1. The Run-Off Environment – Considerations for the Reserving Actuary Jason Russ, FCAS Principal Milliman, Inc.

2. Milliman Considerations for the Reserving Actuary Question: What are some of the adjustments a reserving actuary may want to consider when evaluating a runoff book of business?

3. Milliman Considerations for the Reserving Actuary To Answer: Compare loss statistics for companies prior to and post runoff Compare loss statistics for companies prior to and post runoff Project impact of changes on standard reserving methods Project impact of changes on standard reserving methods Recommend adjustments to methods Recommend adjustments to methods

4. Milliman Considerations for the Reserving Actuary What data did we use? Med mal line of business - Physician claims-made Med mal line of business - Physician claims-made Company X – in liquidation Company X – in liquidation Company Y – voluntary run-off Company Y – voluntary run-off PIAA – control data PIAA – control data

5. Milliman Considerations for the Reserving Actuary Key Statistics Claims Closing Patterns Claims Closing Patterns Average Closed Claim Severity Average Closed Claim Severity Loss Payment Patterns Loss Payment Patterns

6. Milliman Considerations for the Reserving Actuary Claim Closure Patterns Examined ratio of claims closed with payment (CWIP) in a given year to those closed with payment in prior calendar – for a given report year.

7. Milliman Considerations for the Reserving Actuary Evaluation (months) Report Year 1224 Ratio Ratio X20673.350 X + 1 29943.241 X + 2 40872.175 X + 3 18713.944 X + 4 11777.000 Claims Closed with Payment - Incremental

8. Milliman Considerations for the Reserving Actuary

9. Milliman Considerations for the Reserving Actuary

10. Milliman Considerations for the Reserving Actuary What causes these changes? Claimants looking for quicker settlements to avoid reduced recoveries Claimants looking for quicker settlements to avoid reduced recoveries Pressure within company to settle claims faster and reduce uncertainty Pressure within company to settle claims faster and reduce uncertainty Effect of “stay” on claims for companies in liquidation Effect of “stay” on claims for companies in liquidation

11. Milliman Average Payment Per Claim Average loss paid per claim in a calendar year by age of reported claim Average loss paid per claim in a calendar year by age of reported claim Considerations for the Reserving Actuary

12. Milliman Considerations for the Reserving Actuary Evaluation – 12 months Report Year Paid Loss ($000s) CWIP Claims Average Severity ($000s) X5,45640136.4 X + 1 5,20018288.9 X + 2 2,13011193.6 X + 3 1,80515120.3 Average Loss Paid Per Claim with Payments

13. Milliman Considerations for the Reserving Actuary

14. Milliman Considerations for the Reserving Actuary

15. Milliman Considerations for the Reserving Actuary What causes these changes? Claims are settled quicker, perhaps discount for time value of money Claims are settled quicker, perhaps discount for time value of money Concerns about financial condition could lead to claimants accepting less than “usual” Concerns about financial condition could lead to claimants accepting less than “usual” Impact of IGA limits Impact of IGA limits Assets less than liabilities Assets less than liabilities

16. Milliman Considerations for the Reserving Actuary Incremental Paid Loss Development Combined impact of faster closing claims and decrease in average amount paid per claim Combined impact of faster closing claims and decrease in average amount paid per claim Ratio of paid loss in a given calendar year to paid loss in prior calendar year by age of claim report year Ratio of paid loss in a given calendar year to paid loss in prior calendar year by age of claim report year

17. Milliman Considerations for the Reserving Actuary Evaluation (months) Report Year 1224 Ratio Ratio X6,40326,9164.204 X + 1 5,45625,7944.728 X + 2 5,20012,0882.325 X + 3 2,13016,3817.691 Paid Loss – Incremental ($000s)

18. Milliman Considerations for the Reserving Actuary

19. Milliman Considerations for the Reserving Actuary

20. Milliman Considerations for the Reserving Actuary Testing of Results Compare Company X and Y results (prior to and post run-off) to those of on-going industry, as represented by PIAA. Compare Company X and Y results (prior to and post run-off) to those of on-going industry, as represented by PIAA.

21. Milliman Considerations for the Reserving Actuary

22. Milliman Considerations for the Reserving Actuary

23. Milliman Now what? Now what? How do we put these observations to work? How do we put these observations to work? Considerations for the Reserving Actuary

24. Milliman Considerations for the Reserving Actuary Recommendations: Use historic claim frequency levels to estimate ultimate claims – not development methods Use historic claim frequency levels to estimate ultimate claims – not development methods For “counts and averages” reserving methods, adjust paid severities for discounting/IGA involvement For “counts and averages” reserving methods, adjust paid severities for discounting/IGA involvement For paid loss development method, restate triangle to address speed-up in claims closing and decrease in average claim payments – Berquist-Sherman methods For paid loss development method, restate triangle to address speed-up in claims closing and decrease in average claim payments – Berquist-Sherman methods Rely on paid methods more than incurred methods Rely on paid methods more than incurred methods

25. Milliman Impact of Results on: Claimants Claimants Estate Managers/Company Management Estate Managers/Company Management Other Insurers Other Insurers Reinsurers Reinsurers Considerations for the Reserving Actuary

26. Milliman Estimating ULAE Does 50/50 rule still work? Does 50/50 rule still work? Maybe take a more direct approach Maybe take a more direct approach Considerations for the Reserving Actuary

27. Milliman Limitations Limitations Further Research Further Research Considerations for the Reserving Actuary