PRA publishes feedback on reserving reviews

The PRA has published a ‘Dear Chief Actuary’ letter following its review of firms’ reserving during 2019.  The letter contains feedback from the PRA’s reviews which included work on casualty lines for London Market firms, reserving in the UK motor market and a thematic review of case (outstanding claims) reserves in the retail and wholesale markets.  The letter details the key issues stemming from the PRA’s recent actuarial work, including:

1. Bias in reserve assessment – the PRA continues to see firms taking early and/or what the PRA sees as excessive credit for underwriting remediation activity in setting initial estimates.  The PRA recommends that firms consider both upside and downside risks when setting reserves on a best estimate basis;
2. Weakening of case reserving basis – the PRA encourages firms to review the adequacy of case reserving across their portfolio;
3. Inadequate claims inflation allowance – firms are not sufficiently considering how inflation could impact long-tailed classes of business.  Firms should better articulate how they have gained comfort over their allowance for claims inflation in their reserve assessments, including an explicit consideration of the different views held by different teams;
4. Attritional loss deterioration – firms should consider whether their loss development patterns and other material assumptions remain appropriate;
5. Transparency over key judgements and assumptions in management information (MI) – firms should seek to strike a better balance between reporting that is detailed enough to inform decision making and is concise enough to navigate and provide practical effective challenge.  Firms can do this by presenting the most material assumptions more clearly and sign-posting the key judgements which drive reserve estimates; and
6. Other areas of uncertainty.  The PRA expects firms to make adequate allowance, where appropriate, for:
   • Ongoing uncertainty in gross loss estimation relating to 2018/9 Japanese typhoon losses and large Aviation market losses;
   • Latency in claims experience related to opioids, gender equality, sexual molestation and harassment claims;
   • Risk of liability catastrophes and associated accumulation risk within portfolios;
   • Uncertainty regarding claims experience on newer lines of business, such as cyber, where data is limited or where a firm has less experience; and
   • Uncertainty regarding continued reliance on historical data, where the relevance of the data may have diminished given legislative and other changes. The motor market, with changes to the Ogden rate, MedCo, Claims Portal and Whiplash reforms, is an example of an area that may be affected.