Management margins in the general insurance market

Our viewpoint

At a recent LCP roundtable for reserving actuaries we discussed the topic of management margins ie a load added by management on top of the actuarial best estimate of reserves.

The topics we considered were:

  1. How is your management margin set?
  2. How big is your margin?
  3. How did your margin change between the 2020 and 2021 year-ends?

Why do insurers choose to hold a margin?

Broadly speaking, holding best estimate reserves means that the reserves will prove to be inadequate nearly half the time. Some insurers prefer to stack the odds a little bit more in their favour by adding a margin. The margin allows insurers to mitigate the impact of unexpected large losses or poorer than expected experience as it emerges.

For Lloyd’s syndicates, holding a margin can smooth the signing of the world-wide Statement of Actuarial Opinion, including the potential issue created by differences in the accounting and Lloyd’s rules for holding a provision for reinsurance bad debt.

What methods are used to set the margin?

The answers to this question in our survey showed a number of methods used by insurers.

My first observation was that the number of respondents holding no margin was fairly high and this surprised me, particularly as no-one admitted to holding an implicit allowance in their best estimate. I would suggest that any reserving actuary if pushed, and I include myself here, would admit to allowing for a ‘little bit’ of margin in their best estimate, even if only implicitly by way of making “sensible” rather than “cut to the bone” assumptions along the way.

There is a broad range of methods for setting the margin from a simple monetary amount through to a more sophisticated targeting of a specific percentile (or range) in the distribution of reserves. At the roundtable, several participants commented that they use a range of different methods eg for different classes of business.

One comment was that the margin allowed for risks that are not directly captured in the internal model. Also the level of margin was subjective but is a good mechanism to foster debate between actuaries and management and also allows auditors to scrutinise this discussion.

How big is your margin?

There was a wide range of responses to this question.

The most popular response was 5-10% which is in line with my wider experience of general insurance firms over many years. Two respondents hold a margin of greater than 20%.

One comment made was that it didn’t seem worth holding a margin of only a couple of percent. Another comment was sceptical about holding a consistent level of margins year after year – if the margin is for unexpected claims then why isn’t the margin ever used eg margins appeared consistent despite the impact of COVID-19.

How did your margin change from the 2020 to the 2021 year-end?

We asked this question as we wanted to know, given that many insurers returned to profitability in 2021, whether they would take the opportunity to put a bit more ‘under the mattress’.

The answer would appear to be yes, at least for some! Of those who hold a margin, 33% responded that their margin had increased, 19% said it had deceased and 48% responded “no change”.

Margin policy  

One area we didn’t get to discuss was whether insurers have, or should have, a margin policy and, if so, how well this is documented.

My view is that insurers, whether they hold a margin or not, should have a documented margin policy. Indeed, Lloyd’s Project Rio expects any margin to be regularly monitored against the syndicate’s policy even at the ‘Foundational’ ie most basic level of reserving.

It is natural that insurers would want a policy that maintains flexibility, whereas auditors would want a more quantified policy so they can measure consistency from year to year.

I’m sure this topic will be of keen interest at a future reserving roundtable, but please contact me if you would like to join us or have any other topics you would like to add to the agenda.