FirstFirstHome > Staff Login >

Technical Reserving Template for Non-life Insurance

Background

FIRST has so far funded technical assistance to strengthen the insurance sector and the regulatory regime in about 28 countries.  In this process, FIRST detected that in many early stage financial sectors’ non-life insurance accounts for over 80% of the business, and in many cases, both the sector and the regulator lack know-how in the area of technical reserving for claims and potential claims. The absence of prudent reserving by insurers is a major concern in many developing countries; so too is the general inability of the local supervisory office to exercise effective monitoring in this area.  These deficiencies seriously undermine healthy market growth and are a significant cause of insurer insolvency, which can have profound systemic implications.   

FIRST, in consultation with the IAIS, has identified a need for the strengthening of the technical skills of non-life insurers in developing countries, and to address this need, two projects have been implemented between 2006 and 2009.  FIRST funded the development of a “non-life insurance reserving template” in conjunction with IAIS, and implemented a pilot project in Uganda to test and fine tune the template. FIRST is disseminating this template for the benefit of other countries, and stands ready to extend funding to those countries that need assistance in the application of this template.

Projects

There have been numerous insolvencies amongst non-life insurers over recent decades. Ineffective reserving has been a major contributor to this vulnerability.  Due to the nature of insurance business (a present cash flow in exchange for future liabilities) the extent of this vulnerability can remain hidden for considerable periods by which time an insurer’s capital and cash flow can have been irretrievably impaired.  This is particularly the case in developing countries, where amongst other things, accounting and reporting standards tend to fall short of international norms. 

The purpose of the initial project, initiated in 2006, was to produce a template for technical knowledge/skills, insurer management systems and regulatory/supervisory requirements, including insurer data management and reporting requirements, relating to reserving policies and practices for non-life insurers.  The template set the minimum requirements needed in this area to assist the maintenance of an insurers’ financial integrity.  This template was designed to serve as a benchmark for identifying relevant resource/skills gaps in specific markets. These gaps, once identified and measured, would enable specially tailored TA programs to be designed to bring individual markets up to minimum required levels.

The key output from the initial project was a technical requirements template that set out in detail:

  • A minimum reserving policy compatible with the maintenance of the financial integrity of a local non-life insurer operating in an emerging market;
  • The capability and requirements of a data information system (be it manual or electronic) needed by the insurer to serve such reserving policy;
  • A set of periodic returns to be required by the supervisory authority from the insurer to enable the authority to monitor the effectiveness of such reserving policy; and,
  • The legislative provisions necessary to effect statutory requirements for such minimum reserving policy, data information system and supervisory returns.

Once the general template was prepared, the next step was to pilot the implementation of it in a specific jurisdiction.  With the endorsement of the IAIS, the Ugandan Insurance Commission requested assistance, and the project was launched in early 2008.  The Uganda project delivered:

  • The application of the technical requirements template to the insurance market of Uganda;
  • An assessment of the “needs gap” for each of these markets required to be addressed to reach the levels of template requirements;
  • Preparation of a road map/work plan to fill the “needs gap”;
  • Sound technical reserving methodology and principles;
  • Sound and consistent statutory reporting requirements;
  • Appropriate regulatory mechanisms to monitor and enforce the reserving and reporting requirements;
  • Appropriate remedial actions to support the monitoring processes; and,
  • A refined technical requirement template that takes account of lessons learnt on the ground and serves to strengthen the insurance sector in each of the pilot countries.

Results

The delivery of the project, subject to the implementation of the new template, in the regulations will bring about a number of positive outcomes, in particular:

  • The insurers will start submitting more complete and accurate information;
  • The adherence of the non-life insurers to the technical reserving requirements will be enhanced;
  • The supervisor will be in a better position to monitor the solvency position of the insurers in the non-life sector; and,
  • Ultimately, all of the above will contribute to stronger insurance sector in the country.

The achievement of these outcomes is dependent upon the incorporation of the technical reserving template into the Insurance Regulations.  In the case of Uganda, there has been significant progress in that direction. The pertinent section of the Insurance Regulation regarding reserving has been amended to acquire the legal authority to implement the usage of the reserving template.  The Insurance (Amendment) Bill, 2009 has been in the gazette and it is currently before the Parliament for first reading.

Template

The technical reserving template for non-life insurers is disseminated. FIRST stands ready to assist client countries in its application.