A GUIDE TO UNDERSTANDING, COMMUNICATING, AND INFLUENCING ACTUARIAL RESULTS

Transcription

1 A GUIDE TO UNDERSTANDING, COMMUNICATING, AND INFLUENCING ACTUARIAL RESULTS FEBRUARY 9, 2017 Jennifer Price, FCAS, MAAA Amanda Marsh, FCAS, MAAA 2017 Atlanta RIMS Educational Conference

2 Introduction What is your #1 challenge in working with your actuary? a. Knowing what items should be communicated with the actuary at the onset of the project b. Understanding the results c. Communicating results with your internal audience d. Finding insights to assist you in your risk management role e. Other? 1

3 Introduction Which audience is the most challenging when you communicate your actuarial program results? a. Board of Directors b. Finance/Accounting c. Auditor d. Insurance Carrier e. Other external parties 2

4 Introduction What is the most difficult concept from your actuarial report to explain to others within your organization? a. Loss development b. Impact of changes in your mix of business c. Trends d. Change in results from prior analysis e. Other 3

5 Introduction Steps to a Successful Analysis Communication 4

6 Communication The first step to ensure a quality actuarial analysis is providing the actuary all of the necessary data and information. 5

7 Communication Data Requirements: Claims Best Summaries Minimum Summarized by policy year or accident year Typically needs to be supplemented with individual listing of largest claims Better Individual Claim Detail All open and closed claims Ground-up, unlimited $s At least 5 to 10 years (longer for long-tailed lines like WC) Detail at Historical Valuations Individual claim detail at historical annual valuation dates Allows the actuary to measure your unique development patterns (as opposed to using industry patterns) 6

8 Communication Loss Development Actuaries use triangles to derive loss development patterns. Not all audiences want to sit through a tutorial on how triangles work. Workers Compensation Reported Loss & ALAE Limited to $250,000 Policy Evaluation Date in Months Period /1/09-12/31/09 279, , , , , , , ,422 1/1/10-12/31/10 234, , , , , , ,060 1/1/11-12/31/11 444, ,650 1,071,544 1,071,402 1,080,443 1,093,449 1/1/12-12/31/12 409,228 1,035,569 1,208,551 1,289,437 1,383,957 1/1/13-12/31/13 349, , , ,577 1/1/14-12/31/14 333, , ,475 1/1/15-12/31/15 172, ,523 1/1/16-12/31/16 423,423 Policy Period ULT 1/1/09-12/31/ /1/10-12/31/ /1/11-12/31/ /1/12-12/31/ /1/13-12/31/ /1/14-12/31/ /1/15-12/31/ All Yrs Average All Yrs Weighted Yrs Weighted Yrs Weighted Industry Prior Selected ULT Age to Age Age to Ultimate

9 Communication Loss Development As an alternative, consider explaining loss development with pictures. 12 Months of Development 36 Months of Development Final Incurred Value (log scale) $1.2M $163K $22K $3K $0.4K $0.4K $3K $22K $163K $1.2M Incurred at 12 months of development (log scale) Final Incurred Value (log scale) $1.2M $163K $22K $3K $0.4K $0.4K $3K $22K $163K $1.2M Incurred at 36 months of development (log scale) Claims with final values that exceed the estimates at the given stage of development fall above the black line. Claims with final values that are lower than the estimates at the given stage of development fall below the black line. 8

10 Communication Data Requirements: Claims Useful elements of an individual claim listing (workers compensation): claim number or other unique identifier, date of incident / occurrence, date of claim report, claim closure date, unlimited cumulative paid indemnity, unlimited cumulative paid medical, unlimited cumulative paid allocated loss adjustment expense (ALAE), unlimited case outstanding indemnity, unlimited case outstanding medical, unlimited case outstanding ALAE, non-excess insurance recoveries to-date, state of jurisdiction, location / division, claim description, type of claim (indemnity, medical only, record only, etc.), and claim status (open or closed). 9

11 Communication Data Requirements: Exposures Exposure: A measure of the underlying potential for loss Coverage Workers Compensation General Liability Auto Liability Medical Professional Liability Common Exposure Bases Payroll (by state and job class), FTEs Revenue, Transactions Vehicle Counts, Miles Driven Bed Counts, Visits, Surgeries, Physician FTEs, etc. Why is exposure important? Forms basis to measure historical rate of loss per measure of exposure This is used to project future period losses or to estimate loss for less mature periods Allows us to assess trends, while adjusting for operational growth # 1 Priority for exposure data is year to year consistency in its definition! 10

12 Communication Data Requirements: Insurance Program Structure Policy Effective and Expiration Dates Other Loss Sensitive Provisions? Insurance Carrier Retrospective Rating Elements? Policy Limits: Per claim? Aggregate? INSURANCE POLICY Policy Premium Treatment of Defense Costs: In addition to limit? Erode limit? Shared pro-rata? Self-Insured Retention or Deductible: Per claim? Aggregate? 11

13 Communication Data Requirements: Claims Handling Are there any new regulatory reserving requirements? Have there been any recent claim audits? What were the findings? Who sets case reserves (TPA, carrier, inhouse?) Useful Information about Claims Handling Have there been any changes in claim settlement philosophy? Have there been any changes in who sets case reserves? Have there been any changes in how case reserves are set? 12

14 Communication Data Requirements: Other Information The following additional information can enhance the accuracy of the actuarial analysis: Prior actuarial report (if change in actuary) Acquisitions and divestitures - Are past liabilities being acquired? - What is implied loss cost of acquisition? Description of and changes to loss control programs Information on other risk management initiatives Overview of and changes to cost allocation programs Information on any other operational or demographic changes that may impact claims experience 13

15 Considerations You may not wish to delve into all of the actuarial formulas and assumptions, but there are a few key considerations you may want to understand. 14

16 Considerations Questions for Your Actuary 1 External Cost Drivers Have there been any legislative changes that are expected to impact my claims experience (tort reform, court rulings, benefit level changes, etc.)? What is the expected impact? 2 Client vs. Industry Data How much weight has been given to my data versus industry data? What is the source of the industry data? 3 Program Impacts How has my new risk management program been considered? How has our new settlement/case reserving philosophy been considered? 4 Mix of Risk How has the impact of my company s new business division been considered? 15

17 Considerations External Cost Drivers Florida Supreme Court Ruling Example Marvin Castellanos v. Next Door Company April 28, 2016 ruling found that the mandatory attorney fee schedule in Section of the Florida workers compensation statute is unconstitutional as a violation of due process under both the Florida and United States Constitutions thereby eliminating the caps on claimant attorney fees NCCI estimates a cost increase of 14% to 38% for accidents occurring April 28, 2016 and subsequent, and selects a first-year impact of 15% Decision also expected to impact the future payments on currently open claims or claims with the potential to reopen with dates of loss of July 1, 2009 and forward Westphal v. City of St. Petersburg June 9, 2016 ruling found that Florida s statutory 104- week cap on temporary total indemnity is an unconstitutional denial of access to courts. This decision reinstated the 260 week duration cap in effect prior to the legislation that introduced the 104 week cap NCCI estimates a 2.2% cost increase for accidents occurring June 9, 2016 and subsequent Decision also expected to impact the future payments on currently open claims or claims with the potential to reopen with dates of loss of 1994 and forward 16

18 Considerations Client vs Industry Data - Loss Development Pattern How does the selected reported loss development pattern compare to industry data and to your own history? Percentage of Ultimate Loss & ALAE Reported 100.0% Percent Loss & ALAE Reported 90.0% 80.0% 70.0% Age in Months Observed Data Industry Selected 17

19 Considerations Client vs Industry Data Experience Modification Factor How does your loss cost compare to an industry benchmark and how much weight is the actuary giving to your own data? Experience Modification Factor Experience modification factor = actual loss / benchmark loss 18

20 Considerations Mix of Business Adjustments Our company has been growing. How is this growth impacting our expected losses? Loss Rates by State and Class Code Expected Loss & Payroll by Accident Year $10.0 $10,000 $40,000 Loss & ALAE Cost per $100 of payroll $8.0 $6.0 $4.0 $2.0 $0.0 AL GA NC SC TN State Payroll ($000s) $8,000 $6,000 $4,000 $2,000 $ Accident Year $30,000 $20,000 $10,000 $0 Expected Loss & ALAE (000s) Payroll Payroll Payroll Payroll Expected Loss Loss Rates can vary significantly between states and NCCI class code. As your company grows, your expected losses may not increase in proportion to your payroll. 19

21 Comparisons Beyond the loss estimates, what insights should be gained from the actuarial analysis? 20

22 Comparisons Cost Trends Ask your actuary what trends they see in your data If costs per exposure are changing year to year, are these changes driven by claim frequency or claim severity? Claim Frequency: Number of Claims Per Exposure Claim Severity: Average Ultimate Cost Per Claim Loss Cost: Ultimate Cost Per Exposure 21

23 Comparisons Large Losses by Policy Year This chart illustrates a view of large claim experience year over year, distinguishing open and closed claims. Large Reported Claims (Over $250k) 22

24 Comparisons Cost Trends Example of Deeper Investigation As an example, perhaps you are concerned that increased employee turnover is behind an increase in lost-time claim frequency at your organization. The impact can be quantified by combining employee demographics data and claims data. Severity 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Frequency & Severity by Tenure [0-1) [1-5) [5-10) [10-15) [15-20) [20-30) [30+) Frequency Takeaways and action items Assuming a $100 million annual workers compensation cost and 20% annual turnover, reducing the first year claim frequency from 3.0 times to 2.0 times the subsequent year claim frequency could be expected to reduce annual costs by over $12 million (12%) Observations Severity Frequency Lost-time claim frequency is highest for workers with tenure of one year or less Lost-time claim frequency during the first year of employment is nearly 3 times the frequency in subsequent years Without any frequency reduction, reducing the turnover rate from 20% to 15% could be expected to reduce annual costs by over $5 million (5%) Claim severity generally increases with tenure 23

25 Comparisons Cost Trends Deeper Investigation Numerous other potential cost drivers can be examined, including Job classification Geography Shift Hours worked Day of week Body part injured Cause of loss Employee age Report lag Accident reporting and investigation Time of year Compensation level Group health eligibility Group health deductible/co-pay Training program participation Consistency of supervisor Pay code (benefit type or medical provider) 24

26 Comparisons Actual Versus Expected Analysis Actual Losses Change in reported or paid losses from prior to current valuation date vs Expected Losses Expected change in losses based on assumptions from prior report Measured by accident or policy period Early indicator of movement in ultimate losses in current study Flags areas for further investigation confirm / understand large individual claim movements Explain changes in ultimate losses which years are driving the changes? 25

27 Comparisons Actual Versus Expected Graph Actual vs. Expected and Change in Ultimate ($000s) 26

28 Comparisons Change in Ultimates View the progression of estimated ultimate losses by valuation date along with movement in the components of ultimate losses. Ultimate Loss & ALAE by Component 27

29 Comparisons Reserve Reconciliation Break down the components of the change in balance sheet reserves from one period to another (new exposures, revisions to prior period ultimate losses, payments made). 28

30 Comparisons Drivers of Loss Forecast Changes There are typically at least four potential drivers of changes in prospective year loss estimates. Is your actuary identifying and quantifying these drivers? Volume of Underlying Exposure Risk Profile of Underlying Exposure Long Term Annual Cost Trends Experience Changes 29

31 Comparisons Drivers of Loss Forecast Changes This example illustrates the change in loss forecast and drivers of that change. Loss Cost by Policy Year 30

32 Comparisons DivisionTop 5 Lost-Time Frequency Do the division rankings meet your expectations? Are there any surprises on the list, warranting risk management initiatives? Top 5 Division Claim Activity at a Glance Lost- Time Frequency by Division Accident Year Highest Division D LT Frequency Division D LT Frequency Division E LT Frequency Division C LT Frequency Division C LT Frequency Division C LT Frequency Division C LT Frequency Division D LT Frequency Division E LT Frequency Division E LT Frequency Division E LT Frequency Division F LT Frequency Division C LT Frequency Division D LT Frequency Division F LT Frequency Division F LT Frequency Division E LT Frequency Division F LT Frequency Division F LT Frequency Division A LT Frequency Division B LT Frequency Division B LT Frequency Division A LT Frequency Division A LT Frequency Division D LT Frequency Lowest Division A LT Frequency Division A LT Frequency Division B LT Frequency Division B LT Frequency Division B LT Frequency

33 Reasonability Checking There are a variety of statistics that you may review to assess the reasonability of the actuarial study. 32

34 Reasonability Checking Does it Pass the Smell Test? Implied Loss Costs Implied Claim Frequency Ratio of IBNR to Case The Statistics Implied by the Actuarial Selections Should Hang Together Implied Claim Severity Maximum Future Development Implied Average Reserve Per Open Claim 33

35 Reasonability Checking Implied Average Unpaid Per Open Claim Hindsight Average Unpaid Per Open Claim 34

36 Reasonability Checking Implied Ratio of IBNR to Case Hindsight Average IBNR to Case Ratio 35

37 Reasonability Checking Implied Loss Rate, Frequency, and Severity Claim Frequency Implied Ultimate Retained Losses per Exposure Severity 36

38 Questions? Jennifer Price, FCAS, MAAA Amanda Marsh, FCAS, MAAA 37 37