PROJECTING LOSS RESERVES USING TAIL FACTOR DEVELOPMENT METHOD - A CASE STUDY OF STATE INSURANCE COMPANY (MOTOR INSURANCE)

ABSTRACT
In many loss reserve analyses, especially those involving long-tail casualty lines, the loss development triangle may end before all the claims are settled and before the nal costs of any year are known. That is, in loss reserving we implicitly assume that there are no claims after the oldest origin year is fully developed. However, it is not appropriate to assume that the oldest origin year is fully settled. This is because it is possible to have incurred but not reported claims after the oldest origin year is fully settled.The study was conducted to project future claims after the run-o triangle is fully run o . Claims data was collected from the State Insurance Company (SIC) Limited motor insurance for a period of six(6) years. The R-software and the spreadsheet were used to analysis claims data using the chain ladder and tail factor techniques. The study revealed that the motor insurance department of SIC would pay extra 3% of claims after estimated outstanding reserves of about 14 million Ghana cedis. It was therefore, recommended that SIC motor insurance department should set aside extra 3% of the estimated reserve to cater for possible incurred but not reported claims in 2015 and beyond.

CHAPTER 1
Introduction
1.1       Background of the Study
The insurance industry, like State Insurance Company (SIC) LTD, does not sell commodi-ties as such but rather assurances. An insurance policy is an assurance by the insurer to the policyholder to recompense for future claims for an upfront received premium.Consequently, insurers do not know the upfront cost for their service, but rely on past data analysis and judgment to predict a viable price for their contribution. In Non-Life Insurance, e.g. motor insurance; most policies administered for a period of twelve (12) months. Nevertheless, the claims allowance or payment manner can take years. As a result, at all times not even the delivery date of their product is known to insurers. Especially, losses coming from non-life insurance can take a long time to settle and even when the claims are acknowledged, it may take time to establish the extent of the claims settlement cost. Claims can take years to show up. It should come as no shock that the largest item on the liabilities side of an insurer’s balance sheet is often the provision or reserves for future claims payments. These reserves can be divided into case reserves (or outstanding claims), which are losses already reported to the insurance company and losses that are incurred but not reported (IBNR) yet.

Historically, reserving was based on deterministic calculations with pen and paper, combined with expert judgement. Since the 1980s, with the arrival of personal computer, spreadsheet software has become very popular for reserving. Spreadsheets not only reduced the calculation time, but allowed actuaries to test di erent scenarios and the sensitivity of their forecasts. As computers became more powerful, ideas of more sophisticated models started to evolve. Changes in regulatory requirements, have fostered further research and promoted the use of stochastic and statistical techniques. In particular, for many countries, extreme percentiles of reserve deterioration over a xed time period have to be estimated for the purpose of capital setting. Several methods and models have been developed over the years, to estimate both the level and variability of reserves for insurance claims; Schmidt (2012) or P.D. England & R.J. Verrall (2002) for an overview.

In tradition, many actuaries use the Mack chain-ladder and bootstrap chain-ladder models along with stress testing scenario analysis and expert judgment to estimate ranges of reasonable results; surveys of U.K. actuaries in 2002.

In most analysis of loss reserve , mainly those relating to long tail casualty lines, the loss development triangle may end before all the claims are settled and before the nal costs of any year are known. In most times,some actuaries add to the development factors they obtain from available run o triangle with a tail factor that estimates the development beyond the end of the development period for which the link ratio could be estimated.

1.2       Background of study area 
1.2.1    SIC Non-life insurance contracts:
The State Insurance Company has three main contracts. They are usually casualty, prop-erty and personal accident insurance contracts. The Casualty insurance contracts defend customers of SIC against the risk of causing harm to third parties as a result of their jus-ti able activities. The Property insurance policies mainly reimburse SICs customers for damages su ered to their properties or for the value of property lost. The Personal ac-cident insurance contracts mainly recompense the policy holder for injuries su ered. For all these three contracts, premiums are recognised as earned premiums proportionally over the period of coverage. The premium share received on operational contracts that relates to unexpired risks at the statement of nancial position date is reported as the unearned premium liability. Furthermore, in statement of nancial position position premiums are shown before deduction of commission. Loss and claims expenses are charge to income as incurred, based on the estimated liability for compensation owed to contract holders or third party properties damaged by the contract holders. These include indirect and direct claims settlement costs emanating from events that have occurred up to the statement of nancial position date event if they have not yet been reported to the SIC. The State Insurance Company does not discount its liabilities for unpaid claims other than for dis-ability claims. Liabilities for unpaid claims are estimated using the input of assessments for individual cases reported to SIC and the use of statistical analyses for the claims incurred but not reported, and to estimate the expected ultimate cost of more complex claims that may be aected by external factors like court decisions.

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Item Type: Ghanaian Project Material  |  Attribute: 65 pages  |  Chapters: 1-5
Format: MS Word  |  Price: GH50  |  Delivery: Within 30Mins.
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