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September 27, 2018
Christopher M. Holt, ACAS, MAAA
Legaré W. Gresham, FCAS, MAAA
Loss Reserving 201—It's More Than Just Numbers
1
• Legaré W. Gresham, FCAS, MAAA
• Consulting Actuary
• Charleston, SC
• 10+ years in property/casualty
About the Presenters
• Christopher M. Holt, ACAS, MAAA
• Consulting Actuary
• Atlanta, GA
• 18+ years in property/casualty
2
• Background/Loss Reserving 101
• Loss Drivers
– Claims Handling
– Rates and Underwriting
– Reinsurance
– External Influences
– Other Key Information
• Actuarial Considerations
Agenda
3
Background/Loss Reserving 101
INCURRED LOSS TRIANGLE
Accident Months of Maturity
Year 12 24 36 48 60 72 84 96 108 120
2008 10 20 30 40 50 60 70 80 90 95
2009 10 20 30 40 50 60 70 80 90
2010 10 20 30 40 50 60 70 80
2011 10 20 30 40 50 60 70
2012 10 20 30 40 50 60
2013 10 20 30 40 50
2014 10 20 30 40
2015 10 20 30
2016 10 20
2017 10
4
Background/Loss Reserving 101
AGE TO AGE FACTORSAccident 12 24 36 48 60 72 84 96 108 120
Year 24 36 48 60 72 84 96 108 120 Ultimate2008 2.000 1.500 1.333 1.250 1.200 1.167 1.143 1.125 1.0562009 2.000 1.500 1.333 1.250 1.200 1.167 1.143 1.1252010 2.000 1.500 1.333 1.250 1.200 1.167 1.1432011 2.000 1.500 1.333 1.250 1.200 1.1672012 2.000 1.500 1.333 1.250 1.2002013 2.000 1.500 1.333 1.2502014 2.000 1.500 1.3332015 2.000 1.5002016 2.000
Average 2.000 1.500 1.333 1.250 1.200 1.167 1.143 1.125 1.056Selected 2.000 1.500 1.333 1.250 1.200 1.167 1.143 1.125 1.056 1.053
Cumulative LDF 10.000 5.000 3.333 2.500 2.000 1.667 1.429 1.250 1.111 1.053% of Ultimate 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 95.0%
5
Background/Loss Reserving 101Incurred
Accident Expected Incurred Percent of Expected Loss Dev B-FYear Premium Loss Ratio Losses Ultimate Losses Method Method(1) (2) (3) (4) (5) (6) (7) (8)
2008 200 50% 95 95.0% 100 100 1002009 200 50% 90 90.0% 100 100 1002010 200 50% 80 80.0% 100 100 1002011 200 50% 70 70.0% 100 100 1002012 200 50% 60 60.0% 100 100 1002013 200 50% 50 50.0% 100 100 1002014 200 50% 40 40.0% 100 100 1002015 200 50% 30 30.0% 100 100 1002016 200 50% 20 20.0% 100 100 1002017 200 50% 10 10.0% 100 100 100
Total 2,000 545 1,000 1,000 1,000
Col (6) = Col (2) x Col (3)Col (7) = Col (4) / Col (5)Col (8) = Col (4) + Col (6) x { 1 - Col (5) }
6
• Change in procedures
– How initial case reserves are set up
– Relative adequacy of case reserves
– Emphasis on speed of closing claims
– Desire to fight claims
– Staffing, number of claims per adjuster
– Different Third Party Administrator (TPA)
Claims Handling Procedures
7
• Change in reporting of claims
– Changes in how the accident date or report date is assigned
– Changes in the process of how incidents are labeled claims
• Underlying claims trends
– Changes in industry wide trends for claim frequency or severity
– Changes in trends specific to a coverage or region (FL PIP, CA WC)
Claims Handling Procedures
8
Claims Handling Procedures Example
Incurred
Accident Expected Incurred Percent of Expected Loss Dev B-F
Year Premium Loss Ratio Losses Ultimate Losses Method Method
(1) (2) (3) (4) (5) (6) (7) (8)
2008 200 50% 95 95.0% 100 100 100
2009 200 50% 90 90.0% 100 100 100
2010 200 50% 80 80.0% 100 100 100
2011 200 50% 70 70.0% 100 100 100
2012 200 50% 60 60.0% 100 100 100
2013 200 50% 50 50.0% 100 100 100
2014 200 50% 40 40.0% 100 100 100
2015 200 50% 30 30.0% 100 100 100
2016 200 50% 50 20.0% 100 250 130
2017 200 50% 40 10.0% 100 400 130
Total 2,000 605 1,000 1,450 1,060
9
• Changes in case reserve adequacy distort methods based on reported incurred losses
• Methods based on paid losses ignore case reserves
• Berquist-Sherman adjusts average case reserves to remove distortions
• Thus, valuable information in case reserves is not lost
Berquist-Sherman Method
10
• Rates
– Rate level increases/decreases
– Changes in schedule rating
– Concern with adverse selection
• Underwriting
– Changes in what’s acceptable to write
– Change in focus on profit or growth
– New markets/rates
– Changes in mix of business
– Geographical mix
– Limits or deductibles written
Rates and Underwriting
11
Rates ExampleIncurred
Accident Expected Incurred Percent of Expected Loss Dev B-FYear Premium Loss Ratio Losses Ultimate Losses Method Method(1) (2) (3) (4) (5) (6) (7) (8)
2008 200 50% 95 95.0% 100 100 1002009 200 50% 90 90.0% 100 100 1002010 200 50% 80 80.0% 100 100 1002011 200 50% 70 70.0% 100 100 1002012 200 50% 60 60.0% 100 100 1002013 200 50% 50 50.0% 100 100 1002014 200 50% 40 40.0% 100 100 1002015 200 50% 30 30.0% 100 100 1002016 300 50% 20 20.0% 150 100 1402017 450 50% 10 10.0% 225 100 213
Total 2,350 545 1,175 1,000 1,153
Col (6) = Col (2) x Col (3)Col (7) = Col (4) / Col (5)Col (8) = Col (4) + Col (6) x { 1 - Col (5) }
12
• Growing book of business
– Compare long-term & short-term averages of age-to-age factors
– Be careful about overreacting
– Volume weighted average
• Shrinking book of business
– Recent age-to-age factors may show different trend, more volatility
– Volume weighted average
• Stability vs responsiveness
• Growth/shrinkage in a certain subdivision
Growth
13
• New block of business acquired
– Segmentation of current analysis (e.g. new state added to a by-state analysis)
– Difference in historical patterns
– Differences systematic or not
– Relative size
– Differences in claims handling and underwriting
– Persistence of differences after acquisition
• Distinct from organic growth (one-time vs gradual shift)
Acquisitions
14
• Changes in program structure
• Commutations
• Change in reinsurance premiums
• Impact on large claims or potential exposure above reinsurance layers
• Handling of expenses
Reinsurance
15
• Specific contract details
– Quota share percentage
– Retention
– Risk limiting features
• Loss ratio caps
• Loss corridors
• Swing rated premiums or commissions
• Risk transfer concerns
• Reinsurer ability to pay claims
Reinsurance
16
100,000
300,000
450,000
1,000,000
750,000
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
12 24 36 48 60
Months of Maturity
Cumulative Gross Reported Loss for Claim #123
Retention Example
17
100,000
300,000
450,000
1,000,000
750,000
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
12 24 36 48 60
Months of Maturity
Cumulative Gross Reported Loss for Claim #123
Retention Example
Claim Entered Litigation
18
100,000
300,000
450,000
1,000,000
750,000
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
12 24 36 48 60
Months of Maturity
Cumulative Gross Reported Loss for Claim #123
Retention Example
Claim Entered Litigation Claim Settled
19
100,000
300,000
450,000
1,000,000
750,000
500,000
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
12 24 36 48 60
Months of Maturity
Cumulative Gross Reported Loss for Claim #123
Retention Example
Claim Entered Litigation Claim Settled
20
100,000
300,000
450,000
1,000,000
750,000
500,000
250,000
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
12 24 36 48 60
Months of Maturity
Cumulative Gross Reported Loss for Claim #123
Retention Example
Claim Entered Litigation Claim Settled
21
• As retentions increase, development patterns can…
– …project more future development and…
– …be more volatile…
Retention Example
AGE TO AGE FACTORS
12 24 36 48
Losses 24 36 48 60
Unlimited 3.00 1.50 2.22 0.75
Ltd to $500K 3.00 1.50 1.11 1.00
Ltd to $250K 2.50 1.00 1.00 1.00
22
• Most accurate – separate triangles for each retention
• Most conservative – use highest historical retention
• Most responsive – use current retention
– Recent periods expected to experience most development
• Blended – use historical retentions by period (“Net”)
• Availability – may be limited historical data, augment with benchmarks
• Document!
Retention Example – Which Development Factors?
AGE TO AGE FACTORS
12 24 36 48
Losses 24 36 48 60
Unlimited 3.00 1.50 2.22 0.75
Ltd to $500K 3.00 1.50 1.11 1.00
Ltd to $250K 2.50 1.00 1.00 1.00
23
Retention Example
Incurred
Accident Expected Incurred Percent of Expected Loss Dev B-F
Year Exposure Loss Cost Losses Ultimate Losses Method Method
(1) (2) (3) (4) (5) (6) (7) (8)
2008 200 0.50 95 95.0% 100 100 100
2009 200 0.50 90 90.0% 100 100 100
2010 200 0.50 80 80.0% 100 100 100
2011 200 0.50 70 70.0% 100 100 100
2012 200 0.50 60 60.0% 100 100 100
2013 200 0.50 50 50.0% 100 100 100
2014 200 0.50 40 40.0% 100 100 100
2015 200 0.50 30 30.0% 100 100 100
2016 200 0.70 20 20.0% 140 100 132
2017 200 0.90 10 10.0% 180 100 172
Total 2,000 545 1,120 1,000 1,104
Expected loss costs increase as retentions increase
24
• Law changes
– FL PIP
– FL sinkhole
– SCHIP
– ACA
– FL Workers Compensation
• Tort reforms
• Inflation or other economic factors
• New competitors
• New claims sources
– FL public adjusters
External Influences
25
• DDR – Death, Disability, and Retirement
• Extra Contractual Obligations (ECO) claims
• Large claims/specific claim detail
• Subrogation and salvage
• Treatment of Expenses
Other Key Information Items
26
• Trust BUT Verify
• Tools
• Documentation
Actuarial Considerations
27
Questions
28
Join Us for the Next APEX Webinar
29
• We’d like your feedback and suggestions
• Please complete our survey
• For copies of this APEX presentation
• Visit the Resource Knowledge Center at Pinnacleactuaries.com
Final Notes
Commitment Beyond Numbers 30
Thank You for Your Time and Attention
cholt@pinnacleactuaries.com
678-894-7265
Christopher M. Holt
lgresham@pinnacleactuaries.com
678-367-2683
Legaré W. Gresham
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