AASCIF
Super Committee
Conference
Case Reserving Best Practices:
Why You Should Care
Agenda
Introduction of Panel
Discussion of How Loss Costs are Estimated and How Case Reserving Affects Those Estimates
The Case for Consistent Reserving
SFM Mutual, Minnesota
CompSource Oklahoma
Pinnacol, Colorado New Mexico Mutual Casualty
Panel
• Terry Miller, Senior Vice President and CFO, SFM Mutual, Minnesota
• Don Holman, Director of Claims, CompSource Oklahoma
• Debby Magures, Associate Vice President, Pinnacol Assurance, Colorado
• Rick Doxtator, Chief Financial Officer, New Mexico Mutual Casualty
Primer on WC Reserving and Effects it has on Revenues and Costs
• Work Comp insurance: Revenue and Cost Estimates
• Premium Estimates
• Losses Estimates
Components of Loss Cost
• Number of Claims
• Loss Time Benefits
• Medical Benefits (Including Rx, Surgeries and Medical Devices)
Estimates
• Premiums • Losses are more difficult
• How do we estimate those ultimate costs?
• Incurred and Paid Triangles
• Bornhuetter Ferguson Methods
• Frequency Severity Method
• Bergquist Sherman Method
Basics of Development Triangles
• Various Loss Estimate Methods Give Various Loss Cost Projections
• For Example, Paid Loss and Incurred Loss Triangles assume current year losses of $52 million and $55 Million
• Bornhuetter Ferguson and Berquist Sherman give estimates of $57 million and $58 million
• Range $52 to $58 million
• Carried Ultimate Loss of $56 M
Change in Case Reserving Philosophy or Inconsistent Case Reserving
Assume We had increased case reserves 20% which changed Incurred and BF methods by 15%
• Change in liability range
• Change in liability affects next years pricing
•
Claim Reserves and Evaluation Tools Don Holman, Director of Claims
CompSource Oklahoma
New Oklahoma Law
Effective Aug. 27, 2010 •
Max PPD rate LOWERED to $323
•
Will remain frozen for next 5 years
•
Establishes minimum PPD rate of $150
Beginning Nov. 1, 2012
•
Max TTD changed to $771 per week due to an increase in the SAWW
•
No change in PPD
New Oklahoma Law
•
Permanent Total Benefits (PTD) are no longer for the life of the injured worker. •
Benefits are maxed when claimant reaches maximum Social Security retirement benefits or 15 years, which ever is longer.
TTD/PPI Rates Increase Date of Injury: 10‐15‐2005 52 weeks of TTD @ $528 = $27,456
25% to the Body at max rate ($264) = 125 weeks or $33,000
Date of Injury: 11‐15‐2009 52 weeks of TTD @ $717 = $37,284
25% to the Body at max rate ($359) = 125 weeks or $44,875
Date of Injury: 11‐15‐2010 52 weeks of TTD @ $716 = $37,232
25% to the Body at max rate ($323) = 125 weeks or $40,375
Date of Injury: 11‐15‐2012 52 weeks of TTD @ $771 = $40,092
25% to the Body at max rate ($323) = 125 weeks or $40,375
Summary Injury date:
10‐15‐2005
Injury date:
11‐15‐2009
Injury date:
10‐01‐2010
Injury date:
11‐01‐2012
$60,456
$82,159
$77,607
$80,467
Reserve Efficiency Report
• Monthly report that evaluates reserve levels at specific intervals that match NCCI reporting dates, based on date the loss is incurred and when the file is closed. Report is separated by Claims service group and adjuster. Reserve Efficiency Report
• Tracks percentages of total paid (medical and indemnity) on closed claims incurred at the following intervals:
6 month
• 12 month
• 18 month
• 24 month
• 36 month
•
Reserving In A Changing Environment
Debby Magures, Associate Vice President
Pinnacol, Colorado
Reserving Practices
• Review/Update Reserve Philosophy
•
Does your corporate reserve philosophy and practices drive early, ultimate reserve practices?
Pinnacol Assurance
“Reserve for what you expect to pay”
Reserving Practices
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•
•
•
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Training
• Who and how often? Who?
• Formal and informal training?
• CR’s: Do they understand the financial impact (pricing, IBNR etc.)?
• Awareness of new drugs/procedures/costs?
Pinnacol Assurance
Beginning/Advanced training
Leverage desk level mentorship
Revenue impact
Health Headliners, Medical Director, Physician Advisors, RN Specialists
Reserving Practices
•
Resources
• Ready access to key resources?
• Desk level and management reports?
• Leverage paid data?
Pinnacol Assurance
•
Reserve Guide
14 days prior + follow‐up days
Cost
TTD weeks
Percentage of Impairment
Shoulder Arthroplasty
90
$17,387 ‐ $18,107
23 ‐ 26
Scheduled impairment
Spinal Decompression
90
$43,917 ‐ $52,496
50 ‐ 59
18 – 21% whole person
Lumbar Fusion (2+ levels, posterior)
90
$91,343 ‐ $105,935
67 ‐ 79
22 – 26% whole person
Reserve Group
Reserving Practices
Pinnacol Assurance (cont)
• 2/1 CR/RN ratio
• Negative reserve report, current AY average and median reserves, current AY incurred losses, low reserve report, prior AY incurred development, claim audits etc.
Reserving Practices
•
Predictive modeling/available data to drive ultimate reserves?
Pinnacol Assurance
•
•
•
Intake Grid
Initial Reserve
• MCA: 90 days
• CR: 20 days Severity score: • Low/medium severity: ultimate 120 days
• High severity: ultimate 180 days
• Severe severity: ultimate 365 days*
Reserving Practices
• Authority levels: empowerment or obstacle?
Pinnacol Assurance
•
Authority levels (gross incurred):
• Medical Claims Associate (NLT): $7,500 • Basic: $60k*
• Advanced: $120k**
• Expert: $350k
• Strategic CR: $500k
• Business Director: $500k
Case Reserving:
From a Finance Perspective
Rick Doxtator, Chief Financial Officer
New Mexico Mutual, New Mexico
Significance of Carried Reserves
•
Reserves to Policyholder Surplus = 185%
•
Reserves as % of Total Liabilities = 90%
•
Loss Ratio = 77.6% of Earned Premium
•
Impact on A.M. Best BCAR for rated plans
Breakout of NM Mutual Carried Reserves Finance Should:
•
Accept the fact that you work for an insurance company and are going to have losses ☺.
•
Recognize Claim Adjusters’ expertise and allow them to do their job
• Avoidance of unintended consequences or influencing
•
Same for Actuarial expertise
ERM – Should Have Defined Reserve Philosophy and Practices
Overall level of conservatism
• Defined reserve build up methodology • “Exposure”, “Point Estimate”, “Ultimate” , etc.
• “Legacy” Claims
• Timing requirements
• Review/approval requirements
•
CONSISTENCY IS MOST CRITICAL!
Reserve to Exposure
Exposure
• The exposure is the objective finding of a medical condition reported by an authorized health care provider. It represents the most current medical information available. The adjuster builds a reserve based upon this information. As the condition improves or deteriorates, the exposure changes with new medical evidence from the authorized health care provider. •
Exposure Based Reserve
• This reserve establishes the monetary components of a claim file to encompass Indemnity, Medical and Expense costs on a claim based on the known exposure. This reserve establishes the anticipated costs of a claim; it does not establish an expectation of resolution of the claim.
“Legacy” Case Reserving
Ten years old or older
• Utilize pharmaceuticals as the primary treatment
• Do not require additional indemnity benefits
• Continue to require periodic medical examinations
• Does not appear to be a change in treatment plan from year to year
• Case management does not appear to result in any improvement in condition
•
Revise reserve to “Lifetime”
Reserve Worksheet
• Use of Reserve Worksheet
Require discrete reserve elements (types of services, units, cost per unit, etc.)
• Require documentation (that 3rd party can follow)
•
Monitor For:
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“Stair‐Step” Reserving
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•
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Frequent reserve adjustments after payments
Re‐Openings
“Block” Reserving
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Repetitive total reserves
Round numbers
Client or Agent requests
• Capping at deductible
• Authority levels and approvals being followed
•
Monitor Audit Results From:
• Reinsurers • Assigned Risk Pool (NCCI)
• Independent Claims Auditors
• Regulators
• Auditors
• Others?
Monitor Trends
•
Should be some consistency around number off reserves put up, level of reserves, timing, re‐openings, etc.
•
View from statistical perspective:
• Routine Variation
• Special‐Cause Variation
Settlements
• Valuable tool for eliminating future uncertainty and possible negative development
Conclusion
Timely, accurate and consistent case reserving leads for better loss cost estimates which leads to better pricing which leads to better success for each of our companies and over the long haul more fair rates for our number one stakeholders our policyholders
Questions?
Contact Information
Terry Miller
Senior Vice President and Chief Financial Officer
SFM Mutual, Minnesota
(952) 838‐4210
terry.miller@sfmic.com
Don Holman
Director of Claims
CompSource Oklahoma
(405) 962‐3569
Don_H@compsourceok.com
Debby Magures
Associate Vice President
Pinnacol Assurance, Colorado
(303) 361‐4684
debby.magures@pinnacol.com
Rick Doxtator
Chief Financial Officer
New Mexico Mutual Casualty
(505) 343‐2820
rickd@newmexicomutual.com