Sec C Claims Reserves & Liabs

Question 1

Methods for estimation for claim reserves

Answer 1

1. Case reserves - direct enumeration on a claim-by-claim basis. Typically used only when there are very few claims. Can’t use for IBNR.
   a) Examiner’s method - estimate ultimate payment and deduct what’s already been paid
   b) Average size claim method - the number of reported claims times an average claim amount minus the amount already paid
2. Projection method - develop a historical incurred claim rate as a function of some measure of exposure. Then apply this rate to projected exposure to get current incurred claims, and subtract claims already paid. The most common approach is: projected PMPM claim costs * member months - claims already paid
3. Loss ratio method (aka claims cost method) - loss ratio * earned premium - claims already paid. This method and the projected method can be used when the volume of data is small or to validate other methods
4. Tabular method - apply a factor to open claims to calculate reserve. Typically used for LTC or disability. Can’t use for IBNR
5. Development method (aka lag, completion, or triangulation method) - projects historical claim lag pattern into the future to estimate the reserve based on experience data
6. Factor method (aka formula method) - historical studies are done of reserves paid after the valuation date for claims incurred before that date. These past reserved are stated as a percentage of some unit of exposure in the past time period (such as annual premium in force) to develop a factor. Current reserves equal this factor multiplied by the current amount of exposure
7. Stochastic approaches - methods where a probabilistic statement can be made about the level and adequacy of the reserve amount. Any of the methods discussed previously can be given a stochastic treatment

Question 2

Methods for evaluating claim reserve adequacy

Answer 2

1. Runoff studies (commonly done by incurral year) - previous reserve balances are compared to subsequent claim payments and reserve balances, with adjustments for interest
2. Actual to expected claim termination rate studies (commonly done by claim duration) - compares the actual claim terminations to the expected claim terminations based on the table used for reserving
3. Experience studies - typically involves a gross premium valuation. The reserve is adequate if PV of future gross premiums + reserve > PV of future claim costs and expenses

Question 3

Process of building in conservatism in claim reserves

Answer 3

1. Development method - can incorporate conservatism in the completion and projection factors. But usually use most likely factors and add an explicit margin to the reserve
2. Tabular reserves - margins are typically included in the assumptions made to calculate the tabular factors
3. Projection method - add margins to the trend assumptions that are used to project costs per unit
4. Loss ratio method - margins can be explicit or implicit, depending on the choice of loss ratio

Question 4

Common data integrity errors related to claim reserving

Answer 4

1. Missing data
2. Misstated age or gender
3. Inaccurate elimination periods or benefit periods
4. Incomplete or inaccurate information on benefit integration
5. Inaccurate or inconsistent determination of the incurral date
6. Inaccurate information on cause of disability
7. Incorrect coding or claim status (open, closed, or pending)

Question 5

Additional considerations in establishing claim reserves

Answer 5

1. Incurral dating method
2. Reserve basis - statutory, GAAP, and tax bases differ in their use of margin, interest rates, etc
3. Interest - reserves for claims with long payouts may be discounted to reflect interest
4. Controls and reconciliation - the data used should be tested for accuracy
5. Insurance characteristics - reserves vary depending on the type of risk covered
6. Reserve cells - set up separate cells for each homogenous category of business
7. Managed care features - such as discounts and provider risk sharing arrangements
8. Trends
9. Seasonality
10. Claim administrative expenses - set up a reserve equal to a percentage of the claim reserve
11. Morbidity assumptions - for long-term claims, morbidity is reflected in continuance tables
12. Use of the case reserves method - very labor intensive, so only recommended for small blocks

Question 6

Types of claims liabilities and reserves

Answer 6

1. Due and unpaid liabilities - liabilities that have been reported, adjudicated, and processed, but not paid. Is usually small. Itemize or base on historical averages
2. In course of settlement - liabilities for claims reported and received but not yet adjudicated and paid. System may record receipt and run report. Otherwise, use simple method such as average claim times number of claims
3. IBNR - liabilities for claims that are anticipated but have not been reported. Project by using existing payment data to develop average expected claims or claim payment patterns
4. Loss adjustment expenses - liabilities for the administrative costs of adjudicating unpaid claims. Usually a percentage of unpaid claims liability
5. Present value of amounts not yet due (referred to as “unaccrued”) - an estimate of future amounts due on known open claims (commonly for disability or LTC claims). Usually reserved on a seriatim basis using a tabular approach
6. Resisted claims - includes claims for which a known litigation situation exists. Usually reserved seriatim assuming full benefits and possibly amounts for damages
7. Outstanding accounting feed (may overlap with due and unpaid liability) - amounts which have been acknowledged as payments, but for which no check has been cut. Reserves are often based on accounts payable and billing notices
8. Deferred maternity or other extended benefits - the loss is triggered before the valuation data, but benefits are deferred by contractual provisions
9. Other special reserves - such as for waiver of premium due to disability

Question 7

Types of reserves and liabilities

Answer 7

1. Premium reserves
2. Policy reserves (a type of premium reserve)
3. Claim reserves
4. Premium deficiency reserves
5. Expense reserves - to cover administrative expenses
6. Reserves related to government plans. E.g., refund reserves for Medicare Supplement, risk-sharing reserves for Medicare Part D, and special reserves needed for state Medicaid programs
7. Reserves related to ACA-compliant plans, for risk adjustment, reinsurance, risk corridors, MLR rebates, and reconciliations of various government subsidies
8. Reserves for contracts with providers, such as for withholds, bonuses, or other risk-sharing mechanisms
9. Reserves for experience rating refunds

Question 8

Definitions of reserves and liabilities

Answer 8

1. Liabilities are obligations that are already incurred and accrued (such as the ongoing monthly payments on a known disability income claim)
2. Reserves are for obligations which have not yet been incurred or are not yet accrued
3. In practice, reserves and liabilities are both referred to as “reserves”. Most reserve calculations focus almost entirely on calculating the combined value of the two

Question 9

Methods for calculating provider liabilities

Answer 9

1. Risk-based payments - liabilities are based on projected contractual pay out, which is commonly based on the difference between experienced and targeted costs. Settlements are often done several months after the period ends, so reserves play a minimal role. Reserves should consider any applicable stop-loss or carve-out provisions
2. Bonus or incentive contracts - estimates are normally based on utilization studies