- TIA EXAM 5 - WERNER CH 06.txt

Sum of paid loss and ending case reserve

Reported Losses = Paid Losses + Case Reserve

• Amount required to settle all claims for a defined group of policies
• Differs 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

• 1. Choice of relevant statistics (pd or rpt loss)
• 2. Data aggregation method (CY, AY, PY)
• 3. Period of time (Acctg period or Valuation date)

• 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

• Claim related expenses that cannot directly be attributable to a specic claim
• E.g., claims department salaries and rent

• CY paid losses include payments made on any claim during calendar year
• CY reported losses equal paid plus change in case reserves

• 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

• 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

• Group claims according to date of report to the insurer
• Claims-made coverage is dependent on the report date
• No IBNR

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

• To project to level expected when rates will be in effect
• 1. Extraordinary Losses
• 2. Changes in coverage or benefit levels
• 3. Loss Development
• 4. Loss Trend

• 1. Large Individual Losses
• Infrequent individual losses for extremely large amounts

• 2. Catastrophic Losses
• Events whose losses are very large and very infrequent s.t. including them in normal rate review would severly distort the estimation of future expected losses

• Often capped at basic limits
• Ideally should correspond to point at which inclusion causes volatility in rates (may be much higer than basic rate)

• Include as many losses as possible
• Minimize volatility in analysis

• 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)

• 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

• Non-Cat (adjustments like normal losses)
• +
• Non-Modeled Cat (like Hail)
• +
• Modeled Cat (like Hurricanes)
• = Total Loss Cost

• 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

Should be selected based on both stability and responsiveness

• 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

• May choose to write less in CAT-Prone areas, get more reinsurance or write higher deds
• May choose to alter UW Profit in rates to reflect higher cost of capital needed to support risk caused by higher concentration of policies

1. Proportional reinsurance - same % of premiums & losses shared with reinsurer (No need to explicitly include in indications)

2. Non-proportional reinsurance - reinsurer assumes some layer of losses

• 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

Project unpaid (often unreported) claims to ultimate settlement values

• 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

• 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

• 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

Adjust data for changes in frequency and severity

• Monetary inflation
• Increasing medical costs
• Advancements in safety technology
• Distributional changes in the book of business
• Social Influences, such as changes in claim consciousness, court practices, legal precedents

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 effect (usually policy year)

• Used when expect trend in historical period and forecast period to be dffierent
• 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

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

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