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Loss Reserving in Argentina, Brazil and Mexico
Eduardo Esteva
New Orleans, Louisiana
September 11, 2001
2
Index
Argentina
Brazil
Mexico
Final Comments
Argentina
IBNR Estimation
Other Reserves
Role of the Actuary
4
IBNR Estimation
In Argentina there is no obligation to reserve for IBNR claims, instead the companies create a Reserve for deficiency of the Outstanding claims.
This Reserve is estimated by dividing the IBNR Claims amount of the year by the Reserve for Outstanding Claims. If this ratio is greater than 1.2 , the difference is applied to the Reserve for Outstanding Claims to obtain this Reserve
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Unearned Premium Reserve
The unearned premium reserve held by the companies should be determined separately for each policy on a daily basis (pro-rata basis)
Unexpired Risk Reserves are not required
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Loss Deviation Reserve
This reserve is for Automobile Liability coverage and is the difference between the sum of the last 12 months of incurred claims minus a calculated amount that is equal to the number of automobile exposures times a risk factor (provided by the insurance commissioner)
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Role of the Actuary
Background
In Argentina an Actuary receives a University degree after studying 5 or 6 years .
To be able to sign documents for the Commission they need to be affiliated with the Professional Council of Economic Sciences.
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Role of the Actuary
The Insurance Commissioner requires that the technical notes (for rating) and reserve reviews must be sent with the approval of an Actuary.
Brazil
IBNR Estimation Methodology Accounting Rules Data
Other Reserves
Role of the Actuary
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Background of IBNR Estimation
The rules regulating IBNR reserves for Group Life and Non Life Business were implemented in 1999.
Insurance companies had to book at least 50% of the IBNR reserve at the end of 1999 and 100% at the end of 2000.
The rules regulating IBNR reserves for Individual Life and Pension were implemented in 2001.
The total IBNR reserves should be booked by December 2001
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Background of IBNR Estimation
Companies should send a technical note justifying the methodology used to be approved by SUSEP (Insurance Commission) .
The Company needs the approval of SUSEP to use or to make any change to the technical note for the calculation of the IBNR Reserve.
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Background of IBNR Estimation
Together with the Technical Note, there is also a requirement for a study on the consistency of the methodology adopted.
If there is any change to the technical note, SUSEP must be informed and must approve the changes.
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Methodology
Each Company may select its own methodology to estimate the reserve
There is no need to be mechanical
The company can use more than one method
It is not clear in the Legislation if companies should book Total IBNR (IBNER+IBNYR) or only pure IBNR (IBNYR)
Most of companies have been booking pure IBNR
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Methodology
At this moment SUSEP does not allow the companies to have a negative IBNR Reserve, the reserve must be set equal to zero.
It is customary that a company estimates the IBNR Reserve net of Salvage and Subrogation.
The insurance sector in general only uses thepaid loss development method, rather
than both the paid and incurred methods, in case of total IBNR
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Methodology
In case of the pure IBNR, the insurance companies use the Average Cost multiplied by the number of IBNR claims estimated using the Reported Claims run-off triangle.
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Accounting Rules
In Brazil there are some differences in the accounting rules compared to the USA. Some of the more important differences are as follows:
In Brazil there are ALAE Reserves but there are not any ULAE Reserves.
Related to the IBNR claims, the only required loss expense reserve is for ALAE.
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Data
The information for the last three calendar years’ experience concerning the IBNR (Loss triangles) is requested by the SUSEP on a monthly basis. Every March, companies should send this
information to SUSEP for the prior year
This information is requested separately by LOB
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Data
Currently the information reported by the companies is not available to the public, the insurance industry or consulting firms.
Only the Published Balance Sheets (June and December) are available to the public.
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Unearned Premium Reserve
The unearned premium reserve held by the companies should be determined separately for each policy on a daily basis (pro-rata basis)
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Unexpired Risk Reserve
According to new Brazilian reserving regulation effective from 2001companies should book Unexpired Risk Reserve
Unexpired Risk Reserves are required when incurred claims plus administrative expenses, divided by earned premium minus commission results in more than 105%
This calculation is performed on a combined basis and not separately by product/line and is based on the prior year’s experience
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Role of the Actuary
Background
In Brazil an Actuary receives a University degree after studying 4 years and needs to be affiliated with the IBA (Instituto Brasileiro de Atuária)
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Role of the Actuary
SUSEP requires that the technical note describing the estimation of the IBNR reserve and the technical note describing new products be sent with the approval of an Actuary.
In case of a modification of the technical note, the changed technical note should be approved again.
Mexico
IBNR Estimation Methodology Accounting Rules Data
Other Reserves
Role of the Actuary
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Background of IBNR Estimation
The rules regulating IBNR reserves have existed for a long time, but it was not until 1994 that the National Insurance and Surety Commission (CNSF) implemented the rules for estimating the IBNR Reserve.
Insurance companies had to book 100% at the end of 1997.
The rules for the IBNR Reserve were part of the beginning of the deregulation of the Insurance Sector.
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Background of IBNR Estimation
The Company needs the approval of the CNSF to use or to make any change to the technical note to calculate the IBNR Reserve.
In the case of a change, there is also a requirement for a study on the impact of the change, including an analysis of the change by an external appointed actuary.
Each Company may select its own methodology to estimate the reserve, but it needs to be mechanical.
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Methodology
Concerning this constraint, it is not possible to make any selection of patterns or ultimate amounts, the only exception is the selection of the tail factor.
Also, if the results include a series of report-to-report factors that go down and then up, the actuary must adjust the series.
(e.g. if we have 1.2, 1.1, 1.15, the 1.1 must be adjusted)
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Methodology
Currently the CNSF does not allow the companies to have a negative IBNR Reserve, in this case the reserve must be set equal to zero.
It is not customary that a company estimates the IBNR Reserve net of Salvage and Subrogation.
The insurance sector in general only uses theincurred loss development method, rather than both the paid and incurred methods.
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Accounting Rules
In Mexico there are some differences in the accounting rules compared to the USA. Some of the more important differences are as follows:
In Mexico there are no ALAE Reserves and there also not any ULAE Reserves. These are considered to be operational or claim costs for the company and must be paid by the cash flow of the company.
The only required loss expense reserve is for ALAE related to the IBNR claims.
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Accounting Rules
Reinsurance
The cost of the proportional contacts is considered as ceded premium, and for Non Proportional contracts it is considered as acquisition cost.
For this reason, the net IBNR Reserve is typically only net of proportional contracts; booking a reserve net of the non proportional contracts is subject to approval by the CNSF.
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Data
The information concerning the IBNR (Loss triangles) has been requested by the CNSF on a quarterly basis since 1994 for paid claims and since 1997 for incurred claims.
This information is requested separately by: LOB. Liability and Non Liability within the LOB. Currency (National and foreign)
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Data
On an annual basis other information has been required by the Commission since 1994, with some adjustments in 1997.
The required report is similar to Schedule P, but one of the big differences is that the premium that is reported is the written premium in the year and not the earned premium.
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Data
Currently the information reported by the companies is not available to the public, the insurance industry or consulting firms. We are not sure if and when it will be publicly available.
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Unearned Premium Reserve
The unearned premium reserve for Health and Property Casualty LOB held by the companies should be determined separately for each policy on a daily basis (pro-rata basis) after the subtraction of the minimum of the commissions.
According to new proposal of Mexican reserving regulation, the companies should present to the CNSF a technical note to calculate a sufficient Unearned Premium Reserve
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Prevision and Catastrophic Reserves
Prevision Reserve
According to new proposal of Mexican reserving regulation, this reserve will be eliminated and the companies will need to create a new contingency reserve in the case of loss deviation.
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Prevision and Catastrophic Reserves
Catastrophic Reserve
This reserve is created, at the moment, based on the Earthquake risk.
This reserve is created net of reinsurance generally calculated using a model that takes into consideration the geographic location of the exposures and other factors.
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Prevision and Catastrophic Reserves
For the release of these reserves, the Company needs approval from the CNSF and also must make a program to reconstitute it.
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Role of the Actuary
Background
In Mexico an Actuary receives a degree from a University after studying between 4 and 5 years and needs to have an official governmental document as a professional credential.
To be an appointed actuary, one must complete some additional requirements set by the CNSF, including some professional exams or a special approval from the National College of Actuaries.
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Role of the Actuary
According to new proposal of Mexican regulation, an Actuary that signs any technical note will need to have a special certificate from the Mexican College of Actuaries
The Commission requires that the technical note describing the estimation of the IBNR reserve must be sent with the approval of an Actuary.
In case of a modification of the technical note, it must also be presented with the approval of an external appointed actuary.
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Role of the Actuary
Each year, not later than 28 of February, each company must present to the CNSF an external actuarial opinion for all the reserves. This report is signed by the appointed actuary.
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Summary
