A8. Odomirok 15

Question 1

List the parts of Schedule P

Answer 1

• Part 1: loss and LAE experience as of 12/31 of the current year.
• Part 2: historical net loss and DCC estimates
• Part 3: historical net paid loss and DCC
• Part 4: historical net IBNR for loss and DCC (before tabular discount)
• Part 5: historical claim counts (closed with payment, open and reported)
• Part 6: historical earned premium
• Part 7: loss and premium data on loss sensitive contracts

Question 2

List some uses of Schedule P (In addition to being used by outside parties to assess reserve adequacy)

Answer 2

• Supports and provides disclosure for the SAO
• Shows how reserves have developed over time, and indicates where the development is coming from
• Provides the source of payment patterns to be used in the tax discounting calculations
• Shows the split between case reserves and IBNR
• Provides historical claim count data to help review trends in frequency and severity, and changes in claims handling and reserving
• Provides the data to calculate the RBC loss sensitive discount

Question 3

2 Components of LAE

Answer 3

1. Defense and Cost Containment (DCC)

2. Adjusting and Other (A and O)

Question 4

How are losses in Part 1 grouped

Answer 4

• Occurrence policies: Accident Year
• Claims Made policies: Report Year
• Tail policies: Policy Year
• Fidelity and Surety policies: Discovery Year

Question 5

List some examples of A and O

Answer 5

• fees of adjusters and settling agents
• LAE for pools, if reported by CY

-fees and salaries for appraisers, private investigators, hearing representatives, reinspectors, fraud inspectors; if working in
the capacity of an adjuster

-attorney fees incurred in determination of coverage

Question 6

List some examples of DCC

Answer 6

• surveillance expenses
• fixed amounts for medical cost containment
• litigation management expenses (eg audit of bills)
• LAE for pools, if reported by AY

-fees and salaries for appraisers, private investigators, hearing representatives, reinspectors, fraud inspectors; if working in
defense of a claims

• fees and salaries for rehabilitation nurses (if not included in losses)
• attorney fees incurred due to duty to defend
• cost of engaging experts (if not included in losses)

Question 7

How are the S and S expenses recorded

Answer 7

• Paid losses are recorded net of S and S received

- Unpaid losses are recorded net of anticipated S and S (in the bulk and IBNR)

Question 8

How was LAE historically segmented:

Answer 8

• Allocated Loss Adjustment Expenses (ALAE): expenses that can be allocated to a specic claim
• Unallocated Loss Adjustment Expenses (ULAE): expenses that can not be allocated to individual claims

Question 9

List 2 things that the claim count data from Schedule P can be used to identify/ analyze

Answer 9

1. changes in losses

2. changes in claims settlement or reserving philosophy

Question 10

How are tabular and non tabular discounts treated in Part 1

Answer 10

• Net of tabular discount

- Gross of non tabular discounts (until columns 32 and 33) and Net (in columns 35 and 36)

Question 11

How is discounting reflected in Parts 2-4

Answer 11

Data is gross of all discounting.

Question 12

What types of changes should actuaries look out for, when analyzing trends

Answer 12

• Mix of business (type of exposure, geography)
• Policy limits
• Reinsurance attachment points and limits
• The way that the company counts its claims

Question 13

Issues with using the information in Parts 2 to 4 to develop losses:

Answer 13

• Various allocations in the creation of Schedule P are based on the interpretation of the person completing it
• Internal pooling or reinsurance arrangements that may have an impact on the data set may not be very obvious by looking exclusively at Schedule P
• Schedule P includes business from participation in voluntary and involuntary pools and/ or associations: many of these pools record IBNR as case reserves/ the level of participation in the pool may have changed over time
• Schedule P only contains 10 accident years of data, but long tail lines may experience development later than 10 years.
• Commutations will distort the reserves
• The data combines losses and DCC, potentially hiding trends in either component

Question 14

What changes should be considered when using the information in Parts 2 to 4 to develop losses

Answer 14

• Retentions
• Claims settlement and reserving
• Business mix
• Underlying exposures

Question 15

3 sections in Part 5

Answer 15

1. Cumulative number of claims closed with loss payment
2. Number of claims outstanding
3. Cumulative number of claims reported

Question 16

Formula to populate the right most column of the Prior Years Row of Part 3

Answer 16

From Part 1:

D and A loss - ceded loss + D and A DCC - ceded DCC = Col 4 - 5 + 6 - 7

Question 17

List some metrics that can be derived from the claim count data (in addition to other data from the Annual Statement)

Answer 17

• Claim closure rates
• CWP ratios
• Claim Frequency
• Avg Claim Severity

Question 18

What inconsistency should users be aware of when comparing Part 5 data of different companies

Answer 18

Some companies record counts on a per claim basis, whereas others record them on a per claimant basis.

Question 19

2 advantages of closing claims early

Answer 19

1. Minimize chance that the claim will develop adversely

2. Allow to insured to receive medical treatment/ repair property damage/ recover from loss

Question 20

Formula for closure rate

Answer 20

Closed claims / total reported claims

Question 21

Expected impact to ultimate loss projection if a slow down in settlement rates is not reflected:

Answer 21

This will result in an understated projection.

Question 22

3 reasons that settlement rates may reduce

Answer 22

1. Reduction in staff
2. Growth in the book without a corresponding increase in staff
3. Surge in claims from a catastrophe

Question 23

Claim Frequency equation

Answer 23

Claim Counts (from Part 5) divided by Earned Premiums (from Part 1)

Question 24

CWP ratio equation

Answer 24

CWP claims / total closed claims

Question 25

Average Case Outstanding Severity formula

Answer 25

Net case outstanding loss and DCC (Part 2 - 3 - 4) / direct and assumed open counts (Part 5, Section 2)

Question 26

Average Claim Severity formula

Answer 26

Net paid loss and DCC (from Part 3) / direct and assumed claims closed with payment (from Part 5, Section 1)

Question 27

Factors that may cause loss trends

Answer 27

• Inflation
• Law changes
• One time catastrophic claims
• Changes in deductibles/ retentions
• Internal factors

Question 28

Average Reported Claim Severity formula

Answer 28

Net reported loss and DCC (from Part 2 - 4) / direct and assumed reported counts (Part 5, Section 3)

Question 29

List some reasons that premiums in Part 6 may change over time:

Answer 29

• Premium audits
• Retrospective rated policies
• Lags in reporting/ accounting for premiums

Question 30

List some metrics that can be calculated from the Part 5 data to perform reasonableness checks on the unpaid claim estimates (by comparing actual to expected):

Answer 30

• > Average claim frequency = Ultimate claim count by AY / Corresponding EP
• > Average ultimate severity = Ultimate loss and DCC by AY / Ultimate Claim Counts
• > Average unpaid claim severity = Unpaid loss and DCC by AY / Unpaid Claims

Question 31

List the 2 parts of Part 7

Answer 31

• Part A: Primary Contracts (direct business)

- Part B: Reinsurance Contracts (assumed business)

Question 32

When would an insurer populate Part 7

Answer 32

Only if it is using the loss sensitive adjustment to RBC

Question 33

Briefly describe the Schedule P Interrogatories

Answer 33

Series of seven questions that the insurer needs to answer, that add insight to the other information reported in Schedule P

Question 34

List the five sections of each part of Part 7

Answer 34

• Section 1: net loss and LAE unpaid and NWP on loss sensitive contracts, relative to all contracts, for each Schedule P line
• Section 2: incurred loss and DCC on loss sensitive contracts, in the same format as Part 2
• Section 3: loss and DCC IBNR on loss sensitive contracts, in the same format as Part 4
• Section 4: net earned premiums on loss sensitive contracts, in the same format as Part 6
• Section 5: triangle of net reserves for premium adjustments and accrued retrospective premiums for each of the last ten years that the policies were issued

Question 35

Main purpose of Interrogatory 1

Answer 35

Ensure that the ERE coverage has been reserved for.

Question 36

What topics does Interrogatory 1 cover

Answer 36

Extended reporting endorsements (EREs) arising from death, disability or retirement (DDR). There are six parts:

• The first asks whether the insurer offered the endorsement for free (or at a reduced rate)
• The remaining parts are about how the company reports the DDR

Question 37

What topics does Interrogatory 4 cover

Answer 37

Asks for disclosure about whether the reserves are net of non-tabular discounts.

Question 38

What topics does Interrogatory 2 cover

Answer 38

Asks if the LAE is being defined as DCC and A and O

Question 39

What topics does Interrogatory 7 cover

Answer 39

Asks if there are any changes or anything special that the user needs to be aware of if she relies on the Schedule P data to assess the adequacy of recorded loss and LAE reserves

Question 40

What topics does Interrogatory 6 cover

Answer 40

Whether the insurer reports claim counts per claim or per claimant.