Transcript Download Presentation 2

International Reserving Issues
Chandu C. Patel, FCAS, MAAA
Casualty Loss Reserve Seminar
September 17-18, 2008
2
International Reserving Issues
Agenda
International claims process
F/X Effects
Financial Reporting
3
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.
4
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
5
Tsunami, Total Loss to Cement Plant, Indonesia, Asia.
Picture of Plant before Tsunami struck
6
Lafarge Cement Factory before the Tsunami
7
Tsunami, The time the Tsunami struck Banda Aceh,
Indonesia.
8
And after the Tsunami…total devastation
9
Another scary example of the power of this Tsunami
10
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%
11
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.
12
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.



