Dumaria R. Tampubolon, M.Sc, Ph.

D
Statistics Research Division
Faculty of Mathematics and Natural Sciences
Institut Teknologi Bandung, Bandung, Indonesia

MIPAnet School, Institut Teknologi Sepuluh Nopember, Surabaya,

13 April 2019
 Outline
 What is “Actuarial Science”?
 What is “General Insurance” and what is its nature?
 What are the major problems in General Insurance?
 What is a “runoff triangle”?
 What is “outstanding claims liability”?
 Using “Leverage” as a tool to measure the sensitivity
of an estimate of outstanding claims liability due to
small changes in the incremental payments (paid
claims).

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 Actuarial Science
⚫A branch of knowledge which applies mathematics,
probability and statistics, economics, and finance in
assessing risks of financial losses due to measurable
non-prevented events. Such events are those which
will occur at a certain time in the future with
probability greater than zero but the time of
occurrence of the event and the corresponding
amount of the financial losses cannot be determined
with certainty at the time of valuation.

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 Nature of General Insurance (GI)
 Severity (amount of claims) and Frequency (number of claims)
can not be determined with certainty at the time of valuation.
 Time of disastrous event which lead to financial compensation
can not be determined with certainty at the time of valuation.
 Claims are not usually paid as soon as they occur. Hence, there
is a delay: between occurrence of event and reporting of a
claim; and between the time of reporting and settlement of
the claim.
 A closed claim might be reopened and additional money need
to be paid.
Classification: Short-tailed and Long-tailed GI Business

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 Major Problems in General Insurance
 How to determine the premium?
Risk (Adjusted) Premium = Pure Premium +
Loadings
▪ Pure Premium is the Expected of Claims, that is
the mean of the distribution of claims.
▪ How to determine the loading factor?
 How to determine the outstanding claims reserve?
OR
How to determine the outstanding claims liability?
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 Outstanding Claims Liability
The present values of expected future payments which include
Incurred But Not Reported (IBNR) claims, the evaluation of future
payments on claims already notified and the management
expenses of future claims payments of claims incurred as at the
balance date.
(Hart, D. G., Buchanan, R.A., and Howe, B. A. (1996). The Actuarial Practice of General Insurance,
page 26)
 The provision for the outstanding claims is usually the largest
component of a general insurance company’s liabilities; hence,
changes in the outstanding claims liability have a direct, and
possibly large, impact on the company’s profits and tax liabilities.
 (General) Insurance companies need to reserve enough of their
premium income to cover future claim payments from past and
current policies
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 Sensitivity of the Estimate
⚫ Gain insights on the forecasting methodology
used:
→ very or moderately or not sensitive?
⚫ Gain insights on the data:
→ absolute and relative importance
⚫ Gain insights on the uncertainty of the estimate of
the outstanding claims liability

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 Measurement of Sensitivity
Measurement of the sensitivity of the estimate
of the outstanding claims liability to small
perturbation in an incremental payment:

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 EXAMPLE
Estimate of the outstanding claims
liability of AFG Data using Hertig’s model
 The data used as an example is the Automatic
Facultative General (AFG) Liability, excluding Asbestos
and Environmental, from the Historical Loss
Development study, which was also considered by
Mack (1994b). Following Mack, the runoff triangle of
the incurred payments of the AFG data is represented
in thousands ($’000).

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 Runoff Triangle of AFG Data (Mack, 1994)
0 1 2 3 4 5 6 7 8 9
0 5012 3257 2638 898 1734 2642 1828 599 54 172

1 106 4179 1111 5270 3116 1817 -103 673 535

2 3410 5582 4881 2268 2594 3479 649 603

3 5655 5900 4211 5500 2159 2658 984

4 1092 8473 6271 6333 3786 225

5 1513 4932 5257 1233 2917

6 557 3463 6926 1368

7 1351 5596 6165

8 3133 2262

9 2063

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 EXAMPLE
Estimate of the outstanding claims
liability of AFG Data using Hertig’s model
 The estimate of the outstanding claims liability for
the AFG data, using Hertig’s Model (Hertig, 1985) is
$86.889 million or approximately $87million.
 What happen if there is an additional $1,000 in the
incremental payment on a cell of the runoff triangle?
Or, what happen if there is a delay of payment (of a
small amount) of $1,000?

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 Hertig’s Model Leverage
(1 unit increase)
0 1 2 3 4 5 6 7 8 9
0 -1.292 -1.311 -0.513 -0.11 0.48 1.201 2.116 3.237 5.489 12.161
1 -161.585 1.03 -1.596 0.762 0.877 1.323 2.073 3.707 6.455
2 -1.352 -0.629 -0.034 0.257 0.643 1.142 1.677 2.678
3 -0.659 -0.469 0.025 0.47 0.626 0.996 1.528
4 -7.935 0.318 0.254 0.626 0.804 0.996
5 -3.322 0.037 0.671 0.842 1.454
6 -13.908 0.367 1.51 1.405
7 -3.344 1.177 1.664
8 2.265 2.309
9 22.815

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 Hertig’s Model Leverage
(1 unit increase)

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 Sensitivity of the Estimate
 Given the Hertig’s model, the leverage is
calculated as follows. Let us say that there is a
$1000 increase in cell (1,0) of the runoff
triangle of the incremental payments (an
increase of $1000 is small enough since
increases of $500 and $1 in the incremental
payments also result in the same leverage
values).

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 Sensitivity of the Estimate
 The resulting leverage is -161.585. This means
that there is a decrease in the estimate of the
outstanding claims liability of almost 162 times
the increase in the cell. In other words, had the
claims paid in accident year 1 and development
year 0 been $107,000 instead of $106,000, then
the resulting Hertig’s model estimate of the
outstanding claims liability will be approximately
$162,000 lower than the original estimate of
$86,889,000.
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 Sensitivity of the Estimate
 In another example, for accident year 0, let us say
that there is an increase of $1000 in the paid
claims at the final development year (at the tail).
Then the change in estimated total outstanding is
approximately 12 times as much. This means
that, had the $1000 claims been paid later, the
resulting Hertig’s model estimate of the
outstanding claims liability will be approximately
$12,000 higher than the original estimate.

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 Hertig’s Model Leverage
 What happens if claim payments are delayed?
For a particular accident year:
Pay early → a “decrease” in outstanding claims liability estimate
Pay later → an “increase” in outstanding claims liability estimate
 What happens when there are very few observations available to
do forecasting?
Large leverage in the last accident year and at the tails
 There is an extremely large leverage in cell (1,0). It turned out
that the incremental payment in that cell is “unusual” compare
to the other incremental payments in development year 0. The
leverage values of the Hertig’s model indicate “unusual
observations” in the incremental payment data.

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 References
 [1] Hertig, J. (1985), "A Statistical Approach to IBNR-
Reserves in Marine Reinsurance”, ASTIN Bulletin, 15, 2, 171-
183.
 [2] Klugman, S., Panjer, H., Willmot, G. (2012). Loss Models: From
Data to Decisions, 4th edition, New York: Wiley.
 [3] Mack, T. (1994b), "Measuring the Variability of Chain
Ladder Reserve Estimates”, Casualty Actuarial Society
Forum, Spring, 101-182.
 [4] Tampubolon, D. R. (2008). Uncertainties in the Estimation of
Outstanding Claims Liability in General Insurance, PhD Thesis,
Macquarie University, Australia.
 [5] Tse, Y. K. (2009). Non-life Actuarial Models: Theory,
Methods and Evaluation, New York: Cambridge University
Press.
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 Thank You

dumaria@math.itb.ac.id
drtampubolon@gmail.com

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