PHASING TECHNIQUES IN ACTUARIAL RESERVING

Written by Thomas Mutsimba, an author and an Enterprise Risk Management Professional endowed with advanced forensic analysis and advanced actuarial analysis

Actuarial modelling has been the hyphen of focus in the series of modelling issues I have addressed in the past. There are a number of techniques that actuarial modelling proffers through its innovation. Innovatively, actuarial modelling is what I birth out through this nudging gift that seeks to introduce efficient frontiers in strategic management and of course de-campaigning promoting business decisions on archaic foundations of business that run the risk of adjudicating irrelevancy and unreliability.

In this issue I focus on Phasing techniques employable in actuarial reserving . One would ask what phasing techniques are in actuarial reserving? However, it’s a question to be concerned with as I expound on functional fundamentals that algorithmically perspire phasing techniques. Phasing techniques are quantum techniques or tools or methodologies that are used in the reserving tenet of actuarial planning. Reserving is the process of acceleration and deceleration of actuarial fundamentals at financially compliant equitable retention of benefits of an entity at adjudicated intervals through employing decelerated and accelerated indexed input fundamentals to maintain sustainability of an entity within the ambit of its strategic objectives.

Reserving here is a critical component of actuarial modelling. This article seeks to produce or denote phasing techniques in actuarial reserving. This may be postured in staggered withdrawal of funds to allocate them towards a particular tenet of reserving. Phasing here is demonstrated in the ladder approach. The ladder acceleration approach or the ladder deceleration approach stand as a demonstration of phasing.

Phasing Technique 1: Actuarial Reserving formulation

The Reserving formulation is a critical component. How is it a critical component? Reserving, as we have alluded to involves the acceleration and deceleration of fundamentals. From a Financial statements’ perspective reserves are captured in the Statement of changes in equity and reserves but these reserves reflect accounting accumulation of retention profits in the financial period or over the financial period. Inferences may be drawn with actuarial reserving but for the purposes of showing mainly the differential perspiring of reserving through the phasing method. The Phasing method nudgingly shows how the actuarially determined reserves are harnessed-used over various purposes. Formulation of actuarial reserving becomes the starting point. Actuarial reserving has nine characteristics. The characteristics are as follows:

[1] Financial statement analysis of key reserve impact components.

[2] Component testing of key reserve perspiration.

[3] Equilibrium efficiency and its tenet.

[4] Characteristic identifier of reserving components.

[5] Chain reserving method-a component.

[6] Formulation analysis and quantification of risk.

[7] Quantum risk equilibrium analysis.

[8] Decision based reserving.

[9] Formulation analytical.

[10] Reserve retention and reformulation.

1.1 Financial Statement Analysis of Key reserve impact components

What is the impact of Financial Statement analysis? In Actuarial reserving financial statement analysis is important as it is an exercise of debasing the base of accounting values of line items in the financial statements. What is debasing? Debasing is a process of breaking down financial items value formation using degenerate actuarial input fundamentals to reflect the real values as opposed to nominal values. Financial statement analysis is a key tenet in reserving because of the following:

1.1.1 Analysis identifies key line items on financial statements formation critical for sustainability review and formulation

1.1.2 It allows mapping of value items to key input fundamentals.

1.1.3 Financial statement analysis postures reserving injection tenets . These reserving injection tenets are principles to be applied when reserving.

1.1.4 Reserving is formed in two factorial lead indicators.

1.1.3 Financial statement analysis forms correlations between account balances.

2.1 Component Testing of Key reserve perspiration

This refers to the section of the reserves used formulate an actuarial reserve. The components are marked by input fundamentals . Testing of reserve components has 6 components .The components are as follows:

[1] Reserving adjudication principles.

[2] Reserving components divisional factors.

[3] Reserving analytical factors  .

[4] Reserving impact input fundamentals (Regulatory)

[5] Reserving cumulative balances

2.1.1 Reserving adjudication principles

What are reserving adjudication principles? Reserving adjudication principles are the principle-based deliberations of reserving components that are generated at enterprise financial statements level. Actuarially, reserving is apportioned at financial statement account balance and equitable distribution reserves. This forms the basis of apportioning through formulas mathematically and actuarially driven. The following are characteristics of reserving adjudication principles:

• Reserving should be based on a technique defined by organizational policy and industrial board regulatory requirement.

• Reserving identifies equitable distributable resources as a source of funding.

• It is a co-efficient technically accounted for retention of profits.

• Reserving is driven by Industrial Board requirement of maintenance of capital adequacy.

• Reserving is a tenet that runs on continuous bound quantum risk portion to a dedicated account.

• Reserving is an actuarial technique at most to keep the entity on sustained levels.

Reserving will be explained in detail under the phasing methodology.

2.1.2 Reserving Components divisional factors

Reserving components are postured in some determined factors. These factors are known as divisional factors. What are divisional factors? Divisional factors are classes of reserves that are presented in various entities financial statements and chosen for the phasing techniques. These various classes that are depicted as divisional factors can use the division or apportioning of reserves over various periods using the phasing techniques. Divisional factors of reserves present themselves in five modes. The modes are:

[1] Reserve magnitude factorization.

[2]Acceleration methodology characteristics.

[3] Reserving technique-specific reasons and unique quantum risk component.

[4] Divisional factors efficiencies.

[5] Reserving phasing region  or compartment of efficient frontier.

2.1.3 Reserving analytical factors

Reserving analytical factors are lead indicators of trend line requirements of actuarial reserving system. Since we have spoken about the effective factorial methodologies or modes of reserving components divisional factors it becomes imperative at this stage to determine the analytical factors. It is not just about the determination of analytical factors, but it is also about expounding the tenet, the reserving tenet. The analytical factors are as follows:

[1] Analyze the reserving withdrawal component.

[2] Determine the compounding reserving factorial component.

[3] The formula for reserving is built on the “Calculative standard reserving accounting principle’’ that results in the reserve lag released to the Income Statement as a payment of claims in the case of insurance entities or financial services funds.

[4] Reserving is built on a variety of methods such as The Chain ladder method and or Bornhuetter ferguson method as well as trendline reserving techniques.  

[5] Reserving postures Gordon-stated principles. What are the Gordon-stated principles? The Gordon-stated principles are principles built on actuarial visionary man who had visualized the field of actuarial accounting and reserving in the old age.

[6] Actuarial principals development phases.

[7] Factorial leads of actuarial phasing.

Gentric component phasing’

The Gentric component phasing, proportionally calculated at accelerated and decelerated phasing approach is a critical component of the reserving phasing technique. This together with several tested components acquired from various sources that may be internal and external may result in the phasing motion desensitization. Postured at calculated sensitivity indexing we expound on the gentric component phasing work.

Formulation of gentric component phasing

It starts off with the identification of actuarial reserving components. The Actuary or the Actuarial analyst must be provided with a set of financial statements and related disclosures for an entity. As a starting point this allows the Actuary or Actuarial analyst to reserve structural presentation right from reporting to the actual fundamentals. The component phasing formulation requires four modes. The modes are as follows:

[1] List all components according to ranking of usage of the reserve in the component.

[2] Component that can be indexed with Industrial standardization must be identified.

[3] Is the Industrial Standardization a benchmark or a guidance framework? This needs to be answered. The question must be answered by looking at the available information at the entity.

[4] General mathematical formulation tenet. What is this? This is the generic reservation summation serialization that determines how transfers are made between revenue statements and reserving and equity schedules. Usually mathematical calculations that are computative can be presented in the following ways:

[4.1] Efficient Frontiers of component phasing co-efficiency is crucial. How do you present component efficiency frontiers as it marks the mathematical deliberations of behavioral movements in reserves over a period of time? Measurements may be done through a number of bases; rather measurement bases. These measurement bases include the following:

[4.1.1] Standard co-efficiency series analysis.

[4.1.2] Extended data phasing extrapolation.

[4.1.3] Reserving frequency standard deviation from reserving base amount. The base amount refers to the fundamental capital reserve at inception of the reserving phasing that is used to estimate sustainable reserve phasing over a certain number of periods.

[4.1.4] Co-efficiency measures the dual and or binary performance of two factor stages. What are two factor stages? Two factor stages refer to the fundamental input relationships that reserve phasing may create. As an entity engages reserve phasing, this results in creation of a set of performance indicators in the tenet of sustainability. Sustainability measured at postured periodical phased motions of reserving is crucial for the breaking of actuarial advisory conundrum.

Tenure Calculation techniques

Tenure is crucial in actuarial studies and or actuarial work. What does it refer to? It refers to determination of alluded period or time series in which one wants to extrapolate the actuarial performance of the reserving phasing motion. There are five tenure computation techniques. These techniques are as follows:

[1] Period calculated or determined based on populative behavior of reserve phasing. What does it mean? It means the tenure of reserves can hinge on period determination methodology.

[2] Tenure population using tenure extrapolation index of series factorized by the number of reserves made per period.

[3] Using the bipolarization of factors depicting the tenure index computed.

[4] Derelict number of years a reserving method is using. This is also a tenure computation index. As simple as it maybe it shows the extremity or stress asymmetry degenerated fundamentals.

In my next article on reserve phasing I will expound on the tenure determination techniques as well as application and analysis of reserve phasing using industrial actuarial examples.

Disclaimer: All views expressed in this article are my own and do not represent an opinion of an entity whatsoever, with which I have been, am now or will be affiiliated with.©