General Insurance
SA4 General Insurance tests how you apply reserving, pricing, capital and reinsurance techniques to Indian non-life portfolios, and how IRDAI rules constrain those choices. Numerical reserving questions are common, often followed by a judgement on solvency or reinsurance structure.
Core rules and concepts
- Every general insurer must maintain a solvency margin of at least 150% of the required solvency margin under the IRDAI (Assets, Liabilities and Solvency Margin of General Insurance Business) Regulations.
- Reserves split into unexpired risk reserve (URR) for cover not yet expired, outstanding claims (case reserves), IBNR and IBNER, plus claims handling expenses.
- Chain-ladder uses cumulative development factors; Bornhuetter-Ferguson and Cape Cod blend development with an expected loss ratio when data are thin.
- Reinsurance is proportional (quota share, surplus) or non-proportional (excess of loss, stop-loss); it reduces net retained risk but adds counterparty credit risk.
Worked example
For accident year 2023, cumulative paid claims are ₹400 lakh at 12 months, ₹600 lakh at 24 months and ₹660 lakh at 36 months. Development factors are 600/400 = 1.50 and 660/600 = 1.10. At 24 months the projected ultimate is 600 × 1.10 = ₹660 lakh. If case reserves are ₹40 lakh, IBNR = 660 − 600 − 40 = ₹20 lakh. The case reserve is not IBNR: it is already an outstanding claim estimate, so subtracting it avoids double counting.
Traps that cost marks
- Applying development factors to paid claims when a few large claims distort the triangle; use incurred data or separate large losses.
- Ignoring claims inflation and changes in portfolio mix, such as a new motor third-party book.
- Treating URR as IBNR, or double counting claims handling expenses.
- Assuming reinsurance recoveries are certain and ignoring the reinsurer's credit risk.