages.

Ways to improve the link between actuarial analysis and decision making. - Kaye, Geraldine D; Evans, Jillian V; Evans, John; Howard, Sheree K; Loades, David H; McConnell, William D; Rakow, James C. 45 pages.
The long-term objective of this working party must be to find methods of expressing uncertainty to management in ways that enables them to make sensible decisions.

No papers are available for the following Working Parties or Workshops:

• Actuaries in a litigious environment - points arising from NRG vs Bacon & Woodrow.
• Current developments in Lloyd's.
• Shareholder value in insurance companies.

If anyone can supply a copy of these papers we will add them to the site.

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