Circular No. 8/96 - Development of Open Policy Years
November 18, 1996
To: MEMBERS OF THE ASSOCIATIONCircular No. 8/96
DEVELOPMENT OF OPEN POLICY YEARS
At its recent meeting in New York, your Board of Directors considered the development of open policy years and made the following decisions in relation to them.
1993 POLICY YEAR
The loss development of this policy year, including an allowance for undiscounted claims incurred but not reported (IBNR), has marginally worsened in comparison with original projections. In order to bring the year into balance, a further call of 10% of advance premium will be required. Following the levy of this additional amount, it is intended that the year be formally closed in June 1997 at which time the statutory limitation period in regard to personal injury claims will have expired. This will make the total supplementary call for the year 90% of the advance premium in comparison with the original estimate of 80%.
1994 POLICY YEAR
This policy year continues to develop in surplus. Accordingly, no further call is expected in excess of the originally forecast 65% of advance premium prior to closure of the year in due course, probably in mid-1998.
1995 POLICY YEAR
The originally forecast supplementary call requirement for this policy year was 50% of the advance premium. Most of the year's actuarially-calculated claims projections relate to provisions for IBNR. Nevertheless, and despite an apparent improvement in the incidence of claims over the past twenty-four months, your Board considers it prudent to take action at this stage to eliminate any potential deficit for the year by levying a further call of 25% of advance premium for 1995. This will make the expected total call requirement for the year 75% of advance premium in comparison with the original estimate of 50%.
1996 POLICY YEAR
The originally forecast supplementary call requirement for this policy year was 25% of the advance premium. Again, most of the year's actuarially-calculated claims projections relate to IBNR provisions. Although the year is still highly immature and to date displays no exceptional trends actuarial analysis suggests at this stage that the year could ultimately develop to a deficit position without taking account of investment income or the discounting of losses over time.
Although it is too early to say how large such an ultimate deficit might be, actuarial projections suggest that it could be approximately 30% of estimated total premium for the year, entailing a further supplementary call requirement of perhaps 40% of advance premium over and above the original forecast for the year. In the
circumstances, your Board decided that the originally forecast 25% supplementary call should be levied at this time and that the year continue to be monitored to determine, over the next twelve months, where its claims trends are in fact ultimately leading.
The supplementary calls described above will be levied with effect from December 31, 1996 and will in each call be payable in two equal installments due May 20 and August 20, 1997.
Shipowners Claims Bureau, Inc., Manager
for THE AMERICAN CLUB
Joseph E.M. Hughes
Chairman & CEO