Understanding Actuarial and Claims Reserves in Casualty Insurance

1. Actuarial & Claims — Strange Partners? Casualty Loss Reserve Seminar Lisa G. ChanzitPatrick R. NewlinRuth E. Winnicki

2. Claim Reserves — What Do We Mean? • Case reserves • IBNR (incurred but not reported)

3. Big Differences • Case reserves • Actuarial reserves

4. Case Reserves — What Are They? • Dollar estimates of loss • Determined by claim staff • Placed on individual claims

5. Case Reserves • Dependent upon currently available information and specific fact that are subject to change (usually for the worse) as cases develop

6. Case Evaluation and Reserving, e.g., WC $35,000 Resolution Verify MMI and impairment rating $25,000 Analyze official reports, e.g., medical Follow-up contacts Value Field Investigation $15,000 Verify injury and disability Initial contacts with injured worker,medical provider(s), witness(es) $10,000 Verify employment $0 Assignment 0 1 month 3 months 6 months 9 months 12 months Time

7. Case Reserving Practices • A common misconception or pitfall assessing the effectiveness and consistency of case reserving practices • “Stepladder/Stair Step” reserving

8. Claim Reserves • The actuary takes over where case reserving ends

9. Actuarial Reserves • Determined by statistical projections of historical loss data, i.e., aggregate information • Subject to a higher degree of objectivity and accuracy compared to case reserve estimates • Involves considerable judgment

10. Actuarial Reserves (continued) • Takes into consideration • Claims not yet reported • Reopened claim reserves • Consistency of case reserving practices • Reinsurance • Shock losses

11. Sample Aggregate Loss Values

12. What Actuaries Like From Claim Staff • Effective, consistent case reserving practices • Candid communication — Changes in case reserving philosophy — Any changes that may influence case reserving consistency — Claim trends

13. Effective and Consistent Case Reserving Practices • If effectiveness and consistency is important — if you don’t have it, how can you get it?

14. Effective and Consistent Case Reserving Practices • Ensure sound case evaluation and reserving practices

15. Sound Case Evaluationand Reserving Practices • Case reserving philosophy • Probable or expected total cost of the claim, based on current, available information

16. Sound Case Evaluationand Reserving Practices • Case reserving methodology • Separate dollar amounts for the types of loss • Case evaluation and reserve worksheet

17. Sound Case Evaluationand Reserving Practices • Monitor and manage the practices • Establish appropriate authority levels • Conduct qualitative assessment, i.e., individual claim file reviews • Perform quantitative analysis • Link results of analyses to an individual’s performance appraisal

18. Case Studies: Two Types • Actuary notices something unexpected in data • Management or claims staff notifies actuary of change in operation

19. Case Study #1 • Claim management changed general liability TPA a year ago to improve case evaluation/reserving practices • Claim management is also improving oversight and management of TPA’s performance • Financial results • Customer service measures • Quality/compliance with company standards • Efficiency of operations evaluation

20. Case Study #1 (Continued) • Changes in case reserving practices — actuary assesses these changes • Actuarial Analysis • Validate change • paid-to-incurred ratios • average paid claims • average outstanding claims • Adjust analysis

21. Case Study #1 (Continued)Paid-to-Incurred Ratios

22. Case Study #1 (Continued)Average Paid Claims

23. Case Study #1 (Continued)Average Outstanding Claim

24. Case Study #1 (Continued) • Validation • Increase in paid-to-incurred ratios • Stable paid loss trends • Decrease in average outstanding • Follow up • Confirm with interviews and/or claim file review • Development factors based on unadjusted case reserves could be understated

25. Case Study #2 • Actuary sees decreasing case reported workers compensation severity Decreasing Severity

26. Case Study #2 (Continued) Average Outstanding Claim

27. Case Study #2 (Continued) • Possible explanations: • Company management/operational • Environmental, e.g., legislative reform

28. Case Study #2 (Continued) • Interview claim manager • Recent centralization of claim administration function • Delays setting up and assigning claims • decrease in reported severity appears to be result of delays

29. Case Study #2 (Continued) • Adjust actuarial analysis: • Short-term, use trended historical frequency, severity to project 1998 ultimate losses

30. Case Study #2 (Continued) • Action Items • Determine if the new structure is effective • Conduct claim operational review • business process analysis • quantitative assessment (overpayment study) • Outcome • Recommendations • Improve work processes • Implement “how to” monitor/measure results • Long-term actuarial adjustments depend on nature of actions taken

31. Case Study #3 CFO advises actuary over past several years: • Greater proportion claims reported earlier • Case reserves established earlier and at more adequate levels • Greater proportion of claims paid earlier and closed earlier

32. Case Study #3 (Continued) • Evidence • Outstanding average claim value • Paid average claim value • Paid-to-reported ratio • Closed claim counts to reported claim counts

33. Case Study #3 (Continued)Outstanding Average Values (000’s)

34. Case Study #3 (Continued)Paid Average Values (000’s)

35. Case Study #3 (Continued)Paid-to-Incurred Ratio

36. Case Study #3 (Continued)Closed to Total Claims Ratio

37. Case Study #3 (Continued) • Results of claim review as respects case reserve strengthening • High claim staff turnover • New adjusters inexperienced • Regular case reserve reviews? • Recent strengthening represents 50% (or less) of cases

38. Case Study #3 (Continued) • Case reserve strengtheningImplications: • Possible future adverse development • Claims: • conduct case reserve review — levels sufficient? • conduct staffing analysis • Actuarial: • depends on results of review Action Items:

39. Case Study #3 (Continued) • Results of claim review as respects faster settlement rate • Some evidence of faster settlement rate • Claim department “closing campaign” • quickly lower pending caseloads • Questionable cases settled prematurely?

40. Case Study #3 (Continued) • Faster settlement rateImplications: • Paying too much to close claims? • Claims: • assess the basis for the closing campaign • conduct qualitative and quantitative claim review • Actuarial: • use operational analysis to adjust reserve calculation Action Items:

41. Claim Reserving • Claim reserving is a shared enterprise between company management, claim and actuarial functions • Claim Person — Case reserving practices • Actuary — Supplements case reserves and projects ultimate total claim reserve needs • Company Management — • Develops policies/procedures • Monitors and manages practices/procedures • Advises actuary of changes