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CASUALTY LOSS RESERVE SEMINAR

CASUALTY LOSS RESERVE SEMINAR. 1998 Meeting. HOW A.M. BEST EVALUATES RESERVE ADEQUACY. Matthew C. Mosher Managing Actuary September 28, 1998. DISCUSSION OUTLINE. Purpose Sources of Information Methods Used Determining Ultimates Discount Calculation. PURPOSE OF RESERVE ADEQUACY.

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CASUALTY LOSS RESERVE SEMINAR

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  1. CASUALTY LOSS RESERVE SEMINAR 1998 Meeting HOW A.M. BEST EVALUATES RESERVE ADEQUACY Matthew C. Mosher Managing Actuary September 28, 1998

  2. DISCUSSION OUTLINE • Purpose • Sources of Information • Methods Used • Determining Ultimates • Discount Calculation

  3. PURPOSE OF RESERVE ADEQUACY • Capitalization - Key to Solvency • Allocation of Capital • Determine True Profitability

  4. INFORMATION SOURCES • Statutory Annual Statement • Actuarial Work Papers • Supplemental Rating Questionnaire

  5. INTERNAL RESERVE MODEL OVERVIEW • Three Paid Loss Development Based Methods • Three Incurred Loss Development Based Methods • LDF’s by Line • Dollar Weighted Age-to-Ultimate LDF’s • Fixed Loss Ratio Override • Credibility Weighted By-Line

  6. By Line, By Accident Year • Adequacy Projection of Each Method • Credibility Weighted Adequacy • Carried Reserves • Loss & ALAE Ratios • By Line Equity • Net Carried Loss & LAE Reserves • Statutory Discount • Estimated Deficiency • Calculated Discount • Loss Reserve Equity INTERNAL RESERVE MODEL LAYOUT

  7. Company-Based • Paid LD - Based on Previous AY Projections • Paid LD - Based on Previous AY Sch P, Part 2 • Incurred LD - Based on Previous AY Projections • Incurred LD - Based on Previous AY Sch P, Part 2 • Industry-Based • Paid Loss Development • Incurred Loss Development INTERNAL RESERVE MODEL METHODS

  8. Prior Years and AY 1988 • Part 2 Incurred equals ultimate • AY 1989 AY89 Ult. = AY89 Pd@108 x AY88 Pt2 AY88 Pd@108 • AY 1997 AY97 Ult. = AY97 Pd@12 x AY94, AY95, AY96 Pt2 AY94, AY95, AY96 Pd@12 METHOD 2 - COMPANY PAID LOSS DEVELOPMENT

  9. Prior Years and AY 1988 • Part 2 Incurred equals ultimate • AY 1989 AY89 Ult. = AY89 Pd+Cs@108 x AY88 Pt2 AY88 Pd+Cs@108 • AY 1997 AY97 Ult. = AY97 Pd+Cs@12 x AY94, AY95, AY96 Pt2 AY94, AY95, AY96 Pd+Cs@12 METHOD 4 - COMPANY INCURRED LOSS DEVELOPMENT

  10. Prior Years Req. Res. = Carr. Res. x 1 + 3Yr Dev in PY’s 2 PY Carr Res @12/94 • AY 1988 AY88 Ult. = AY88 Pt3 + Carr. Res. x 1 + 3Yr Dev in PY’s & AY88 PY & AY88 Carr Res @12/94 METHOD 1 - COMPANY PAID LOSS DEVELOPMENT

  11. AY 1989 AY89 Ult. = AY89 Pd@108 x AY88 Proj Ult AY88 Pd@108 • AY 1990 AY90 Ult. = AY90 Pd@96 x AY88, AY89 Proj Ult AY88, AY89 Pd@96 • AY 1997 AY97 Ult. = AY97 Pd@12 x AY94, AY95, AY96 Proj Ult AY94, AY95, AY96 Pd@12 METHOD 1 - COMPANY PAID LOSS DEVELOPMENT

  12. Prior Years Req. Res. = Carr. Res. x 1 + 3Yr Dev in PY’s 2 PY Carr Res @12/94 • AY 1988 AY88 Ult. = AY88 Pt3 + Carr. Res. x 1 + 3Yr Dev in PY’s & AY88 PY & AY88 Carr Res @12/94 METHOD 3 -COMPANY INCURRED LOSS DEVELOPMENT

  13. AY 1989 AY89 Ult. = AY89 Pd+Cs@108 x AY88 Proj Ult AY88 Pd+Cs@108 • AY 1990 AY90 Ult. = AY90 Pd+Cs@96 x AY88, AY89 Proj Ult AY88, AY89 Pd+Cs@96 • AY 1997 AY97 Ult. = AY97 Pd+Cs@12 x AY94, AY95, AY96 Proj Ult AY94, AY95, AY96 Pd+Cs@12 METHOD 3 - COMPANY INCURRED LOSS DEVELOPMENT

  14. Prior Years Required Reserves = PY Carr. Res. x Industry Tail Factor • AY 1988 Ultimate = AY88 Pt3 + AY88 Carr. Res. x Ind. Tail Factor • AY 1989 Ultimate = AY89 Pt3 x Industry 108-to-Ult. Paid LDF • AY 1997 Ultimate = AY97 Pt3 x Industry 12-to-Ult. Paid LDF METHOD 5 - INDUSTRY INCURRED LOSS DEVELOPMENT

  15. Prior Years Required Reserves = PY Carr. Res. x Industry Tail Factor • AY 1988 Ultimate = AY88 Pt3 + AY88 Carr. Res. x Ind. Tail Factor • AY 1989 Ultimate = AY89 Pt2 - Pt4 x Industry 108-to-Ult. Incurred LDF • AY 1997 Ultimate = AY97 Pt2 - Pt4 x Industry 12-to-Ult. Incurred LDF METHOD 6 - INDUSTRY INCURRED LOSS DEVELOPMENT

  16. Used If LDF > 4.0 • AY 1997 Loss Ratio = AY97 Ind. LR x AY95 Co. Ult. LR + AY96 Co. Ult. LR AY95 Ind. Ult. LR + AY96 Ind. Ult. LR • AY 1997 Ultimate = AY97 Loss Ratio x 1997 Net Earned Premium FIXED LOSS RATIO OVERRIDE

  17. Early Years vs. Latest Years • Paid vs. Incurred Methods • Company Credibility Based on Variation in Loss Development Pattern WEIGHTING OF METHODS

  18. Sum the Coefficient of Variance over First Six Development Periods • Compare to Industry Levels • Minimum of 40% Credibility CREDIBILITY

  19. Calculated By Line of Business • Uses Company Payment Patterns, if Stable • Uses IRS Payment Pattern Calculation • Three Calendar Year Average • Uses a 5% Discount Rate DISCOUNTING

  20. QUALITATIVE/ QUANTITATIVE REVIEW • Qualitative • Schedule P Development Pattern • Avg. Premium Per Policy vs. AY Loss Ratio Trends • Quantitative • Model Projection • Paid to Incurred Ratios • Reserves to Earned Premium

  21. DISCUSSIONS WITH MANAGEMENT • Actuarial Work Papers • Understand Distortions in Data • Reconcile Differences, if Possible

  22. RATING IMPLICATIONS • Confidence in Reserve Practices • Feeds into Capital Adequacy • Impacts Appraisal of Profitability

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