Solvent schemes and IBNR -is the BAIC decision right?

By Peter Fidler and Mark Allen*

This article was first published in Insurance Run-Offs Newsletter, 24th March 2006, issue 86.

Solvent schemes appear, on the surface, to have recovered from the shock caused by the refusal to sanction the BAIC scheme in the summer of 2005, and a significant number of schemes have been sanctioned since then. Efforts have been made to address a number of the concerns raised by the BAIC judgement and to make sure schemes continue to provide benefits for both insurer and insured.

From an actuarial point of view, the BAIC decision has created a number of questions for the industry. The reasons for putting the Incurred But Not Reported ("IBNR") claims into the separate class in solvent schemes of arrangement are not sound, as they are based on a misunderstanding of the process involved in estimating reserves, and the estimation of IBNR claims is not always less certain than the estimation of notified claims. In particular the irregular position of IBNER