• Filing Date: 2020-03-23
  • Form Type: 10-K
  • Description: Annual report
Reserve for Losses and Loss Adjustment Expenses
12 Months Ended
Dec. 31, 2019
Insurance [Abstract]  
Reserve for Losses and Loss Adjustment Expenses

The following table summarizes the Company’s loss and loss adjustment expenses (“LAE”) and the reserve for loss and LAE reserve movements for the years ended December 31, 2019 and 2018:


    Year ended  
    December 31,  
    2019     2018  
    ($ in thousands)  
Gross balance, beginning of year   $ 4,108       4,836  
Incurred, net of reinsurance, related to:                
     Current period     -       10,000  
     Prior period 1     (106 )     (1,006 )
           Total incurred, net of reinsurance     (106 )     8,994  
Paid, net of reinsurance, related to:                
     Current period     -       (6,000 )
     Prior period     (4,002 )     (3,722 )
           Total paid, net of reinsurance     (4,002 )     (9,722 )
Net balance, end of year   $ -       4,108  
     Add: reinsurance recoverable     -       -  
Gross balance, end of period   $ -       4,108  


1 During the year ended December 31, 2019, the Company entered into final commutation agreement with one (1) cedant under which the Company’s liabilities were commuted and discharged. The Company recognized a net gain on commutation of $106,000 which is presented as a separate line item in the Consolidated Statement of Operations.


The reserve for losses and LAE are comprised of case reserves (which are based on claims that have been reported) and IBNR reserves (which are based on losses that are believed to have occurred but for which claims have not yet been reported and include a provision for expected future development on existing case reserves). The Company uses the assistance of an independent actuary in the determination of IBNR and expected future development of existing case reserves. This is performed on a quarterly basis.


The uncertainties inherent in the reserving process and potential delays by cedants and brokers in the reporting of loss information, together with the potential for unforeseen adverse developments, may result in the reserve for losses and LAE ultimately being significantly greater or less than the reserve provided at the end of any given reporting period. The degree of uncertainty is further increased when a significant loss event takes place near the end of a reporting period. Reserve for losses and LAE estimates are reviewed periodically on a contract by contract basis and updated as new information becomes known. Any resulting adjustments are reflected in income in the period in which they become known.


The Company’s reserving process is highly dependent on the timing of loss information received from its cedants and related brokers.


Reserving methodologies and assumptions


Loss reserves are generally established based on loss payments and case reserves reported by clients when, and if, received. Estimates for IBNR losses are added to the case reserves. To establish IBNR loss estimates, the Company uses quarterly actuarial estimates from its independent actuary, who utilizes loss data reported by the Company along with industry loss data and information, knowledge of the business written and actuary’s own professional judgment.


The independent actuary employs standard actuarial methods for its analysis each quarter. Such methods may include the:


Reported Loss Development Method. Ultimate losses are estimated by calculating past reported loss development factors and applying them to exposure periods with further expected reported loss development. Since reported losses include payments and case reserves, changes in both of these amounts are incorporated in this method.


Expected Loss Ratio Method. Ultimate losses are estimated by multiplying earned premiums by an expected loss ratio. The expected loss ratio is selected using industry data, historical company data and actuarial professional judgment. This method is typically used for lines of business and contracts where there are no historical losses or where past loss experience is not credible.


Bornhuetter-Ferguson Reported Loss Method. Ultimate losses are estimated by modifying expected loss ratios to the extent reported losses experienced to date differ from what would have been expected to have been reported based upon the selected reported loss development pattern. This method avoids some of the distortions that could result from a large development factor being applied to a small base of reported losses to calculate ultimate losses.


Reserving methodologies and assumptions (cont’d)


Frequency / Severity Method. Ultimate losses are estimated under this method by multiplying the ultimate number of claims (i.e. the frequency multiplied by the exposure base on which the frequency has been determined), by the estimated ultimate average cost per claim (i.e. the severity). By analyzing claims experience by its frequency and severity components, the Company can examine trends and patterns in the rates of claims emergence (i.e. reporting) and settlement (i.e. closure) as well as in the average cost of claims. The approach is valuable because sometimes there is more inherent stability in the frequency and severity data when viewed separately rather than in the total losses


In addition, the Company may supplement its analysis with other reserving methodologies that are deemed to be relevant to specific contracts.


For each contract, the Company’s independent actuary utilizes reserving methodologies that are deemed appropriate to calculate a best estimate, or point estimate, of reserves. The decision of whether to use a single methodology or a combination of multiple methodologies depends upon the judgment of the independent actuary. The Company’s reserving methodology does not require a fixed weighting of the various methods used. Certain methods are considered more appropriate depending on the type and structure of the contract, the age and maturity of the contract, and the duration of the expected paid losses on the contract.


The Company’s gross aggregate reserves are the sum of the point estimate reserves of all portfolio exposures. Generally, IBNR loss reserves are calculated by estimating the ultimate incurred losses at any point in time and subtracting cumulative paid claims and case reserves, which incorporate specific exposures, loss payment and reporting patterns and other relevant factors.


There were no significant changes in the actuarial methodology or assumptions relating to the Company’s reserve for loss and loss adjustment expenses for the year ended December 31, 2019 or 2018.


Claims Development Tables, IBNR Reserves and Claims Frequency


The following table discloses information about the Company’s incurred and paid claims development as of December 31, 2019, as well as cumulative claim frequency and the total of incurred-but-not-reporting and expected development on reported claims included within the net incurred claims amounts. A claim is defined as a reported loss from a cedant on an excess-of-loss reinsurance contract arising from a loss event for which the Company records a paid loss or case reserve. The Company operates a single business segment, being property catastrophe reinsurance.


Property Catastrophe Reinsurance                                   
(in thousands)                                   
                              As of  

Incurred Losses and Loss Adjustment Expenses

                          December 31, 2019  
                              Total of Incurred-but-Not-Reported Liabilities Plus Expected Development on Reported Claims     Cumulative Number of Reported Claims  
                              (dollars in thousands)        

Accident Year

    2016     2017     2018     2019              
2016     $ 14,775     $ 18,801     $ 17,795     $ 17,689     $ -       5  
2017             $ 38,401     $ 38,401     $ 38,401     $ -       8  
2018                     $ 10,000     $ 10,000     $ -       2  
2019                             $ -     $ -       -  
        Total                     $ 66,090     $ -          


Cumulative Paid Losses and Loss Adjustment Expenses


For the Years Ended December 31,

(in thousands)


Accident Year     2016     2017     2018     2019              
2016     $ 6,073     $ 16,073     $ 17,687     $ 17,689                  
2017             $ 36,293     $ 38,401     $ 38,401                  
2018                     $ 6,000     $ 10,000                  
2019                             $ -                  
        Total                     $ 66,090                  
  Reserve for loss and loss adjustment expenses at December 31, 2019, net of reinsurance                           $ -                  



During the year ended December 31, 2019, the Company did not enter into any retrocession arrangements.


During the year ended December 31, 2018, the Company did not enter into any retrocession arrangements. However, the Company had issued its $2 million Series 2018-1 participating notes, all of which were drawn down to settle losses incurred by the Company as per the provisions of the Series 2018-1 participating notes. As such, the Company’s gross and net reserve for losses and loss adjustment expenses at December 31, 2018 are both $4,108,000 as recorded on the consolidated balance sheets.


The following table shows the historical average annual percentage payout of claims as at December 31, 2019.



  1     2     3     4  
Property Catastrophe Reinsurance     62.9 %     34.0 %     9.1 %     0.0 %