Reserving Text Flashcards
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Describe 5 components of unpaid claims
1) Case outstanding (on known claims): this reserve is set by the claims department, third party adjustors, or independent adjustors for known and reported claims only (the future expected payments for claims already reported.
2) IBNER: a provision for future development on known (case) reserves (incurred but not enough reported).
3) Reopen: a provision for expected costs due to the reopening of claims.
4) IBNR: provision for claims incurred but not reported (this is the narrow definition of IBNR). IBNR comes about due the lag between a covered event occurring, and it being reported to the company—in some lines of business this time lag can be very long.
5) In transit: a provision for claims reported, but not yet recorded within the database/system.
How do you calculate incremental paid claims, case outstanding, and reported claims?
Incremental paid claims during a period are the sum of payments in the period, or equivalently cumulative paid claims at the end of the period minus cumulative paid claims at the beginning of the period.
Similarly, incremental case O/S changes during a period are the sum of changes in case O/S in the period, or case O/S at the end of the period minus case O/S at the beginning of the period.
Incremental reported claims within a period can be calculated in the following ways:
1) Reported claims at end of period – reported claims at beginning of period.
2) Incremental paid + case O/S at the end of period - case O/S at the beginning of period.
3) Incremental paid + incremental case O/S.
4) Sum of incremental reported claims during the period.
External data commonly used when (3):
1) Small company: data sets not credible.
2) Systems limitations limit availability of data.
3) Entering a new line of business or region.
External data is particularly useful as a benchmark for (3):
External information can be very valuable as a benchmark, especially for the following:
1) Tail development factors.
2) Trend rates.
3) Expected claims ratios.
External data may be misleading or irrelevant due to differences in (5):
External data may be misleading or irrelevant due to differences in:
1) Insurance products.
2) Case outstanding and settlement practices.
3) Insurer’s operations or coding.
4) Geographic areas
5) Mix of business/products
Consideration for data groupings for an unpaid claims analysis (6):
1) Volume of claim counts in the group.
2) Length of time to report the claim once an insured event has occurred- i.e. reporting patterns.
3) Ability to develop an appropriate case outstanding estimate from earliest report through the life of the claim- i.e. accuracy of case reserves.
4) Time to settle the claim once it is reported- i.e. settlement, or payment patterns.
5) Likelihood of claims to reopen once it is settled.
6) Average settlement value- i.e. severity. -Must balance credibility and homogeneity of groupings. If relative volume of business between two or more segments is constant, less homogeneity in groupings is needed.
Treatments of ALAE under excess of loss reinsurance (3):
1) ALAE included with claims in the limit.
2) ALAE not covered.
3) ALAE covered pro rata: i.e. covered in the same proportion as claims, e.g. if $5M of a $15M claim is covered, 1/3 of ALAE will be covered.
Examples of exposures used in estimating unpaid claims: (8):
1) Earned premium: most commonly used, on-level if available.
2) Written premium.
3) Policies in force.
4) Number of vehicles insured- auto.
5) Payroll- WC.
6) Property value- property insurance.
7) Number of employees- crime.
8) Sales- general liability.
Define the following: Policy effective dates Accident date Report date Accounting Date Valuation Date
Policy effective dates: policy begin and end dates.
Accident date: the date of covered occurrence.
Report date: date claim reported to the insurer.
Accounting date: the date through which liabilities are estimated, for all claims occurring on or before regardless if they have been reported or not.
Valuation date: the date through which known claim data is included, regardless of when the actuary performs the analysis.
Describe Calendar Year aggregation (including Advantages and Disadvantages)
Calendar Year (CY): payments include all claims paid in a given year regardless of when the accident, policy, or report of claim occurred. CY exposures (e.g. calendar year earned premium) are commonly used, but CY claims are rarely used to estimate unpaid claims. CY earned premium can be calculated as: WP + (Beginning Unearned Premium Reserve - Ending Unearned Premium Reserve).
Advantage: readily available and is not subject to further development. -
Disadvantage: cannot be used it to estimate development of claims.
Describe Accident Year aggregation (including Advantages and Disadvantages)
Accident Year (AY): by far the most commonly used aggregation for claims data. Claims are grouped by the year of occurrence, regardless of when the claim is reported, policy was written, or payments are made. Actuaries commonly use CY exposure data with AY claims data (CY exposures approximately match AY claims).
Advantage: Represents a shorter timeframe than policy years (or underwriting years) so we can estimate ultimate claims sooner, and there are numerous industry benchmarks available on an AY basis.
Disadvantages: slight mismatch with CY exposures, the potential for mixing of claims from policies underwritten/priced at differing levels, or at different retentions for self-insureds.
Describe Policy Year aggregation (including Advantages and Disadvantages)
Policy Year (PY) or Underwriting Year: Claims can be grouped by when the policy was written (PY if a primary policy, U/W year if a reinsurance policy) regardless of when claims occur, are reported, or paid. -
Advantages: PY claims directly match PY exposures, and are useful If there have been significant changes in policy characteristics or shifts in types of business written from one year to the next (since AY aggregation will mix claims from different PYs).
Disadvantages: the extended timeframe. it can also be hard to understand or isolate the effects of a large event (e.g. catastrophe). If a catastrophic event occurs in April, it will affect policies written in the prior year and current year (i.e. the effect will be spread over the current and prior PY).
Describe Report Year aggregation (including Advantages and Disadvantages)
Report Year (RY): Claims can be aggregated by the year claims are reported, regardless of when the claim occurred, are paid, or when the policy was in effect.
Advantage: number of claims is fixed by the end of the first year, resulting in more stable data.
Disadvantage: only measures development on case (IBNER) rather than newly reported claims (IBNR).
Sample Topics/Question with: Claims Department
Claims: understand any changes in claim settlement or report speed, changes in case adequacy (or how case reserves are set), shifts in large/small claims, or changes in the rigor of claims defense.
Sample Topics/Question with: Underwriting Department
Underwriting: understand shifts the book of business, large risks underwritten, and pricing of policies.
Sample Topics/Question with: Data/Accounting Department
Data or Accounting: understand changes in claim coding, data availability and definitions, and processes in place to ensure data accuracy.
Sample Topics/Question with: Ratemaking Actuaries
Ratemaking actuaries: understand any changes in operations, shifts in the book of business, use and availability of external data, filing information, and priced claims ratios.
Sample Topics/Question with: Reserving Department (if you are a consultant)
If you are a consultant and meeting with in house reserving actuaries, ask for prior reserve reports to review, ask about areas of disagreement between prior studies, and for any additional background they can provide.
Sample Topics/Question with: Reinsurance Department Senior Management
Reinsurance: details of the reinsurance programs, especially any changes in the program or retentions.
Sample Topics/Question with: Senior Management
Senior management: company overview, types of business written, types of marketing and distribution channels (e.g. direct writer, independent agents, captive agents), and any organization changes.
Describe the 3 important dimensions of the development triangle
Rows, the columns, and the diagonals.
Each row in the triangle represents one accident year.
Each column represents the age (or maturity) of development.
Each diagonal represents the values at each successive valuation date.
The sum of the latest diagonal minus the sum of the second latest diagonal represents the amount paid during that given timeframe since each valuation represents a cumulative value.
Explain how for self-insurers the policy year, fiscal year, and accident year are commonly the same
Self-insurers issue policies on a single date (rather than throughout the year as insurers do) and this date often corresponds to the first day in the fiscal year, and in these cases the accident year is defined over the same timeframe as the fiscal year (accident years do not necessarily have to run 1/1 to 12/31). In such a situation the policy year, fiscal year, and accident year would all be the same timeframe.
What should be considered when deciding on the number of periods to include in the data triangle?
Line of business, state, and type of data. Ideally, we would like to have development periods available until we expect no further development– often we will not have this amount of data and will need to use tail factors to project from the oldest maturity to ultimate.
What are 4 very basic diagnostic checks that should be done for claims amounts?
1) Visual examination of the Reported claims development triangle.
2) Visual examination of the Paid claims development triangle
3) Triangle of Reported Claims/Earned Premium (on-level if available).
4) Triangle of Paid Claims/ Earned Premium (on-level if available).