This abstract relates to the following paper: KlumpesP., KumarA. and DubeyR.Investigating risk reporting practices in the global insurance industry ‐ Abstract of the Edinburgh Discussion. British Actuarial Journal, doi: 10.1017/S1357321714000087

This paper argues that all reserving methods based on claims triangulations (the “triangle trick”), no matter how sophisticated the subsequent processing of the information contained in the triangle is, are inherently inadequate to accurately model the distribution of reserves, although they may be good enough to produce a point estimate of such reserves. The reason is that the triangle representation involves the compression (and ultimately the loss) of crucial information about the individual losses, which comes back to haunt us when we try to extract detailed information on the distribution of incurred but not reported (IBNR) and reported but not settled (RBNS) losses.

This paper then argues that in order to avoid such loss of information it is necessary to adopt an approach which is similar to that used in pricing, where a separate frequency and severity model are developed and then combined by Monte Carlo simulation or other numerical techniques to produce the aggregate loss distribution.

A specific implementation of this approach is described, whose core feature is a method to produce a frequency model for the incurred but not reported claim count based on the empirical distribution of delays (delay = the time between loss date and reporting date), after adjustments to make up for the bias towards smaller delays. The method also produces a kernel severity model for the individual losses, from which the severity distribution of each year of occurrence can be derived. By combining the frequency and severity model in the usual way (e.g. through Monte Carlo simulation), an aggregate model for IBNR and UPR losses can be produced.

As for RBNS losses, we suggest using one of the many methods to analyse the distribution of IBNER (incurred but not enough reserved) factors to produce a possible distribution of outcomes.

A case study based on real-world liability claims is used to illustrate how the method works in practice.

Also, in a first step towards validating the method for calculating IBNR and comparing it with existing methods, a series of experiments with artificial data sets was undertaken, which show a drastic reduction in the prediction error of both the IBNR claim count and the IBNR total amount with respect to the standard chain ladder method. And what is perhaps most promising, the experiments show that the distribution of IBNR reserves is much closer (in terms of the Kolmogorov-Smirnov distance) to the “true” one than that based on Mack's method in the way it is normally applied. The method promises therefore a more accurate assessment of the uncertainty around reserves.

This abstract relates to the following paper:

ParodiP.Triangle-free reserving A non-traditional framework for estimating reserves and reserve uncertainty ‐ Abstract of the London discussionBritish Actuarial Journal, doi:10.1017/S1357321713000093

Diversification across asset classes has declined markedly in the last decade and concerns abound about the ability (or lack) of the financial system to weather another 2008-like event. There is a growing volume of academic literature seeking to derive measurement variables for detecting systemic risk. There is clearly a role for the actuarial profession within this discussion and we hope that this paper can engender further discussions and papers on this specific issue.

Just as diversification across conventional asset classes has decreased there has been greater attention paid to the broader array of potential investment strategies that can be accessed via derivatives. The paper explores the prudent management of derivatives in pension funds and general asset portfolios to improve portfolio efficiency both in terms of implementing investment strategies and in broadening the range of investment opportunities for building an efficient investment portfolio from a risk-based perspective.

At the end of 2013 the real yields that the UK government had to pay on its debt were negative over the whole curve. Several possible explanations are available for this phenomenon – central bank action, regulatory changes, demographic developments and economic conditions. The first two can result from deliberate interaction by the state into the financial markets and can be labelled as financial repression. We explain the historic precedents for Governments to use financial repression to manage their debt, look into the influence of regulation on asset allocation for insurers and pension funds, and introduce the concept of a balance-sheet recession.

This abstract relates to the following paper: FulcherPaul, BoardmanRichard, CollierIan, GasserHans-Christof, PriceRod, ShelleyPaul and SoftleySarah. Financial repression: what does it mean for savers and investors? ‐ Abstract of the Edinburgh DiscussionBritish Actuarial Journal, doi: 10.1017/S1357321714000154.