The Run-Off Environment

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The Run-Off Environment Considerations for the
Reserving Actuary
Jason Russ, FCASPrincipal Milliman, Inc.
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Considerations for the Reserving Actuary

• Question
• What are some of the adjustments a reserving
  actuary may want to consider when evaluating a
  runoff book of business?

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Considerations for the Reserving Actuary

• To Answer
• Compare loss statistics for companies prior to
  and post runoff
• Project impact of changes on standard reserving
  methods
• Recommend adjustments to methods

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Considerations for the Reserving Actuary

• What data did we use?
• Med mal line of business - Physician claims-made
• Company X in liquidation
• Company Y voluntary run-off
• PIAA control data

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Considerations for the Reserving Actuary

• Key Statistics
• Claims Closing Patterns
• Average Closed Claim Severity
• Loss Payment Patterns

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Considerations for the Reserving Actuary

• Claim Closure Patterns
• Examined ratio of claims closed with payment
  (CWIP) in a given year to those closed with
  payment in prior calendar for a given report
  year.

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Considerations for the Reserving Actuary
Claims Closed with Payment - Incremental
Evaluation (months) Evaluation (months)
Report Year 12 24 Ratio
X 20 67 3.350
X 1 29 94 3.241
X 2 40 87 2.175
X 3 18 71 3.944
X 4 11 77 7.000
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Considerations for the Reserving Actuary
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Considerations for the Reserving Actuary
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Considerations for the Reserving Actuary

• What causes these changes?
• Claimants looking for quicker settlements to
  avoid reduced recoveries
• Pressure within company to settle claims faster
  and reduce uncertainty
• Effect of stay on claims for companies in
  liquidation

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Considerations for the Reserving Actuary

• Average Payment Per Claim
• Average loss paid per claim in a calendar year by
  age of reported claim

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Considerations for the Reserving Actuary
Average Loss Paid Per Claim with Payments
Evaluation 12 months Evaluation 12 months
Report Year Paid Loss(000s) CWIPClaims Average Severity(000s)
X 5,456 40 136.4
X 1 5,200 18 288.9
X 2 2,130 11 193.6
X 3 1,805 15 120.3
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Considerations for the Reserving Actuary
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Considerations for the Reserving Actuary
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Considerations for the Reserving Actuary

• What causes these changes?
• Claims are settled quicker, perhaps discount for
  time value of money
• Concerns about financial condition could lead to
  claimants accepting less than usual
• Impact of IGA limits
• Assets less than liabilities

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Considerations for the Reserving Actuary

• Incremental Paid Loss Development
• Combined impact of faster closing claims and
  decrease in average amount paid per claim
• Ratio of paid loss in a given calendar year to
  paid loss in prior calendar year by age of claim
  report year

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Considerations for the Reserving Actuary
Paid Loss Incremental (000s)
Evaluation (months) Evaluation (months)
Report Year 12 24 Ratio
X 6,403 26,916 4.204
X 1 5,456 25,794 4.728
X 2 5,200 12,088 2.325
X 3 2,130 16,381 7.691
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Considerations for the Reserving Actuary
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Considerations for the Reserving Actuary
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Considerations for the Reserving Actuary

• Testing of Results
• Compare Company X and Y results (prior to and
  post run-off) to those of on-going industry, as
  represented by PIAA.

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Considerations for the Reserving Actuary
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Considerations for the Reserving Actuary
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Considerations for the Reserving Actuary

• Now what?
• How do we put these observations to work?

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Considerations for the Reserving Actuary

• Recommendations
• Use historic claim frequency levels to estimate
  ultimate claims not development methods
• For counts and averages reserving methods,
  adjust paid severities for discounting/IGA
  involvement
• For paid loss development method, restate
  triangle to address speed-up in claims closing
  and decrease in average claim payments
  Berquist-Sherman methods
• Rely on paid methods more than incurred methods

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Considerations for the Reserving Actuary

• Impact of Results on
• Claimants
• Estate Managers/Company Management
• Other Insurers
• Reinsurers

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Considerations for the Reserving Actuary

• Estimating ULAE
• Does 50/50 rule still work?
• Maybe take a more direct approach

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Considerations for the Reserving Actuary

• Limitations
• Further Research