© 2011 National Association of Insurance Commissioners Reserves - P/C - Life ASSAL – July 2011 Todd Sells

© 2011 National Association of Insurance Commissioners

ReservesReserves- P/C- P/C- Life- Life

ASSAL – July 2011ASSAL – July 2011

Todd SellsTodd Sells


Property and Property and Casualty Casualty ReservesReserves


SSAP No. 55SSAP No. 55——Unpaid Claims, Unpaid Claims, Losses and Loss Adjustments Losses and Loss Adjustments

ExpensesExpensesClaims, losses, and loss/claim adjustment Claims, losses, and loss/claim adjustment

expenses shall be recognized as expense expenses shall be recognized as expense when a when a covered or insured event occurs.covered or insured event occurs.

AA covered or insured event:covered or insured event: OccurrenceOccurrence

The occurrence of an incident which gives rise to a claim or The occurrence of an incident which gives rise to a claim or the incurring of costs.the incurring of costs.

Claims Made Claims Made Reporting to the entity of the incident that gives rise to a Reporting to the entity of the incident that gives rise to a

claim.claim.


Life Cycle of a Claim Life Cycle of a Claim ReserveReserve

10/5/06Individual reserveestablished

$10,000 Case Reserve

1/1/07More research --Estimate revised


8/18/07Settlement agreed


7/11/06 Accident reported

Claim in Transit

7/8/06Accident occurs

Pure IBNR

8/1/06 Accident entered into records as $1,000 Formula Reserve

8/25/07Payment sent


Pure IBNRClaims in TransitFormula/Bulk ReserveCase Reserve

9/2/07Claim draft clears

Claim Closed

$ 0 Case Reserve


Insurance Insurance Data Data OrganizationOrganization

Accident DateAccident Date• The date on which the loss occurred.The date on which the loss occurred.

Report DateReport Date• The date on which the loss The date on which the loss

is first reported to the is first reported to the insurer.insurer.

Recorded DateRecorded Date• The date on which the loss is first The date on which the loss is first

entered into the statistical entered into the statistical records of the insurer.records of the insurer.


Who Sets the Reserves?Who Sets the Reserves? Case Reserves: Case Reserves: Claims RepresentativesClaims Representatives IBNR/Bulk: IBNR/Bulk: Actuaries & Company ManagementActuaries & Company Management

SSAP 55: “Management’s Best Estimate” By line of business and in AggregateBy line of business and in Aggregate Reserve will NOT be accurate with Reserve will NOT be accurate with

certaintycertainty.. All All ReasonableReasonable outcomes to be outcomes to be

considered – not all considered – not all PossiblePossible outcomes outcomes If all points within a range are probable If all points within a range are probable

(RARE), record the (RARE), record the Midpoint.Midpoint.


What Costs are Considered?What Costs are Considered?Generally, the amount necessary to settle Generally, the amount necessary to settle

unpaid claims…unpaid claims…

SSAP 55:SSAP 55: Reported losses Reported losses Incurred but not reported claims Incurred but not reported claims

(IBNR)(IBNR)Can include “Development on Known Can include “Development on Known

Claims”Claims” Loss adjustment expensesLoss adjustment expenses

Defense and Cost Containment Defense and Cost Containment (DCC)(DCC)

Adjusting and Other (AO)Adjusting and Other (AO)


Loss Adjustment Expenses Loss Adjustment Expenses (LAE) (LAE)

DCCDCC Defense, Litigation, Medical Cost Defense, Litigation, Medical Cost

ContainmentContainment Cost of Experts …Cost of Experts …(potentially testify in court)(potentially testify in court) In DEFENSE of Claim:In DEFENSE of Claim:

Private investigators, appraisers Private investigators, appraisers Attorney Fees – (Duty to Defend)Attorney Fees – (Duty to Defend)

AO: All other LAEAO: All other LAE Claim AdjustersClaim Adjusters In Determination of Coverage:In Determination of Coverage:

Private investigators, appraisers Private investigators, appraisers Attorney Fees – (Litigation in determining Attorney Fees – (Litigation in determining

coverage)coverage)


How Are Reserves How Are Reserves Estimated?Estimated?

SSAP 55SSAP 55

Loss Reserve Projections by line Loss Reserve Projections by line of businessof business Not Just for Company in TOTAL…Not Just for Company in TOTAL…

it’s by lineit’s by line

Results of More than One Results of More than One Method Should be ConsideredMethod Should be Considered



Report Year DataReport Year Data

Similar to Accident Similar to Accident Year, but Year, but Use date of Report Use date of Report NOT date of Accident.NOT date of Accident.

Used for Claims-Made Used for Claims-Made policiespolicies


How Are Reserves Estimated?How Are Reserves Estimated?Loss Development Analysis: Loss Development Analysis:

TriangleTriangle

AccideAccident Yearnt Year

Cumulative Paid Losses at AgeCumulative Paid Losses at Age

EstimatEstimated ed

UltimatUltimatee1212 2424 3636 4848

20022002 100100 200200 300300 300300 Predict Predict $300 $300 each each yearyear

20032003 100100 200200 300300

20042004 100100 200200

20052005 100100

Loss Development = Change in Loss Over TimeLoss Development = Change in Loss Over Time



Are They Right?Are They Right?Compare:Compare:

Indicated Reserve: Indicated Reserve: Actuarial Actuarial EstimateEstimate

Carried Reserve: Carried Reserve: Amount on the Amount on the BooksBooks

Are They Are They AdequateAdequate or or InadequateInadequate??

Same as…Are They Same as…Are They RedundantRedundant or or DeficientDeficient??


Salvage and SubrogationSalvage and Subrogation

Salvage: Car value when it’s totaled.Car value when it’s totaled.

Subrogation: Paid claim but reimbursed by at-Paid claim but reimbursed by at-fault person.fault person.

ReceivedReceived: Adjust Paid Losses for : Adjust Paid Losses for amounts amounts received.received.

AnticipatedAnticipated:: If choose to anticipate If choose to anticipate recoverables, recoverables, then then estimate & estimate & deduct from the liability deduct from the liability for unpaid for unpaid claims or losses.claims or losses. (Required to maintain data & perform actuarial tests to support (Required to maintain data & perform actuarial tests to support reasonableness.)reasonableness.)


DiscountingDiscounting

Time Value of MoneyTime Value of Money

No discounting, unless authorizedNo discounting, unless authorized See SSAP 54 and 65See SSAP 54 and 65

Fixed and reasonably determinable Fixed and reasonably determinable payments payments (Issue Paper No. 65)(Issue Paper No. 65)

Example: Workers compensation Example: Workers compensation Tabular indemnity reservesTabular indemnity reserves Long-term disability claimsLong-term disability claims


Structured SettlementsStructured Settlements

Periodic fixed payments to claimant Periodic fixed payments to claimant for a determinable period (or for life)for a determinable period (or for life)

Often purchase an annuity to fund the Often purchase an annuity to fund the payments:payments: When reporting entity is owner and When reporting entity is owner and

payee, no reduction to loss reserves. payee, no reduction to loss reserves. Annuity is an “other than invested asset”Annuity is an “other than invested asset”

When claimant is payee, reduce loss When claimant is payee, reduce loss reserve. Cost of annuity recorded as paid reserve. Cost of annuity recorded as paid loss.loss.


Catastrophe Catastrophe ReservesReserves

Catastrophe Loss Catastrophe Loss Reserves Are Reserves Are established only established only AFTER a catastrophe AFTER a catastrophe has occurredhas occurred

Any reserves for the Any reserves for the “Potential for a CAT” “Potential for a CAT” are Special Surplus are Special Surplus FundsFunds

Tornado

WindEarthquake

Hail


Life and Health Life and Health Insurance Insurance ReservesReserves


Life Insurance Policy Life Insurance Policy ReservesReserves

Excess of the present value of Excess of the present value of future benefits over the present future benefits over the present value of future net premiumsvalue of future net premiums

1.1. Based on an interest rate – minimum Based on an interest rate – minimum determined annuallydetermined annually

2.2. Based on a mortality table – changed Based on a mortality table – changed every 10 – 15 yearsevery 10 – 15 years

3.3. Cash value floorCash value floor


Life Insurance ReservesLife Insurance Reserves

Determination of future benefitsDetermination of future benefits1.1. Face amountFace amount

2.2. Indexed (Cost of Living)Indexed (Cost of Living)

3.3. Universal / Variable LifeUniversal / Variable Life Net premiumsNet premiums

1.1. Based on the interest and mortality of Based on the interest and mortality of the reservethe reserve

2.2. Level percentage of the guaranteed Level percentage of the guaranteed gross premiumsgross premiums



Net premiumsNet premiums1.1. Based on the interest and mortality of Based on the interest and mortality of

the reservethe reserve2.2. Level percentage of the guaranteed Level percentage of the guaranteed

gross premiumsgross premiums3.3. Other patternsOther patterns

Net level premium reserves (NLP)Net level premium reserves (NLP) Commissioners Reserve Valuation Method Commissioners Reserve Valuation Method

(CRVM)(CRVM) CRVM graded to NLPCRVM graded to NLP

4.4. May limit period of insuranceMay limit period of insurance



Mean ReservesMean Reserves1.1. Assume net premium paid annuallyAssume net premium paid annually

2.2. Calculate reserves at the end of each Calculate reserves at the end of each policy yearpolicy year

3.3. Mean of net premium and 2 terminal Mean of net premium and 2 terminal reservesreserves

4.4. If premium is not paid annually, If premium is not paid annually, produces deferred premium.produces deferred premium.



Deficiency ReservesDeficiency Reserves1.1. Present value of the excess of net Present value of the excess of net

premiums over guaranteed gross premiums over guaranteed gross premiumspremiums

2.2. 1976 – Difference between actual 1976 – Difference between actual reserve and minimum reserve based reserve and minimum reserve based on maximum interest rate and on maximum interest rate and specified mortality tablespecified mortality table

3.3. 1990’s – Allowed to modify specified 1990’s – Allowed to modify specified mortality with actuarial certificationmortality with actuarial certification


Deferred Annuity Deferred Annuity ReservesReserves

The greatest present value of all The greatest present value of all possible future guaranteed benefits possible future guaranteed benefits streams over future considerations. streams over future considerations. (CARVM) – discount at interest (CARVM) – discount at interest only.only.

1.1. SurrendersSurrenders

2.2. Partial WithdrawalsPartial Withdrawals

3.3. AnnuitizationsAnnuitizations

4.4. Death BenefitsDeath Benefits


Heath Policy ReserveHeath Policy Reserve

Unearned premium reserveUnearned premium reserve1.1. Net premium if there is a contract Net premium if there is a contract

reservereserve

2.2. Gross premium otherwiseGross premium otherwise Contract reserveContract reserve


Health ReservesHealth Reserves

Contract reservesContract reserves1.1. Similar to life policy reserves Similar to life policy reserves

2.2. Morbidity (probability of becoming Morbidity (probability of becoming disabled and probability of staying disabled and probability of staying disabled) set by regulationdisabled) set by regulation


Health Claim ReservesHealth Claim Reserves

Medical insuranceMedical insurance1.1. Analyze historical claim payment patternsAnalyze historical claim payment patterns

2.2. Categorize claims by period incurred and Categorize claims by period incurred and by period paidby period paid

3.3. Follow up studiesFollow up studies Disability / Long-Term CareDisability / Long-Term Care

1.1. Present value of amount due in the futurePresent value of amount due in the future

2.2. Morbidity table may be specified in a Morbidity table may be specified in a regulationregulation


U.S. SolvencyU.S. SolvencyModernization InitiativeModernization Initiative

Principle-Based ReservingPrinciple-Based Reserving


What is it?What is it? New calculation methodology that captures all New calculation methodology that captures all

material risks on life and annuities reserves by material risks on life and annuities reserves by establishing those reserves based on a establishing those reserves based on a magnitude of risks, unlike the current formula magnitude of risks, unlike the current formula approach.approach.

Movement away from industry data to credible Movement away from industry data to credible company experiencecompany experience

New business onlyNew business only

Principles-Based Valuation ProjectPrinciples-Based Valuation Project


Why is needed?Why is needed? Good public policyGood public policy

Requires understanding of the real economic condition Requires understanding of the real economic condition of the company. of the company.

Improves the price of products to consumersImproves the price of products to consumers Eliminate flaws in current methodologyEliminate flaws in current methodology

Eliminates need to constantly develop new rulesEliminates need to constantly develop new rules Focused on “what could happen” instead of “what Focused on “what could happen” instead of “what

happened”happened” InternationalInternational

PBR is a step in the right direction towards international PBR is a step in the right direction towards international accounting if the NAIC moves in that direction.accounting if the NAIC moves in that direction.

Allows U.S. to compete in the global insurance market Allows U.S. to compete in the global insurance market

Principles-Based Valuation ProjectPrinciples-Based Valuation Project


Basic Framework for PBR CalculationBasic Framework for PBR Calculation

The reserve is the greater of:

1. A prescribed formulaic amount (the net premium reserve)

And either

2a. A deterministic calculation assuming a single economic scenario

2b. A stochastically derived amount using multiple economic scenarios


Actions Taken Thus FarActions Taken Thus Far

Adoption of a revised Standard Valuation Law by the Adoption of a revised Standard Valuation Law by the NAIC membership at the 2009 Fall National NAIC membership at the 2009 Fall National Meeting. Meeting. Provides among other things that the Valuation Manual Provides among other things that the Valuation Manual

becomes operative becomes operative January 1 of the calendar year following July 1 of the calendar January 1 of the calendar year following July 1 of the calendar

year in which all of the following have occurred:year in which all of the following have occurred:

(1) Adoption of VM by NAIC by 42 states or more (Done)(1) Adoption of VM by NAIC by 42 states or more (Done)

(2) Amended SVL enacted in states representing greater (2) Amended SVL enacted in states representing greater than 50% than 50% of direct premiums written as reported in the of direct premiums written as reported in the annual statements annual statements

(3) Amended SVL enacted in at least 42 of the 55 (3) Amended SVL enacted in at least 42 of the 55 jurisdictionsjurisdictions


Future Expected ActionsFuture Expected Actions

Adoption of Initial Valuation ManualAdoption of Initial Valuation Manual August 2010 adoption by LATFAugust 2010 adoption by LATF

Impact Study Current Being Completed by Impact Study Current Being Completed by Towers WatsonTowers Watson If no material problems with 2010 Valuation Manual, If no material problems with 2010 Valuation Manual,

updates to the Valuation Manual in Summer 2011 and updates to the Valuation Manual in Summer 2011 and adoption of Manual by full NAIC by end of 2011adoption of Manual by full NAIC by end of 2011

Start introducing legislative packages for adoption at Start introducing legislative packages for adoption at the individual states (late 2011, 2012)the individual states (late 2011, 2012)

Update Summary TimelineUpdate Summary Timeline What groups need to do, by when, etcWhat groups need to do, by when, etc


Questions?Questions?

Documents

© 2011 National Association of Insurance Commissioners Reserves - P/C - Life ASSAL – July 2011 Todd Sells