Reserving

Boardroom Battle

We performed reserving for all lines of business for a UAE based insurer as per the requirement of the Insurance Authority (“IA”). The report is not a requirement for reserving unless it is a year-end exercise, but as a matter of best practice we provide that as well.

The Reserves we estimated/calculated include the OS, Mathematical Reserve, Unit Reserve, Non Unit Reserve, IBNR, ULAE, UPR, DAC, AURR, UCI. Most companies book the DAC and UCI reserves we provide, even though it is not a regulatory requirement. This client on the other hand only books the DAC we recommend and not the UCI.

Sharing of draft results was followed up by a meeting with the whole team. The Motor department asked for a reduction in IBNR, citing a higher than necessary penalty for OS motor recoveries. We tried to accommodate their view, but we could not find analytical justification for such a reduction and eventually it was agreed to keep the reserves as initially recommended.

Managing Operational Risk

We are the Appointed Actuary to one of the largest UAE based insurers. Our main task is to independently peer review the technical provisions results produced by the Company’s internal Actuarial team & highlighting any inconsistencies we find in the results.

Since the Company provides us with the reserving triangles for each line of business, instead of the data, this requires additional scrutiny when we review the Company’s results. Subsequently, our main challenge is managing the tight timelines for this exercise as this Company is majority owned by a bank which works towards closing quarter end financials within days after the current quarter ends. As a result, this increases the level of the operational risk for the client. However, Lux works towards mitigating this operational risk by advance preparation and assigning multiple people to work on this project and this tactic has worked effectively in enabling us to always meet the deadlines.

Challenging Client

We have been reserving for a UAE based insurance company for over a year. We have faced several issues in the reserving process such as data preparation, inconsistency in the case estimates, solvency margin deficit, internal controls and processes. We use high level assumptions to address data limitations. Inconsistency in outstanding claims estimation and claims payment pattern from one quarter to another further adds to the challenge of determining best estimate reserves.

Since the Company experiences solvency margin pressure, it (is their duty to) always question our reserves. There is a series of meetings before the reserves are finalised every quarter. In the meetings, we explain the importance of adequate reserving to the Company. Due to inadequate reserving provision for the prior years, the P&L of the Company was affected due to payments of claims pertaining to earlier years. We also explain the actual reserves, using an Actual vs Expected analysis where the actual claims payments are compared with the expected claims payments at an overall level and at a loss origin level. We also discuss the individual claims level actual payments against the provisions which improves their understanding of the impact of inadequate reserving.

Two Day Turnaround Time

The reserving exercise that we worked on for a UAE based Takaful insurer was distinct from other UAE valuations in that the expected turnaround time for the exercise was two days and results needed to be delivered to the client within two working days of receiving data. There is a lot that goes into a reserving exercise, starting from data accuracy, consistency and reasonability checks to complex modelling.

In spite of the intricacies involved, we were able to meet the tight deadlines because we prepared ahead of time, keeping in constant contact with the client. Data discrepancies that were identified in the previous valuation were brought to the notice of the client and together, we worked as a team to resolve the issues leading into the next valuation. Also, given that we have been the Appointed Actuary to this client for more than 3 years, processes have been customized and automated to spot unexpected data variations early on. The client readily accepted our technical provisions results since there were no material differences between Lux premium reserves and the Company calculated figures.

Keeping Companies Regular

We carry out quarterly reserve reviews for a number of clients. Whilst this is usually not a statutory requirement, our clients have found that this helps to monitor the business and to meet tight regulatory deadlines as:

  • data issues can be addressed ahead of the year-end review
  • the profitability of each line of business can be tracked independently
  • any strengthening or release of reserves on prior years can be assessed earlier.

Forewarned is forearmed!