April 2020 Q1

[Actuary_140]

Hi,

The solutions go into detail on how longer tail lines are likely to be more reserve risk driven, which is fine and makes sense given the uncertainty around the level of claims settling. However, this question suggests the company is considering whether or not to enter into writing long-tail lines.

Thinking purely in terms of insurance risk here, my initial thought was that the answer should be more focused on the premium risk (i.e. relating to risks yet to be written/earned) because there will be an initial concern in the short-medium term of mis-pricing, and that reserving risk is not an immediate concern upfront (contrary to the solutions)? To me, the solution is implying premium risk isn't much of a concern for this new line? Am I misinterpreting how these are applied?

Thanks

 

[Darren Michaels]

Hi

You are correct that initially premium risk will be an issue to the insurer due to the lack of past experience / data on which to price the risks in question. However, this would be true for any new class of business (even a different short-tailed property class) and there isn't too much more that you can say about this point, so for four marks you needed to focus a bit more on some of the specifics of the question by considering the differences between a long-tail liability class versus a short-tailed property class.

For example, once you have started writing it, the reserve risk component will be much more significant for a long-tail liability class than for a short-tailed property class.

There is some mention of premium risk in the Examiners' Report although we mention it a bit more explicitly as you have suggested in our ASET solution.