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The fundamental assumptions of the Dollar-based method
- ULAE expenditures track with loss dollars
- Implies that the general timing of ULAE costs follows timing of the reporting or payment of loss dollars
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The fundamental assumptions of the Count-based method
- Same kind of transaction costs the same amount of ULAE
- Regardless of claim size
- Longer the claim stays open, the more it costs due to parameter to reflect cost of ongoing management and maintenance of claims
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The key assumptions of the Classical or Traditional Technique (Paid-to-Paid Ratio Method)
- 1. Specific company's ULAE-to-claim relationship have achieved a steady state
- *Provides reasonable approximation of relationship of ultimate ULAE to ultimate claims
2. Relative volume and cost of future claims-management activity on unreported and open reported claims will be proportional to IBNR and case outstanding dollars
3. Additional assumption: 50% of the ULAE occurs when claim is reported, 50% when closed
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Mechanics of the Classical Technique (4 steps)
- 1. Calculate historical CY paid ULAE to CY paid claims
- 2. Review historical paid ULAE to paid claims ratios for trends or patterns
- 3. Select ratio of ULAE-to-claims for future claims payments
- 4. Apply 50% of ratio to case outstanding and 100% to IBNR= Ratio * (50% * Case OS + IBNR)
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Challenges of the Classical Technique
1. "Closing" and "paying" a claim may not mean the same thing
- 2. Definition of IBNR
- In practice IBNR typically includes both IBNYR and IBNER
- Correct application would be to apply full ULAE-to-loss ratio to IBNYR and half the ratio to the sum of Case reserves and IBNER
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When the Classical Technique works
- Very short-tailed, stable lines of business
- Low cost inflation
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When the Classical Technique may not work
- Long-tail lines of business
- Times of changing inflationary forces - past or expected future
- Rapid change in volume
- When 50/50 assumption is not appropriate
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The key assumptions to Kittel's renement to the Classical Method
- ULAE incurred with the reporting of claims, with or without payment
- ULAE payments during a CY are related to both reporting and payment of claims
- Relative volume and cost of future claims-management activity on unreported and open reported claims will be proportional to IBNR and case outstanding dollars
- 50% of the ULAE occurs when claim is reported, 50% when closed
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Mechanics of Kittel Renement
- Calculate historical CY paid ULAE to average of CY paid and CY incurred claims
- Review historical ratios for trends or patterns
- Select ratio of ULAE-to-claims for future claims payments
- Apply 50% of ratio to case outstanding and 100% to IBNR= Ratio * (50% * Case OS + IBNR)
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When the Kittle Renement works
Can handle growing insurer situation that classical technique cannot
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When the Kittle Renement may not work
- Maintains 50/50 assumption: Doesn't allow particular allocation of ULAE to opening, maintaining, and closing
- Times of changing inflationary forces - past or expected future
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Conger and Nolibos Method - Generalized Kittel Approach defined a procedure to estimate ULAE
- Recognize an insurer's rapid growth
- Be consistent with patterns of the insurer's ULAE over a claim's life
- Reproduce key concepts behind Johnson method
- Use commonly available and reliable aggregate payment and unpaid claims data
- Develop an extension to the Kittel renement which could allow for alternatives to the traditional 50/50 assumption
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Define Claims Basis
weighted average of the ultimate cost of claims reported during the period, the ultimate cost of claims closed during the period, and losses paid during the period
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Assumptions of Generalized Kittel Approach
- Generalized method assumes expenditure of ULAE resourcesis proportional to dollars of claims being handled
- ULAE amounts spent opening claims are proportional to the ultimate cost of claims being reported
- ULAE amounts spent maintaining claims are proportional to payments made
- ULAE amounts spent closing claims are proportional to the ultimate cost of claims being closed
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Mechanics of Generalized Kittel Approach
- Select an overall ratio of ULAE to loss (W*)
- ULAE payments are typically measured and reported ona calendar year basis
- U1, U2, and U3 are estimated or selected{ R, P, and C determined from actuarial claims reserveanalysis
- Compute W = M / B by calendar year then select overall ratio W*
- Can estimate ultimate ULAE (U) for a group of accident years as U = W* x L
- Where L = independently estimated ultimate claims for group of accident years
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Practical Difficulties with the Generalized Approach
- Generalized methodology assumes claims adjusting activities associated w/ reopening and reclosing a claim have no cost
- Estimation of R and C may not be trivial
- Claim inflation can cause material distortions in projection of future ULAE
- Effect of reopened claims on accuracy of estimates of unpaid ULAE
- How to modify approach to properly reflect the change overtime in the quantity or cost of resources dedicated to the handling of a claim as it ages
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Describe the Mango-Allen Refinement
- Suggest possible variation of the Kittel refinement to the classical technique when actual historical calendar year paid claims are volatile
- Suggest replacing actual calendar period claims with "expected" claims for historical calendar periods
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Mango Allen's Key Assumptions
- ULAE-to-claim relationship is derived using paid ULAE toexpected paid claims
- Relative volume and cost of future claims-management activity on unreported and open reported claims will beproportional to IBNR and case outstanding dollars
- 50% of the ULAE occurs when claim is reported, 50% whenclosed
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Mechanics of Mango-Allen Renement to the Classical Technique
- Five Steps:
- 1. Estimate CY expected paid claims
- 2. Calculate historical CY paid ULAE to expected CY paid claims
- 3. Review historical ratios for trends or patterns
- 4. Select ratio of ULAE-to-claims for future claims payments
- 5. Apply 50% of ratio to case outstanding and 100% to IBNR= Ratio * (50% * Case OS + IBNR)
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When the Mango-Allen Refinement Works and When it Does Not
- Good option for insurers with:
- *Limited experience
- *Highly volatile claims payment experience
- May not be good for insurers with sufficient volume of paid claims experience
- *Additional effort may not be justied
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Major drawbacks of Dollar-Based techniques
- ULAE amount does not solely depend on claim dollars
- ULAE responds to volatility present in estimate of ultimate claims
- If ultimate claims drop in a year, you don't expect an immediate drop in overhead expenses or number of claims management personnel
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Describe Wendy Johnson Technique
- Method suggests using reporting and maintenance as the key transactions
- Estimates cost of each transaction by comparing historical aggregate ULAE expenditures to number of transactions occurring in same period
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Describe Mango-Allen Claim Staffing Technique
- Project the following components
- *Future CY opened, closed, and pending claims(OCP)
- *Future CY claim staff workloads expressed as OCP claims per staff member
- *Future CY claim staff count
- *Future CY ULAE per claim staff member
- Future CY ULAE payments, which include consideration of inflation
- = Future clm staff count * Future ULAE per clm staff member
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Three characteristics of OCP claims that make use as a base appealing in Claim Staffing Technique
- Reasonable proxy for claims department activity
- Claim count based
- Derivable from typical reserve study information
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Issues in Claim Staffing Technique
- Likely quite sensitive to the magnitude of the selected parameters
- Estimates will be influenced by parameters not explicitly considered
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Describe the focus of the Rahardjo Method
- Focus on situation in which annual (or quarterly) cost of maintaining and managing a claim varies over the life of the open claim
- Claims open for long periods of time likely to be complex requiring more claim adjuster time from a senior claim adjuster
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Describe Spalla's method for quantifying transaction costs
- Claim management systems can track amount of time spent on claim by level of employee
- Feasible to calculate average cost of each type of claim transaction
- Benefit - Allows for more detailed analysis of the claim activity costs
- Can determine which types of claims, claim transactions,and stages of a claim have similar costs
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Describe three Triangle-Based Techniques
- 1. Paid ULAE by AY and evaluation year triangle used to calculate development factors
- 2. Slifka describes method that projects ultimate or unpaid ULAE based on historical ULAE payments
- **Use time-and-motion study to estimate claim department's allocation of resources between current AY claims and prior AY claims
- 3. Construct paid ULAE triangles by restating allocations to AY using current time-and-motion studies and/or relationships to loss payment patterns
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