25.3 Insurer Op Risk: Plan Loss Ratios

Mostly impact long tailed LoBs (e.g. 50% reported @ 5yrs, 90% @ 10yrs)

Optimistic loss ratio propagates forward

  • Optimistic LR for older years lead to optimistic LR for th recent years

  • Since the ELR is based on older years experience that might be too low, the planned LR is too low as well

As the older years losses develop higher than expected \(\Rightarrow\) increase in reserves for all years, and can lead to:

  • Rating downgrade

  • Downgrade of claims paying ability

  • Massive non-renewals

  • No new business

  • Eventual runoff

25.3.1 Three reasons why the planned LR did not work

  1. Model unable to forecast accurate LR

    • If the market and other carriers did fine, then the model was effective

      \(\therefore\) Op-risk: Planning system did not deliver accurate LR,

    • If everyone else failed to price properly, e.g. asbestos

      \(\therefore\) A true insurance risk (unpredictable nature of long-tailed business)

  2. Model was able to forecast accurate LR but was improperly used

    • Op risk: What checks were there to be sure the model was used correctly?

  3. Model did accurately forecast the LR but indications were unpopular so ignored

    • Op risk: What governance should be there around management’s decisions