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“The technical reserves represent the principal liabilities of an insurance company. They are established to enable the company to meet and administer its contractual obligations to policyholders. Specific reserves are required to meet indemnity or other compensatory payments to policyholders plus the associated administration costs. In addition, reserves of a contingent nature might be carried (e.g., claims equalization or catastrophe reserves) in order to provide a further buffer against adverse development of claims and to smooth the emergence of profit”.

The main financial performance measures used by the stakeholders of the insurance companies depend upon the estimated value of the reserve in each financial period. The reserving process also is a fundamental issue of business management in all insurance activities. The analysis that the reserving process provides from historical claims development and risk exposure can influence the bottom line of the financials and the terms and conditions offered on future re/insurance business and are usually the basis of decision making; whether to update the risk appetite of the insurance company or to withdraw from insurance business entirely.

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Reserve and Economic capital
The Economic capital modeling has become an important issue for property and casualty insurers. In many countries, the regulators or supervisor authorities allow companies to assess their own risk profile and to build their own economic capital models according to the pillars of Solvency II. In the United States, rating agencies view internal economic capital models as a necessity to comply with COSO requirements. Company use of economic capital models is considered a key element of effective and robust enterprise risk and capital management, both of which are main inputs in the rating process and compliance.

While insurance companies seek to have a robust enterprise risk management system, they use economic capital models, no unified agreed methodology exists. The insurance standard that has established in all of European countries, driven by Solvency II, is derived from banking risk management and capital analysis studies. Most property and casualty insurers in the United States have relied on factor-based methodologies (as the limited case in Egypt) recommended by the regulator or rating agency formulae that are dynamically reviewed, taking into consideration the past history and future view.
Under the Solvency II framework, insurers will have to estimate enough claim reserve to cover future claims expected from policyholders. The outstanding claim reserve will be equivalent to the amount another insurer would be expected to pay to assume and meet the original insurer’s policyholder obligations. Insurers must also have admissible assets sufficient to cover the liabilities and the maximum of the minimum capital requirement and a solvency capital requirement.
The solvency capital requirement is meant to cover all risks that an insurer faces, including underwriting, market, credit and operational risks. Outstanding claim reserve risk is usually considered a component of underwriting risk, along with catastrophe risks. Outstanding loss reserve risk is the deviation that may occurs in the amount held in reserve to pay for occurred claims obligations.

The main purposes to held reserves are illustrated as follows:
• Premiums have been received but the cover relating to part of the premiums has not yet been completed.
• Claims that occurred and have been reported and that have not yet been reported.
• Other expenses incurred by the insurance company that have yet to be paid.
• For financial reporting and disclosure of profit (loss).
• In the Egyptian insurance market, The Egyptian law as stated in Article (37) from the Act No. 10 in the year 1981, amended by Law No. 91 in the year 1995, set that the Egyptian property and liability insurer must establish the required reserves to meet its liabilities to policyholders and beneficiaries.
• For tax purposes;
• To assist in ratemaking process.

According to the reserves purposes above, the reserve held categories are as following:
(1) Reserves in respect of unexpired or unearned exposure:
• unearned premium reserve (UPR)
• deferred acquisition costs (DAC)
• additional unexpired risk reserve (AURR)
(2) Contingent reserves
• catastrophe reserves
• claims equalization reserves (CERs)
(3) Reserves in respect of earned exposure
• reported claims, which can be subdivided into notified (open) claims and reopened claims
• incurred but not reported (IBNR) claims
• incurred but not enough reserved (IBNER) on existing notified claims.
(4) Reserve for claims handling costs.
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1.2Research Problem

According to the regulatory requirements, the actuary must establish an adequate estimation of the ultimate claims for each accident year, such estimate must be enough to meet the claims when it’s due.
Ultimate: one of the Merriam-Webster dictionary definitions of ultimate is “arrived at as the last result” .
Ultimate Losses: “The total sum an insurer pays for resolution of a claim, including both loss and loss adjustment expenses. It may not be possible to know the exact value of ultimate losses for a long period of time following the end of a policy period and actuaries are employed to assist in projecting ultimate losses for the purposes of setting rates, financial modeling, or estimating required reserves.” ,
Ultimate Loss = Paid Claims + Outstanding Claims + IBNR

Outstanding Claims and IBNR can be combined and just called reserve, so that Ultimate Loss = Paid Claims + Reserves.

Components of Ultimate Claims for each accident year:
• Cumulative claim payment.
• Outstanding claim reserve for reported or reopened claims.
• Change in the outstanding claim reserve.
• Claims that have been occurred but not yet reported IBNR.
• Claims that have been occurred but not enough reserved IBNER.

In the Egyptian insurance market, The Egyptian law as stated in Article (37) from the Act No. 10 in the year 1981, amended by Law No. 91 in the year 1995, set that the Egyptian property and liability insurer must establish the required reserves to meet its liabilities to policyholders and beneficiaries, as follows:
• Unearned Premium Reserve (UPR)
• Incurred But Not Reported Losses provision (IBNR)
• The Outstanding Claim provision for the reported losses(OCR)
• Loss Ratio Fluctuation provision.

1) Own Damage Motor Insurance:
The following table shows the amount in thousands EGP of the development of outstanding claim reserve (including IBNR) by year for own damage motor insurance class of business in the Egyptian insurance companies:
Year 2009 2010 2011 2012 2013 2014 2015 2016 2017
Public sector 215071 298021 306458 373067 404766 330395 290898 265584 271476
Private sector 192408 174265 255206 275600 275742 272123 268439 274217 311577
Source: Insurance statistics book, EFSA

From the above chart:
• For the public insurance sector, there is an increase in the outstanding claim reserve from financial years 2009 to 2013, the pick was achieved in 2013 the reserve amount was 404,766,000 LE, there was an annual decrease in the reserve value for years 2014 and 2017 .
• In the private sector there is a decrease in 2010 (this was the first time to estimate an IBNR value according to the unified actuarial report), from year 2011 there is no significant development in the outstanding claim reserve.
The following graph describes the development in the outstanding reserve for both public and private insurance sectors.

The following chart describes the developments in the earned premiums, paid claims and outstanding claim reserve. There is a general increase in the earned premiums and paid claims compared with the decrease in the outstanding claim reserve.

The following chart describes the developments in the earned premiums, paid claims and Incurred claims.

• The trend in the increase in the earned premiums and the paid losses is more than the trend in the incurred losses. The main reason in that is annual decrease in the outstanding claim reserve; the conclusion is despite the annually increase in the earned premiums; there is a decrease in the outstanding claims.
• The decrease in the outstanding claim reserve does not resulted from the fast settlement of the claims; the following chart shows the claim process life time from claim reporting to ultimate settlement from a private insurance company data for motor insurance branch (measured in months 2015/2016):

• The chart shows that about 25% of the claims values were settled during the first 6 months from reporting, and it may take a 42 month to close this insurance business liabilities. So there is no need to establish a low outstanding claim reserve in presence of annual increasing earned premiums.

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2) Compulsory Motor Insurance:
The following table shows the amount in thousands EGP of the development of outstanding claim reserve (including IBNR) by year for Compulsory motor insurance class of business in the Egyptian insurance companies:
Year 2009 2010 2011 2012 2013 2014 2015 2016 2017
Public sector 3,242,436 3,453,803 3,374,213 3,135,544 3,139,519 2,964,754 2,878,167 2,519,957 2,397,690
Private sector 30,757 63,613 129,443 181,477 226,886 278,951 312,946 344,619 421,276
Source: Insurance statistics book, EFSA

From the above chart:
• For the public insurance sector, there is an increase in the outstanding claim reserve in 2010 as a result of estimating the IBNR reserve for the first time.
• In the private sector there is a decrease in 2010 (this was the first time to estimate an IBNR value according to the unified actuarial report), from year 2011 there is no significant development in the outstanding claim reserve.
The following graph describes the development in the outstanding reserve for both public and private insurance sectors.

The following chart describes the developments in the earned premiums, paid claims and outstanding claim reserve. The incurred claims are more than the earned premiums every year, this is an indicator for the mispricing of the compulsory motor insurance.

The following chart describes the developments in the earned premiums, paid claims and Incurred claims.

The paid-to-incurred ratios analysis:
In his paper: “Are We There Yet? A Review of Liability Reserving” George Zanjani told us that there are two assessments of industry reserving:
1) Incurred loss development on recent years and
2) Paid-to-incurred ratios.

The first indicator gives represent the recent trends in the industry’s forecasting of the ultimate claims. Since liability claims can take a long time to settle (about 42 months) and the incurred losses are decreasing while the production is increasing; this means that the industry was underestimating the reserves.
The second indicator is the paid-to-incurred ratio gives us a sense of whether the industry’s collective assessment of the ultimate value of incurred losses associated with a given accident year is in line with historical payment patterns. It tells us what fraction of the industry’s projection has already been paid out, so if the fraction is high there is cause for suspicion; it could mean that the industry is underestimating the ultimate value of incurred losses (i.e., the denominator in the ratio) and thus has a reserving problem as shown from the following table:

Own Damage Motor Insurance:
Public Sector
Year 2009 2010 2011 2012 2013 2014 2015 2016 2017
Paid 275,303 338,796 362,198 425,232 441,348 416,014 499,207 515226 618413
Incurred Losses 271,402 421,302 369,732 491,643 471,015 341,358 458,792 487282 602153
P/I 101.44% 80.42% 97.96% 86.49% 93.70% 121.87% 108.81% 105.73% 102.70%
Private Sector
Year 2009 2010 2011 2012 2013 2014 2015 2016 2017
Paid 326,182 362,581 408,605 383,506 427,022 448,224 528,302 535,846 632,690
Incurred Losses 437,523 422,582 439,521 403,892 426,947 444,509 524,687 541,577 668,610
P/I 74.55% 85.80% 92.97% 94.95% 100.02% 100.84% 100.69% 98.94% 94.63%
Market
Year 2009 2010 2011 2012 2013 2014 2015 2016 2017
Paid 601,485 701,377 770,803 808,738 868,370 864,238 1,027,509 1,051,072 1,251,103
Incurred Losses 708,925 843,884 809,253 895,535 897,962 785,867 983,479 1,028,859 1,270,763
P/I 84.84% 83.11% 95.25% 90.31% 96.70% 109.97% 104.48% 102.16% 98.45%

Paid to Incurred Ratio

From the above chart there is an increasing trend in the paid-to-incurred ratio and it appears from the positive slope of the straight line trend.
Therefore:
a) High paid-to-incurred ratios for recent accident years and
b) Low outstanding reserve estimate.
The two assessments of industry reserving together are sufficient to conclude that there is an underestimating outstanding claim reserve.

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"The technical reserves represent the principal liabilities of an insurance company. (2019, May 16). Retrieved January 27, 2021, from https://midwestcri.org/the-technical-reserves-represent-the-principal-liabilities-of-an-insurance-company/

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