About Reserve Discounting. |
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Starting in 2003 Canada’s regulators require that p&c insurers 'discount' their outstanding loss reserves to reflect the time-value of money. However, this is not the entire story. In addition, ultimate loss provisions have also been adjusted by three 'Margins for Adverse Deviations'. The margins address uncertainties relating to claims development, reinsurance recoverables and investment return rates.
These new adjustments impair comparability of 2003 results with those of prior years as well as comparability with other jurisdictions such as the US and Europe (where most reserves are carried on an undiscounted - and unadjusted, basis).
Mandatory reserve discounting flows directly through the balance sheet and income statements affecting:
- Loss ratios (accident-year & calendar-year)
- Combined ratios (accident-year & calendar-year)
- ROE's
- Loss development metrics etc.
Unlike other sources, MSA Report 2003 results are presented under the new discounted basis as well as under the traditional, and familiar, undiscounted basis. Thus enabling the reader to compare company results with prior years and with foreign jurisdictions.
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For more information on mandatory reserve discounting, please see OSFI's filing guidelines (pdf). as well as the Canadian Institute of Actuaries' Consolidated Standards of Practice - Practice-Specific Standards for Insurers - Dec 2002 (pdf).
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