The Run-Off Environment –
Considerations for the
Reserving Actuary
Jason Russ, FCAS
Principal
Milliman, Inc.
Considerations for the
Reserving Actuary
Question:
What are some of the
adjustments a reserving actuary
may want to consider when
evaluating a runoff book of
business?
Milliman
Considerations for the
Reserving Actuary
To Answer:

Compare loss statistics for companies
prior to and post runoff

Project impact of changes on standard
reserving methods

Recommend adjustments to methods
Milliman
Considerations for the
Reserving Actuary
What data did we use?

Med mal line of business Physician claims-made

Company X – in liquidation

Company Y – voluntary run-off

PIAA – control data
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Considerations for the
Reserving Actuary
Key Statistics

Claims Closing Patterns

Average Closed Claim Severity

Loss Payment Patterns
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Considerations for the
Reserving Actuary
Claim Closure Patterns
Examined ratio of claims closed with
payment (CWIP) in a given year to
those closed with payment in prior
calendar – for a given report year.
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Considerations for the
Reserving Actuary
Claims Closed with Payment - Incremental
Evaluation (months)
Report
Year
12
24
Ratio
X
20
67
3.350
X+1
29
94
3.241
X+2
40
87
2.175
X+3
18
71
3.944
X+4
11
77
7.000
Milliman
Considerations for the
Reserving Actuary
Development
Incremental CWIP Development
Company X
20.00
3 Yr Pre Runoff
10.00
Post Runoff Yr 1
0.00
Post Runoff Yr 2
1
2
3
Post Runoff Yr 3
Evaluation (Years)
Milliman
Considerations for the
Reserving Actuary
Development
Incremental CWIP Development
Company Y
10.00
3 Yr Pre Runoff
5.00
Post Runoff
0.00
1
2
3
Evaluation (Years)
Milliman
Considerations for the
Reserving Actuary
What causes these changes?

Claimants looking for quicker
settlements to avoid reduced recoveries

Pressure within company to settle claims
faster and reduce uncertainty

Effect of “stay” on claims for companies
in liquidation
Milliman
Considerations for the
Reserving Actuary
Average Payment Per Claim
 Average
loss paid per claim
in a calendar year by age of
reported claim
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Considerations for the
Reserving Actuary
Average Loss Paid Per Claim with Payments
Evaluation – 12 months
Report
Year
Paid
Loss
($000s)
CWIP
Claims
Average
Severity
($000s)
X
5,456
40
136.4
X+1
5,200
18
288.9
X+2
2,130
11
193.6
X+3
1,805
15
120.3
Milliman
Considerations for the
Reserving Actuary
Paid Clm Sev
Average Paid Claim Severity ($000s)
Company X
3 Yr Pre Runoff
300.00
200.00
100.00
0.00
Post Runoff Yr 1
Post Runoff Yr 2
1
2
3
4
Evaluation Period
Milliman
Considerations for the
Reserving Actuary
Paid Clm Sev
Average Paid Claim Severity ($000s)
Company Y
400.00
3 Yr Pre Runoff
200.00
Post Runoff Yr 1
0.00
1
2
3
4
Evaluation Period
Milliman
Considerations for the
Reserving Actuary
What causes these changes?

Claims are settled quicker, perhaps
discount for time value of money
 Concerns about financial condition
could lead to claimants accepting less
than “usual”
 Impact of IGA limits
 Assets less than liabilities
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Considerations for the
Reserving Actuary
Incremental Paid Loss Development

Combined impact of faster closing
claims and decrease in average
amount paid per claim

Ratio of paid loss in a given calendar
year to paid loss in prior calendar year
by age of claim report year
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Considerations for the
Reserving Actuary
Paid Loss – Incremental
($000s)
Evaluation (months)
Report
Year
12
24
Ratio
X
6,403
26,916
4.204
X+1
5,456
25,794
4.728
X+2
5,200
12,088
2.325
X+3
2,130
16,381
7.691
Milliman
Considerations for the
Reserving Actuary
Incremental Paid Loss Development
Company X
Paid Dev
3 Yr Pre Runoff
10.00
Post Runoff Yr 1
5.00
Post Runoff Yr 2
Post Runoff Yr 3
0.00
1
2
3
Evaluation Period
Milliman
Considerations for the
Reserving Actuary
Incremental Paid Loss Development
Incremental Paid Loss Development
Company Y
Paid
PaidDev
Dev
Company Y
3.00
3.00
2.00
2.00
1.00
1.00
0.00
0.00
3 Yr
3 Yr Pre Runoff
Pre Runoff
Post RunoffPost
Yr 1 Runoff Yr
1
2
1
3
1
2
Evaluation
Period
3
Evaluation Period
Milliman
Considerations for the
Reserving Actuary
Testing of Results
 Compare
Company X and Y
results (prior to and post
run-off) to those of on-going
industry, as represented by
PIAA.
Milliman
Considerations for the
Reserving Actuary
Incremental CWIP Development
Test of Results
Development
3 Yr Pre Runoff
PIAA Pre Runoff
16.00
12.00
8.00
4.00
0.00
PIAA Post Runoff
Post Runoff Yr 1
Post Runoff Yr 2
1
2
3
Evaluation Period
Milliman
Considerations for the
Reserving Actuary
Development
Incremental Paid Loss Development
Test of Results
3 Yr Pre Runoff
8.00
6.00
4.00
2.00
0.00
PIAA Pre Runoff
PIAA Post Runoff
Post Runoff Yr 1
1
2
3
4
Evaluation Period
Milliman
Considerations for the
Reserving Actuary
 Now
what?
 How
do we put these
observations to work?
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Considerations for the
Reserving Actuary
Recommendations:




Use historic claim frequency levels to estimate
ultimate claims – not development methods
For “counts and averages” reserving methods,
adjust paid severities for discounting/IGA
involvement
For paid loss development method, restate triangle
to address speed-up in claims closing and decrease
in average claim payments – Berquist-Sherman
methods
Rely on paid methods more than incurred methods
Milliman
Considerations for the
Reserving Actuary
Impact of Results on:

Claimants

Estate Managers/Company
Management

Other Insurers

Reinsurers
Milliman
Considerations for the
Reserving Actuary
Estimating ULAE

Does 50/50 rule still work?

Maybe take a more direct
approach
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Considerations for the
Reserving Actuary
 Limitations
 Further
Research
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