Lesson 1The legal map: LISF articles 216 and 217
Article 216 requires insurers to hold seven types of technical reserves: unearned premium (risks in force); outstanding obligations; special mathematical, investment fluctuation and contingency reserves (these three for pension insurance under the social security laws, with the contingency reserve also required of mutual insurers); catastrophic risk reserves; and any others the National Insurance and Surety Commission (CNSF) determines.
Article 217 sets the purpose of each. The outstanding obligations reserve covers the expected value of claims, benefits, guaranteed values or dividends once the insured event has occurred, and has four parts: matured policies and incurred claims pending payment; dividends and profit sharing; claims incurred but not reported, together with allocated adjustment expenses; and the operations in article 118, section XXI. The IBNR from the earlier mini-courses lives in the third part.
Lesson 2Valuation principles: article 218 and CUSF Chapter 5.2
For unearned premium and outstanding obligation reserves, article 218 requires prudent, reliable and objective valuation, using actuarial methods based on the standards of practice set by the Commission. The amount is the sum of a best estimate and a risk margin, calculated separately.
The best estimate is the probability-weighted mean of future cash flows, discounted with the market risk-free yield curves published by the Commission; it considers all inflows and outflows gross, expense and claims inflation, policyholder options and segmentation into homogeneous risk groups. The insurer must also periodically compare the best estimate with its experience and adjust methods or assumptions if it finds a systematic deviation.
CUSF Chapter 5.2 applies this to outstanding obligations: for claims incurred but not reported or not fully reported, the best estimate is the present value of future claim payments, including adjustment expenses, salvage and recoveries, plus the Chapter 5.4 risk margin. The applicable standards of practice are in Annex 4.3.1-b, under Chapter 5.17.
Lesson 3Method registration: article 219 and Title 5
Article 219 requires insurers to register with the Commission the actuarial methods for unearned premium and outstanding obligation reserves. Methods must comply with article 218, be prepared and signed by an actuary holding a professional license and current certification from the professional college for the specialty (or who demonstrates the required knowledge to the Commission), and carry a favorable opinion from an independent actuary who meets the same requirements.
If the Commission determines that a method does not reflect a sufficient reserve level, the insurer has thirty days to adjust it; otherwise, the Commission requires a regularization plan and assigns an actuarial method. The registration procedure is in CUSF Chapter 5.5 and the statutory method in Chapter 5.3. Using third-party methods or data does not relieve the insurer of its responsibility.
Lesson 4Risk margin and actuarial opinion
CUSF Chapter 5.4 sets the net cost of capital rate at 10% (provision 5.4.3). The margin is calculated separately for the unearned premium reserve and for the IBNR reserve, by line and type of insurance, using the solvency capital requirement (RCS) as of the close of the previous month. For each, provision 5.4.4 defines it as the product of three elements:
\[MR=CoC\times BC\times D,\qquad CoC=10\%\]
where \(BC\) is the capital base, that is, the share of the RCS allocated to that reserve according to its deviation risk, and \(D\) is the duration of the obligations, calculated with the risk-free curve. Reserve adequacy is certified at each year end by an independent actuary, who must be engaged no later than June 30 of the year under review (Chapter 23.2) and must follow the standard of practice in Annex 23.3.1 (Chapter 23.3, under LISF article 311).