Purpose and scope
The purpose of this section is to provide a summary of key features of the Estimation Guidelines that the Scheme Actuary will use to value the unliquidated element of the Scheme Claims of Scheme Creditors pursuant to the Scheme, including incurred but not reported Scheme Claims.
As well as describing the methodology that the Scheme Actuary will apply to Scheme Claims that are referred to him, the Estimation Guidelines (which is at Appendix B to the Scheme) also provide an indication of the types of methods that Scheme Creditors might consider applying themselves in deriving the values for such Scheme Claims that they wish to submit as part of the Scheme process. It also provides guidelines for appropriate supporting documentation in relation to IBNR claims.
If at any stage of the process, either before voting, or before the submission of their Claim Form, a Scheme Creditor has any questions relating to the possible future application of the Estimation Guidelines to their Scheme Claim, then they should contact the Scheme Manager who will be pleased to assist them (see page iv for contact details).
Role of Scheme Actuary
The Scheme Actuary will usually apply the Estimation Guidelines in circumstances where the Scheme Manager and the Scheme Creditor have been unable to agree those elements of the Scheme Claim which comprise notified outstanding claims or IBNR. Scheme Creditors may also propose their own methodology for use by the Scheme Actuary, as explained further in Section 9.2 below.
9.2 Estimation Guidelines 9.2.1 Introduction
This section provides a summary of the methods that the Scheme Actuary will apply, by business/claim type, in order to derive an estimate of the value of the Scheme Claims that are submitted to him for review. Details of the methods by claim type are given in the Estimation Guidelines in Appendix B of the Scheme.
Method for U.S. and Non U.S. Asbestos, Environmental Pollution and Health Hazard ("APH") – Direct and Facultative reinsurance ("Direct")
Ground-up exposure analysis, allowing for estimation of total claim amounts, allocated across years of coverage and to the Scheme Creditor's Insurance Contracts.
The methodology for Non-US APH direct/facultative will be similar to the descriptions in the Estimation Guidelines for US APH, modified to reflect the specific circumstances of the relevant territory.
Exposure-based projection of individual underlying direct loss estimates (as they affect the underlying direct or reinsurance policies written by the Scheme Creditors) aggregated appropriately and then applied to the relevant Scheme Creditor's Insurance Contracts.
Alternatively, if suitable data is not available, then appropriate benchmark burn factors, survival and/or IBNR to outstanding ratios and/or ultimate to paid or incurred claim ratios will be used.
The methodology for Non-US APH reinsurance will be similar to the descriptions in the Estimation Guidelines for US APH reinsurance, modified to reflect the specific circumstances of the relevant territory.
Method for Direct and Reinsurance Non-APH classes of business
Appropriate development factors (and/or loss ratios) will be derived by application of standard actuarial techniques, such as the link ratio (or chain ladder) method to claims development triangles. These factors will either be derived from relevant data supplied by the Scheme Creditor, or from other appropriate data for the relevant classes of business.
For individual loss events (e.g. individual catastrophes) the above approach will be modified to either use:
(a) projection to ultimate of the Scheme Creditor's underlying gross loss development for each event, the results of which are then applied to the relevant Scheme Creditor's Insurance Contracts using an appropriate allocation; or
(b) projection to ultimate of the loss development for each event as it affects each of the relevant Scheme Creditor's Insurance Contracts. Alternatively, if suitable data is not available, then:
(c) application of benchmark factors for each event to the Scheme Creditor's data for that event (e.g. benchmark ultimate to paid/incurred claims ratio and/or IBNR-to- outstanding claims ratio for that event multiplied by the paid/incurred and/or outstanding claims for that event under the relevant Scheme Creditor's Insurance Contracts).
In some cases, the above approach may need modifying, to consider:
(a) details of known individual claims, including consideration of associated loss adjuster or attorney reports; and/or
(b) loss emergence patterns (i.e. number and amount of claims that have emerged in the past for the relevant policies).
9.2.2 Additional points
In situations where the Scheme Creditor has applied its own methodology in order to estimate IBNR, and provided details of it, the Scheme Actuary will use his judgment to assess the reasonableness of the methodology employed by the Scheme Creditor, as compared to the generic methodology for the relevant claim type(s) set out in the Estimation Guidelines. The
Estimation Guidelines set out the principles that the Scheme Actuary will apply to assess the reasonableness of a Scheme Creditor's own methodology.
If the Scheme Actuary believes that a Scheme Creditor's methodology is more appropriate than the corresponding methodology in the Estimation Guidelines, then the Scheme Actuary will proceed to review the detailed application of the Scheme Creditor's methodology, including the reasonableness of all the assumptions.
In some cases, the Scheme Actuary may select results based on a combination of results produced by the application of the Scheme Creditor's methodology, and those produced by application of the relevant section(s) of the Estimation Guidelines.
The Estimation Guidelines focus mainly on the estimation of IBNR claims. However, in some cases it may be appropriate for the Scheme Actuary to apply the Estimation Guidelines to calculate the reserve value - outstanding claims plus IBNR claims. It may also be appropriate in some cases for him to calculate the ultimate claims - outstanding claims plus IBNR claims plus paid claims (as defined in the Estimation Guidelines).
For all claim types where required data is not available, the Scheme Actuary will use his judgment in deciding on an appropriate methodology to apply in order to derive an estimate of IBNR claims, which in some cases may be zero, particularly if limited supporting data is available. In all cases, the Scheme Actuary will document his rationale for selection of a particular methodology and set of assumptions.
For Scheme Creditors' policies with claim types that have little or no claims history at the date of submission of claims under the Scheme, but where the Scheme Creditor wishes to assert an IBNR claim, the approaches outlined in the Estimation Guidelines may need some modification to reflect the specific circumstances of the submitted claim. However, as for other policies and claim types, it will be advisable for Scheme Creditors to submit details of their own methodology for estimating their claim. In considering the suitability of such methodology, and hence the amount of IBNR claimed, the Scheme Actuary will apply certain principles to test for reasonableness. In particular, for policies where there are no specific known underlying losses that can be projected (such as direct policies where there are no reported losses in any year) then those principles will include the following:
(a) For direct insurance exposures (as opposed to reinsurance), there should be a demonstrable link between the claim type(s) being claimed and the business activities of the Scheme Creditor. Scheme Creditors should supply details linking their business activities with the claim type(s) being claimed (e.g. details of products manufactured by Scheme Creditors and the types of claim that may be associated with these products). For reinsurance exposures, there should similarly be a link between the business activities of the entity(ies) insured by the Scheme Creditor and the claim type(s) being claimed.
(b) The selected assumptions should be based on a rational and unbiased analysis (of the Scheme Creditor's own, and where appropriate relevant wider market information), and not simply set at the extremes of possible ranges for those assumptions.
(c) Where an exposure-based approach has been used, then, in the case of personal-injury based direct claims, it should begin with reasonable assumptions regarding the population of exposed persons, the proportion that will ultimately claim and the likely size of these claims.
(d) Exposure to selected claim types or sources of claim should be based upon recognised sources.
(e) When the results are "grossed-up" to be at an industry or country-wide level, they should be plausible, based on current known information. In other words, if the Scheme Actuary were to take the estimates for the Scheme Creditor's policies and divide them by an appropriate market share percentage, then the resulting industry or country-wide figure should be plausible.
9.2.3 Deriving a net present value
Once the inwards outstanding claims and IBNR claims have been ascertained, they will be discounted to the Bar Date to take account of the time value of money. The discount factors to be applied depend on rates of interest and claims development (i.e. payment) patterns, as explained in the Estimation Guidelines. The discount factors set out in Attachment H to the Estimation Guidelines will be applied to outstanding claims and IBNR unless the Scheme Creditor supplies further information relating to payment patterns specific to their Scheme Claim, which would have a material impact on the discount factors.