QIS4 Technical Provisions in Non-life Insurance Market Parameters for a Bornhuetter-Ferguson-Based Proxy

Transcription

1 KREDITTILSYNET (The Financial Supervisory Authority of Norway) June 2008 Revised version QIS4 Technical Provisions in Non-life Insurance Market Parameters for a Bornhuetter-Ferguson-Based Proxy I. Introduction The purpose of the present document is to supplement the QIS4 Technical Specifications with respect to the proxy-calculation of provisions for claims outstanding (post-claims technical provisions) in non-life insurance. The content of the document is confined to market parameters related to one of the Bornhuetter-Ferguson-based proxies described in the QIS4 Technical Specifications. For the sake of completeness this proxy is briefly summarised in section II below. 1 An overview of the relevant market parameters for the individual lines of business is given in section III. It should be noticed that in some respects the segmentation into lines of business applied to the Norwegian market is more granular than the QIS4- segmentation. 2 Accordingly, a comparison of the two segmentations is given in annex A. II. Brief Description of a Bornhuetter-Ferguson-Based Proxy A Bornhuetter-Ferguson proxy using development patterns based on paid claims is briefly summarised below. For a given line of business, the calculation of the undiscounted best estimate for the provisions for claims outstanding on a gross basis is carried out in four main steps in the following manner: (1) An inflation-adjusted earned premium (EPIA i ) is stipulated for each accident year i by applying a given inflation-adjustment factor (IA i ) normally based on the consumer price index to the earned gross premium in nominal terms (EP i ), that is EPIA i = EP i IA i. (2) For each accident year i, the effective loss ratio or market ultimate loss ratio (MULR i ) is in practice given, since both the average loss ratio (LR) and the accident year adjustment factors (AYA i ) are given as input to the undertaking (applying this proxy), that is MULR i = LR AYA i. (3) As also the market payment pattern (MPP d where d represents the development years) is given to the undertaking, proxies for the provisions for claims outstanding related to the individual accident years (PCO Gross,i ) are calculated as follows: PCO Gross,i = EPIA i MULR i OP i, 1 Cf. paragraphs TS.IV.D.7 TS.IV.D.11 of the QIS4 Technical Specifications. 2 Cf. paragraph TS.II.E.1 of the QIS4 Technical Specifications.

2 2 where OP i = d>i i MPP d is the expected outstanding part of the ultimate (inflation-adjusted) claims costs and I is the last accounting year. (For QIS4-purposes I = 2007, since the valuation date is fixed as 31 December 2007.) 3 (4) Finally, the undiscounted (but inflation-adjusted) best estimate for the overall provisions for claims outstanding on a gross basis (PCO Gross ) is calculated in the following manner: PCO Gross = i I PCO Gross,i. It should be noticed that due to the adjustment for inflation all amounts referred to in (1) (4) above are evaluated according to the price level at the balance sheet day. This aspect must be taken into account when stipulating the discounted best estimate for the provisions for claims outstanding. The part of the (inflation-adjusted) provisions for claims outstanding that is expected to be paid at a future maturity date j (j>i) is given by Y j = i I PCO Gross,i MPP j i for j = I+1,,I+D, where D is the maximum number of development years. By applying the available risk-free interest rate curve the discounted best estimate of the overall provisions for claims outstanding on a gross basis is given as (PCO Gross ) * = j>i Y j ((1+r j )/(1+p)) j+1/2 = j>i Y j ((1+p)/(1+r j )) j 1/2, where r j denotes the risk-free interest rate corresponding to maturity j while p denotes the expected future rate of inflation (assumed to be constant for the sake of simplicity). With respect to the combined inflation and discounting factor for payment year j (i.e. the factor ((1+p)/(1+r j )) j 1/2 ) it should be noticed that the calculation of the discounted best estimate is carried out at year-ends while all future payments are assumed to take place in the middle of the relevant payment years. III. Overview of Market Parameters for Individual Lines of Business It follows from (1) (4) in section II that the following market parameters should be stipulated for all lines of business and all relevant accident (or underwriting) years 4 : the inflation adjustment factors (IA i ), the average loss ratio (LR), the accident year adjustment factors (AYA i ), 3 According to the definitions used in connection with the various QISs (and in the background documents), the current accounting year coincides with the one year time horizon (and is fixed as 2008 for QIS4-purposes). 4 It should be noticed that the notation differs somewhat from the one used in the context of the Norwegian regulations on technical provisions in non-life insurance.

3 3 the expected outstanding part of the ultimate (inflation-adjusted) claims costs (OP i ). An overview of these parameters is given in sub-sections III.1 III.12 below. In general, information regarding the individual parameters MPP d (where d represents the development years) is not explicitly given in the tables below. 5 However, the MPP d s can in any case be calculated in the following manner: and MPP d = OP I d+1 OP I d for d = 1,...,D, MPP 0 = 1 OP I, where I is the last accounting year (i.e for QIS4-purposes) and D the maximum number of development years. It should be noticed that the information regarding MPP 0 is not (explicitly) used when calculating the discounted best estimate for the provisions for claims outstanding on a gross basis. The risk-free interest rate to be used when calculating the discounted best estimate of the provisions for claims outstanding is given as the swap-rate in NOK, cf. the QIS4 Excel-file labelled Term Structures. With respect to assumptions regarding future inflation no detailed guidance has been given. However, in general terms the undertakings should use assumptions that take into account e.g. the expected rise in consumer prices or the base amount of the National Insurance Scheme as well as the rise in all other claims-related expenses being relevant for the line of business in question. Moreover, the undertaking should disclose the assumptions made with respect to expected future inflation (in a broad sense). 5 Exceptions are made for two lines of business: Workers compensation insurance and Collective accident and disease insurance.

4 4 III.1 Accident and health Workers compensation Workers compensation insurance Remarks: Due to a shift in both the expected loss ratio and the market development pattern, the accident years have been split into two groups: and As a consequence, it is necessary to stipulate two sets of the parameters MPP d (d = 0,,D), cf. the table on page 5. The inflation-adjustment factors (IA i ) for the accident years are stipulated as a product of the pure inflation-adjustment factor (PIA i ) and an ad hoc factor (AHF i ) reflecting e.g. the underestimation of the premium rates for these accident years. The details are given in the table on page 6.

5 5 Workers compensation insurance (cont d) Accident years Development years (d) MPP d MPP d

6 6 Workers compensation insurance (cont d) Accident year PIA i AHF i IA i

7 7 III.2 Accident and health Health insurance This line of business is not relevant for the Norwegian market. III.3 Accident and health Others In the Norwegian market this line of business comprises the following sub-lines: Accident insurance Collective accident and disease insurance Group-life insurance (of the kind that non-life insurance undertakings are allowed to (under)write) Market parameters are not available for the sub-line Group-life insurance. Accident insurance

8 8 Collective accident and disease insurance Remarks: Due to a shift in both the expected loss ratio and the market development pattern, the accident years have been split into two groups: & and As a consequence, it is necessary to stipulate two sets of the parameters MPP d (d = 0,,D), cf. the table on page 9. This line of business may also be labelled Supplementary employee benefits indicating that these insurance products represent a supplement to the compulsory Workers compensation insurance.

9 9 Collective accident and disease insurance (cont d) Accident years Development & years (d) MPP d MPP d

10 10 III.4 Motor, third party liability Third party motor insurance private risks Third party motor insurance commercial risks

11 11 III.5 Motor, other classes Other motor insurance private risks Other motor insurance commercial risks

12 12 III.6 Marine, aviation and transport In the Norwegian market this line of business comprises the following sub-lines: Transport insurance Blue water hull insurance Coastal hull insurance P&I insurance Energy insurance Aviation insurance Market parameters are not available for the sub-lines P&I insurance, Energy insurance and Aviation insurance. Transport insurance Blue water hull insurance Underwriting year IA i LR AYA i OP i Remark: The tabulated average loss ratio (LR) for this sub-line has been estimated by taking into account the so-called frequency claims. Frequency claims are defined as claims where the inflation-adjusted claim amount (severity) is less than NOK 20 million (i.e. approximately EUR 2.5 million).

13 13 The impact of large claims should be taken into account by applying one of the following approaches: Replace the average loss ratio given in the table above with an average loss ratio based on all claims, i.e. LR = should be replaced by LR = Use a case-by-case (proxy) method to estimate the claim amounts for the large claims and combine this estimate with a reasonable discounting factor. Coastal hull insurance Underwriting year IA i LR AYA i OP i Remark: The tabulated average loss ratio (LR) for this sub-line has been estimated by taking into account the so-called frequency claims. Frequency claims are defined as claims where the inflation-adjusted claim amount (severity) is less than NOK 20 million (i.e. approximately EUR 2.5 million). The impact of large claims should be taken into account by applying one of the following approaches: Replace the average loss ratio given in the table above with an average loss ratio based on all claims, i.e. LR = should be replaced by LR = Use a case-by-case (proxy) method to estimate the claim amounts for the large claims and combine this estimate with a reasonable discounting factor.

14 14 III.7 Fire and other property damage In the Norwegian market this line of business comprises the following sub-lines: Comprehensive insurance (incl. fire insurance) private risks Small craft and pleasure craft insurance Travel insurance Comprehensive insurance (incl. fire insurance) (large) industrial risks Comprehensive insurance (incl. fire insurance) other commercial risks Comprehensive insurance (incl. fire insurance) private risks Small craft and pleasure craft insurance

15 15 Travel insurance Comprehensive insurance (incl. fire insurance) (large) industrial risks Remark: The tabulated average loss ratio (LR) for this sub-line has been estimated by taking into account the so-called frequency claims. Frequency claims are defined as claims where the inflation-adjusted claim amount (severity) is less than NOK 20 million (i.e. approximately EUR 2.5 million). The impact of large claims should be taken into account by applying one of the following approaches: Replace the average loss ratio given in the table above with an average loss ratio based on all claims, i.e. LR = should be replaced by LR = Use a case-by-case (proxy) method to estimate the claim amounts for the large claims and combine this estimate with a reasonable discounting factor.

16 16 Comprehensive insurance (incl. fire insurance) other commercial risks Remark: The tabulated average loss ratio (LR) for this sub-line has been estimated by taking into account the so-called frequency claims. Frequency claims are defined as claims where the inflation-adjusted claim amount (severity) is less than NOK 20 million (i.e. approximately EUR 2.5 million). The impact of large claims should be taken into account by applying one of the following approaches: Replace the average loss ratio given in the table above with an average loss ratio based on all claims, i.e. LR = should be replaced by LR = Use a case-by-case (proxy) method to estimate the claim amounts for the large claims and combine this estimate with a reasonable discounting factor.

17 17 III.8 Third party liability General liability insurance Remark: The tabulated average loss ratio (LR) for this sub-line has been estimated by taking into account the so-called frequency claims. Frequency claims are defined as claims where the inflation-adjusted claim amount (severity) is less than NOK 20 million (i.e. approximately EUR 2.5 million). The impact of large claims should be taken into account by applying one of the following approaches: Replace the average loss ratio given in the table above with an average loss ratio based on all claims, i.e. LR = should be replaced by LR = Use a case-by-case (proxy) method to estimate the claim amounts for the large claims and combine this estimate with a reasonable discounting factor. III.9 Credit and suretyship Market parameters are not available for this line of business. III.10 Legal expenses Market parameters are not available for this line of business.

18 18 III.11 Assistance Market parameters are not available for this line of business. III.12 Miscellaneous In the Norwegian market this line of business comprises the following sub-lines: Non-marine insurance other private risks Livestock insurance Fish farm insurance Non-marine insurance other commercial risks Market parameters are not available for the sub-lines Non-marine insurance other private risks and Non-marine insurance other commercial risks. Livestock insurance Fish farm insurance

19 19 Annex A A comparison of the QIS4-segmentation and the segmentation applied in the Norwegian market A comparison of the QIS4-segmentation and the segmentation applied in the context of the Norwegian regulations on technical provisions in non-life insurance is given in table A below. It should be noticed that the latter segmentation differs somewhat from (i.e. is more granular than) the segmentation applied for licensing of (non-life) insurance undertakings. Table A. QIS4-segmentation Accident and health WC Accident and health Health insurance Accident and health Others Motor, third party liability Motor, other classes Marine, aviation and transport Fire and other property damage Segmentation related to the Norwegian regulations on technical provisions Workers compensation insurance Not relevant for the Norwegian market Accident insurance Collective accident and disease insurance Group life insurance Third party motor insurance private risks Third party motor insurance commercial risks Other motor insurance private risks Other motor insurance commercial risks Transport insurance Blue water hull insurance Coastal hull insurance P&I insurance Energy insurance Aviation insurance Comprehensive insurance (incl. fire insurance) private risks Small craft and pleasure craft insurance Travel insurance Comprehensive insurance (incl. fire insurance) (large) industrial risks Comprehensive insurance (incl. fire insurance) other commercial risks

20 20 Table A (cont d). QIS4-segmentation Third-party liability Credit and suretyship Legal expenses Assistance Miscellaneous Segmentation related to the Norwegian regulations on technical provisions General liability insurance Credit insurance Included in some of the other lines of business Included in some of the other lines of business Non-marine insurance other private risks Livestock insurance Fish farm insurance Non-marine insurance other commercial risks