Schedule P

Question 1

Schedule P provides & helps

Answer 1

• provides detail about loss & LAE reserves
• only can be used by outside parties to assess reserve adequacy
• helps: support and provide disclosure for SAO, show how reserves have developed over time, source of payment patterns for tax discounting, show split between case and IBNR, provide historical claim count data, provide data to calc RBC loss sensitive discount

Question 2

Part1

Answer 2

summary of all LoBs combined and separate schedules by line

• typically 10 AYs plus prior years but certain lines only 2 AYs
• EP are shown by CY so they do not change in subsequent years
• losses shown by OP (AY), CMP (RY), tail policies (PY), fidelity & surety (discovery year)
• LAE is divided into DCC & A&O
• S&S: paid losses are always net of S&S received and unpaid can be recorded net or gross
• case & IBNR: net of tabular discount and both gross and net of non tabular whereas in BS reserves are net of all discount

Question 3

DCC & A&O

Answer 3

• DCC: defense, litigation and medical cost containment; in AS needs to be assigned to AY in accordance with associated loss
• A&O: all expenses associated with adjusting and recording the claim other than those included in DCC; in AS needs to be assigned in any justifiable way

Question 4

net claim counts & claim count uses

Answer 4

• net claim counts = direct + assumed unless all business ceded
• claim count data can be used to analyze/identify

Changes in loss

Changes in claim settlement or reserving philosophy

Question 5

when analyzing trends, important to account for changes in

Answer 5

MOB

Policy limits

Reinsurance attachment points & limits

Way company counts claims

Question 6

Part2-4

Answer 6

loss triangles of each line

Net incurred loss & DCC

Net paid loss & DCC

Net bulk & IBNR reserves for loss & DCC

• data net of S&S and reinsurance and contains 10 years
• case reserves = part2-part3-part4
• data is gross of discounting so will not reconcile with part1 if company discounts but can be reconciled by adjusting for tabular discount which is disclosed in notes to financial statements

Question 7

actuarial projections

Answer 7

these parts can be used to develop losses, LDFs can be derived

-issues: various allocations, internal pooling or reinsurance arrangements may have impact on data and may not be obvious, only 10 years of data but long tailed may develop later than 10, includes participation in pools or associations, commutations will distort, data combines loss & DCC, cannot really understand any observed trends

Question 8

hindsight tests from part2

Answer 8

how company’s ultimate projection has changed over past year and past 2 years

Question 9

Part5

Answer 9

10 years of claim counts on direct + assumed basis grouped by AY for certain LOBs

Cumulative # CWOP

Outstanding

Cumulative # reported

• counts can be used to identify trends, identify changes in the way the claims are settled and reserved
• One common inconsistency between companies is that some companies record counts on a per claim basis, whereas others per claimant basis

Question 10

claim closure rates

Answer 10

-claim closure rates = closed claims/total reported claims = (rptd-outstanding)/reported

Identify changes in claim settlement rate

Closing early adv = min chance claim will develop adversely and allow insured to receive treatment, repair, or recover from loss

Important to monitor because changes will distort loss proj methods

Can reduce due to: reduction in staff, growth in book without increase in staff, surge in claims from CAT

Question 11

claim freq

Answer 11

-claim freq=claim counts/EP; exposure is preferable because EP can be distorted from rate changes

Question 12

average claim severities

Answer 12

Avg closed = net paid/closed with pay counts

Avg CO = net CO/open counts

Avg rptd = net reported/reported counts

Can review to identify trends

Changes during first few years of development important since biggest impact on indicated reserves

Question 13

reasonableness tests

Answer 13

-reasonableness tests: checks on unpaid claim estimates

Avg claim freq = ult claim count by AY/corresponding EP

Avg ult sev = ult loss by AY/ult claim counts

Avg unpaid sev = unpaid loss / unpaid claims

Question 14

Part6 & differences from Part1

Answer 14

cumulative prem earned for last 10 years valued as of 12/31

-prem may change at future valuations due to factors: prem audits, retrospective rated policies, lags in reporting

Audits – recalculate premium based on changes between expected and actual exposure counts

• Retrospective rating adjustments – bill for additional premium or return premium based on experience of book.
• differences between Part1 bc part1 is fixed whereas part6 will reflect adj to exposure year prem

Question 15

Part7

Answer 15

provides prem and loss info on loss sensitive contracts on policy year basis; optional since only completed by companies that are using loss sensitive adjustment to RBC

Question 16

Intercompany pooling

Answer 16

diff to intercompany reinsurance; gross and net losses are combined and then distributed to each company based on pooling %

• intercompany reinsurance is accounted for as 3rd party reins
• sched P is only exhibit that does not treat pooling arrangement as reinsurance

Question 17

Frequency trend drivers

Answer 17

speedup claim setup in claim system, increase in nuisance claims, shortened statute of limitation, deteriorating BOB, change in type of claims, new business strategy, change in reins structure, change in policy limit, rate deteriorating, change in claim count def

Question 18

Severity trend drivers

Answer 18

improved claims process identifies simpler lower severity claims and closes them earlier, increase in S&S, increase in reins coverage, more CWOP, claims closed faster which drives down ALAE, change in claim count def

Question 19

Newly rptd claims during CY

Answer 19

Newly rptd claims during CY= cumulative rptd @ t– cumulative rptd@ t-1

Question 20

Total claims closed during CY

Answer 20

Total claims closed during CY = open @t-1 + newly rptd claims during CY - open @t

Question 21

calculating new yr part 3

Answer 21

remove C1 and subtract C2 from other columns

combine prior and R1

use part1 to get net loss & DCC paid for each AY during CY

C4=C3+net loss paid

result is paid @ new eval

Question 22

calculating new yr part 2

Answer 22

remove C1 and part2 - part3 = unpaid @ prior eval

combine prior and R1

add new prior part3 to above; remaining rows remain the same from previous AS

C4=part3+net bulk&IBNR+net C/O from part1

final result is incd @ new eval

Question 23

trend analysis examples of Schedule P

Answer 23

All Claim Closure = (Reported – Outstanding) / Reported, Monitor the speed that claims were settled

Claims Outstanding = Outstanding / Reported, Identify any changes in claim settlement practices

Claim Closure Rate = Claims Closed with Payment / Reported, This reveals the changes in the rate at which the claims are settled

Claims Closed with Pay = Claims Closed with Payment / (Reported – Outstanding), To see if there is a change in claims closed with pay compared to total closed claims, which could highlight a change in the claims settlement process

Claim Frequency = Reported / Earned Premium, To identify change in the rate claims are reported relative to EP, which is a proxy for exposure.

Claim Severity = Incurred Loss / Reported, Average severity trend analysis shows how the average severity of reported claims has changed over time.

Incurred Loss Ratio = Incurred Loss / EP, To show the change in loss ratios over time

Question 24

calc paid loss for CY using 2 SchedP part1

and where this number will reconcile

Answer 24

subtract older Sched P from newer

you do not subtract prior yr row & next yr bc prior yr row in newer Sched P is incremental

Underwriting & Investment Exhibit: Section on Paid Loss

Question 25

calculating part 2 and part 3 for schedule P when there is reinsurance, retoractive reinsurance, and intercompany pooling

calculate entries in Schedule F part 3 (ceded reinsurance)

Answer 25

part 2: incd loss*(1-ceding%)*(pooling%)

part 2: paid loss*(1-ceding%)*(pooling%)

**not impacted by retroactive reinsurance

**reflect only most recent pooling percentage (does not vary for each year)

reinsurance recoverable on paid by reinsurer:

paid*ceding%, paid*(1-ceding%)*(1-pooling%)

reinsurance recoverable on case by reinsurer:

similar but instead of paid -> (incd-paid)

Question 26

Schedule P treatment of intercompany pooling

& calc incd loss and WP for Sched P

Answer 26

does not treat as reinsurnace

to get direct and assumed incd = %*total incd combined

ceded incd = 0

lead comp direct & assumed WP = total WP

non-lead comp ceded WP = comp’s WP

lead comp ceded WP = (1-pooling%)*total WP

non-lead comp direct & assumed WP = comp’s WP + lead comp ceded WP

Question 27

actions distressed insurers might take to artificially strengthen their surplus and how to use claim counts to uncover

Answer 27

Weaken IBNR reserves = Average severities (Losses from Part 2/ Reported Claims Counts from Part 5, Section 3) would be going down

Slow down claims payouts = Open to reported ratios rising and/or closed to reported ratios falling (all from Part 5).

Question 28

two ways presentation of loss data in Schedule P differs from the presentation of data in the rest of NAIC Property and Casualty Annual Statement.

How differences aid an actuary in evaluating an insurance entity.

Answer 28

1. Loss data is on an accident year basis in triangle format. 2. Loss data for certain lines of similar characteristics is combined
2. The loss data on an accident year basis in triangle format allows an actuary to monitor reserve development over time and determine the reserve adequacy of a company 2. The combination of certain lines of similar characteristics simplifies the actuarial analysis by providing more credibility to the data.

Question 29

Net Case Incurred Loss and Defense and Cost Containment Expenses calc

Answer 29

Part 2 – Part 4

Question 30

how this could underestimate payroll when determining the initial premium distort the loss & loss expense ratios

Answer 30

EP in Part 1 is frozen, and therefore audit premium collected after year end will be included in a future year when it is collected. Similarly, the premium in Part 1 will include audit premium collected during the year from prior policy years. If the company only recently began understating the premium or is now understating to a greater degree than historically, the loss ratios would be overstated