Chapter 12: Reserving - Latent claims and disease claims

Question 1

Dictionary definition: latent

Answer 1

• present but not visible

- existing as potential

Question 2

Latency period

Answer 2

the time it takes for the condition to become visible

Question 3

Actuarial definition: latent claims

Answer 3

Claims arising from a risk not allowed for by the underwriter when selling or pricing the original policy.

Question 4

4 Typical stages of development of a latent claim

Answer 4

UNKNOWN: The risk has been accepted but the identity of the latent claim is not yet known.

POTENTIAL: Information about the possible identity of the claim type emerges but no clear link or liability has been proven.

EMERGING: The claim type has emerged as a latent claim but the full extent of the liability is still developing.

EMERGED/CLOSED: The latent claim type has occurred and fully developed or is still emerging but in a predictable way that can be directly underwritten, e.g. industrial deafness and coal-miners’ black lung.

Question 5

Top-down estimates of latent claims

Answer 5

Under the top down method, we aim to produce a global estimate of the liability to the economy or the insurance industry. We then estimate the proportion of this which will be attributable to the insurer, taking into account the insurer’s policy terms, excesses and limits.

Question 6

Bottom-up estimates of latent claims

Answer 6

Under this method, we review the policies written by the insurance company to see which could be exposed to the latent claim type.

We estimate the liability for each insured in so far as each insured has potentially different scope for the production and aggregate cost of latent claims. We allocate to this the proportion of coverage provided by the insurer.

We make assumptions about the manner in which the claim will be allocated between the various years of coverage and the various insurance policies providing cover in each year.

Question 7

The credibility of a bottom-up latent claim estimate

Answer 7

• Changes to the legal environment. E.g. a number of legal rulings and legislative changes have increased the insurance industry’s liability in respect of asbestos-related claims.
• Incomplete policy records. If policy records are incomplete, we will be unable to estimate the true extent of the liability.
• Changing propensity to claim. As claimants become more aware of the injury type and their legal rights, the propensity to claim tends to increase.
• Increased longevity. In the case of bodily injury claims, latent claims are more likely for people who live longer. Increases in longevity will therefore increase the number of latent claims.

Question 8

When pricing, we should attempt to identify the potential of the risk under review to give rise to latent claims.

We will determine this, by: (5)

Answer 8

• The historical rate at which latent claims have emerged from the class of business. (e.g. liability classes are far more likely to give rise to latent claims)
• The nature of the insurance cover provided (e.g. cover on a “losses occurring” basis will be far more likely to give rise to latent claims)
• Exclusions within the policy wording.
• The industry being covered (e.g. the pharmaceutical industry)
• Territory (e.g. North America)

Question 9

What’s the difference between the “claims made” and “losses occurring” basis?

Answer 9

QUESTION 1

Question 10

“Risk attaching” basis

Answer 10

QUESTION 1

Question 11

Asbestosis

Answer 11

Related to breathing in asbestos, resulting in:

scarring of the lung tissue that can reduce the lung’s efficiency, but which is not normally fatal.

Question 12

Mesothelioma

Answer 12

Related to breathing in asbestos, resulting in:

A cancer which is normally fatal within two years of diagnosis.

Question 13

Worker’s Compensation in SA is regulated by 2 statutes:

Answer 13

• Occupational Diseases in Mines and Works Act No. 78 of 1973 as amended (ODMWA)
• Compensation for Occupational Injuries and Diseases Act No. 1330 of 1993 (COIDA)

Question 14

Occupational Diseases in Mines and Works Act No. 78 of 1973 as amended (ODMWA)

Answer 14

Only covers occupational health dispensation specifically for mine and risk works related diseases.

These include cardio-respiratory diseases such as asbestos related diseases, pneumoconiosis, tuberculosis, chronic airways obstruction, occupational asthma and progressive systemic sclerosis.

Question 15

Compensation for Occupational Injuries and Diseases Act No. 1330 of 1993 (COIDA)

Answer 15

Covers all employees and provides for the medical examination, certification and compensation of all employees who are injured on duty or who suffer from an occupational disease.

• 75% of a temporarily disabled employee’s monthly earnings
• the employee must pay such compensation for the first three months, after which the Commissioner takes over the payments and repays the amounts already paid out by the employer.
• Compensation for temporary disablement is usually limited to a maximum of 12 months.

Question 16

Section 80 of the ODMWA provides for (2)

Answer 16

• a temporary total disability benefit of 75% of an employee’s loss of earnings for a period of up to six months to a person who is suffering from tuberculosis and does not render min permanently unfit to do his ordinary work. The benefit also applies to the 12-month period immediately after the date on which he performed risk work for the last time.
• lump sum benefits for persons suffering from compensatable diseases (other than tuberculosis), in accordance with the formula (A x 12) x B.
• • A: person’s monthly earnings
• • B: an annuity factor depending on the extent of the disability and whether a previous payment has been paid or not.

Question 17

4 considerations when advising reserves for an insurer of latent claim exposures

Answer 17

• the number of future claims by mix of claim type and year of manifestation as a claim
• the exposure data that is available from original insureds (most do not have detailed records available as to the number of employees and the activities which exposed them to asbestos)
• the distribution of compensation amounts by claim types
• the uncertain legal position regarding liability

Question 18

The process for latent claims can be full of disputes and uncertainties regarding (8)

Answer 18

• the time to reporting
• the chance of litigation against multiple parties in very different jurisdictions
• whether or not the insurer has a duty to defend the insured
• whether legal expenses are covered, and to what extent
• how deductibles and limits apply, and the effects of claim allocation between years of coverage
• the type of claim (e.g. product-related)
• how reinsurance is applied
• the data available for analysis

Question 19

The main method for calculating IBNR is to apply loadings to reported claims to date.
The loading will depend on (10)

Answer 19

• what loadings competitors use
• the loadings used for similar accounts
• what the loading is being applied to (e.g. reported claims or paid claims)
• backlogs of unsettled claims and the speed of processing
• how the reinsurance process works
• the maturity of the cohort
• whether the business is direct, reinsurance or retrocession
• whether there are aggregate limits close to exhaustion
• the composition of the portfolio
• whether insurers have a habit of commuting policies