Basic Track I

1
Basic Track I

• 1999 CLRS
• September 1999
• Scottsdale, Arizona

2
Introduction

• Topics Covered
• CAS Statement of Principles
• Definitions
• Principles
• Considerations
• Data Needs and Organization
• Basic Reserving Techniques
• Paid Loss Development Method
• Incurred Loss Development Method

3
Statement of Principles

• CAS Statement of Principles Regarding Property
  Casualty Loss Loss Adjustment Expense Reserves
• 3 Sections
• Adopted May 1988
• Actuary should also be familiar with standards of
  practice.

4
Definitions

• LOSS RESERVE
• Definition Amount necessary to settle unpaid
  claims
• Characteristic Estimated liability
• Importance Accurate evaluation of financial
  condition underwriting income

5
Definitions

• Accounting Aspects of Loss Reserves

Balance Sheet
Assets
Liabilities
Surplus
6
Definitions

• Carried Loss Reserve
• The amount shown in a published statement or an
  internal statement of financial condition.
• Indicated Loss Reserve
• The amount that results from the application of a
  particular loss reserving method.

7
Definitions

• Loss Adjustment Expenses (LAE) are sum of
• Allocated Loss Adjustment Expenses (ALAE)
• Defense, litigation and medical cost containment
  expenses. Does not include claims adjusters fees.
• Unallocated Loss Adjustment Expenses (ULAE)
• All expenses not included above, including claims
  adjusters fee, and company overhead.

8
Definitions

• Prior to 1998 the NAIC considered as ALAE all
  expenses that could be allocated to an individual
  claim. This could include adjusters fees. This
  led to inconsistencies between insurers. All
  adjusters fees are now included in ULAE.

9
Definitions

• Elements of a Loss Reserve
• IBNR
• Claims in Transit
• Formula Reserve/Case Reserve
• Development on Known Claims
• Reopened Claims Reserve

10
Life Cycle of a Claim Reserve
7/11/96 Accident reported Claims in Transit
8/1/96 Accident entered into records as 1,000
Formula Reserve
4/2/96 Accident occurs Pure IBNR
10/5/96 Individual reserve established 10,000
Case Reserve
1/1/97 Estimate revised 25,000 Case Reserve
8/18/97 Settlement agreed 30,000 Case Reserve
9/2/97 Claim draft clears Closed
8/25/97 Payment sent 30,000 Case Reserve
11
Four Guiding Principles

• Principle 1 Actuarially Sound Loss Reserves
• A provision for the unpaid amount required to
  settle all claims, whether reported or not, for
  which liability may exist on a particular
  accounting date.

12
Four Guiding Principles

• Principle 2 Actuarially Sound LAE Reserve
• A provision for the unpaid amount required to
  investigate, defend and effect the settlement of
  all claims, whether reported or not, for which
  LAE liability exists on a particular accounting
  date.

13
Four Guiding Principles

• Principle 3 Uncertainty Inherent in Reserves
• Implies that a range of reserves can be
  actuarially sound.
• Exists because true value of the liability for
  loss or LAE at any accounting date can be known
  only when all attendant claims have been settled.

14
Four Guiding Principles

• Principle 4 Most appropriate reserve within a
  range of actuarially sound estimates
• Depends on
• the relative likelihood of estimates within the
  range
• financial reporting context in which the reserve
  will be presented

15
Principles

• Actuarially Sound Characteristics
• For a defined group of claims
• As of a given valuation date
• Based on estimates derived from reasonable
  assumptions appropriate actuarial methods
• Guiding principles apply to
• statutory balance sheets
• statements of opinion
• reports to shareholders or securities regulators

16
ConsiderationsData Organization

• Accident Date
• The date on which the loss occurred.
• Report Date
• The date on which the loss is first reported to
  the insurer.
• Recorded Date
• The date on which the loss is first entered into
  the statistical records of the insurer.

17
ConsiderationsData Organization

• Accounting Date
• Defines a group of claims for which liability may
  exist.
• All claims incurred on or before the accounting
  date.
• Valuation Date
• Defines the time period for which transactions
  are included when evaluating the existing
  liability.

18
ConsiderationsHomogeneity

• Accuracy is often improved by subdividing
  experience into groups exhibiting similar
  characteristics.

Automobile
Physical Damage
Liability
Bodily Injury Property Damage PIP Medical
Payments UM-BI UM-PD
Collision Other Than Collision
19
ConsiderationsCredibility

• A measure of the predictive value that is
  attached to a body of data.
• A group of claims should be large enough to be
  statistically reliable.
• May be a point at which partitioning will divide
  the data into groups too small to provide
  credible development patterns.
• Use of supplementary data sources

20
ConsiderationsEmergence Patterns

• The delay between the occurrence of a claim
  when it is recorded on the companys books.
• Property claims reported quickly
• Reporting of liability claims is substantially
  delayed

21
ConsiderationsSettlement Patterns

• The length of time that it normally takes for
  reported claims to be settled (or closed)
• Affects the choice of reserving methods
• Lines which settle quickly, generally are less
  subject to reserve uncertainty.
• The amount of settlement often varies
  considerably from the original estimate

22
ConsiderationsEmergence/Settlement

• Emergence (E) vs. settlement (S)

Collision
S
A
E
Automobile Bodily Injury
S
A
E
Workers Compensation
A
E
S
Products Liability
S
A
E
23
Other Considerations

• Factors Affecting Loss Reserves
• Internal or Operational
• Reinsurance programs
• Claims handling practices
• Business growth
• Case reserve adequacy
• Mix of business
• Underwriting
• Organizational changes
• Contract changes
• Structured settlements
• Portfolio characteristics

24
Other Considerations

• Factors Affecting Loss Reserves
• External or Environmental
• Society
• Regulation
• Judiciary
• Seasonality
• Residual Market
• Inflation
• Economy

25
Terminology

• Case Reserves
• Claim reported but not yet paid
• Assigned a value by a claims adjuster or by
  formula
• Bulk IBNR reserves include
• Reserves for claims not yet reported (pure IBNR)
• Claims in transit
• Development on known claims
• Reserves for reopened claims

26
Terminology

• Reserves Outstanding
• Liabilities Unpaid
• Case Reserves IBNR
• Incurred losses may have various meanings!
• Ultimate Losses (incl. IBNR)
• Reported Losses (excl. IBNR)

27
Definitions

• Loss Development
• The financial activity on claims from
• the time they occur to the time they are
  eventually settled and paid.
• Triangles
• Compiled to measure the changes in cumulative
  claim activity over time in order to estimate
  patterns of future activity.

28
Paid Loss Development Method (LDM)

• The losses are sorted by the year in which the
  accident occurred
• The losses are summed at the end of each year
• Losses paid to date are shown on the most recent
  diagonal
• The data are organized in this way to highlight
  historical patterns

29
Paid LDMCompilation of Triangle

• Actuarial Configuration
• The goal is to estimate the total amount that
  will ultimately be paid

Cumulative Paid Losses (000 Omitted)
Final
Accident
Development Stage in Months
Total
Year
12
24
36
48
60
72
Cost
1993
3,780


6,671


8,156


9,205


9,990


10,508

???
1994
4,212


7,541


9,351


10,639

11,536

???
1995
4,901


8,864


10,987

12,458

???
1996
5,708


10,268

12,699

???
1997
6,093


11,172

???
1998
6,962


???
30
Paid RTR Development Factors
Evaluation Interval in Months

• From the end of the accident year (at 12 months)
  to the end of the following year (at 24 months),
  paid losses for 1993 accident-year grew 79.
  During the next year (from 24 to 36 months), paid
  losses experienced an additional 24 growth (or
  development) and so forth.
• Report-to-report development (RTR) factors are
  also known as
• Age -to-Age factors
• Link ratios

Accident
72 to
Year
12-24
24-36
36-48
48-60
60-72
Ultimate
1993
1.765


1.223


1.129


1.085


1.052


???
1994
1.790


1.240


1.138


1.084


1995
1.809


1.240


1.134


1996
1.799


1.237


1997
1.834


1998
Sample Calculation for Accident Year 1993
12-to-24 Months
1.790



7,541 / 4,212
31
Paid LDMRTR Factors
32
Paid LDMIssues to Consider
Issues to Consider Have there been any changes
which might make the older years
irrelevant? Are the more recent years better
predictors of the future? Are there outlier
points that need to be ignored or adjusted?
Examples There are more motorcycle losses in the
oldest year Typical PC no longer insures
motorcycles. Typical PC has begun writing more
business in state X. In one year, there were bad
ice storms at the end of December. Late
reporting caused unusually high development in
the next year.
33
Paid LDMApplication
1.126


1.070


34
Paid LDMProjections Reserves

• Loss Reserve Estimate _at_ 12/31/98 32.307
  million

35
Incurred LDMCompilation of Triangle
Case Reserves (000 Omitted)
Accident
Development Stage in Months
Year
12
24
36
48
60
72
1993
5,557
4,176
2,936
1,987
1,245
742
1994
6,328
4,664
3,200
2,051
1,189
1995
6,974
4,968
3,251
1,955
1996
7,635
5,274
3,367
1997
8,376
5,604
1998
9,599
Cumulative Reported Losses (000 Omitted)
Final
Accident
Development Stage in Months
Total
Year
12
24
36
48
60
72
Cost
1993
9,337
10,847
11,092
11,192
11,235
11,250
???
1994
10,540
12,205
12,551
12,690
12,725
???
1995
11,875
13,832
14,238
14,413
???
1996
13,343
15,542
16,066
???
1997
14,469
16,776
???
1998
16,561
???
paid losses case reserves
36
Incurred LDMRTR Factors Selected
37
Incurred LDMProjections Reserves