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IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area

A general insurer writes liability cover with claims that take many years to be reported and settled. The appointed actuary notices the latest run-off triangle shows development factors rising for the most recent accident years. What is the most appropriate challenge to highlight to management?

Management should be told that reserves built on older, lower development patterns may be understated. Rising development factors in recent years imply higher ultimate claims, so reserving assumptions must be reviewed. Cutting premiums, ignoring IBNR or cancelling reinsurance would worsen the problem.

  1. AReserves based on older, lower development patterns may be understated, so the reserving assumptions need reviewCorrect
  2. BPremium rates can be reduced because claims are settling more slowly
  3. CThe unearned premium reserve should be released immediately
  4. DOnly reported claims need to be reserved, so IBNR can be ignored
  5. Reinsurance should be cancelled because late claims cannot be recovered

Explanation

Rising development factors mean ultimate claims are larger than earlier patterns implied, so reserves built on old factors may be too low. Slower settlement is not a reason to cut premiums, and IBNR matters most in long-tail classes.

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