Basic Track II. 2000 CLRS September 2000 Minneapolis, Minnesota. Introduction. Topics Covered Comparison of Results from Paid and Incurred LDMs Reasonableness Checks Ultimate Loss Ratios Frequency/Severity Pure Premium Current Year Sensitivity Analysis Rate Level Adequacy
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PLDM: No changes in the payment pattern
ILDM: No changes in case reserve adequacy
PLDM: “Hard” data; no estimates involved
ILDM: Uses all the available information
PLDM: May generate large, volatile loss development factors
& take longer to develop to ultimate
ILDM: Uses case reserves, which are estimates, to develop
estimates of ultimate losses
Increasing delays in claim closing rates
Conscious effort to improve case reserve adequacy;
Introduction of new case reserving procedures
Change in data processing;
Revised claim payment recording procedures
Increasing frequency of full policy limits claims;
Changing policy limits
Claims settlement patterns unchanging
Case reserving practices & philosophies
No claim processing changes
Policy limits have no impact on loss
Surges in inflation;
Diminished policy defenses
Changes in reinsurance coverages;
Increased long-tail exposures;
Introduction of new or revised coverages
Claims settlement or reserving impacted
by business underwriting cycles
Catastrophic or unusual losses reflected in
Unusual claim settlement/reporting delays
Loss development unaffected by changing
loss cost trends
No change in mix of business
No cyclical loss development
No data anomalies
Increases in average premium are primarily due to:
Changes in the mix of business.
If the changes in average premium in the latest two years are due to rate increases, then that would explain much of the improvement in loss ratios.
If the changes are due to shifts in the mix of business, then the improvement in the loss ratios
may or may not be real. Further investigation would be needed to understand what the shift
was and whether the different business types have varying loss development characteristics.
There is no consistent pattern in severity, except that it has generally increased over the years. This is typical, as we expect severity to increase due to inflation.
The very small increase in severity that is forecast for the current year is unusual. In the same year, claim frequency has increased. Perhaps there is an increase in the number of small dollar claims? This would be a good question to ask the Claim Department.
In the past few years, claims have been closing more rapidly. This would imply that claims are being paid more rapidly and that the paid loss development factor is probably too high. One of the major assumptions of the PLDM (consistent payment patterns) has been violated.
In general, we expect increasing numbers:
1. Across the rows because smaller claims settle more quickly; and
2. Down the columns due to inflation.
It is important to understand the company’s case reserving philosophy and procedures to be able to interpret trends in the data. Many changes in case reserve procedures can be monitored by talking to the Claims Department.
Changes in case reserve adequacy affect incurred loss development patterns. For example, if case reserves were less adequate in the current accident year, greater future development would be expected for those accidents than was typical in the past. Use of historical loss development factors in this situation would underestimate future development and lead to inadequate overall reserve estimates.
The fit of the average case reserves @ 12 months implies an annualized trend rate of 19%! This rate is substantially higher than industry trend rates for private passenger automobile liability, which are in the range of 8% to 10%.
A line or another curve can be fitted through actual values for accident years 1994 through 1998. The fitted points for the current year can be used as estimates for the ultimate frequency and severity.
R-squared is a measure of how well a fitted curve matches the data. The value can range from 0 to 1.00, where 1.00 indicates a perfect fit.