September 28–29, 1998 Philadelphia, Pennsylvania Lisa G. Chanzit Patrick R. Newlin Ruth E. Winnicki Actuarial & Claims — Strange Partners? Casualty Loss Reserve Seminar

2 Claim Reserves — What Do We Mean? Case reserves IBNR (incurred but not reported)

3 Big Differences Case reserves Actuarial reserves

4 Case Reserves — What Are They? Dollar estimates of loss Determined by claim staff Placed on individual claims

5 Case Reserves Dependent upon currently available information and specific fact that are subject to change (usually for the worse) as cases develop

6 Case Evaluation and Reserving, e.g., WC Value $35,000 $25,000 $15,000 $10,000 $0 1 month3 months6 months9 months12 months Time 0 Resolution Verify MMI and impairment rating Analyze official reports, e.g., medical Follow-up contacts Field Investigation Verify injury and disability Initial contacts with injured worker, medical provider(s), witness(es) Verify employment Assignment

7 Case Reserving Practices A common misconception or pitfall assessing the effectiveness and consistency of case reserving practices  “Stepladder/Stair Step” reserving

8 Claim Reserves The actuary takes over where case reserving ends

9 Actuarial Reserves Determined by statistical projections of historical loss data, i.e., aggregate information Subject to a higher degree of objectivity and accuracy compared to case reserve estimates Involves considerable judgment

10 Actuarial Reserves (continued) Takes into consideration  Claims not yet reported  Reopened claim reserves  Consistency of case reserving practices  Reinsurance  Shock losses

11 Sample Aggregate Loss Values

12 What Actuaries Like From Claim Staff Effective, consistent case reserving practices Candid communication —Changes in case reserving philosophy —Any changes that may influence case reserving consistency —Claim trends

13 Effective and Consistent Case Reserving Practices If effectiveness and consistency is important — if you don’t have it, how can you get it?

14 Effective and Consistent Case Reserving Practices Ensure sound case evaluation and reserving practices

15 Sound Case Evaluation and Reserving Practices Case reserving philosophy  Probable or expected total cost of the claim, based on current, available information

16 Sound Case Evaluation and Reserving Practices Case reserving methodology  Separate dollar amounts for the types of loss  Case evaluation and reserve worksheet

17 Sound Case Evaluation and Reserving Practices Monitor and manage the practices  Establish appropriate authority levels  Conduct qualitative assessment, i.e., individual claim file reviews  Perform quantitative analysis  Link results of analyses to an individual’s performance appraisal

18 Case Studies: Two Types Actuary notices something unexpected in data Management or claims staff notifies actuary of change in operation

19 Case Study #1 Claim management changed general liability TPA a year ago to improve case evaluation/ reserving practices Claim management is also improving oversight and management of TPA’s performance  Financial results  Customer service measures  Quality/compliance with company standards  Efficiency of operations evaluation

20 Case Study #1 (Continued) Changes in case reserving practices — actuary assesses these changes Actuarial Analysis  Validate change  paid-to-incurred ratios  average paid claims  average outstanding claims  Adjust analysis

21 Case Study #1 (Continued) Paid-to-Incurred Ratios

22 Case Study #1 (Continued) Average Paid Claims

23 Case Study #1 (Continued) Average Outstanding Claim

24 Case Study #1 (Continued) Validation  Increase in paid-to-incurred ratios  Stable paid loss trends  Decrease in average outstanding Follow up  Confirm with interviews and/or claim file review  Development factors based on unadjusted case reserves could be understated

25 Case Study #2 Actuary sees decreasing case reported workers compensation severity Decreasing Severity

26 Case Study #2 (Continued) Average Outstanding Claim

27 Case Study #2 (Continued) Possible explanations:  Company management/operational  Environmental, e.g., legislative reform

28 Case Study #2 (Continued) Interview claim manager  Recent centralization of claim administration function  Delays setting up and assigning claims  decrease in reported severity appears to be result of delays

29 Case Study #2 (Continued) Adjust actuarial analysis:  Short-term, use trended historical frequency, severity to project 1998 ultimate losses

30 Case Study #2 (Continued) Action Items  Determine if the new structure is effective  Conduct claim operational review  business process analysis  quantitative assessment (overpayment study)  Outcome  Recommendations  Improve work processes  Implement “how to” monitor/measure results  Long-term actuarial adjustments depend on nature of actions taken

31 Case Study #3 Greater proportion claims reported earlier Case reserves established earlier and at more adequate levels Greater proportion of claims paid earlier and closed earlier CFO advises actuary over past several years:

32 Case Study #3 (Continued) Evidence  Outstanding average claim value  Paid average claim value  Paid-to-reported ratio  Closed claim counts to reported claim counts

33 Case Study #3 (Continued) Outstanding Average Values (000’s)

34 Case Study #3 (Continued) Paid Average Values (000’s)

35 Case Study #3 (Continued) Paid-to-Incurred Ratio

36 Case Study #3 (Continued) Closed to Total Claims Ratio

37 Case Study #3 (Continued) Results of claim review as respects case reserve strengthening  High claim staff turnover  New adjusters inexperienced  Regular case reserve reviews?  Recent strengthening represents 50% (or less) of cases

38 Case Study #3 (Continued) Case reserve strengthening Implications:  Possible future adverse development  Claims:  conduct case reserve review — levels sufficient?  conduct staffing analysis  Actuarial:  depends on results of review Action Items:

39 Case Study #3 (Continued) Results of claim review as respects faster settlement rate  Some evidence of faster settlement rate  Claim department “closing campaign”  quickly lower pending caseloads  Questionable cases settled prematurely?

40 Case Study #3 (Continued) Faster settlement rate Implications:  Paying too much to close claims?  Claims:  assess the basis for the closing campaign  conduct qualitative and quantitative claim review  Actuarial:  use operational analysis to adjust reserve calculation Action Items:

41 Claim Reserving Claim reserving is a shared enterprise between company management, claim and actuarial functions  Claim Person — Case reserving practices  Actuary — Supplements case reserves and projects ultimate total claim reserve needs  Company Management —  Develops policies/procedures  Monitors and manages practices/procedures  Advises actuary of changes