Justification for, and Implications of, Regulators Suggesting Particular Reserving Techniques

Motivation. Prior to 30th June 2013, Kenya’s Insurance Regulatory Authority mandated that minimum IBNR reserves for a particular class of insurance be set as a percentage of a company’s calendar year net written premium for that class. While this method may provide a proxy that is easy to use by those who do not have actuarial training, it is uncertain how accurate the mandated IBNR percentage is for individual insurers. This could lead to a situation of reserves that are acceptable in the eyes of the regulator but actually deficient. Some stakeholders may not be aware of the consequences of such a method. Most importantly, any suggestion to use one particular reserving method may lead to inaccurate reserves for many insurers.

Method. This paper uses several actuarial methods to calculate the IBNR of one Kenyan general insurance company’s private motor insurance line. These estimates are compared to the minimum IBNR required of the regulator.

Results. The minimum IBNR mandated by the regulator understates IBNR of the company according to the alternative methods used.

Conclusions. In Kenya, an industry-wide study could be undertaken to make sure that mandated IBNR percentages do not lead to inaccurate reserves on average. Also, the regulatory authority could determine a more reliable proxy. Individual companies should be encouraged, as they are under new Kenyan guidelines, to calculate IBNR by other methods. Both regulators and insurers should know that using a formulaic proxy to set IBNR is not a fail-safe method. Furthermore, insurers should consider multiple methods when calculating reserves.

Keywords: Reserving Methods, IBNR, Solvency, Data Quality, Data Collection and Statistical Reporting