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International Reserving Issues
Chandu C. Patel, FCAS, MAAA
Casualty Loss Reserve Seminar
September 17-18, 2008
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International Reserving Issues
Agenda
International claims process
F/X Effects
Financial Reporting
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International Claims Process
Geographic, cultural, legal and currency issues make for a challenging environment
Geographic – loss adjusting process in a foreign country will be different. The speed at
which information is gathered and communicated is generally slower.
Cultural – language barriers may exists; what is compensable will vary – for example, when
I was working on estimating reserves in Italy, I was told that relatives that witnessed an
accident need to be compensated for pain and suffering (of watching the accident) as well
Legal – where a trial takes place can vary. Based on the legal environment of the country
that the claim is tries in, outcomes may be unexpected
Currency – If there is a considerable gap between the accident date and the date at which
the loss is settled, changes in F/X rates can have a significant impact on the amount of loss
in corporate currency.
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International Claims Process
An example of a large claim from the Tsunami event dated December 26, 2004.
Large cement plant located in Banda Aceh, Indonesia
The event led to a total loss of the cement factory owned by a French conglomerate
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Tsunami, Total Loss to Cement Plant, Indonesia, Asia.
Picture of Plant before Tsunami struck
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Lafarge Cement Factory before the Tsunami
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Tsunami, The time the Tsunami struck Banda Aceh,
Indonesia.
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And after the Tsunami…total devastation
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Another scary example of the power of this Tsunami
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Tsunami Claim
Date of Loss – Dec 26, 2004
Initial Loss Estimate based on available policy limits for EQ events = 50M Euro
F/X Rates on Dec 31, 2004 I Euro = 1.3644 USD
Initial Loss Estimate based on original F/X rate = 68M USD
First payment made in July 2005; F/X rate 1 Euro = 1.2195 USD
Second payment made in April 2006; F/X rate 1 Euro = 1.2607 USD
The insured went to court in France in 2007
In January 2008, the court found that the EQ sub-limit (or any other sub-limit such as
Flood) does not apply.
New total compensable amount = 88M Euro plus interest and costs (50M Euro was
already paid as of this point in time); F/X rate 1 Euro = 1.4851 USD
New total loss = 131M USD
Total increase in loss due to legal proceedings = 76%
Total increase in loss due to F/X = 9%
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F/X Effects
Impact on loss development
Loss triangles stated in corporate currency will be subject to fluctuations based on changes
in F/X rates
Payments will be made at historic currency rates; case reserves will be stated at current
rates
Decreasing currency strength will lead to higher loss development factors and the reverse
will be true for increasing currency strength
It is difficult to separate true development from F/X effects
A couple of ways to deal with this:
ᅳ Use local currency to do reserve triangles and selections
ᅳ Convert entire triangle to corporate currency using current F/X rates
Particularly challenging in multi-currency domain since a large number of triangles have to
be generated or a large amount of data has to be converted every quarter.
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Financial Reporting
Financial Reporting, including the role of actuaries
Income fluctuations can result from changes in F/X rates
Profit or Loss from a foreign subsidiary can be amplified based on fluctuations in F/X rates
Value of a foreign subsidiary can fluctuate based on changes in F/X rates
Loss development tables within the SEC disclosures (10K) will be impacted
ᅳ It is permissible to adjust the development for impact of F/X rates
Role of the actuary in reserve process can vary. The US has a framework that has evolved
over a period of time – the same is not true in all jurisdictions.
“Preferred” methods used for reserving can vary. I find that “Chain-Ladder” and triangulation
is a clear favorite in the US. Actuaries abroad tend to use more theoretical approaches.