September 28–29, 1998Philadelphia, Pennsylvania

Lisa G. ChanzitPatrick R. NewlinRuth E. Winnicki

Actuarial & Claims — Strange Partners?

Casualty Loss Reserve Seminar

2

Claim Reserves — What Do We Mean?

Case reserves

IBNR (incurred but not reported)

3

Big Differences

Case reserves

Actuarial reserves

4

Case Reserves — What Are They?

Dollar estimates of loss

Determined by claim staff

Placed on individual claims

5

Case Reserves

Dependent upon currently available information and specific fact that are subject to change (usually for the worse) as cases develop

6

Case Evaluation and Reserving, e.g., WC

Valu

e

$35,000

$25,000

$15,000

$10,000

$0

1 month

3 months 6 months 9 months 12 months

Time

0

Resolution

Verify MMI and impairment rating

Analyze official reports, e.g., medical

Follow-up contacts

Field Investigation

Verify injury and disability

Initial contacts with injured worker,medical provider(s), witness(es)

Verify employment

Assignment

7

Case Reserving Practices

A common misconception or pitfall assessing the effectiveness and consistency of case reserving practices “Stepladder/Stair Step” reserving

8

Claim Reserves

The actuary takes over where case reserving ends

9

Actuarial Reserves

Determined by statistical projections of historical loss data, i.e., aggregate information

Subject to a higher degree of objectivity and accuracy compared to case reserve estimates

Involves considerable judgment

10

Actuarial Reserves (continued)

Takes into consideration Claims not yet reported Reopened claim reserves Consistency of case reserving practices Reinsurance Shock losses

11

Sample Aggregate Loss Values

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%0 24 48 72 96 120

144

168

192

216

240

Evaluation Point in Months

% Paid

% Reported

Ultimate

12

What Actuaries Like From Claim Staff

Effective, consistent case reserving practices

Candid communication

— Changes in case reserving philosophy

— Any changes that may influence case reserving consistency

— Claim trends

13

Effective and Consistent Case Reserving Practices

If effectiveness and consistency is important — if you don’t have it, how can you get it?

14

Effective and Consistent Case Reserving Practices

Ensure sound case evaluation and reserving practices

15

Sound Case Evaluationand Reserving Practices

Case reserving philosophy Probable or expected total cost of the claim,

based on current, available information

16

Sound Case Evaluationand Reserving Practices

Case reserving methodology Separate dollar amounts for the types of

loss Case evaluation and reserve worksheet

17

Sound Case Evaluationand Reserving Practices

Monitor and manage the practices Establish appropriate authority levels Conduct qualitative assessment, i.e.,

individual claim file reviews Perform quantitative analysis Link results of analyses to an individual’s

performance appraisal

18

Case Studies: Two Types

Actuary notices something unexpected in data

Management or claims staff notifies actuary of change in operation

19

Case Study #1

Claim management changed general liability TPA a year ago to improve case evaluation/reserving practices

Claim management is also improving oversight and management of TPA’s performance Financial results Customer service measures Quality/compliance with company standards Efficiency of operations evaluation

20

Case Study #1 (Continued)

Changes in case reserving practices — actuary assesses these changes

Actuarial Analysis Validate change

paid-to-incurred ratios average paid claims average outstanding claims

Adjust analysis

21

Case Study #1 (Continued)Paid-to-Incurred Ratios

AccidentYear Evaluation Age in Months

12 24 36 48 60

‘94 .36 .58 .70 .78 .89

‘95 .37 .62 .71 .85

‘96 .35 .61 .78

‘97 .36 .69

‘98 .46

22

Case Study #1 (Continued)Average Paid Claims

AccidentYear Evaluation Age in Months

12 24 36 48 60

‘94 $500 $1,500 $2,500 $3,200 $3,700

‘95 525 1,575 2,625 3,375

‘96 550 1,650 2,750

‘97 580 1,750

‘98 605

23

Case Study #1 (Continued)Average Outstanding Claim

AccidentYear Evaluation Age in Months

12 24 36 48 60

‘94 $500 $2,000 $5,000 $10,000 $11,250

‘95 525 2,103 5,282 8,980

‘96 550 2,206 4,464

‘97 580 1,730

‘98 423

24

Case Study #1 (Continued)

Validation Increase in paid-to-incurred ratios Stable paid loss trends Decrease in average outstanding

Follow up Confirm with interviews and/or claim file

review Development factors based on unadjusted

case reserves could be understated

25

Case Study #2

Actuary sees decreasing case reported workers compensation severity

Decreasing Severity

26

Case Study #2 (Continued)

AccidentYear Evaluation Age in Months

12 24 36 48 60

‘94 $500 $2,000 $5,000 $10,000 $11,750

‘95 525 2,103 5,282 10,100

‘96 550 2,206 5,550

‘97 580 2,310

‘98 425

Average Outstanding Claim

27

Case Study #2 (Continued)

Possible explanations: Company management/operational Environmental, e.g., legislative reform

28

Case Study #2 (Continued)

Interview claim manager Recent centralization of claim

administration function Delays setting up and assigning claims

decrease in reported severity appears to be result of delays

29

Case Study #2 (Continued)

Adjust actuarial analysis: Short-term, use trended historical frequency,

severity to project 1998 ultimate losses

30

Case Study #2 (Continued)

Action Items Determine if the new structure is effective

Conduct claim operational review business process analysis quantitative assessment (overpayment study)

Outcome Recommendations

Improve work processes Implement “how to” monitor/measure results

Long-term actuarial adjustments depend on nature of actions taken

31

Case Study #3

Greater proportion claims reported earlier

Case reserves established earlier and at more adequate levels

Greater proportion of claims paid earlier and closed earlier

CFO advises actuary over past several years:

32

Case Study #3 (Continued)

Evidence Outstanding average claim value Paid average claim value Paid-to-reported ratio Closed claim counts to reported claim

counts

33

Case Study #3 (Continued)Outstanding Average Values (000’s)

AccidentYear Evaluation Age in Months

12 24 36 48 60 72 84 96 108 120

‘89 61 39 43 24 36 30

‘90 23 26 51 42 7 65

‘91 50 39 48 39 18 16

‘92 77 23 28 24 18 12

‘93 40 35 36 33 29 36

‘94 19 30 47 33 24

‘95 24 43 36 29

‘96 24 33 39

‘97 21 27

‘98 26

34

Case Study #3 (Continued)Paid Average Values (000’s)

AccidentYear Evaluation Age in Months

12 24 36 48 60 72 84 96 108 120

‘89 21.8 20.3 20.8 22.0 22.1 22.6

‘90 9.2 10.5 12.8 12.9 14.4 16.7

‘91 7.6 14.2 19.7 23.0 23.9 24.8

‘92 3.9 10.3 14.0 17.4 18.9 19.1

‘93 2.8 6.5 15.0 21.9 25.2 25.3

‘94 1.1 5.2 11.7 19.8 25.4

‘95 1.6 8.9 16.3 23.9

‘96 3.6 10.8 18.0

‘97 2.2 8.1

‘98 3.9

35

Case Study #3 (Continued)Paid-to-Incurred Ratio

AccidentYear Evaluation Age in Months

12 24 36 48 60 72 84 96 108 120

‘89 .02 .18 .28 .80 .87 .81 .84 .94 .95 .96

‘90 .01 .18 .44 .69 .67 .63 .76 .97 .81

‘91 .03 .20 .35 .55 .68 .83 .95 .98

‘92 .10 .17 .58 .66 .86 .94 .98

‘93 .16 .26 .55 .78 .83 .90

‘94 .07 .26 .42 .73 .89

‘95 .08 .26 .50 .76

‘96 .15 .36 .52

‘97 .10 .32

‘98 .15

36

Case Study #3 (Continued)Closed to Total Claims Ratio

AccidentYear Evaluation Age in Months

12 24 36 48 60 72 84 96 108 120

‘89 .95 .87 .91 .94 .97 .97

‘90 .82 .80 .85 .91 .94 .94

‘91 .71 .70 .80 .88 .92 .97

‘92 .76 .68 .75 .89 .94 .96

‘93 .64 .48 .66 .80 .82 .92

‘94 .24 .52 .65 .78 .87

‘95 .17 .42 .54 .74

‘96 .19 .41 .58

‘97 .06 .36

‘98 .11

37

Case Study #3 (Continued)

Results of claim review as respects case reserve strengthening High claim staff turnover New adjusters inexperienced Regular case reserve reviews? Recent strengthening represents 50% (or

less) of cases

38

Case Study #3 (Continued)

Case reserve strengthening

Implications: Possible future adverse development

Claims: conduct case reserve review — levels

sufficient? conduct staffing analysis

Actuarial: depends on results of review

Action Items:

39

Case Study #3 (Continued)

Results of claim review as respects faster settlement rate Some evidence of faster settlement rate Claim department “closing campaign”

quickly lower pending caseloads

Questionable cases settled prematurely?

40

Case Study #3 (Continued)

Faster settlement rate

Implications: Paying too much to close claims?

Claims: assess the basis for the closing campaign conduct qualitative and quantitative claim review

Actuarial: use operational analysis to adjust reserve

calculation

Action Items:

41

Claim Reserving

Claim reserving is a shared enterprise between company management, claim and actuarial functions Claim Person — Case reserving practices Actuary — Supplements case reserves and

projects ultimate total claim reserve needs Company Management —

Develops policies/procedures Monitors and manages practices/procedures Advises actuary of changes