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