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Changing Incurred losses Imagine that you are working with an insured and it is apparent that they do not understand their mod, and do not understand the correlation of reserves (guesses) in the final mod formula. How useful would it be for you to pro-forma your services and calculate the financial impact to their bottom line? Introduction: • We must calculate the “mod penalty” as respects the amount of incurred loss (paid + reserve not including expense) we are changing. • In this example lets imagine we are subtracting $7,000 of loss New York for the 01/01/2008. The reason for the $7,000 change is that we discovered a mistake where the reserve was $7,000 too high and it is our objective to quantify to the prospect the financial impact of that mistake.The mod sheet is attached in the subsequent slides.
Primary actual losses Step 1: • We must first calculate the value of the 10,217 actual incurred loss that is already reflected in the overall mod formula, this loss only makes up part of the mod. • First we must determine the “primary actual loss” • The first $5,000 of any loss is the primary actual loss. • The total actual incurred loss is $10,217 • Therefore the primary actual loss equals $5,000.
Ratable actual excess losses Step 2 : • Next we must calculate the “ratable actual excess loss” this is a two part calculation. • Part 1: Subtract the Actual Primary loss (calculated in the previous slide) from the actual incurred loss as listed on the mod sheet illustrated below. • 10,217-5,000 = 5,217 actual excess losses (this is the gross amount). • Next we must factor in the W factor by multiplying it times the actual excess loss. • 5,217 X .09 = 470 of ratable actual excess loss.
Total Actual losses Step 3: • Add the primary actual losses from step 1 of 5000 to the ratable actual excess losses from step 2 of 470 for the actual total of 5470. • 5000 + 470 = 5470 This amount, 5470, represents the value of the 10,217 actual incurred loss.
Total actual losses Step 4: • Now we must calculate the value of the loss reduced by $7,000 • As in step 2, the first 5,000 = the actual primary loss. • So in this case the actual incurred total is 3,217 (10,217 – 7,000). Therefore the entire amount represents the actual primary loss because it is less than $5,000. • As in step 3 we take the W factor or .09 times the actual excess, • However since this loss is all primary the actual ratable loss = 0. • Therefore the total value for the $7,000 reduction is 3,217 • If we take the value of the entire loss out as represenented by the value 5470 versus the value we are putting in represented by the value of 3217, the net effect to the mod is 3217-5470= -2253 • Now we will calculate this net affect to measure it’s impact to the mod.
The Final Calculation Step 6: • This part of the mod calculation from page 1 of 5 is called the foot totals. It contains the aggregate value of all payroll and losses in format of the mod formula. The mod formula is simply Actual/Expected= the mod • You can see that the Actualtotal is 68,091. • So simply adjust the total by net the value of the $7,000 loss reduction or -2253 and redo the calculation. • 68,091- 2253=65838 • 65,838/72,759=..904 rounded off to .90 • Therefore, by reducing the claim by $7,000, the mod is reduced by four points. Remember that the mod is made up of the last four years not including the most recent. So if this over reserve was never caught the affect would have been over three years for a total of 12pts X the premium for three years. Assume three years of $100,000 in premium for a savings of $12,000 based upon us uncovering this over reserve.
