International Reserving Issues

Chandu C. Patel, FCAS, MAAA

Casualty Loss Reserve SeminarSeptember 17-18, 2008

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International Reserving Issues

Agenda

International claims process F/X EffectsFinancial 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, IndonesiaThe event led to a total loss of the cement factory owned by a French conglomerate

5Tsunami, Total Loss to Cement Plant, Indonesia, Asia. Picture of Plant before Tsunami struck

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Lafarge Cement Factory before the Tsunami

7Tsunami, 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, 2004Initial Loss Estimate based on available policy limits for EQ events = 50M EuroF/X Rates on Dec 31, 2004 I Euro = 1.3644 USDInitial Loss Estimate based on original F/X rate = 68M USDFirst payment made in July 2005; F/X rate 1 Euro = 1.2195 USDSecond payment made in April 2006; F/X rate 1 Euro = 1.2607 USDThe insured went to court in France in 2007In 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 USDNew total loss = 131M USDTotal 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 selectionsￚ 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 impactedￚ 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.