Part 8 (Odomirok 15) (***) Flashcards
*** Structure of Schedule P | *** What data is contained in each Part
What is the most important schedule in the Annual Statement?
Schedule P
Parts of Schedule P
Part 1: Loss & LAE
Part 2: Historical net incurred loss & DCC estimates
Part 3: Historical net paid loss & DCC
Part 4: Historical net IBNR for loss & DCC
Part 5: Historical claim counts
Part 6: Historical earned premium
Part 7: Loss and premium data on loss sensitive contracts
Schedule P Part 1
Loss & LAE
Premiums shown are by Calendar Year
Losses are by Accident Year
Loss Information is net of salvage/subrogation (Col 10 is just for information)
AAO expenses are not associated with individual claims, reserves are not segmented into case and IBNR
Totals are sums from all other columns
Net is Direct and assumed - ceded
How are premiums shown in S.P/P.1
By Calendar Year
How are losses shown in S.P/P.1
By Accident Year generally, but depends on policy type
Occurrence: Accident Year
Claims Made: Report Year
Tail: Policy Year
Fidelity & Surety: Discovery Year
- Fidelity: Cover losses due to fraud of a particular party
- Surety: Responsible for debt of a different party
How is LAE split
Defense & Cost Containment (DCC): Defense, litigation, and medical cost containment
Adjusting and Other (A&O): All other expenses associated with adjusting and recording claim
How is LAE shown
DCC is shown by Accident Year
A&O is assigned “in any justifiable way”
- Preferred way is in proportion to the number of claims reported, closed, or outstanding each year
Case & IBNR Reservers in Part 1 of Schedule P are what
Net of tabular discount
and
Gross of non tabular discount
- Until columns 32&33; and Net in 35 & 36
and
Net of intercompany pooling
Claim counts in Schedule P in part 1 are on what?
Since they are on this method, what can be calculated?
on a direct and assumed basis
Frequency trends, based on the ratio of claim count to prem can be calculated
- Trends may be distorted as claim counts is not developed to ultimate
- trends calculated based on premium will be distorted by rate changes
Severity trends, based on the ratio of d&a loss to claim counts can be calculated
- Not developed to ultimate
- Mix of business may be changing over time affecting severity
- Policy Limits may increase, also increasing severity
- Reinsurance attachment points & limits
- The way claims are counted (occurrence, claimants)
Avg cost of open claims = Case Reserves / Number claims outstanding
- Typically increases overtime. But then after a certain point will start decreasing when insurance company starts making payments
Schedule P Part 2-4 contained what
Loss triangles of each line
Part 2 = Net incurred loss & DCC
Part 3 = Net paid loss & DCC
Part 4 = Net Bulk & IBNR for loss & DCC
- In this case incurred includes IBNR for this
What can be derived from Schedule P Part 2-4
Triangles of Case Reserves
Case reserves = Part 2 - Part 3 - Part 4
What are the issues with determining LDFs from Schedule P data
- Instructions to complete Schedule P are not completely comprehensive
- So may be different from company to company
- Internal pooling or reinsurance arrangements may not be obvious
- Distortions due to changes in pool participations; or Communications
- Schedule P has 10 AYs of data, but development may occur later
- Losses and DCC are combined, potentially hiding trends in either component
Schedule P Part 4
Represents the bulk & IBNR reserves for all AYs prior to the ten most recent
How to calculate Schedule P Part 4
Column before the right most column can be derived from the prior year’s part 4 by adding the year and prior in previous together.
For most right column, current year’s Part 1, in addition to the current tabular discount amount.
Part 1 Col 15 (D&A Bulk & IBNR Loss) - Part 1 Col 16 (Ceded Bulk & IBNR loss) + Part 1 Col 19 (D&A Bulk & IBNR DCC) - Part 1 Col 20 (Ceded Bulk & IBNR DCC) + Tabular Discount
Schedule P Part 3
Shows payments that have been made on the reserves since a valuation date with all prior AYs combined.
How to calculate Schedule P Part 3
Columns before the right most column can be derived from prior year’s part 3.
For right most column, all from Part 1
(D&A - ceded) paid loss + (D&A - ceded) paid DCC
Col 4 - 5 + 6 - 7
How and when to derive Schedule P Part 2
Derive after deriving part 3 first
Prior year row: Ending reserves of each year end (based on the schedule P from previous year) and paid losses from the corresponding Prior Years row of part 3
For right most column use current year’s part 1 and 3
- Cumulated paid losses + Reserves
- Reserves are derived from the current Part 1: Col 24 - (21 - 22)
- - Gross up for tabular discounts
Schedule P Part 5 and the 3 parts
Shows 10 years of claim counts on a direct plus assumed basis, grouped by AY
Has 3 sections
- Cumulative number of claims closed with loss payment
- Number of claims outstanding
- Cumulative number of claims reported
What metrics can be calculated using S.P/P.5 data
- Claim Closure rate
- Closed with pay ratio
- Claim frequency
- Avg Claim severities
- Reasonableness Tests
Claim closure rate
Closed Claims / Total Reported Claims
Claims - All claims or closed with payments
This can be used to identify if claim settlement rate has changed
- This can distort chain ladder method
Closed with Pay (CWP) Ratio
Closed with Pay (CWP) / Total Closed Claims
- A decrease may seem good, but could mean there will be an increase in reopened claims in future
Claim Frequency
Claim Count (Part 5) / Earned Prem (Part 1)
- EP may be distorted by rate changes
Claim Severities different metrics and what it tells us
- Avg Closed Claim Severity
- Avg Case O/S Severity
- Avg Reported Claim Severity
Used to see if strengthening or weakening of case reserves and if reserving method needs to be changed.
Avg Closed Claim Severity
Net Paid Loss & DCC (Part 3) / D&A Claims CWP (Part 5 Sec 1)
Numerator includes payments on both open and closed claims, but denominator is only closed
Avg Case O/S Severity
Net Case O/S Loss & DCC / D&A Open Counts
Avg Reported Claim Severity
Net Reported Loss & DCC / D&A Reported Counts
Reasonableness Tests: Unpaid Data
Avg Claim Frequency
Avg Ultimate Severity
Avg Unpaid Claim Severity
Avg Claim Frequency
Ultimate Claim Count by AY / Corresponding EP
Increasing - More claims? Concern
Decreasing - Less claims? Volatility or changes in business practice?
Avg Ultimate Severity
Ultimate Loss & DCC by AY / Ultimate Claim Counts
- How much did each claim cost on average during the year
Avg Unpaid Claim Severity
Unpaid Loss & DCC by AY / Unpaid Claim Counts
- Include no payments and partial payments
Schedule P Part 6
Shows the Cumulative EP by exposure year for the last ten years, valued as of 12/31
Exposure year is like Calendar year, but if changes from audits, retrospective rating, or lags occur, the premium will change in that exposure year.
How can Part 1 be generated from Part 6 in Schedule P
Corresponding value from the left most diagonal of Part 6 plus and adjustments to prior exposure years that arise during the calendar year.
Schedule P Part 7
Provides policy year premium and loss information on loss sensitive contracts
Optional
Parts of Schedule P Part 7
Part A: Primary Contracts (Direct Business)
Part B: Reinsurance Contracts (Assumed Business)
Schedule P Part 7 Part Sections
Both Parts, A&B have sections
- 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 & DCC on loss sensitive contracts (in same format as Part 2)
- Section 3: loss & DCC IBNR on loss sensitive contracts (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 & accrued retrospective premiums for each of the last ten years that the policies were issued
Schedule P Part 7 Part Section 1
Net Loss and LAE unpaid and NWP on loss sensitive contracts, relative to all contracts, for each Schedule P line
Schedule P Part 7 Part Section 2
incurred loss & DCC on loss sensitive contracts (in same format as Part 2)
Schedule P Part 7 Part Section 3
loss & DCC IBNR on loss sensitive contracts (same format as Part 4)
Schedule P Part 7 Part Section 4
net earned premiums on loss sensitive contracts (in the same format as part 6)
Schedule P Part 7 Part Section 5
triangle of net reserves for premium adjustments & accrued retrospective premiums for each of the last ten years that the policies were issued
Schedule P Interrogatory 1
Extended reporting endorsements if offered and how they report DDR reserve.
Schedule P Interrogatory 2
IF LAE is being defined as DCC and A&O
Schedule P Interrogatory 4
If reserves are net of non-tabular discounts
Schedule P Interrogatory 6
If insurer reports claim counts per claim or claimant
Schedule P Interrogatory 7 (most important interrogatory)
Any changes or anything special that the user needs to be aware of if relying on Schedule P data to asses the adequacy of recorded loss & LAE reserves
Intercompany Pooling
Structure in which a group of affiliated companies share exposure
Schedule P is the only exhibit that does not treat the pooling arrangement as what
reinsurance
- Other exhibits will double count the cessions of intercompany pooling
- On a net basis, the numbers will be the same
If there is a change in the intercompany pooling percentage, how is Schedule P restated
retroactively to reflect the updated pooling percentage
What is an alternative structure to Intercompany pooling
Intercompany reinsurance
Intercompany Reinsurance
One affiliated company reinsures an affiliate
- Accounted for the same way as third party reinsurance
- Harder to administer compared to intercompany pooling
- Need multiple unpaid claim analysis compared to pooled basis
