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The Run-Off Environment – Considerations for the Reserving Actuary

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  1. The Run-Off Environment – Considerations for the Reserving Actuary Jason Russ, FCASPrincipal Milliman, Inc.

  2. Considerations for the Reserving Actuary Question: What are some of the adjustments a reserving actuary may want to consider when evaluating a runoff book of business? Milliman

  3. Considerations for the Reserving Actuary To Answer: • Compare loss statistics for companies prior to and post runoff • Project impact of changes on standard reserving methods • Recommend adjustments to methods Milliman

  4. Considerations for the Reserving Actuary What data did we use? • Med mal line of business - Physician claims-made • Company X – in liquidation • Company Y – voluntary run-off • PIAA – control data Milliman

  5. Considerations for the Reserving Actuary Key Statistics • Claims Closing Patterns • Average Closed Claim Severity • Loss Payment Patterns Milliman

  6. Considerations for the Reserving Actuary Claim Closure Patterns Examined ratio of claims closed with payment (CWIP) in a given year to those closed with payment in prior calendar – for a given report year. Milliman

  7. Considerations for the Reserving Actuary Claims Closed with Payment - Incremental Milliman

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  10. Considerations for the Reserving Actuary What causes these changes? • Claimants looking for quicker settlements to avoid reduced recoveries • Pressure within company to settle claims faster and reduce uncertainty • Effect of “stay” on claims for companies in liquidation Milliman

  11. Considerations for the Reserving Actuary Average Payment Per Claim • Average loss paid per claim in a calendar year by age of reported claim Milliman

  12. Considerations for the Reserving Actuary Average Loss Paid Per Claim with Payments Milliman

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  15. Considerations for the Reserving Actuary What causes these changes? • Claims are settled quicker, perhaps discount for time value of money • Concerns about financial condition could lead to claimants accepting less than “usual” • Impact of IGA limits • Assets less than liabilities Milliman

  16. Considerations for the Reserving Actuary Incremental Paid Loss Development • Combined impact of faster closing claims and decrease in average amount paid per claim • Ratio of paid loss in a given calendar year to paid loss in prior calendar year by age of claim report year Milliman

  17. Considerations for the Reserving Actuary Paid Loss – Incremental ($000s) Milliman

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  20. Considerations for the Reserving Actuary Testing of Results • Compare Company X and Y results (prior to and post run-off) to those of on-going industry, as represented by PIAA. Milliman

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  23. Considerations for the Reserving Actuary • Now what? • How do we put these observations to work? Milliman

  24. Considerations for the Reserving Actuary Recommendations: • Use historic claim frequency levels to estimate ultimate claims – not development methods • For “counts and averages” reserving methods, adjust paid severities for discounting/IGA involvement • For paid loss development method, restate triangle to address speed-up in claims closing and decrease in average claim payments – Berquist-Sherman methods • Rely on paid methods more than incurred methods Milliman

  25. Considerations for the Reserving Actuary Impact of Results on: • Claimants • Estate Managers/Company Management • Other Insurers • Reinsurers Milliman

  26. Considerations for the Reserving Actuary Estimating ULAE • Does 50/50 rule still work? • Maybe take a more direct approach Milliman

  27. Considerations for the Reserving Actuary • Limitations • Further Research Milliman