cycle survival kit ii working party members philip archer-lock ian hilder stuart brown steven fisher...

Cycle survival kit II

Working party members

Philip Archer-Lock Ian HilderStuart Brown Steven Fisher David Simmons

Richard Doman Kevin Wenzel (Chairman)

The Actuarial Profession ▀making financial sense of the future

• Recap on work from last year

• Update of some results

• Report on further investigations

Agenda

Recap

• What do we mean by the reserving cycle?

Initial overstatement/(understatement) of ultimate claim estimatesas a proportion of current ultimate estimates

-15%

-10%

-5%

0%

5%

10%

15%

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Accident year

USA All UK 1-year

Initial overstatement/(understatement) of ultimate claim estimatesas a proportion of current ultimate estimates

-15%

-10%

-5%

0%

5%

10%

15%

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Accident year

USA All UK 1-year

Recap

Recap

Conclusions we came to:

• There is a reserving cycle in the UK

• Apparently correlated with the underwriting cycle

• Actuarial methods can generate cycles

• Rating indices understate size of the underwriting cycle

Update

• This year focus solely on Motor & Liability

• FSA data updated to 2002 year end

• Data provided by Standard & Poor’s Systhesis

MOTOR - Development Year 1Historical overstatement/(understatement)

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Accident year

Red dotted line is 2001 year end data

Solid black line is 2002 year end data

LIABILITY - Development Year 1Historical overstatement/(understatement)

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%1

98

6

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

199

5

19

96

19

97

19

98

19

99

20

00

20

01

20

02

last year this time

Further investigations

• How long for the cycle to flatten?

• Impact on total reserves?

• Is it a few isolated companies?

• Impact of claims inflation?

• Further investigations of the chain ladder.

How long for the cycle to flatten?

Liability - whole marketHistorical overstatement/(understatement)

-40%

-30%

-20%

-10%

0%

10%

20%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Accident year

year 1

1

Liability - whole marketHistorical overstatement/(understatement)

-40%

-30%

-20%

-10%

0%

10%

20%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Accident year

year 1 year 2

2

Liability - whole marketHistorical overstatement/(understatement)

-40%

-30%

-20%

-10%

0%

10%

20%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Accident year

year 1 year 2 year 3

3

Liability - whole marketHistorical overstatement/(understatement)

-40%

-30%

-20%

-10%

0%

10%

20%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Accident year

year 1 year 2 year 3 year 4

4

Liability - whole marketHistorical overstatement/(understatement)

-40%

-30%

-20%

-10%

0%

10%

20%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Accident year

year 1 year 2 year 3 year 4 year 5

5

Liability - whole marketHistorical overstatement/(understatement)

-40%

-30%

-20%

-10%

0%

10%

20%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Accident year

year 1 year 2 year 3 year 4 year 5 year 6

6

Liability - whole marketHistorical overstatement/(understatement)

-40%

-30%

-20%

-10%

0%

10%

20%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Accident year

year 1 year 2 year 3 year 4 year 5 year 6 year 7

7

Liability - whole marketHistorical overstatement/(understatement)

-40%

-30%

-20%

-10%

0%

10%

20%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Accident year

year 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8

8

Liability - whole marketHistorical overstatement/(understatement)

-40%

-30%

-20%

-10%

0%

10%

20%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Accident year

year 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9

9

How long for the cycle to flatten

• It takes several years

• Some years get worse before getting better.

Impact on total reserves?

Impact on total reserves

• Previous graphs shown by origin years

• Impact on a company is mixture of all past origin years:– some overstated– some understated

Motor - Historical Under/Overstatement of Liabs as % of Premium

-15%

-10%

-5%

0%

5%

10%

15%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Calendar Year

% O

ve

r/U

nd

ers

tate

me

nt

Liability - Historical Under/Overstatement of Liabs as % of Premium

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Calendar Year

% O

ve

r/U

nd

ers

tate

me

nt

Isolated companies?

MOTOR - individual companiesYear 1 Historic overstatement/(understatement)

-20%

-10%

0%

10%

20%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

MOTOR - individual companiesYear 1 Historic overstatement/(understatement)

-20%

-10%

0%

10%

20%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

MOTOR - individual companiesYear 1 Historic overstatement/(understatement)

-20%

-10%

0%

10%

20%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

MOTOR - individual companiesYear 1 Historic overstatement/(understatement)

-20%

-10%

0%

10%

20%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Isolated companies?

So not an isolated company on motor,

– what about other lines of business?

LIABILITY - individual companiesYear 1 Historic overstatement/(understatement)

-45%

-30%

-15%

0%

15%

30%

45%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

LIABILITY - individual companiesYear 1 Historic overstatement/(understatement)

-45%

-30%

-15%

0%

15%

30%

45%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

LIABILITY - individual companiesYear 1 Historic overstatement/(understatement)

-45%

-30%

-15%

0%

15%

30%

45%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

LIABILITY - individual companiesYear 1 Historic overstatement/(understatement)

-45%

-30%

-15%

0%

15%

30%

45%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Impact of claims inflation?

Claims inflation

• Is claims inflation driving the cycle?

• Implicit chain ladder assumption of future inflation being an average of past inflation

• Try hypothetical data with RPI inflation

Paid chain ladder - RPI inflation on constant claim number payment pattern

-5%

0%

5%

10%

15%

20%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Claims inflation

• Changing levels of inflation affect the results of methods we use

• Not the sole cause of a cycle but could be a contributing factor

• ACPC or inflation adjusted methods?

Further investigation of the chain ladder

Further investigation of the Chain Ladder

• The chain ladder method reflected the cycle seen in the company figures– Did it under / over estimate for the same origin

and development years as the companies?

• If so, why did it turn out to be wrong?

• Could we have seen the problem at the time?

ICL

Company

>100%

<100%

TPLU lt a s % o f l a t e s t

1 2 3 4 5 6 7 8 9 1 0

1 0 0 %1 9 7 9 1 0 7 % 1 0 0 %1 9 8 0 1 0 6 % 9 8 % 1 0 0 %1 9 8 1 1 0 8 % 9 9 % 1 0 0 % 1 0 0 %1 9 8 2 1 0 7 % 9 9 % 1 0 3 % 1 0 4 % 1 0 0 %1 9 8 3 1 0 8 % 9 8 % 1 0 4 % 1 0 4 % 1 0 1 % 1 0 0 %1 9 8 4 1 0 0 % 9 3 % 9 8 % 9 9 % 9 7 % 9 6 % 1 0 0 %1 9 8 5 9 9 % 9 2 % 9 8 % 1 0 0 % 9 9 % 9 6 % 9 9 % 1 0 0 %1 9 8 6 1 0 2 % 9 6 % 1 0 0 % 1 0 2 % 1 0 2 % 9 8 % 9 9 % 9 9 % 1 0 0 %1 9 8 7 1 0 6 % 1 0 0 % 1 0 5 % 1 0 7 % 1 0 5 % 1 0 2 % 1 0 3 % 1 0 3 % 1 0 3 % 1 0 0 %1 9 8 8 9 1 % 1 0 1 % 1 0 5 % 1 0 8 % 1 0 6 % 1 0 7 % 1 0 5 % 1 0 4 % 1 0 1 % 1 0 0 %1 9 8 9 8 3 % 8 7 % 9 1 % 9 4 % 9 8 % 1 0 0 % 9 9 % 9 9 % 1 0 1 % 1 0 0 %1 9 9 0 1 0 3 % 1 0 8 % 1 1 0 % 1 1 7 % 1 1 4 % 1 0 9 % 1 0 5 % 1 0 4 % 1 0 2 % 1 0 0 %1 9 9 1 1 0 5 % 1 1 1 % 1 1 8 % 1 1 8 % 1 1 2 % 1 0 6 % 1 0 4 % 1 0 2 % 9 9 % 1 0 0 %1 9 9 2 1 2 4 % 1 3 1 % 1 3 0 % 1 2 3 % 1 1 4 % 1 0 9 % 1 0 6 % 1 0 3 % 1 0 2 % 1 0 0 %1 9 9 3 1 2 6 % 1 2 4 % 1 1 8 % 1 1 1 % 1 0 2 % 1 0 1 % 1 0 1 % 1 0 0 % 1 0 1 % 1 0 0 %1 9 9 4 1 2 2 % 1 1 8 % 1 0 8 % 1 0 1 % 1 0 2 % 1 0 1 % 1 0 0 % 1 0 1 % 1 0 0 %1 9 9 5 1 2 2 % 1 1 5 % 1 0 4 % 1 0 4 % 9 9 % 9 8 % 9 9 % 1 0 0 %1 9 9 6 1 1 0 % 1 0 6 % 1 0 2 % 1 0 0 % 1 0 1 % 9 9 % 1 0 0 %1 9 9 7 9 8 % 1 0 0 % 9 5 % 9 6 % 9 6 % 1 0 0 %1 9 9 8 9 3 % 9 0 % 9 5 % 9 6 % 1 0 0 %1 9 9 9 8 2 % 8 9 % 9 5 % 1 0 0 %2 0 0 0 7 3 % 8 6 % 1 0 0 %2 0 0 1 8 8 % 1 0 0 %2 0 0 2 1 0 0 %

U lt a s % o f l a t e s t1 2 3 4 5 6 7 8 9 1 0

1 0 0 %1 9 7 9 9 9 % 1 0 0 %1 9 8 0 9 8 % 9 7 % 1 0 0 %1 9 8 1 9 8 % 9 8 % 9 9 % 1 0 0 %1 9 8 2 9 6 % 9 6 % 1 0 1 % 1 0 2 % 1 0 0 %1 9 8 3 9 5 % 9 5 % 9 8 % 1 0 1 % 1 0 0 % 1 0 0 %1 9 8 4 8 8 % 8 9 % 9 1 % 9 4 % 9 5 % 9 5 % 1 0 0 %1 9 8 5 8 5 % 8 9 % 9 1 % 9 4 % 9 6 % 9 6 % 9 7 % 1 0 0 %1 9 8 6 8 6 % 8 9 % 9 1 % 9 3 % 9 5 % 9 5 % 9 5 % 9 6 % 1 0 0 %1 9 8 7 8 7 % 8 9 % 9 2 % 9 5 % 9 7 % 9 7 % 9 8 % 9 8 % 1 0 0 % 1 0 0 %1 9 8 8 8 3 % 8 8 % 9 2 % 9 9 % 1 0 0 % 1 0 0 % 1 0 0 % 1 0 1 % 1 0 0 % 1 0 0 %1 9 8 9 6 0 % 7 3 % 7 7 % 8 5 % 8 8 % 9 0 % 9 2 % 9 4 % 9 9 % 1 0 0 %1 9 9 0 8 2 % 8 9 % 9 6 % 1 0 3 % 1 0 4 % 1 0 2 % 9 9 % 9 8 % 9 8 % 1 0 0 %1 9 9 1 9 1 % 9 5 % 1 0 5 % 1 1 1 % 1 0 9 % 1 0 6 % 1 0 3 % 1 0 3 % 1 0 3 % 1 0 0 %1 9 9 2 1 0 6 % 1 1 1 % 1 1 5 % 1 1 8 % 1 1 4 % 1 0 9 % 1 0 6 % 1 0 5 % 1 0 2 % 1 0 0 %1 9 9 3 1 0 1 % 1 0 5 % 1 0 8 % 1 1 1 % 1 0 5 % 1 0 3 % 1 0 2 % 1 0 2 % 1 0 0 % 1 0 0 %1 9 9 4 1 0 4 % 1 0 7 % 1 0 5 % 1 0 6 % 1 0 6 % 1 0 4 % 1 0 2 % 1 0 0 % 1 0 0 %1 9 9 5 1 1 4 % 1 1 1 % 1 0 8 % 1 1 1 % 1 0 6 % 1 0 3 % 1 0 0 % 1 0 0 %1 9 9 6 1 1 0 % 1 0 8 % 1 0 7 % 1 0 8 % 1 0 7 % 1 0 0 % 1 0 0 %1 9 9 7 9 9 % 1 0 2 % 1 0 0 % 1 0 3 % 1 0 0 % 1 0 0 %1 9 9 8 8 8 % 9 3 % 9 6 % 1 0 1 % 1 0 0 %1 9 9 9 7 9 % 9 0 % 9 5 % 1 0 0 %2 0 0 0 7 5 % 9 0 % 1 0 0 %2 0 0 1 9 0 % 1 0 0 %2 0 0 2 1 0 0 %

ICL

Company

>105%

< 95%

TPLU lt a s % o f l a t e s t

1 2 3 4 5 6 7 8 9 1 0

1 0 0 %1 9 7 9 1 0 7 % 1 0 0 %1 9 8 0 1 0 6 % 9 8 % 1 0 0 %1 9 8 1 1 0 8 % 9 9 % 1 0 0 % 1 0 0 %1 9 8 2 1 0 7 % 9 9 % 1 0 3 % 1 0 4 % 1 0 0 %1 9 8 3 1 0 8 % 9 8 % 1 0 4 % 1 0 4 % 1 0 1 % 1 0 0 %1 9 8 4 1 0 0 % 9 3 % 9 8 % 9 9 % 9 7 % 9 6 % 1 0 0 %1 9 8 5 9 9 % 9 2 % 9 8 % 1 0 0 % 9 9 % 9 6 % 9 9 % 1 0 0 %1 9 8 6 1 0 2 % 9 6 % 1 0 0 % 1 0 2 % 1 0 2 % 9 8 % 9 9 % 9 9 % 1 0 0 %1 9 8 7 1 0 6 % 1 0 0 % 1 0 5 % 1 0 7 % 1 0 5 % 1 0 2 % 1 0 3 % 1 0 3 % 1 0 3 % 1 0 0 %1 9 8 8 9 1 % 1 0 1 % 1 0 5 % 1 0 8 % 1 0 6 % 1 0 7 % 1 0 5 % 1 0 4 % 1 0 1 % 1 0 0 %1 9 8 9 8 3 % 8 7 % 9 1 % 9 4 % 9 8 % 1 0 0 % 9 9 % 9 9 % 1 0 1 % 1 0 0 %1 9 9 0 1 0 3 % 1 0 8 % 1 1 0 % 1 1 7 % 1 1 4 % 1 0 9 % 1 0 5 % 1 0 4 % 1 0 2 % 1 0 0 %1 9 9 1 1 0 5 % 1 1 1 % 1 1 8 % 1 1 8 % 1 1 2 % 1 0 6 % 1 0 4 % 1 0 2 % 9 9 % 1 0 0 %1 9 9 2 1 2 4 % 1 3 1 % 1 3 0 % 1 2 3 % 1 1 4 % 1 0 9 % 1 0 6 % 1 0 3 % 1 0 2 % 1 0 0 %1 9 9 3 1 2 6 % 1 2 4 % 1 1 8 % 1 1 1 % 1 0 2 % 1 0 1 % 1 0 1 % 1 0 0 % 1 0 1 % 1 0 0 %1 9 9 4 1 2 2 % 1 1 8 % 1 0 8 % 1 0 1 % 1 0 2 % 1 0 1 % 1 0 0 % 1 0 1 % 1 0 0 %1 9 9 5 1 2 2 % 1 1 5 % 1 0 4 % 1 0 4 % 9 9 % 9 8 % 9 9 % 1 0 0 %1 9 9 6 1 1 0 % 1 0 6 % 1 0 2 % 1 0 0 % 1 0 1 % 9 9 % 1 0 0 %1 9 9 7 9 8 % 1 0 0 % 9 5 % 9 6 % 9 6 % 1 0 0 %1 9 9 8 9 3 % 9 0 % 9 5 % 9 6 % 1 0 0 %1 9 9 9 8 2 % 8 9 % 9 5 % 1 0 0 %2 0 0 0 7 3 % 8 6 % 1 0 0 %2 0 0 1 8 8 % 1 0 0 %2 0 0 2 1 0 0 %

U lt a s % o f l a t e s t1 2 3 4 5 6 7 8 9 1 0

1 0 0 %1 9 7 9 9 9 % 1 0 0 %1 9 8 0 9 8 % 9 7 % 1 0 0 %1 9 8 1 9 8 % 9 8 % 9 9 % 1 0 0 %1 9 8 2 9 6 % 9 6 % 1 0 1 % 1 0 2 % 1 0 0 %1 9 8 3 9 5 % 9 5 % 9 8 % 1 0 1 % 1 0 0 % 1 0 0 %1 9 8 4 8 8 % 8 9 % 9 1 % 9 4 % 9 5 % 9 5 % 1 0 0 %1 9 8 5 8 5 % 8 9 % 9 1 % 9 4 % 9 6 % 9 6 % 9 7 % 1 0 0 %1 9 8 6 8 6 % 8 9 % 9 1 % 9 3 % 9 5 % 9 5 % 9 5 % 9 6 % 1 0 0 %1 9 8 7 8 7 % 8 9 % 9 2 % 9 5 % 9 7 % 9 7 % 9 8 % 9 8 % 1 0 0 % 1 0 0 %1 9 8 8 8 3 % 8 8 % 9 2 % 9 9 % 1 0 0 % 1 0 0 % 1 0 0 % 1 0 1 % 1 0 0 % 1 0 0 %1 9 8 9 6 0 % 7 3 % 7 7 % 8 5 % 8 8 % 9 0 % 9 2 % 9 4 % 9 9 % 1 0 0 %1 9 9 0 8 2 % 8 9 % 9 6 % 1 0 3 % 1 0 4 % 1 0 2 % 9 9 % 9 8 % 9 8 % 1 0 0 %1 9 9 1 9 1 % 9 5 % 1 0 5 % 1 1 1 % 1 0 9 % 1 0 6 % 1 0 3 % 1 0 3 % 1 0 3 % 1 0 0 %1 9 9 2 1 0 6 % 1 1 1 % 1 1 5 % 1 1 8 % 1 1 4 % 1 0 9 % 1 0 6 % 1 0 5 % 1 0 2 % 1 0 0 %1 9 9 3 1 0 1 % 1 0 5 % 1 0 8 % 1 1 1 % 1 0 5 % 1 0 3 % 1 0 2 % 1 0 2 % 1 0 0 % 1 0 0 %1 9 9 4 1 0 4 % 1 0 7 % 1 0 5 % 1 0 6 % 1 0 6 % 1 0 4 % 1 0 2 % 1 0 0 % 1 0 0 %1 9 9 5 1 1 4 % 1 1 1 % 1 0 8 % 1 1 1 % 1 0 6 % 1 0 3 % 1 0 0 % 1 0 0 %1 9 9 6 1 1 0 % 1 0 8 % 1 0 7 % 1 0 8 % 1 0 7 % 1 0 0 % 1 0 0 %1 9 9 7 9 9 % 1 0 2 % 1 0 0 % 1 0 3 % 1 0 0 % 1 0 0 %1 9 9 8 8 8 % 9 3 % 9 6 % 1 0 1 % 1 0 0 %1 9 9 9 7 9 % 9 0 % 9 5 % 1 0 0 %2 0 0 0 7 5 % 9 0 % 1 0 0 %2 0 0 1 9 0 % 1 0 0 %2 0 0 2 1 0 0 %

Third Party Liability Class 7. Incurred as % of 1993 ICL. Data as at 31.12.1993

— 1977— 1978— 1979— 1980— 1981— 1982— 1983— 1984— 1985— 1986— 1987— 1988— 1989— 1990— 1991— 1992— 1993— Ultimate

Development Year

0

10

20

30

40

50

60

70

80

90

100

0 2 4 6 8 10 12 14 16 18

Third Party Liability Class 7, Incurred % 1993 ICL, data to 1993

— 1988

— 1989

— 1990

— 1991

— 1992

— 1993

— Ultimate

Development Year

0

10

20

30

40

50

60

70

80

90

100

0 2 4 6 8 10 12 14 16 18

Third Party Liability Class 7 Incurred % - 1993 ICL data to year 10

— 1988— 1989— 1990— 1991— 1992— 1993

— Ultimate

Development Year

0

20

40

60

80

100

120

0 4 8 12 16 20 24

Third Party Liability Class 7 Incurred % - 2002 ICL data to 2002

— 1977

— 1978

— 1979

— 1980

— 1981

— 1982

— 1983

— 1984

— 1985

— 1986

— 1987

— 1988

— 1989

— 1990

— 1991

— 1992

— 1993

— 1994

— 1995

— 1996

— 1997

— 1998

— 1999

— 2000

— 2001

— 2002

— Ultimate

Development Year

0

20

40

60

80

100

120

0 2 4 6 8 10 12

Third Party Liability Class 7. Incurred as % 2002 ICL. Data to 31.12.1993

— 1988

— 1989

— 1990

— 1991

— 1992

— 1993

— Ultimate

Development Year

0

20

40

60

80

100

120

0 2 4 6 8 10 12 14 16 18

Could we have seen the problem?

• The problem was a change in (future) development pattern.

• Are there differences in the past patterns that could have predicted this?

• One possible diagnostic was to consider paid/incurred %

Paid as % of Incurred v Change in ultimate ICL by Development Period

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

70% 80% 90% 100% 110% 120% 130% 140%

Incurred Chain Ladder Ultimate as % latest ICL ultimate

Pa

id /

In

cu

rre

d %

123456789

10

Development Period

Third Party Liability

Paid as % of Incurred v Change in ultimate ICL by Development Period

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

70% 80% 90% 100% 110% 120% 130% 140%

Incurred Chain Ladder Ultimate as % latest ICL ultimate

Pa

id /

In

cu

rre

d % 1

2

3

Linear (1)

Linear (2)

Linear (3)

Development Period

Third Party Liability

Paid as % of Incurred v Change in ultimate ICL by Development Period

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

90% 95% 100% 105% 110% 115%

Incurred Chain Ladder Ultimate as % latest ICL ultimate

Pa

id /

In

cu

rre

d % 1

2

3

Linear (1)

Linear (2)

Linear (3)

Development Period

Motor

Further investigations of the chain ladder

• The pattern changing for groups of years is causing this chain ladder cycle

• Random noise can make paid to incurred ratios a weak diagnostic

Overall Conclusions• There is a UK reserving cycle• It lasts for several years• Applies to individual origin years and

aggregate reserves• It is exhibited consistently over major

companies in the market• Changing claims inflation may be a cause• At market level it is difficult to identify

detailed causes

Challenges• We don’t have a solution to the reserving cycle

today• Internal analysis of individual company data may

help• Onus is on individual actuaries to consider the

issues raised• Encourage actuaries to monitor the long term

run off of their reserves – not just this time vs last time

• We hope GRIT will give consideration to some of these issues