The point of calculating the Excess/Deficiency ratio in practice

Tony88passTony88pass
in CCIR.ARinstr

Hi Graham,

So in practice, you would have show the calculation on the annual return exhibit. lots of negative ratios would raise OSFI's attention, but would lots of excess ratios be a problem as well since they may think you have been over-reserved? Ideally, would 0 excess/deficiency be the best?

Thanks,
Tony

Comments

  • grahamgraham

    Hi Tony,

    In general, a regulator probably wouldn't draw any conclusions from a single ratio from a single year, whether it's the excess/deficiency ratio, the MCT ratio or any of the MSA ratios. (Although lots of negatives would likely warrant more research.) I suppose in a perfect world, the excess/deficiency would be 0 but it would have to be evaluated within a broader framework.

    I don't think there is a right or wrong answer here. If an insurer is consistently under-reserved then their net income would appear larger earlier on, but then take a hit later when those claims are actually paid. The reverse is true if an insurer is consistently over-reserved. (Their income would appear smaller earlier on but when those claims are paid and the excess reserves are released, their income would receive a bump.) So you could look at it as a timing issue. Once the claims are paid, all the plusses and minuses cancel each other out. There may even be valid reasons for a reserving philosophy that is consistently too high or too low.

    Of course, under-reserving could obviously be a problem if the insurer really doesn't have enough resources to pay those claims and is just pushing the problem to a later date. An excess/deficiency ratio that is trending down may be a clearer sign of a problem.

    An insurer that consistently over-reserves may be trying to avoid taxes but at least they are more protected against adverse development which may reduce the likelihood of insolvency, which is a regulator's primary concern.

    So, that's probably a longer answer than you were expecting! I have never been a regulator so can't say for sure what signals a specific excess/deficiency ratio would send, but to summarize, a ratio that consistently stays close to 0 probably wouldn't raise flags or warrant further investigation. A ratio that's high or low may warrant further investigation but may not necessarily be a problem.

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