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Basic Track I. 2002 CLRS September 2002 Arlington, Virginia. Introduction to Loss Reserving. Topics Covered Definitions Considerations Basic Reserving Techniques Paid Loss Development Method (PLDM) Incurred Loss Development Method (ILDM). Definitions. What is a Loss Reserve?

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basic track i

Basic Track I

2002 CLRS

September 2002

Arlington, Virginia

introduction to loss reserving
Introduction to Loss Reserving
  • Topics Covered
    • Definitions
    • Considerations
    • Basic Reserving Techniques
      • Paid Loss Development Method (PLDM)
      • Incurred Loss Development Method (ILDM)
definitions
Definitions
  • What is a Loss Reserve?

Amount necessary to settle unpaid claims

  • Why are Loss Reserves Important?

Accurate evaluation of financial condition & underwriting income

definitions1
Definitions
  • Accounting Aspects of Loss Reserves

Balance Sheet

Assets

Liabilities

Surplus

definitions2
Definitions
  • Carried Loss Reserve

The amount shown in a published statement or an internal statement of financial condition.

  • Indicated Loss Reserve

The amount that results from the application of a particular loss reserving method.

  • Reserve Margin/Deficit

The difference between an indicated loss reserve and a carried loss reserve.

definitions3
Definitions
  • Elements of a Loss Reserve
    • Incurred But Not Reported (IBNR)
    • Claims in Transit
    • Formula Reserve/Case Reserve
    • Development on Known Claims
    • Reopened Claims Reserve
definitions4
Definitions
  • 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
definitions5
Definitions
  • Loss Adjustment Expenses (LAE) are sum of:
    • Defense & Cost Containment (DCC) Expense
      • Includes all defense, litigation, and medical cost containment related expenses, whether internal or external to a company.
      • In general, includes costs associated with controlling the severity of cases.
    • Adjusting & Other (AO) Expense
      • Includes all claims adjusting expenses, whether internal or external to a company.
      • In general, includes costs associated with recording and adjusting cases.
life cycle of a claim reserve
Life Cycle of a Claim Reserve

7/11/01

Accident reported

Claims in Transit

8/1/01

Accident entered

into records as $1,000 Formula Reserve

4/2/01

Accident occurs

Pure IBNR

1/1/02

Estimate revised

$25,000 Case Reserve

10/5/01

Individual reserve

established

$10,000 Case Reserve

8/18/02

Settlement agreed

$30,000 Case

Reserve

9/2/02

Claim draft clears

Closed

8/25/02

Payment sent

$30,000 Case Reserve

definitions6
Definitions
  • Reserves = Outstanding

= Liabilities = Unpaid

= Case Reserves +IBNR

  • Incurred losses may have various meanings!
  • Ultimate Losses (incl. IBNR)
  • Reported Losses (excl. IBNR)
considerations data organization
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.
considerations data organization1
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.
considerations homogeneity
Considerations:Homogeneity
  • Accuracy is often improved by subdividing experience into groups exhibiting similar characteristics.

Automobile

Physical

Damage

Liability

Bodily Injury

Property Damage

PIP

Medical Payments

UM-BI

UM-PD

Collision

Other Than Collision

considerations credibility
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
    • Examples include industry data, countrywide data.
considerations emergence patterns
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.
considerations settlement patterns
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.
considerations emergence settlement
Considerations:Emergence/Settlement

Emergence (E) vs. Settlement (S) from Accident Date (A)

Collision

S

A

E

Automobile Bodily Injury

S

A

E

Workers Compensation

A

S

E

Products Liability

S

A

E

other considerations
Other Considerations
  • Factors Affecting Loss Reserves
    • Internal or Operational
      • Reinsurance programs
      • Claims handling practices
      • Business growth
      • Case reserve adequacy
      • Mix of business
      • Underwriting
      • Contract changes
      • Structured settlements
      • Portfolio characteristics
other considerations1
Other Considerations
  • Factors Affecting Loss Reserves
    • External or Environmental
      • Society
      • Regulation
      • Judiciary
      • Seasonality
      • Residual Market
      • Inflation
      • Economy
basic reserving techniques introduction
Basic Reserving Techniques:Introduction
  • Loss Development
  • Fundamental Techniques
basic reserving techniques definitions
Basic Reserving Techniques: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.

  • Loss Development Factor

The ratio of losses at successive evaluations for a defined group of claims (e.g. accident year).

basic reserving techniques compilation of paid loss triangle
Basic Reserving Techniques:Compilation of Paid Loss Triangle
  • 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 is organized in this way to highlight historical patterns.
basic reserving techniques compilation of paid loss triangle2
Basic Reserving Techniques:Compilation of Paid Loss Triangle
  • The goal is to estimate the total amount that will ultimately be paid
basic reserving techniques paid loss development factors
Basic Reserving Techniques: Paid Loss Development Factors

From the end of the accident year (at 12 months) to the end of the following year (at 24 months), paid losses for 1997 grew 79%. During the next year (from 24 to 36 months), paid losses experienced an additional 24% growth (or development) and so forth.

Loss Development Factors (LDFs) are also known as:

Age-to-Age factors

Link Ratios

basic reserving techniques paid ldm projections reserves
Basic Reserving Techniques:Paid LDM Projections & Reserves
  • Loss Reserve Estimate @ 12/31/01 = $32.241 million
basic reserving techniques issues to consider for paid ldm
Basic Reserving Techniques:Issues to Consider for Paid LDM

Issues to Consider

Have there been any changes which might make the older years irrelevant?

Are the more recent years better predictors of the future?

Are there outlier points that need to be ignored or adjusted?

Examples

There are more motorcycle losses in the oldest year; Typical P&C no longer insures motorcycles.

Typical P&C has begun writing more business in state X.

In one year, there were bad ice storms at the end of December. Late reporting caused unusually high development in the next year.