Loss Reserving 201 It's More than Numbers

Transcription

1 Loss Reserving 201 It's More than Numbers Derek W. Freihaut September 17, 2015 Agenda Background/Loss Reserving 101 Key Considerations Claims Handling Reinsurance Underwriting Rates External Influences Other Key Information How Actuaries Handle 1 1

2 Background/Loss Reserving 101 INCURRED LOSS TRIANGLE Accident Months of Maturity Year Background/Loss Reserving 101 AGE TO AGE FACTORS Accident Year Ultimate Average Selected Cumulative LDF % of Ultimate 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 95.0% 3 2

3 Background/Loss Reserving 101 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) % % % % % % % % % % % % % % % % % % % % Total 2, ,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) } 4 Claims Handling Procedures 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) 5 3

4 Claims Handling Procedures 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) 6 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) % % % % % % % % % % % % % % % % % % % % Total 2, ,000 1,450 1,

5 Berquist Sherman Method 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 not lost 8 Reinsurance Changes in program structure Excess of loss versus quota share Change in retention level Commutations Changes in historical retentions Change in reinsurance premiums Impact on large claims or potential exposure above reinsurance layers Handling of expenses 9 5

6 Reinsurance 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 10 1,200,000 Cumulative Gross Reported Loss for Claim # , , , , , , , , Months of Maturity 11 6

7 1,200,000 Cumulative Gross Reported Loss for Claim #123 Claim Entered Litigation 800, , , , , , , , Months of Maturity 12 1,200,000 Cumulative Gross Reported Loss for Claim #123 Claim Entered Litigation Claim Settled 800, , , , , , , , Months of Maturity 13 7

8 1,200,000 Cumulative Gross Reported Loss for Claim #123 Claim Entered Litigation Claim Settled 800, , , , , , , , , Months of Maturity 14 1,200,000 Cumulative Gross Reported Loss for Claim #123 Claim Entered Litigation Claim Settled 800, , , , , , , , , , Months of Maturity 15 8

9 AGE TO AGE FACTORS Losses Unlimited Ltd to $500K Ltd to $250K As retentions increase, development patterns can project more future development and be more volatile Expected loss costs increase as retentions increase 16 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) % % % % % % % % % % Total 2, ,120 1,000 1,

10 Common example Net analysis Retention changes over program history How to limit losses in development triangles? 18 Most accurate separate triangles for each retention Most conservative use highest historical retention Blended use historical retentions by period Most responsive use current retention Recent periods expected to experience most development Availability may be limited historical data Augment with benchmarks Approach should be documented Note: Currently valued loss runs should be available Limit losses to actual historical retentions by period Apply selected patterns 19 10

11 Rates and Underwriting 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 20 Rates 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) % % % % % % % % % % % % % % % % % % % % Total 2, ,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) } 21 11

12 Acquisition Example New block of business acquired Segmentation of current analysis (e.g. new state added to a bystate 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) 22 Growth Example 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 23 12

13 External Influences External Influences Law changes FL PIP FL sinkhole SCHIP ACA Tort reforms Inflation or other economic factors New competitors New claims sources FL public adjusters 24 Other Key Information Items DDR Death, Disability, and Retirement Unearned premium and unearned premium reserve required Extra Contractual Obligations (ECO) claims Need to understand how they are included in the data and reserved for Large claims/specific claim detail Subrogation and salvage Need to understand how they are included in the data Treatment of Expenses ALAE/ULAE vs DCC/A&O 25 13

14 How Actuaries Handle Trust But Verify Verification Loss data Claim count and average severity triangles Diagnostics Comparison exhibits Company expectations Time Tools Alternative methods Berquist Sherman Judgment Non traditional methods Wait Documentation 26 Questions 27 14

15 Thank you for your time and attention Derek Freihaut Commitment Beyond Numbers 28 15