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Understanding Reserve Methods: A Practical Guide to Schedule P and Estimating Reserves

This guide provides an overview of reserve methods using Schedule P data, including selecting LDFs, analyzing tails and ELRs, comparing indications, and selecting the best estimate and range for reserves.

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Understanding Reserve Methods: A Practical Guide to Schedule P and Estimating Reserves

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  1. Basic Track III 2008 CLRS September 2008 Washington, DC

  2. Introduction • Comparison of Reserve Methods • Schedule P - A Source of Data • You set the reserve! • Pick LDFs, Tails & ELRs • Compare Indications • Select a Best Estimate • Select a Range

  3. RECALL RESERVE METHOD DIFFERENCES

  4. SCHEDULE P - PART 1 SUMMARY - PAID

  5. SCHEDULE P - PART 1 SUMMARY - UNPAID

  6. SCHEDULE P TERMINOLOGY • Bulk + IBNR reserves include: • Reserves for claims not yet reported (pure IBNR) • Claims in transit • Development on known claims • Reserves for reopened claims

  7. SCHEDULE P TERMINOLOGY Reserves = Liabilities = Accruals = Unpaid = Case Reserves + IBNR Incurred losses and Claim counts may have various meanings!

  8. DATA AVAILABLE FROM SCHEDULE P - PART 1 • Loss Adjustment Expenses • Direct+Assumed, Ceded • Defense and Cost Containment (columns 6-7; 17-20) • Adjusting and Other (columns 8-9; 21-22) • Cumulative Paid LAE, Case Reserves, Bulk + IBNR Reserves • Claim Counts • Reported (column 12) • Outstanding (column 25) • Closed = Reported - Outstanding

  9. DATA AVAILABLE FROM SCHEDULE P - PART 2,3, & 4 • Each Part contains Net Loss + Defense & Cost Containment (DCC) • 10 accident years of history • Note some lines of business = two year detailed history • 10 calendar-year periods of development • Summary =  (21 Lines of Business) • Summary contains - full 10 year history for lines of business with two year detailed history • Check to see if properly calculated

  10. DATA AVAILABLE FROM SCHEDULE P - PART 2,3, & 4 Part 2 = Total Incurred = Published Ultimate = Paid + Case + IBNR Part 3 = Paid history Part 4 = IBNR history Case Incurred: Total Incurred Part 2 - IBNR Part 4 Case Reserve: Total Incurred Part 2 - IBNR Part 4 - Paid Part 3

  11. SCHEDULE P - PART 2Incurred Net Loss + DCC

  12. SCHEDULE P - PART 3Paid Net Loss + DCC

  13. SCHEDULE P - PART 4Bulk + IBNR Net Loss + DCC

  14. Example 1 LINE A: STEADY GROWTH OVER 10 YEARS HAS BEEN ACCOMPANIED BY MODEST RATE INCREASES

  15. Example 1: Paid Loss History

  16. Example 1: Paid Loss History

  17. Example 1: Incurred Loss History

  18. Example 1: Incurred Loss History

  19. Example 1: Estimates from LDFs

  20. Example 1: Bornheutter-Ferguson Estimates

  21. Example 1: Ultimates Compared

  22. Example 1: Reserve Estimates Compared Short Tailed Line

  23. Example 2 LINE B: 10 YEAR GROWTH REFLECTS EFFORTS TO GAIN MARKET SHARE

  24. Example 2: Paid Loss History

  25. Example 2: Paid Loss History

  26. Example 2: Incurred Loss History

  27. Example 2: Incurred Loss History

  28. Example 2: Estimates from LDFs

  29. Example 2: Bornheutter-Ferguson Estimates

  30. Example 2: Ultimates Compared

  31. Example 2: Reserve Estimates Compared Longer Tailed Line

  32. Example 3 LINE C: A new assignment. Business was acquired in an acquisition. Little information available.

  33. Example 3: Paid Loss History

  34. Example 3: Paid Loss History

  35. Example 3: Incurred Loss History

  36. Example 3: Incurred Loss History

  37. Example 3: Estimates from LDFs

  38. Example 3: Bornheutter-Ferguson Estimates

  39. Example 3: Ultimates Compared

  40. Example 3: Reserve Estimates Compared What’s happening here?

  41. Session III Review • Schedule P - A Source of Data • Estimating Reserves • Dealing with Uncertainty • A Range of Estimates can be Reasonable Now it’s time! You Set the Reserves

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