Exam Questions - Reserving Flashcards
Learn to understand concepts well enough to give full written answers, explaining your through process.
List three considerations when establishing a large claim threshold for the purpose of estimating unpaid claims.
(1) The # of claims over threshold,
(2) Size of claims relative to reinsurance limits,
(3) Credibility of large claims.
(4) The large loss threshold may vary by line of business (for example, property vs. liability)
(5) External data relevant to the large loss threshold.
(6) Amount of total Losses - a large loss will have a much more severe effect on a book of business with a total of $10M total losses as compared to a book with $1B
(7) % of policy limits. If your book of business is composed of different coverages or limits by policy.
(8) Size of claim relative to policy limits.
(9) Credibility of data above the threshold.
(10) Percentile of loss distribution,
(11) Industry benchmark,
(12) Discussion with claims department on large claims,
(13) Stability vs. Responsiveness of overall rate indication from year to year.
Contrast the effect that large claims have on the development technique and the Bornhuetter-Ferguson technique for estimation of unpaid claims.
Large claims could cause a leveraging effect to LDFs. This will result in high LDFs being applied and resulting in overstated unpaid claims. The B-F unpaid claims will not be impacted because unpaid claims are based on an a priori estimate of ultimate claims.
Briefly describe the primary assumption and advantage of the BF Method.
The primary assumption of the reported BF method is that unreported (and unpaid) claims will emerge in accordance with expected claims. The advantage of the BF method is that it is more responsive to actual claims than the expected claims method) and more stable than the development method.
Briefly describe three situations the expected claims technique is particularly useful.
1) When entering a new line of business or a new territory.
2) If historical data becomes irrelevant for projecting future claims
3) When the line of business being evaluated is very long tailed and the development method is highly leveraged (high CDFs).
Briefly describe an advantage and disadvantage of the expected claims techniques.
Advantage: Stability
Disadvantage: also stability, or more specifically lack or responsiveness-the actuary can make it more responsive by actively monitoring and updating the a-priori estimation as needed.
Briefly describe the primary assumptions of the claims development method.
Assumes future claims will develop the same as previous claims, and that claims observed in immature AYs can be used to predict future development (uses development patterns from the top half of the triangle to predict the bottom half of the triangle). The reported claims development method implicitly assumes there have been no significant changes in case adequacy levels during the experience period. The paid claims development method implicitly assumes there are no material changes in speed of claim closure and payment. (This solution is more involved than needed for “briefly discuss”)
If case adequacy levels have increased discuss the accuracy of the reported and paid development method estimates.
The reported development estimate will be overstated since the latest diagonal(s) are greater due to the increase in case adequacy and recent age-age factors are larger due to the increase, while we do not expect the earlier recognition of future claims (rather than case reserves increasing over time when inadequate) to effect ultimate claims. The paid development estimate will be unaffected since case reserves are not included in paid claims.
-OR-
ChatGPT:
“In the context of property and casualty insurance, if case adequacy levels have increased, it can have both specific and broader implications for the accuracy of reported and paid development method estimates.
Specifically, the reported development estimate is likely to be influenced by the increase in case adequacy. This is because the reported development estimate is calculated based on the development of reported claims over time. An increase in case adequacy levels means that more funds are available to cover reported claims as they occur. As a result, the reported development estimate may show larger incremental claims, and recent age-age factors could be larger due to this increase. Consequently, the reported development estimate may appear overstated when compared to historical data. However, it’s important to note that this overstatement does not necessarily affect the ultimate claims’ cost but rather reflects a change in the timing of recognizing these claims.
On the other hand, the paid development estimate is less likely to be directly impacted by increased case adequacy levels. The paid development estimate tracks the actual cash outflows related to claims, and case reserves, which are affected by case adequacy, are not included in paid claims. Therefore, the paid development estimate may remain relatively unaffected by changes in case adequacy.
However, it’s crucial to consider the broader implications of increased case adequacy levels. These include improved financial reporting accuracy, regulatory compliance, and enhanced financial stability for the insurance company. Adequate case reserves ensure that the insurer is better prepared to meet its obligations to policyholders, reducing the risk of unexpected financial losses or insolvency.
In conclusion, an increase in case adequacy levels can have specific impacts on the reported development estimate, potentially leading to an overstatement in the short term. Still, it generally does not directly affect the paid development estimate. However, it’s essential to recognize the broader benefits of maintaining adequate case reserves in terms of financial stability and compliance.”
If payment speed has increased discuss the accuracy of the reported and paid development method estimates.
The paid development estimate will be overstated since the latest diagonal(s) are greater due to the increase in payment speed and recent age-age factors are larger due to the increase, while we do not expect the shift in timing of payments to effect ultimate claims. The reported development estimate will be unaffected since an increase in payments is simply a shift between case and paid, within reported claims.
What is the purpose(s) or performing diagnostic testing prior to performing the unpaid claims analysis?
We are looking to confirm any changes in the data we have learned about from management, and keep an eye out for any other changes or trends not discussed.
What are the most basic diagnostics the actuary should perform?
Performing a visual inspection of the data triangles and other values to examine for any outliers or other notable values or trends.
When reviewing a triangle of Paid to Reported Claims, or Closed to Reported Claim Counts, what in particular should we examine?
Look down the columns of both-we are looking for increasing or decreasing trends.
Paid/Reported Claims: if case reserves are becoming more adequate the ratio would go down because case is contained in Reported Claims in the denominator. if settlement patterns are increasing, we would expect the ratio to increase at earlier ages since more will be Paid earlier and Paid Claims are in the numerator.
Closed/Reported Claims: trends can indicate a change in the settlement rate of claims (upward trends indicate an increase in settlement rates). Blips in this ratio can be caused by one time internal or external events (e.g. systems outages or catastrophe
What are we looking for when reviewing the Average Paid, Average Reported, and Average Case Outstanding triangles?
We are looking at the trends down the columns. We would expect there to be trends due to inflation/trend and they are roughly equal. If the trends in average case outstanding are larger than in the average reported which are yet larger than average paid, case adequacy may be increasing (average case reserves increasing faster than inflation with paid increasing at inflation).
What is important to keep in mind when reviewing ratios.
Changes in the ratio could be due to either the value in the numerator or denominator, and no change does not necessarily mean nothing is changing as changes in the numerator and denominator may be offsetting each other.
An insurance company faces the following scenarios:
i. For property claims, a new claims processing system is implemented that will result in claims closing faster.
ii. For liability claims, a tort reform change is passed that will reduce the statute of limitations on reporting a claim.
a. For each scenario above, explain the effect on the average case outstanding triangle.
b. Briefly describe two additional scenarios that could cause a change in the ratio of closed to reported claim counts.
Property/Faster - We will likely see an increase in average case outstanding. Often an increase in settlement rate means small claims are being closed quicker. A higher percentage of open claims will likely be large claims.
Liability/Tort Reform - This will result in a speed up in reporting rate as people need to file claims sooner. Its effect on average case is difficult to tell. It could lower average case at early maturities if we see a lot of claims filed that we believe will result in no payment. When statute of limitations decreases, we may see more filing claim first ask questions later behavior.
- Change in claims department strategy to fight more claims in court will result is a decrease of closed to reported claim counts.
- Increase in average case load per claims adjuster due to staff cuts could also result in decrease of closed to reported ratio.
OR
Property/Faster: both case reserves and open counts should be lower at each age, since as payments are made, claims close and case is reduced. As such it is unclear how the ratio of these two will react to the denominator and numerator changing. For example, if it is small claims being closed more quickly, then average case will go up, and vice versa.
Liability/Tort Reform: we would see an influx of claims reported as people try to get their claims in before the new cap on reporting date. This would increase open counts and case O/S. If these new claims have higher severity than the old average claim, we would see average case rise as the reserves put up would outpace the number of new open counts in the denominator.
- CAT hits an insurer creating a backlog of reported claims -> ratio goes down
- Focus on closing small claims quickly -> ratio goes up.
