Win Friends and Influence your Actuary

1
Win Friends and Influence your Actuary

• Dustin Gary, FCAS, MAAA
• Principal Consulting Actuary
• Centric Actuarial Solutions

2
Overview

• Discuss actuarial process
• Review industry work comp trends
• Provide practical tips to help you prove your case

3
Actuarial Process

• Step 1
• Task-Estimate ultimate losses for historical
  policy periods.
• Purpose-Assist clients in establishing
  appropriate liability accruals for their balance
  sheet.

According to FAS 5, a loss from a loss
contingency should be accrued if it is probable
that a loss has occurred and it can be reasonably
estimated.
4
Actuarial Process

• Step 2
• Task-Forecast ultimate losses for upcoming policy
  period.
• Purpose-Assist clients in identifying expenses
  for budgeting and accruals.

5
Example

• Multi-state restaurant group that has experienced
  tremendous growth
• Risk manager has instituted various programs to
  control claims
• 250,000 Paid Loss Deductible Plan
• 2008 Payroll 145,000,000

6
Loss Projection-Industry Data
Trended ultimate losses are divided by trended
payroll to calculate loss rates. Loss rate for
projection period is selected from historical
averages.
7
Loss Projection-Industry Data
Trended ultimate losses are divided by trended
payroll to calculate loss rates. Loss rate for
projection period is selected from historical
averages.
8
Loss Projection-Industry Data
Trended ultimate losses are divided by trended
payroll to calculate loss rates. Loss rate for
projection period is selected from historical
averages.
9
Loss Projection-Industry Data
Trended ultimate losses are divided by trended
payroll to calculate loss rates. Loss rate for
projection period is selected from historical
averages.
10
Loss Projection Overview

• Loss Projection - Forecast of ultimate losses for
  the upcoming period.
• Process - Estimate ultimate losses for historical
  periods, adjust for legislative
  frequency/severity trends, and divide by
  exposures to account for growth/decline in the
  business.
• Legislative Changes- State of Kansas increases
  workers compensation benefits by changing
  reimbursement schedule.
• Frequency Trend - Company implements safety
  program which cuts down the number of claims.
• Severity Trend - Average cost for a workers
  compensation claim rises due to increasing
  medical costs.

11
Industry Data

• Insurance industry statistics used to develop
  assumptions found in an actuarial analysis
• May be state-specific but generally not specific
  to clients industry
• Most work comp industry data is obtained from
  NCCI, WCIRB, or other rating bureaus

12
Industry Data

• Easy to obtain and verify
• Widely accepted for use in actuarial applications
• Often a good approximation to clients actual
  experience
• Client-specific data is unavailable or not
  credible

13
Terminology

• Paid Losses - Losses paid on individual cases.
  Often includes defense costs and other allocated
  loss adjustment expenses (ALAE).
• Case Reserves - Amount established by a claims
  adjuster to settle an individual open case.
• Incurred Losses Paid Losses Case Reserves
• Development/IBNR Reserves - Amount projected by
  actuaries to settle remaining open claims, late
  reported claims, and claims that re-open and
  require additional payments.
• Ultimate Losses Paid Losses Case Reserves
  Development/IBNR Reserves

14
Components of Ultimate Loss
IBNR/ Development
Total Reserves (Accrual)
Ultimate Loss
Case Reserves
Incurred
Paid
Example of a typical policy year at a given point
in time.
15
Individual Claim Loss Development
Initial Reserve is Set at 25,000 4/1/2000
25,000 Paid to Claimant. Reserve adjusted to
50,000 7/1/2001
115,000 Paid to Claimant and claim is
settled 1/1/2003
Accident Occurs 1/1/2000
3/15/2000 Claim is Reported
12/1/2000 10,000 Paid to Claimant Reserve
adjusted to 75,000
3/1/2002 Injury worsens. Reserve adjusted to
100,000
Initial Reserve 25,000 Total Paid 150,000
16
Accident Year Loss Development
This example tracks aggregate losses for claims
occurring in the year 2000.
Paid and Incurred losses increase over time and
eventually reach ultimate value
17
Ultimate Losses-Industry LDFs
Ultimate Loss is the total amount when all
claims from a policy year have closed. Ultimate
Loss Loss Development Factor (LDF) x Actual
losses-to-date
18
Ultimate Losses

• Organize losses by policy year or accident year
• Need detail on individual claims to calculate
  limited paid and incurred losses
• Gather loss runs from prior evaluations to create
  loss development triangles

19
Incurred Loss Triangle
20
Loss Development Analysis

• Loss development varies by TPA, state,
  retentions, and other factors
• Triangle analysis helps to prove that your claims
  close more quickly or are reserved adequately
• Could lead to lower ultimate loss estimates

21
Ultimate Losses-Client LDFs
22
Industry WC Frequency
Source 2007 NCCI State of the Line Presentation
WC Frequency has decreased by an average of -5
per year
23
Claim Count Analysis
24
Claim Count by Year
25
Calculation of Frequency
26
Client WC Frequency
Client WC Frequency has decreased by an average
of -7 per year
27
Frequency Analysis

• Divide claims by payroll or other exposure to
  calculate frequency
• Remove incident-only (0) claims and possibly
  med-only claims as they can distort results
• Observe how frequency changes over time to prove
  your programs are working

28
Frequency Trend Factors
29
Industry WC Severity
Source 2007 NCCI State of the Line Presentation
WC Lost-Time Severity has increased by an average
of 7.0 per year
30
Calculation of Severity
31
Client WC Severity
No discernible upward trend in clients severity
32
Severity Trend Factors
33
Severity Analysis

• Divide limited ultimate losses by claims for each
  policy year (average cost per claim)
• Remove incident-only (0) claims and possibly
  med-only claims as they can distort results
• Observe how severity changes over time to prove
  your programs are working

34
Loss Projection-Client Data
35
Summary of Results
36
Summary of Methodology

• Base loss development, frequency, severity
  assumptions on your data
• Maintain detailed history of claims at various
  points in time
• Use to make quantitative arguments

37
Summary of Benefits

• Provides more accurate forecast of expenses and
  liabilities
• Results in lower premium and collateral
  requirements
• MAKES YOU LOOK LIKE A HERO!