CEIOPS' Advice for Level 2 Implementing ... - EIOPA - Europa

• assume independency between assets, for instance, between equity
rate of return and interest rate.
3.2.3. Non-life insurance specific
3.2.3.1. Outstanding reported claim provision. First simplification
3.224 Description. This simplification applies to the calculation of the best
estimate of reported claims by means of consider the number of claims
reported and the average cost thereof. Therefore is a simplification
applicable when it does not deliver material model error in the estimate
of frequency, severity and its combination. This simplification can be
used to calculate outstanding claims provision and provision for incurred
but not reported claims as a whole, adding to Ni the IBNR claims
calculated as Nt in 3.233.
3.225 Calculation. The calculation is rather straightforward:
where:
Ni= number of claims reported, incurred in year i
Ai= average cost of claims closed in year i
Pi= payments for claims incurred in year i
Ni and Pi are known, while Ai is determined using the average cost of
claims closed in the year i, independently of the accident year, multiplying
that amount by a factor to take into account future inflation and
discounting. See in annex A an explanatory example.
Undertakings should complete this reserve with an incurred but not
reported provision (IBNR) and an ULAE provision.
3.226 Criteria for application. Additional to the general requirements set out in
this advice, the above method is an allowable simplification when the
size of claims incurred in a year has a little variance, or the number of
claims incurred in a year is big enough to allow the average cost to be
representative.
CEIOPS notes that these two conditions are unlikely to exist in case of
claims that have a medium or long term of settlement since the claim is
reported.
It should be noted that this method described does not seem appropriate
in situations where only few development years or occurrence years
respectively are available. In these cases it is likely that the claims which
are still open are the more complex ones with higher average of expected
ultimate loss. Especially for reinsurance business, this simplification is not
applicable, as the necessary data are not available.
3.2.3.2. Outstanding reported claim provision. Second simplification
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© CEIOPS 2010