1. Specific areas where actuarial judgment is required
    • Determining optimal combinations of kinds of clms data to be used
    • Assessing effect of chg in an insr operations on the claim data
    • Adjusting clm data for influences of know and quantifiable events
    • Evaluating the strenghts and weaknesses of various estimation techniques
    • Making the final selection of the unpd clm estimate
  2. Chain Ladder / Dvpmt technique
    • Assumptions
    • Future clm dvpmt is similar to prior yrs dvpmt
    • Clms observed for immature AY tell you something about clms yet to be observed
    • Mechanics
    • When selecting dvpmt factors, consider: smooth progression, stability, credibility, chg in patterns
    • Observations
    • Dvpmt factors tend to increase as the retention increases
    • When does it work
    • + large clm do not greatly distort data
    • + high freq low sev
    • - insufficient volume of credible data
    • - leveraged effect of large clms
    • Changing environment
    • Responsive to inc CR, overstates when inc CO strength
  3. Expected claims technique
    • Assumptions
    • Unpd clms can better be estimated based on a priori estimate than using experience observed to date
    • Common uses
    • Lines w. longer emergence and settlement patterns / New lob/terr / Operational or environemental chg / CL not appropriate / Data is unavailable
    • Mechanics
    • Ult clms = ECR * earned premium
    • When does it work
    • + maitain stability over time
    • - lack of responsiveness to recent experience
    • Changing environment
    • Understate when inc CR, responsive to inc CO strength
  4. Bornhuetter-Ferguson Technique
    • Assumptions
    • Unrpt clms will develop based on expected clms
    • Mechanics
    • Uld clms = rpt + exp clms * (1 - 1 / CDF)
    • When does it work
    • + rdm fluctuations at early maturities do not sign distort
    • + used when data extremely thin or volatile or both
    • - when CDF lt 1: have to limit to 1 or use other technique
    • Changing environment
    • Must make delibarate chng in ECR to respond to inc CR
    • Rpt BF will overstate when CO strenght inc, but less than CL
    • Paid BF responsive to CO strenght chg
  5. Benktander Technique
    • Credibility-weighted avg of BF and CL
    • More responsive than BF and more stable than CL
    • Uses BF estimate as initial expected losses to run BF again
  6. Cape Cod / Stanard-BuhlmannTechnique
    • Reinsurers are most frequent users
    • Assumptions
    • Urnpt clms will develop based on expected clms
    • Mechanics
    • Like BF except for ECR (used-up premium)
    • SB ECR = Σ(Rpt) / Σ(Adj EP * %Rpt)
    • SB IBNR = ECR * Σ(Adj EP * (1 - %Rpt))
    • When does it work
    • + rdm fluctuations at early maturities do not sign distort
    • - not as appropriate as BF when data is thin
    • - may be difficult to obtain adj prem
    • Changing Environment
    • Understates when CR inc, but less than EC or BF
    • Overstates by more than BF when chg in CO strength
  7. FS Techniques - Definition
    • Proj ult clms by mult nbr clms * avg value
    • Helps in understanding drivers in clm activity
    • + examine trends and patterns
    • + validate or reject findings
  8. FS Approach # 1 - Dvpmt
    • Assumptions
    • Consistent def of clm cnt
    • Clm cnt are reasonably homogeneous
    • Clm cnt to date will continue to dvp in a similar manner
    • Mechanics
    • Project and select ult clm cnt and severity
  9. FS Approach # 2 - Incorporation of exposures and inflation
    • Assumptions
    • Trend rates reflect economic and social inflation
    • Trend rates vary by lob, geog, limits
    • Mechanics
    • Compare ult clm cnt to exposures and select freq
    • Project severity
  10. FS Approach # 3 - Disposal Rate Technique
    • Assumptions
    • Disposal rate = cum closed clm cnt / ult clm cnt
    • Incr clm cnt = prev * (disp at y - disp at y-12) / (1 - disp at latest diag) * (ult clm cnt - closed to date)
    • Multiply by incr severities
    • When does it work
    • + gain greater insight into clm process
    • + may be used w. paid clm data
    • + ability to explicitely reflect inflation
    • - highly sensitive to the inflation assumption
    • - data needed may be unavailable
    • - chgs in def of clm cnt
    • - method relies on mix of clm to be relatively consistent
  11. CO Dvpmt Approach # 1 - Wiser
    • Assumptions
    • Clm activity related to IBNR is related consistently to clms already rpt
    • Common uses
    • Works well w. clms-made coverage and RY analysis
    • Mechanics
    • Use ratio of incr pd to CO and ratio of CO to prev CO
    • When does it work
    • - future IBNR is not always related to clms already rpt
    • - infrequent use and lack of benchmark
  12. CO Approach # 2
    • Assumptions
    • Only data available is CO
    • Clms to date for self-insr will devp in a similar manner as industry benchmark
    • Mechanics
    • CO dev factor = (Rpt CDF - 1)(Paid CDF)/(Paid CDF - Rpt CDF) + 1
    • Limitations
    • Benchmark may prove to be inaccurate
    • Inappropriate for more recent yrs
    • Individual large clms can distort
  13. Berquist-Sherman: Data selection
    • Selection of substitute forms of data
    • Use earned exposures instead of clm cnt
    • Substitute PY for AY when limit or ded chg
    • Substitute RY for AY when shift in social climate
    • Substitute quarter for yr when growth shifts avg acc date
    • Subdivide loss exp into more homogeneous grps
  14. Berquist-Sherman - Data Adjustments
    • Detect chg in case adequacy using
    • Questions to clm dpmt mgmt
    • Diagnostics (pd to rpt, avg CO, avg rpt, avg pd)
  15. Berquist-Sherman CO Adjustment
    • Choose reference diagonal (last -> remain the same un/adj)
    • Restate avg CO by trending back from latest diagonal
    • Adj rpt = adj avg CO * open clm cnt + unadj paid
  16. Berquist-Sherman Pd clm dvpmt Adjustment
    • Determine disposal rates
    • Apply selected disposal rates to ult nb of clms to determine adj nb of closed clm cnt
    • Derive paid clm corresponding to adj clm cnt (use regression analysis)
  17. Define salvage and subrogation
    • Salvage: amt insr is able to collect from sale of damaged property acquired when paying insd for a total loss
    • Subrogation: insr's right to recover the amt of clm pmt to a covered insd from a third party responsible for the injury or damage
  18. Evaluation of reserving techniques
    • Should use more than 1 method (should incorporate credibility, regression analysis, data smoothing)
    • Responsibility of the actuary to select most appropriate estimate from highly stable to highly responsive
    • Actuary should explain significant differences between projections
  19. Formula for projected clms to emerge
    Clms to emerge IBNR * (CDFx-y - 1) / (CDFx-ult - 1)
  20. Hugh White's question
    • If rpt loss is higher than expected do you
    • Reduce the bulk reserve by corresponding amt (EC)
    • Leave the bulk reserve as same level (BF)
    • Increase bulk reserve in proportion (CL)
  21. When looking at other types of development triangles, what time period considerations should be made?
    • Credibility of experience
    • Stability of development (different cyclical effects)
  22. What are the goals of diagnostic review of data?
    Determine if the effect of implemented managament changes can be observed in data

    Be able to determine what types of data and which techniques are most appropriate to estimate unpaid claims under current circumstances.
  23. Downward trend in ratio of Paid-to-Reported Claims could be due to:
    • Decreasing paid claims
    • Increasing case adequacy
  24. What are some forces that could result in change in ratio of closed-to-reported claim counts?
    • 1. Large Cat, temporarily limit insurer's operations
    • 2. Change in guidelines to establish claim
    • 3. Decrease in statute of limitations (usually with a tort reform)
    • 4. Delegation of higher limit for settlement of claims to a TPA
    • 5. Restructure of claim field offices (merging or adding new offices)
    • 6. New call center to handle claims (can affect closed & reported claims)
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