A relook at Portfolio Management practices in Non-Life Insurance


Terms of Reference:

Accounting Earned Premium

This is the most common and widely understood method. The unearned premium reserve at the beginning of the period is added to the premium written (booked) during the period, and the unearned premium reserve at the end of the period is subtracted. Accounting Earned is the figure used in the Annual Statement.

Exposure Earned

This method calculates the premiums which were actually exposed to loss (or earned) for the period. The date on which premiums were booked is disregarded. What is significant is the effective date and term to which the premium applies. The portion of the premium written which was exposed to loss (earned) is allocated to the exposure period whether the premiums were booked prior to the period, during the period, or after the period. The exposure earned premium eliminates the deficiency contained in accounting earned premium that results from timing problems in the recording of premiums.

Incurred But Not Reported (IBNR)

The liability for future payments on losses which have already occurred but have not yet been reported in the insurer’s records. This definition may be extended to include expected future development on claims already reported. Thus, technically IBNR covers the field from a) those individual losses that have occurred but have not been reported to the insurer to b) that amount of loss that may arise from a known loss which has been reported as an event but which has not been recorded in full to its ultimate loss value (known as loss development).

Loss Development

The process of changing the amount of estimated loss reserves as a policy or accident year matures, as measured by the difference between the paid losses and estimated outstanding losses at one point in time and the paid losses and estimated outstanding losses at some previous point in time. In common usage it might refer to development on reported cases only, whereas a broader definition would also take into account the IBNR claims.

Predictive (Modeling) analytics

Encompasses a variety of techniques from statistics, data mining and game theory that analyze current and historical facts to make predictions about future events.

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11 comments for “A relook at Portfolio Management practices in Non-Life Insurance

  1. koh cc
    September 15, 2011 at 11:11

    Is PIAM doing anything about pricing for both motor and fire insurance since these two major classes will be detariff soon under Competition Act early next year?

    Can you elaborate what PIAM is currently planning to do? It seems things are not being discussed openly, closed door most of the time??

  2. December 17, 2010 at 20:40

    My cousin recommended this blog and she was totally right keep up the fantastic work!

  3. January 28, 2010 at 00:52

    How to do this? How to calculate prem deficiency and earned premium?

    • January 30, 2010 at 02:17

      Well, premium deficiency is about the shortfall in premium charged when calculated as a portfolio.- hopefully I can learn something from the actuary as to how this is computed. Earned premium is premium already earned after the risk has gone through a specific time frame, usually link to policy period. Whatever that is not earned would eventually fall under this category of unexpired risk reserves…… where unearned premium is a subset of it.

  4. Jap-pan
    January 25, 2010 at 10:58

    Portfolio checks can be strategic if the industry can agree on the specific set of ratios for monitoring and adoption. From these established ratios, the identification of whether an insurer is able to continue writing a particular class of business over the medium to longer terms above the break-even position would be made easier. Tying min rates to RBC-calculated parameters should be deemed tactically correct – at least keeping unnecessary competitions in check. It is always a question of how are we going to do it.

    On the contrary, can the local players compete against the foreign-based insurers in the face of capital scarcity?

    • January 25, 2010 at 23:37

      Thanks for the comment…. getting to those minimum rates that are RBC-compliant or somewhere near there is indeed difficult. We can only visualise as of now! Let’s say, this posting is a beginning of a long and winding road(map) getting there. Perhaps we start by getting those portfolio analytical parameters in place. Sort to breakdown those RBC components (whether from the SCAR or ICAR computation) and have those components reworked backward aligning them with those derived from the portfolio analytics…….. LEt’s see what happens then!

      • January 27, 2010 at 09:02

        In the US and Europe markets, underwriting is already very much driven by actuarial computation. Most insurers employ a huge pool of actuary or trainees to work out both the industry and internal stats, then introduce a spreadsheet tool for the underwriters to use in their daily quotation. What we normally get is a rate too far out! To follow means to quote your way out of the market. Therefore, putting in discounting factors (sometimes to extent of 50%) is not uncommon – anything different from rate slashing? Of course, there will always be a limit as to what percentage you can slash.

        • January 27, 2010 at 22:07

          It is still a better practice to have quantitative analysis in place and then make final decision on available qualitative factors. Of course, the costs of getting to the quantitative data may be unjustifiably high, especially where qualified actuaries are engaged.

          • C
            January 30, 2010 at 10:38

            Rather than building with excel sheet this portfolio management stuff, perhaps it is better and more efficient if we consider SPSS Stats version 18.

            • January 30, 2010 at 22:41

              Thanks…. our malaysian insurance industry has yet to utilise such software for portfolio analysis and predictive modeling. Take your suggestion and relook at their latest version on statistics v 18…

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