Updating the Berquist Sherman Paper—Thirty Years Later CLRS September 2007

1. Updating the Berquist Sherman Paper—Thirty Years LaterCLRS September 2007 Joseph O. Thorne, ACAS Thorne & Thorne, Inc.

2. Two Key Points • I am not RES. • I am not JRB.

3. Who Is Talking At You

4. Add An Another Key Point • I am not RES. • I am not JRB. • I am Joe Thorne.

5. Why Here and Now? • Why am I here?

6. Why Am I Here?THE ANSWER • I was silly enough to have thoughts, to put them in writing, to have them “snagged” from the PCAS and put on the syllabus for thirty years. • They are still there. • I am still answering for it (bleeding).

7. Why Are You Here?THE ANSWER • They were silly enough to have thoughts, to put them in writing, to have them “snagged” from the PCAS and put on the syllabus for thirty years. • They are still there. • You insist that we still answer for it (and rightfully so – you did bleed).

8. The Historian • 1973, 74, …..78

9. The HistorianA JRB Comment From 2002 • Joe, I had the contacts in the industry.

10. The HistorianJRB Quote From 2002 • “One of the prime motivators for writing our paper was that the accountants were moving in on our turf.”

11. The HistorianJRB Quote From 2002 • “One of the prime motivators for writing our paper was that the accountants were moving in on our turf.” • Editorial comment by Joe: I worried about FSA’s more.

12. Why Here and Now? • Why were we there?

13. What was said? • Title/Authors • Text • Appendix • Thorne Discussion • 2002 Roundtable

14. Title • LOSS RESERVE ADEQUACY TESTING: A COMPREHENSIVE, SYSTEMATIC APPROACH

15. Authorship“All Ten Of Us” • Dick Fallquist • Jim Foote • David Hu

16. Thorne Discussion & Shifts In SOL RES Quote From 2002 • RES: “Few insurers even have size of loss data. That’s surprising but true.” • JOT: “It is interesting that corporate clients .... do have (it).”

17. 2002 Roundtable MotivationComment From Amsterdam • “An actuary who shows up at a rate hearing with nothing but the chain-link method would get run out of the room.”

18. Updating the Berquist Sherman Paper—Thirty Years Later • Updating/What have we learned?

19. Ad Hoc Survey • Have you seen reserve studies of P&C insurance companies performed by other actuaries? • Have any of these studies not included a claims disposed adjustment (CD adj.)? • Of these studies with no CD adj, in the workpapers did all of them evaluate the need for such an adjustment?

20. Ad Hoc Survey • Have you seen reserve studies of P&C corporate self-insureds performed by other actuaries? • Have any of these studies not included a claims disposed adjustment (CD adj.)? • Of these studies with no CD adj, in the workpapers did all of them evaluate the need for such an adjustment?

21. Ad Hoc SurveySame Questions • Insurance Company Reserve Studies – CD Adj • Corp Self-Insured Reserve Studies – CD Adj • All Reserve Studies - Adjustment For Changes in Size Of Loss Distribution (Thorne Discussion) • Claims Disposed Adjustment In Rate Filings For Insurance Companies and Rating Bureaus

22. Ad Hoc SurveyConversations Before CLRS • Rodney Kreps • Leigh Halliwell • Joe Marker • Mark Shapland • Frank Schmid • Tom Hettinger • Gary Venter (N/A)

23. Summary • New Historical Perspective When Reviewing Thoughts Of 1977/1978/2002

24. Summary • New Historical Perspective When Reviewing Thoughts Of 1977/1978/2002 • Ad Hoc Surveys On Reserving and Ratemaking

25. Summary • New Historical Perspective When Reviewing Thoughts Of 1977/1978/2002 • Ad Hoc Surveys On Reserving and Ratemaking • Frequency Of Actual Application Of These Thoughts In Practice Implies They Are Not State Of the Art Even Thirty Years Later

26. Summary • New Historical Perspective When Reviewing Thoughts Of 1977/1978/2002 • Ad Hoc Surveys On Reserving and Ratemaking • Frequency Of Actual Application Of These Thoughts In Practice Implies They Are Not State Of the Art Even Thirty Years Later • Rodney Kreps In 2007

27. Summary • As actuaries let’s look to the future. • We’ve squared triangles (link ratio technique) long enough.

28. Report Last Week • Over the past few years there has been a transition in workers’ compensation from the old TPA to the new TPA (see Background section). It is our understanding that the old TPA is no longer in the WC TPA. The active claim management of the new TPA that started in April of last year may explain the higher level of claims under the old TPA in Fiscal Accident Years 2005 and 2006 and the lower level under the new TPA for Fiscal Accident Year 2007 (see V-WC page 3). It is our understanding that there was a cleanup with closing of claims by the new TPA. This cleanup and the inherent acceleration in payments can artificially inflate the actuarial methods. This possible artificial affect on actuarial methods was considered in our analysis and in the final selection of our estimates of this report. • In Fiscal Accident Year 2006 OTS experienced two large liability fatality claims. For one claim only legal expense has been paid. We have accepted the indemnity reserve for that claim as estimated by the TPA. The other claim closed during the two months after receipt of the June 30, 2007 data used in this report. This claim was settled for $400,000 more than the case reserve. We have reflected the settlement of this second claim in our estimates by increasing the Fiscal Accident Year 2006 reserves as of June 30, 2007 by $400,000 (see the footnote on Exhibit 3). Though these claims contribute to a spike in loss costs for that year (see Exhibit VII-LIAB) the level for Fiscal 2007 has returned to historical levels, and we continue to estimate loss costs consistent with historical pre-2006 levels and the loss cost trend as flat or 0% per year.