Whatever the motivation, a fundamental fact must be highlighted – conversion is a risky undertaking given the variability inherent in the evolution of loss reserves and the structure of claims reported over time. For example, the switches negotiated in the early 1990s may have been apparently “good” business at the time. However, the current trend of negative losses and environmental development has turned many of these transactions into catastrophic means. Therefore, a basic assumption about switches should be that they are approached with considerable caution and some general skepticism. All actuarial assumptions regarding the evolution of reserves over time should include a reasonable range of possible outcomes so that all parties can fully understand the potential risks. The insurance undertaking may also consider terminating the reinsurance contract if it finds that the reinsurer is not financially sound and therefore poses a risk to the solvency of the insurer. The insurer may also feel that it is better able to cope with the financial impact of losses than the reinsurer. Each of the two methods, if used appropriately, should lead to adequate estimates by the IBNR. In most cases, it is recommended to make at least four different estimates of the IBNR reserve. Two Bornheutter-Ferguson estimates based on losses paid and received, and two Chain Ladder estimates based on the same data.
The results of all these estimates should be considered together and any differences should be reconciled before a final estimate of the IBNR is made. If the IBNR estimate is challenged, the most likely candidates for further analysis would be the applicability of the expected loss ratio of the Bornheutter-Ferguson technique and/or the applicability of the loss development model selected from both techniques. These assumptions should reflect as much as possible the actual underlying activity, and using industry data in its place is often a bias for books with specific underwriting policies, significantly different pricing philosophies, or atypical case booking/claims handling practices. The choice of the discount factor should be relatively objective and based as far as possible on objective external data points. It should reflect current performance; However, it should also be an after-tax return specific to the company`s tax situation. It should also take into account any change in the tax situation that may be caused by the conversion itself. While the general trend in a switch is to commute all the actual years of acceptance between the two parties, it is possible to commute for only one or two years through a so-called “lasering” transaction. This is almost always the norm in a long-term relationship between two financially solvent parties; Situations where the incentive to move is purely based on commercial considerations. For example, due to a strategic exit from a particular industry, a large public airline may only want to shut down for a few years of a long-term contract program with a major reinsurer. A conversion contract includes the methods used to assess unpaid claims or fees and how to pay any remaining losses or premiums. When it comes to negotiation strategy, the property and casualty insurance industry tends to communicate the switching process to the different parties within an organization (e.g.B. law, actuarial, finance, claims, etc.).
“to be delivered”. Although each of these parties is required throughout the process, it is a serious mistake not to let direct negotiations be conducted by important “businessmen”. The best transformations are achieved when a key businessman – with the power to close a deal – works with his business partner in the other organization. The training team (or consultants) would do the detailed “file” work on the account and have most of the work-level discussions with the other party. However, it is clear that a senior business owner must communicate the initial and final offers. Reinsurers (and rehabilitators) want to do business with decision-makers within an organization. Similarly, reinsurers should conduct a thorough review of the premium and claims processes as soon as possible. This detailed work is crucial at the beginning of the transformation cycle as it will profoundly affect the IBNR reserve estimation process and could help identify unfavorable trends and developments that are critical to the proper valuation of the transaction.
This is an opportunity for the switching team to review in detail some of the underlying account files to better assess the assignor`s due diligence and claims handling procedures. Some of the questions that should be asked are: In general, switching and “work” activities require a very different approach and mindset than ongoing business activities. These are based on long-term relationships and the opportunity for both parties to enjoy a mutually beneficial and profitable relationship over time. Switching, on the other hand, is a contentious issue that will (often) lead to the breakdown of long-term relationships. Other aspects of the switching process One of the most important steps in the entire process is that the recoverable balances of losses paid are fully matched with the assignor (and broker) on the effective “stand” date. In practice, accounts often experience delays in reporting between the transferor and the reinsurer, and these delays can have a profound impact on actuarial estimates of final reserves. Since a conversion represents a complete and final release between the two parties, any “surprise transaction” discovered under the agreement (those that were not properly declared or agreed) could have a huge impact on the perceived economy of the transaction. This risk is more likely to be observed in the context of the deductible than in the reinsurance of the quotas. Switching is the change in the payment method. In insurance, this means that the insurance payment can be changed from a series of regular payments to a lump sum or vice versa.
Negotiating switching agreements can be complicated. Some types of insurance claims are filed long after the breach, as is the case with some types of liability insurance. For example, problems with a building may not occur until years after construction. Depending on the language of the reinsurance contract, the reinsurer may continue to be liable for claims made against the policy taken out by the liability insurer. In other cases, claims may be made decades later. Mark Jones is Director of Research and Development and Consulting Actuary at Perr&Knight. Its main task is the development of new products and services for all areas of the company. Mark has extensive experience including pricing, regulatory compliance, competitive analysis, disaster modeling and bookings for most personal and business lines. He also has experience in the development and implementation of predictive models, dynamic financial analysis tools for reinsurance applications, financial forecasting applications for budgeting and retention analysis, rate monitoring tools for most business lines and ad hoc statistical studies for claims investigations, review of premiums and control of claims.
Mark`s skills include in-depth knowledge of insurance data systems and business operations, as well as Visual Basic, SQL, R and other software. Best managed primary companies understand this fundamental problem and are proactive in identifying these risks and establishing internal protocols to manage an active switching program. Those who hesitate are at a disadvantage compared to their more proactive competitors. In this context, the one who hesitates is lost. In addition, the risk of counterparty default is implicit in any reinsurance transaction; A transferor immediately pays premiums to a reinsurer in the hope of receiving compensation for losses over time. For decades, this commercial expectation has been taken for granted; However, the environmental debacle of the late 1980s definitely changed that belief. In the 1990s alone, more than 20 companies left the London and international markets due to insolvencies. Domestic markets are also affected by catastrophic and latent losses, which have led to several insolvencies. Burdened by this trend of increasing insolvencies, the concept of reinsurance “security” has gained prominence, causing a “quality leak” that favors larger, better-capitalized reinsurers.
Clearly, the best way to mitigate this inherent credit risk is to maintain proactive monitoring and controls to ensure that the most financially viable panel is used by reinsurers. This is an important point that needs to be emphasized; The extent to which internal management resources are used in a switching effort could impact the achievement of long-term objectives. For this reason, companies often tend to use a training session or use outsourced resources and consultants to perform the most important day-to-day activities related to switching. .