Basic Track I
1998 CLRS
September 28, 1998
Philadelphia, Pennsylvania
CLRS Basic Track I
1
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
CLRS Basic Track I
2
Statement of
Principles

CAS Statement of Principles
Regarding Property & Casualty
Loss & Loss Adjustment
Expense Reserves
» 3 Sections
» Adopted May 1988
» Actuary should also be familar
with standards of practice.
CLRS Basic Track I
3
Definitions

LOSS RESERVE
Definition: Amount necessary to
settle unpaid claims
Characteristic: Estimated liability
Importance: Accurate evaluation of
financial condition &
underwriting income
CLRS Basic Track I
4
Definitions

Accounting Aspects of Loss
Reserves
Balance Sheet
Assets
Liabilities
Surplus
CLRS Basic Track I
5
Definitions

Carried Loss Reserve
The amount shown in a published
statement or an internal statement
of financial considition.

Indicated Loss Reserve
The amount that results from the
application of a particular loss
reserving method.
CLRS Basic Track I
6
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.
CLRS Basic Track I
7
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.
CLRS Basic Track I
8
Definitions

Elements of a Loss Reserve
»
»
»
»
»
CLRS Basic Track I
IBNR
Claims in Transit
Formula Reserve/Case Reserve
Development on Known Claims
Reopened Claims Reserve
9
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
8/18/97
Settlement agreed
1/1/97
Estimate revised
$30,000 Case
Reserve
$25,000 Case Reserve
$10,000 Case Reserve
8/25/97
Payment sent
9/2/97
Claim draft clears
$30,000 Case Reserve
Closed
CLRS Basic Track I
10/5/96
Individual reserve
established
10
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.
CLRS Basic Track I
11
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.
CLRS Basic Track I
12
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.
CLRS Basic Track I
13
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
CLRS Basic Track I
14
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
CLRS Basic Track I
15
Considerations:
Data 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.
CLRS Basic Track I
16
Considerations:
Data 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.
CLRS Basic Track I
17
Considerations:
Homogeneity

Accuracy is often improved by
subdividing experience into
groups exhibiting similar
characteristics.
Automobile
Liability
Bodily Injury
Property Damage
PIP
Medical Payments
UM-BI
UM-PD
CLRS Basic Track I
Physical
Damage
Collision
Other Than Collision
18
Considerations:
Credibility
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
CLRS Basic Track I
19
Considerations:
Emergence Patterns

The delay between the
occurrence of a claim & when it
is recorded on the company’s
books.
» Property claims reported quickly
» Reporting of liability claims is
substantially delayed
CLRS Basic Track I
20
Considerations:
Settlement 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
CLRS Basic Track I
21
Considerations:
Emergence/Settlemen
t
 Emergence
Collision
A
(E) vs. settlement (S)
S
E
Automobile Bodily Injury
A
S
E
Workers Compensation
A
S
E
Products Liability
A
CLRS Basic Track I
E
S
22
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
CLRS Basic Track I
23
Other Considerations

Factors Affecting Loss Reserves
» External or Environmental
– Society
– Regulation
– Judiciary
– Seasonality
– Residual Market
– Inflation
– Economy
CLRS Basic Track I
24
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
CLRS Basic Track I
25
Terminology
Reserves = Outstanding
= Liabilities = Unpaid
= Case Reserves +IBNR
 Incurred losses may have
various meanings!
 Ultimate Losses (incl. IBNR)
 Reported Losses (excl. IBNR)

CLRS Basic Track I
26
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.
CLRS Basic Track I
27
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

CLRS Basic Track I
28
Paid LDM:
Compilation of
Triangle

Actuarial Configuration
Accident
Year
12
1992
1993
1994
1995
1996
1997
3,780
4,212
4,901
5,708
6,093
6,962

Cumulative Paid Losses ($000 Omitted)
Development Stage in Months
24
36
48
60
6,671
7,541
8,864
10,268
11,172
8,156
9,351
10,987
12,699
9,205
10,639
12,458
9,990
11,536
72
10,508
Final
Total
Cost
???
???
???
???
???
???
The goal is to estimate the total
amount that will ultimately be
paid
CLRS Basic Track I
29
Paid RTR
Development Factors
Evaluation Interval in Months
Accident
Year
1992
1993
1994
1995
1996
1997
12-24
1.765
1.790
1.809
1.799
1.834
24-36
1.223
1.240
1.240
1.237
36-48
1.129
1.138
1.134
48-60
1.085
1.084
60-72
1.052
72 to
Ultimate
???
Sample Calculation for Accident Year 1993:
12-to-24 Months
1.790
=
7,541 / 4,212
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
CLRS Basic Track I
30
Paid LDM:
RTR Factors
Evaluation Interval in Months
Accident
Year
12-24
24-36
1992
1.765
1.223
1993
1.790
1.240
1994
1.809
1.240
1995
1.799
1.237
1996
1.834
1997
Simple Average - All Years
1.799
1.235
Simple Average - Latest 3 Years
1.814
1.239
36-48
1.129
1.138
1.134
48-60
1.085
1.084
60-72
1.052
1.134
1.085
1.052
1.134
XXX
XXX
XXX
XXX
1.085
1.052
Simple Average - Excluding High & Low
1.799
1.238
1.134
Weighted Average - All Years
1.803
1.235
Selected RTR Factors
1.800
CLRS Basic Track I
1.235
1.134
1.134
1.085
1.052
72 to
Ultimate
???
1.070
31
Paid LDM:
Issues to Consider
Issues to Consider
Examples
Have there been any changes
which might make the older
years irrelevant?
There are more motorcycle
losses in the oldest year;
Typical P&C no longer
insures motorcycles.
Are the more recent years
better predictors of the
future?
Typical P&C has begun
writing more business in
state X.
Are there outlier points that
need to be ignored or
adjusted?
In one year, there were bad
ice storms at the end of
December. Late reporting
caused unusually high
development in the next
year.
CLRS Basic Track I
32
Paid LDM:
Application
!
Evaluation Interval in Months
12-24
RTRs
Accident
Year
1992
1993
1994
1995
1996
1997
24-36
1.800
12
3,780
4,212
4,901
5,708
6,093
6,992
1.235
36-48
1.134
48-60
1.085
60-72
1.052
Cumulative Paid Losses ($000 Omitted)
Development Stage in Months
24
36
48
60
6,671
8,156
9,205
9,990
7,541
9,351
10,639
11,536
8,864
10,987
12,458
13,157
10,268
12,699
14,401
15,625
11,172
13,797
15,646
16,976
12,532
15,477
17,550
19,042
72 to
Ultimate
1.070
72
10,508
12,136
14,220
16,437
17,859
20,032
Final
Total
Cost
11,244
12,985
15,215
17,588
19,109
21,435
Sample Calculations for Accident Year 1996:
At 24 Months:
At 36 Months:
12 to Ult
3.082
CLRS Basic Track I
12,532 = 6,962 x 1.800
15,477 = 12,532 x 1.235
or 15,477 = 6,962 x 1.800 x 1,235
Cumulative Development Factors
24 to Ult 36 to Ult 48 to Ult 60 to Ult
1.712
1.386
1.222
1.126
72 to Ult
1.070
33
Paid LDM:
Projections & Reserves

Loss Reserve Estimate @
12/31/97 = $32.307 million
Accident
Year
(1)
Actual
Paid
Losses
@ 12/31/97
(2)
1992
1993
1994
1995
1996
1997
10,508
11,536
12,458
12,699
11,172
6,962
Total
65,335
CLRS Basic Track I
Selected
RTR
Factors
(3)
1.070
1.052
1.085
1.134
1.235
1.800
Cumulative
Development
Factors to
Ultimate
(4)
1.070
1.126
1.222
1.386
1.712
3.082
Estimated
Ultimate
Losses
[(2) x (4)]
(5)
Actual
Paid
Losses
@ 12/31/97
(6)
Estimated
Loss
Reserves
{(5) - (6)}
(7)
11,244
12,990
15,224
17,601
19,126
21,457
10,508
11,536
12,458
12,699
11,172
6,962
736
1,454
2,766
4,902
7,954
14,495
97,642
65,335
32,307
34
Incurred LDM:
Compilation of
Triangle
Case Reserves ($000 Omitted)
Development Stage in Months
24
36
48
60
4,176
2,936
1,987
1,245
4,664
3,200
2,051
1,189
4,968
3,251
1,955
5,274
3,367
5,604
Accident
Year
1992
1993
1994
1995
1996
1997
12
5,557
6,328
6,974
7,635
8,376
9,599
Accident
Year
1992
1993
1994
1995
1996
1997
Cumulative Reported Losses* ($000 Omitted)
Development Stage in Months
12
24
36
48
60
72
9,337
10,847 11,092 11,192 11,235 11,250
10,540 12,205 12,551 12,690 12,725
11,875 13,832 14,238 14,413
13,343 15,542 16,066
14,469 16,776
16,561
72
742
Final
Total
Cost
???
???
???
???
???
???
* = paid losses + case reserves
CLRS Basic Track I
35
Incurred LDM:
RTR Factors Selected
Evaluation Interval in Months
Accident
Year
12-24
24-36
1992
1.162
1.023
1993
1.158
1.028
1994
1.165
1.029
1995
1.165
1.034
1996
1.159
1997
Simple Average - All Years
1.162
1.029
72 to
60-72 Ultimate
1.001
???
36-48
1.009
1.011
1.012
48-60
1.004
1.003
1.011
1.004
1.001
Simple Average - Latest 3 Years
1.163
1.030
1.011
XXX
XXX
Simple Average - Excluding High & Low
1.162
1.029
1.011
XXX
XXX
Weighted Average - All Years
1.162
1.030
1.011
1.003
1.001
Selected RTR Development Factors
1.162
1.030
1.011
1.003
1.001
CLRS Basic Track I
1.000
36
Incurred LDM:
Projections & Reserves
Accident
Year
(1)
Actual
Estimated
Actual
Estimated
Reported Development Ultimate
Paid
Loss
Losses
Factors to
Losses
Losses
Reserves
@ 12/31/97
Ultimate
[(2) x (3)] @ 12/31/97 {(4) - (5)}
(2)
(3)
(4)
(5)
(6)
1992
1993
1994
1995
1996
1997
11,250
12,725
14,413
16,066
16,776
16,561
Total
87,791
CLRS Basic Track I
1.000
1.001
1.004
1.015
1.045
1.214
11,250
12,738
14,471
16,307
17,531
20,105
10,508
11,536
12,458
12,699
11,172
6,962
742
1,202
2,013
3,608
6,359
13,143
92,402
65,335
27,067
37