TIA Section A - Odomirok 15

Question 1

List some uses of schedule P (in addition to being used by outside parties to assess the reserve adequacy)

Answer 1

• supports and provides disclosure for the SAO
• shows how reserves have developed over time and indicates where the development is coming from
• provides the source of payment patterns to be used in the tax discounting calculations
• shows the split between case reserves and IBNR
• provides historical claim count data to help review trends in frequency, severity as well as changes in claims handling and reserving
• provides the data to calculate the RBC loss sensitive discount

Question 2

List the parts of Schedule P

Answer 2

Part 1: loss and LAE experience as of 12/31 of the current year

Part 2: historical net incurred loss and DCC estimates

Part 3: historical net paid loss and DCC

Part 4: historical net IBNR for loss and DCC (before tabular discount)

Part 5: historical claim counts (closed with payment, open and reported)

Part 6: historical earned premium

Part 7: loss and premium data on loss sensitive contracts

Question 3

How are losses in Schedule Part 1 grouped

Answer 3

• occurrence policies: accident year
• claims made policies: report year
• tail policies: policy year
• fidelity and surety policies: discovery year

Question 4

Two components of LAE

Answer 4

• defense and cost containment DCC

- adjusting and other A&O

Question 5

List some examples of DCC

Answer 5

• surveillance expenses
• fixed amounts for medical cost containment
• litigation management expenses (audit bills)
• LAE for pools of reported by AY
• fees in salaries for appraisers, private investigators, hearing representatives, re-inspectors, fraud inspectors; if working in defense of claims
• attorney fees incurred due and duty to defend
• cost of engaging experts if not included in losses

Question 6

List some examples of A&O

Answer 6

• fees of adjusters and settling agents
• LAE for pools if reported by CY
• Fees and salaries for appraisers, private investigators, hearing representatives, reinspectors, fraud inspectors; if working in the capacity of an adjuster
• attorney fees incurred in determination of coverage

Question 7

How was LAE historically segmented

Answer 7

• allocated loss adjustment expenses (ALAE): expenses that can be allocated to a specific claim
• unallocated loss adjustment expenses (ULAE): expenses that cannot be allocated to individual claims

Question 8

How are S&S expenses recorded in Schedule P

Answer 8

• paid losses are recorded net of S&S received

- unpaid losses can be net or gross of anticipated S&S

Question 9

How are tabular and non-tabular discounts treated in Part 1

Answer 9

• net of tabular discount

- Gross of non-tabular discounts and Net

Question 10

List two things that the claim count data from schedule P can be used to identify or analyze

Answer 10

• changes in losses, i.e. frequency and severity

- changes in claims settlement or reserving philosophy

Question 11

What types of changes should actuaries look out for when analyzing trends involving claim counts.

Answer 11

• mix of business (type of exposure, geography)
• policy limits
• reinsurance attachment points and limits
• The way that the company counts it’s claims

Question 12

How is discounting reflected in Parts 2-4

Answer 12

Data is gross of all discounting.

Question 13

Issues with using information in Parts 2-4 to develop losses

Answer 13

• various allocations in the creation of schedule P are based on the interpretation of the person completing it
• internal pooling or reinsurance arrangements that may have an impact on the data set may not be very obvious by looking exclusively at schedule P
• schedule P includes business from participation in voluntary and involuntary pools and/or associations: many of these pools record IBNR as case reserves/ The level of participation in the pool may have changed over time
• schedule P only contains 10 accident years of data, but long tail lines may experience development late than 10 years
• commutations will distort the reserves
• The data combines losses and DCC potentially hiding trends in either component

Question 14

What changes should be considered when using the information in Parts 2-4 to develop losses

Answer 14

• Retentions
• claim settlement and reserving
• business mix
• underlying exposures

Question 15

Formula to populate the right most column of the prior years row of Part 3

Answer 15

It equals the Part 3 second right most column, plus the following from Part 1:
D&A loss - ceded loss + D&A DCC - ceded DCC = Col 4 - 5 + 6 -7

Question 16

Three sections of Part 5

Answer 16

• Cumulative number of claims closed with loss payment
• Number of claims outstanding
• Cumulative number of claims reported

Question 17

What inconsistency should users be aware of while comparing Part 5 data of different companies

Answer 17

Some companies record counts on a per claim basis, whereas others record them on a per claimant basis.

Question 18

List some metrics that can be derived from the claim count data (in addition to other data from the annual statement)

Answer 18

• Claim closure rates
• CWO ratios
• Claim Frequency
• Avg Claim Severity

Question 19

Formula for closure rate

Answer 19

Closed claims
__________________
Total reported claims

Question 20

Two advantages of closing claims early

Answer 20

• minimize chance that the claim will develop adversely

- allow the insured to receive medical treatment, repair property damage, recover from loss

Question 21

Three reasons that settlement rates may reduce

Answer 21

• Reduction in staff
• Growth in the book without a corresponding increase in staff
• Surge in claims from a catastrophe

Question 22

Expected impact to ultimate loss projection if a slow down in settlement rates is not reflected

Answer 22

This will result in an understated project

Question 23

CWP ratio equation

Answer 23

CWP claims
__________________
Total closed claims

Question 24

Claims frequency equation

Answer 24

Claim counts (from part 5) divided by earned premiums (from part 1)

Question 25

Average claim severity formula

Answer 25

Net paid loss and DCC (from part 3)
__________________________________
Direct and assumed claims closed with payment (from part 5 section 1)

Question 26

Average case outstanding severity formula

Answer 26

Net case outstanding loss and DCC
_______________________________
Direct and assumed open accounts

Question 27

Average reported claim severity formula

Answer 27

Net reported loss and DCC
______________________________
Direct and assumed reported counts

Question 28

Factors that may cause loss trends

Answer 28

• inflation, law changes
• one time catastrophic claims
• changes in deductibles/retention
• internal factors

Question 29

List some metrics that can be calculated from the Schedule P Part 5 data to perform reasonableness checks on the unpaid claim estimates (by comparing actual to expected)

Answer 29

• average claim frequency = Ultimate claim count by AY/corresponding EP
• average ultimate severity = Ultimate loss and DCC by AY/ Ultimate claim counts
• average unpaid claim severity = unpaid loss and DCC by AY/ unpaid claims

Question 30

List some reasons that premium in schedule P part 6 may change over time

Answer 30

• Premium audits
• Retrospective rated policies
• Lags in reporting/accounting for premiums

Question 31

When would an insurer populate Schedule P Part 7

Answer 31

Only if it is using the loss sensitive adjustment to RBC

Question 32

List the two parts of Schedule P Part 7

Answer 32

Part A: Primary Contracts (direct business)

Part B: Reinsurance Contracts (assumed business)

Question 33

List five sections of each part of Schedule P - Part 7

Answer 33

Section 1: net loss and LAE unpaid and NWP on lost sensitive contracts, relative to all contracts, for each Schedule P line

Section 2: incurred loss and DCC on loss sensitive contracts, in the same format as part 2

Section 3: loss and DCC IBNR on loss sensitive contracts, in the same format as part 6

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 and accrued retrospective premiums for each of the last ten years that the policies were issued

Question 34

Briefly describe Schedule P Interrogatories

Answer 34

Series of seven questions that the insurer needs to answer, that add insight to the other information reported in Schedule P

Question 35

What topics does Interrogatory 1 cover

Answer 35

Extend reporting endorsements (EREs) arising from death, disability or retirement (DDR)

There are six parts:

• the first asks whether the insurer offered the endorsement for free or at a discount
• the remaining parts are about how the company reports DDR

Question 36

Main purpose of Interrogatory 1

Answer 36

Ensure that the ERE coverage has been reserved for.

Question 37

What topics does the Interrogatory 2 cover

Answer 37

Asks if the LAE is being defined as DCC and A&O

Question 38

What topics does Interrogatory 4 cover

Answer 38

Asks for disclosure about whether the reserves are net of non-tabular discounts

Question 39

What topics does Interrogatory 6 cover

Answer 39

Whether the insurer reports claim counts per claim or per claimant

Question 40

What topics does the Interrogatory 7 cover

Answer 40

Asks if there are any changes or anything special that the user needs to be aware of if they rely on the schedule P data to assess the adequacy of recorded laws in LAE reserves