Actuarial & Claims —
Strange Partners?
Casualty Loss Reserve Seminar
Lisa G. Chanzit
Patrick R. Newlin
Ruth E. Winnicki
September 28–29, 1998
Philadelphia, Pennsylvania
Claim Reserves — What Do We Mean?
 Case reserves
 IBNR (incurred but not reported)
2
Big Differences
 Case reserves
 Actuarial reserves
3
Case Reserves — What Are They?
 Dollar estimates of loss
 Determined by claim staff
 Placed on individual claims
4
Case Reserves
 Dependent upon currently available
information and specific fact that are subject
to change (usually for the worse) as cases
develop
5
Case Evaluation and Reserving,
e.g., WC
$35,000
Resolution
Verify MMI and impairment rating
Value
$25,000
Analyze official reports, e.g., medical
Follow-up contacts
Field Investigation
$15,000
Verify injury and disability
Initial contacts with injured worker,
medical provider(s), witness(es)
$10,000
Verify employment
$0
0
Assignment
1 month
3 months
6 months
Time
9 months
12 months
6
Case Reserving Practices
 A common misconception or pitfall assessing
the effectiveness and consistency of case
reserving practices
 “Stepladder/Stair Step” reserving
7
Claim Reserves
 The actuary takes over where case reserving
ends
8
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
9
Actuarial Reserves (continued)
 Takes into consideration
 Claims not yet reported
 Reopened claim reserves
 Consistency of case reserving practices
 Reinsurance
 Shock losses
1
0
Sample Aggregate Loss Values
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
% Paid
% Reported
240
216
192
168
144
120
96
72
48
24
0
Ultimate
Evaluation Point in Months
11
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
1
2
Effective and Consistent Case Reserving
Practices
 If effectiveness and consistency is important
— if you don’t have it, how can you get it?
1
3
Effective and Consistent Case
Reserving Practices
 Ensure sound case evaluation and reserving
practices
1
4
Sound Case Evaluation
and Reserving Practices
 Case reserving philosophy
 Probable or expected total cost of the claim,
based on current, available information
1
5
Sound Case Evaluation
and Reserving Practices
 Case reserving methodology
 Separate dollar amounts for the types of loss
 Case evaluation and reserve worksheet
1
6
Sound Case Evaluation
and 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
1
7
Case Studies: Two Types
 Actuary notices something unexpected in data
 Management or claims staff notifies actuary of
change in operation
1
8
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
1
9
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
2
0
Case Study #1 (Continued)
Paid-to-Incurred Ratios
Accident
Year
12
Evaluation Age in Months
24
36
48
‘94
.36
.58
.70
.78
‘95
.37
.62
.71
.85
‘96
.35
.61
.78
‘97
.36
.69
‘98
.46
60
.89
2
1
Case Study #1 (Continued)
Average Paid Claims
Accident
Year
12
Evaluation Age in Months
24
36
48
‘94
$500
$1,500
$2,500
$3,200
‘95
525
1,575
2,625
3,375
‘96
550
1,650
2,750
‘97
580
1,750
‘98
605
60
$3,700
2
2
Case Study #1 (Continued)
Average Outstanding Claim
Accident
Year
12
Evaluation Age in Months
24
36
48
‘94
$500
$2,000
$5,000
$10,000
‘95
525
2,103
5,282
8,980
‘96
550
2,206
4,464
‘97
580
1,730
‘98
423
60
$11,250
2
3
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
2
4
Case Study #2
Decreasing Severity
 Actuary sees decreasing case reported
workers compensation severity
2
5
Case Study #2 (Continued)
Average Outstanding Claim
Accident
Year
12
Evaluation Age in Months
24
36
48
‘94
$500
$2,000
$5,000
$10,000
‘95
525
2,103
5,282
10,100
‘96
550
2,206
5,550
‘97
580
2,310
‘98
425
60
$11,750
2
6
Case Study #2 (Continued)
 Possible explanations:
 Company management/operational
 Environmental, e.g., legislative reform
2
7
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
2
8
Case Study #2 (Continued)
 Adjust actuarial analysis:
 Short-term, use trended historical frequency,
severity to project 1998 ultimate losses
2
9
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
3
0
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
3
1
Case Study #3 (Continued)
 Evidence
 Outstanding average claim value
 Paid average claim value
 Paid-to-reported ratio
 Closed claim counts to reported claim counts
3
2
Case Study #3 (Continued)
Outstanding Average Values (000’s)
Accident
Year
Evaluation Age in Months
12
24
36
48
60
72
84
96
108
120
61
39
43
24
36
30
23
26
51
42
7
65
50
39
48
39
18
16
77
23
28
24
18
12
36
‘89
‘90
‘91
‘92
‘93
40
35
36
33
29
‘94
19
30
47
33
24
‘95
24
43
36
29
‘96
24
33
39
‘97
21
27
‘98
26
3
3
Case Study #3 (Continued)
Paid Average Values (000’s)
Accident
Year
Evaluation Age in Months
12
24
36
48
60
72
84
96
21.8
20.3
20.8
9.2
10.5
12.8
7.6
14.2
19.7
3.9
10.3
14.0
‘89
‘90
‘91
‘92
108
120
22.0
22.1
22.6
12.9
14.4
16.7
23.0
23.9
24.8
17.4
18.9
19.1
25.3
‘93
2.8
6.5
15.0
21.9
25.2
‘94
1.1
5.2
11.7
19.8
25.4
‘95
1.6
8.9
16.3
23.9
‘96
3.6
10.8
18.0
‘97
2.2
8.1
‘98
3.9
3
4
Case Study #3 (Continued)
Paid-to-Incurred Ratio
Accident
Year
Evaluation Age in Months
12
24
36
48
60
72
84
96
108
120
‘89
.02
.18
.28
.80
.87
.81
.84
.94
.95
.96
‘90
.01
.18
.44
.69
.67
.63
.76
.97
.81
‘91
.03
.20
.35
.55
.68
.83
.95
.98
‘92
.10
.17
.58
.66
.86
.94
.98
‘93
.16
.26
.55
.78
.83
.90
‘94
.07
.26
.42
.73
.89
‘95
.08
.26
.50
.76
‘96
.15
.36
.52
‘97
.10
.32
‘98
.15
3
5
Case Study #3 (Continued)
Closed to Total Claims Ratio
Accident
Year
Evaluation Age in Months
12
24
36
48
60
72
84
96
108
120
.95
.87
.91
.94
.97
.97
.82
.80
.85
.91
.94
.94
.71
.70
.80
.88
.92
.97
.76
.68
.75
.89
.94
.96
.92
‘89
‘90
‘91
‘92
‘93
.64
.48
.66
.80
.82
‘94
.24
.52
.65
.78
.87
‘95
.17
.42
.54
.74
‘96
.19
.41
.58
‘97
.06
.36
‘98
.11
3
6
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
3
7
Case Study #3 (Continued)
 Case reserve strengthening
Implications:
 Possible future adverse development
Action Items:
 Claims:


conduct case reserve review — levels sufficient?
conduct staffing analysis
 Actuarial:

depends on results of review
3
8
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?
3
9
Case Study #3 (Continued)
 Faster settlement rate
Implications:
 Paying too much to close claims?
Action Items:
 Claims:


assess the basis for the closing campaign
conduct qualitative and quantitative claim review
 Actuarial:

use operational analysis to adjust reserve calculation
4
0
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
4
1