Werner ch 6

  1. Reported Loss (a.k.a. case incurred loss)´╗┐
    Sum of paid loss and ending case reserve

    Reported Losses = Paid Losses + Case Reserve´╗┐
  2. Ultimate Loss
    • Amount required to settle all claims for a de fined group of policies
    • Diff ers from reported loss due to IBNR and case adequacy (or IBNER)
    • IBNER - incurred but not enough reported or development on known claims

    Ultimate Losses = Reported Losses + IBNR Reserve + IBNER Reserve
  3. Aggregated loss measures defi ned by
    • 1. Choice of relevant statistics
    • 2. Data aggregation method
    • 3. Period of time
  4. Allocated loss adjustment expenses (ALAE)
    • Claim related expenses that can directly be attributable to a specifi c claim
    • E.g., legal fees for outside counsel hired to work on a specifi c claim
  5. Unallocated loss adjustment expenses (ULAE)
    • Claim related expenses that cannot directly be attributable to a speci c claim
    • E.g., claims department salaries and rent
  6. Calendar Year Losses
    • CY paid losses include payments made on any claim during calendar year
    • CY reported losses equal paid plus change in case reserves
  7. Accident Year Losses
    • Losses grouped according to date of occurrence, regardless of when pol written or claim reported
    • AY paid losses include all payments made on claims that occurred in that AY
    • AY reported losses include all payments plus ending case reserves for claims occurred in AY
    • Accident year losses can change in successive calendar years
  8. Policy Year Losses
    • Group losses by year in which policy was written
    • Directly matches premiums and claims from a block of policies
    • Paid and reported loss calculated similar to AY
    • Policy year losses can change in successive calendar years
  9. Report Year Losses
    • Group claims according to date of report to the insurer
    • Claims-made coverage is dependent on the report date
    • No IBNR
  10. Loss ratio
    Measures the portion of each premium dollar needed to pay loss

    • Projected Ultimate Loss and ALAE ratio:
    • Ultimate Loss Projected to Future Level / Projected Earned Premium at CR
  11. Adjustments to Losses
    • To project to level expected when rates will be in eff ect
    • 1. Extraordinary Losses
    • 2. Changes in coverage or benefi t levels
    • 3. Loss Development
    • 4. Loss Trend

    • How to determine threshold at which losses should be capped?
    • Often capped at basic limits
    • Ideally should correspond to point at which inclusion causes volatility in rates
  12. When basic limit is not used, determine threshold that best balances the following goals
    • Include as many losses as possible
    • Minimize volatility in analysis
  13. When excluding shock losses, must add back provision for shock losses
    • Typically use average expected large loss calculated using many years of data
    • Length of time depends on size of insurer and line of business
    • Note - older data may be less relevant (e.g., changes in jury awards)
  14. Catastrophe Losses
    • Event whose losses are very large and very infrequent such that their inclusion in a normal rate review would severely distort the estimation of future expected losses
    • E.g., hurricane, earthquakes, oil spills
  15. Non-modeled cat analysis
    • Generally used on events that happen with some regularity
    • E.g., hail storms for auto physical damage
    • If not treated separately, increase indicated rate need in years after events and understate needed rate in years without events
  16. Number of years used for non-modeled cat analysis
    Should be selected based on both stability and responsiveness
  17. Catastrophe models
    • Generally used for projecting extremely sporadic, high severity events
    • Stochastic models to estimate likelihood of events with varying magnitude
    • Estimate damages resulting from events given characteristic of insured properties
    • Catastrophe provision added to non-cat loss amount to get aggregate expected losses
  18. Two ways to consider reinsurance in ratemaking analysis
    • Reduce projected losses for reinsurance recoveries and premiums for cost of reinsurance
    • Net cost of non-proportional reinsurance may be included as an expense item
  19. Loss Development
    Project unpaid (often unreported) claims to ultimate settlement values
  20. Chain Ladder Method
    • 1. Future claims' development is similar to prior years' development
    • 2. Claims recorded to date will continue to develop in a similar manner in the future
    • Past is indicative of the future
  21. Mechanics of Loss Development
    • 1. Step 1 - Compile loss data in a development triangle
    • 2. Step 2 - Calculate age-to-age factors (a.k.a. report-to-report factors or link ratios)
    • 3. Step 3 - Calculate averages of the age-to-age factors
    • 4. Step 4 - Select loss development factors
    • 5. Step 5 - Select tail factor
    • 6. Step 6 - Calculate cumulative loss development factors
    • 7. Step 7 - Project ultimate claims
  22. Other Methods for Calculating Loss Development
    • 1. Bornhuetter-Ferguson Method
    • Unreported (or unpaid) claims will develop based on expected claims
    • 2. Berquist-Sherman Method
    • Deals with changes in claims settlement rates or case reserving philosophy
  23. Loss Trend
    Adjust data for changes in frequency and severity
  24. Examples of loss trend drivers
    • Monetary inflation
    • Increasing medical costs
    • Advancements in safety technology
    • Distributional changes in the book of business
    • Social Iflnuences, such as changes in claim consciousness, court practices, legal precedents
  25. Loss Trend Periods
    Period of time from average loss occurrence date of experience period (usually cal/acc year) to average loss occurrence date for period in which rates will be in eff ect (usually policy year)
  26. Two-Step Loss Trending
    • Used when expect trend in historical period and forecast period to be dffi erent
    • Legislative changes
    • 1. Trend losses from average occurrence in experience period to average accident date in last data point in trend data
    • 2. Trend from average accident date of last data point to average accident in forecast period
  27. Leveraged Eff ect of Limits on Severity Trend
    • Assuming a constant percentage trend acting on all sizes of loss
    • Basic limit losses will trend at a lower rate than losses limited at higher limits
    • Which in turn trend at a lower rate than excess layers
  28. Overlap Fallacy: Loss Development and Loss Trend
    • 1. Has been incorrectly suggested that severity trend is double counted when both loss development factors and severity trend factors applied to losses
    • 2. Both necessary
    • Trend factor reflects trend between midpoint of experience period and midpoint of exposure period
    • The LDF reflects trend between occurrence and settlement
Card Set
Werner ch 6
Exam 5 TIA Werner ch 6