Outstanding claims reserves
Encyclopedia
Outstanding claims reserves in general insurance
are a type of technical reserve or accounting provision
in the financial statements
of an insurer. They seek to quantify the outstanding loss liabilities for insurance claims which have been reported and not yet settled
(IBNeR) or which have been incurred but not yet reported (IBNyR) reserves. This is a technical reserve of an insurance company, and is established to provide for the future liability for claims which have occurred but which have not yet been settled.
claims occurrence and claims reporting at the insurance company); (ii) settlement delay because
it usually takes time to evaluate the whole size of the claim. The time difference between
claims occurrence and claims closing (final settlement) can take days (e.g. in property insurance)
but it can also take years (typically in liability insurance).
Claims reserving now means, that the insurance company puts sufficient provisions
from the premium payments aside, so that it is able to settle all the claims that
are caused by these insurance contracts. This is different from social insurance where
one typically has a pay-as-you-go system which means that premium payments are not matched
to the contracts that cause the claims, see Wüthrich-Merz (2008), Section 1.1.
(see Benjamin (1987), Taylor (2000), England-Verrall (2002) and Wüthrich-Merz (2008))
Most of these methods started off as deterministic algorithms. Later actuaries started to develop and analyze underlying stochastic models that justify these algorithms. Probably, the most popular stochastic model is the distribution-free chain ladder method which was developed by T. Mack (1993). These stochastic methods allow to analyze and quantify the prediction uncertainty in the outstanding loss liabilities. Classical analysis studies the total prediction uncertainty, whereas recent research (under the influence of Solvency 2) also studies the one-year uncertainty, called claims development result (CDR), see Merz-Wüthrich (2008).
Good overviews provide England-Verrall (2002) and Wüthrich-Merz (2008).
General insurance
General insurance or non-life insurance policies, including automobile and homeowners policies, provide payments depending on the loss from a particular financial event. General insurance typically comprises any insurance that is not determined to be life insurance. It is called property and...
are a type of technical reserve or accounting provision
Provision
Provision may refer to:* Provision , an industrial dance / synthpop band from Houston, Texas, USA* Provision , a term for liability in accounting* Provision , a term for a procurement condition...
in the financial statements
Financial statements
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
of an insurer. They seek to quantify the outstanding loss liabilities for insurance claims which have been reported and not yet settled
(IBNeR) or which have been incurred but not yet reported (IBNyR) reserves. This is a technical reserve of an insurance company, and is established to provide for the future liability for claims which have occurred but which have not yet been settled.
Background
An insurance policy provides, in return for the payment of a premium, acceptance of the liability to make payments to the insured person on the occurrence of one or more specified events (insurance claims) over a specific time period. The occurrence of the specified events and the amount of the payment are both usually modelled as random variables. In general, there is a delay in the insurer's settlement of the claim, typical reasons are (i) reporting delay (time gap betweenclaims occurrence and claims reporting at the insurance company); (ii) settlement delay because
it usually takes time to evaluate the whole size of the claim. The time difference between
claims occurrence and claims closing (final settlement) can take days (e.g. in property insurance)
but it can also take years (typically in liability insurance).
Claims reserving now means, that the insurance company puts sufficient provisions
from the premium payments aside, so that it is able to settle all the claims that
are caused by these insurance contracts. This is different from social insurance where
one typically has a pay-as-you-go system which means that premium payments are not matched
to the contracts that cause the claims, see Wüthrich-Merz (2008), Section 1.1.
Method of estimation
Various statistical methods have been established for the calculation of outstanding claims reserves in general insurance. These include:- Distribution-free chain ladder method
- Over-dispersed Poisson (ODP) model
- Hertig's log-normal chain ladder model
- Separation method
- Average cost per claim methods
- Bornhuetter-Ferguson method
- Paid-incurred chain (PIC) claims reserving model
- Bootstrap methods
- Bayesian methods
(see Benjamin (1987), Taylor (2000), England-Verrall (2002) and Wüthrich-Merz (2008))
Most of these methods started off as deterministic algorithms. Later actuaries started to develop and analyze underlying stochastic models that justify these algorithms. Probably, the most popular stochastic model is the distribution-free chain ladder method which was developed by T. Mack (1993). These stochastic methods allow to analyze and quantify the prediction uncertainty in the outstanding loss liabilities. Classical analysis studies the total prediction uncertainty, whereas recent research (under the influence of Solvency 2) also studies the one-year uncertainty, called claims development result (CDR), see Merz-Wüthrich (2008).
Good overviews provide England-Verrall (2002) and Wüthrich-Merz (2008).