1. 1 Casualty Actuarial Society Loss Reserve Seminar Thomas G. Moylan, FCAS, MAAA September 8th, 2003 Closing the Books

2. 2 Closing the Books - CLRS 2003 Overview I. What are we trying to do? II. Alternate Approaches III.Questions

3. 3 What are we trying to do? Set IBNR & Bulk reserve balances, as accurately as possible, balancing constraints such as: Ever tightening book close cycles Inherent volatility of experience Data availability/legacy systems Desire to deliver consistent messages from one valuation to the next Ability to quickly understand and explain variances from expected results Allow for judgment, but don’t fool ourselves Provide operating entities monthly income statements with minimal distortions Allocation of IBNR to very fine segments (state/product/legal entity etc.) Consistency between direct and ceded IBNR Closing the Books - CLRS 2003

4. 4 Some Approaches to Booking IBNR “Put all the data in (commercial reserving package - name deleted) and book what comes out” “Wait until we get the Actuarial Report and book the indicated” “Book to our planned loss ratio, review annually” Book long tail lines to a loss ratio, short tail lines to a factor off of earned premium Build up current AY IBNR as a factor off earned premium, run-off prior year IBNR based on schedule, allowing prior year case activity better or worse than anticipated to run through income. Closing the Books - CLRS 2003

5. 5 These fall into two general categories AY Ultimate Losses = Paid + Case + IBNR Estimate IBNR, AY Ultimate falls out IBNR = AY Ultimate Losses – Paid – Case Estimate AY Ultimate Losses, IBNR falls out Closing the Books - CLRS 2003

6. 6 Approach 1 - Estimating IBNR: AY Ultimate Losses = Paid + Case + IBNR Advantages: Responsive to emerging experience Tends to be self correcting Depending on method, IBNR can be estimated prior to close Can be easier to explain monthly variances to plan Disadvantages: Can require significant set up depending on implementation Responsive to emerging results: more variability in monthly income Closing the Books - CLRS 2003

7. 7 Approach 1 - Estimating IBNR: AY Ultimate Losses = Paid + Case + IBNR Some Methods: Simplistic 1)Flat or limited change in IBNR based on growth between reserve studies 2)Can work for short tailed lines where IBNR is small relative to total incurred 3)Also reasonable in stable environments with fairly short intervals between formal studies Bornhuetter-Fergusson 1)Predetermine a monthly reported loss emergence pattern by accident year based on historical experience 2)Estimate ultimate losses by accident year (Prior AY’s from latest reserve study, current AY from plan or pricing studies) 3)Prepare a schedule of monthly IBNR balances 4)Incurred in month = Calendar month paid + case activity + change in IBNR balance 5)Review and update 1) & 2) throughout the year as formal reserve analyses are completed Closing the Books - CLRS 2003

8. 8 Approach 1 - Estimating IBNR: AY Ultimate Losses = Paid + Case + IBNR Some Methods: Paid & Reported Loss Development 1)Use predetermined mechanical methods 2)Is the most responsive to actual emergence, with least stable results 3)Not recommended for small or volatile books Closing the Books - CLRS 2003

9. 9 Approach 2 - Estimating AY Ultimate Loss: IBNR = AY Ultimate Loss - Paid - Case Advantages: More stable monthly results Prior accident year impacts become budgeted item Less susceptible to changes in claim department case reserving or settlement practices Disadvantages: Can lead to reserve inadequacies or redundancies that eventually need to be recognized, often as large one-time adjustments If not pro-actively managed, can result in counter intuitive results such as negative IBNR reserves or higher ceded than direct IBNR. Not appropriate for short tailed lines Closing the Books - CLRS 2003

10. 10 Approach 2 - Estimating AY Ultimate Loss: IBNR = AY Ultimate Loss - Paid - Case Method: Current Accident Year: 1.From prior reserve or pricing studies, obtain estimates of recent accident year loss ratios 2.Adjust for loss trends and pricing changes 3.Multiply times earned premium 4.Subtract YTD paid and case 5.Review and adjust loss ratio estimate throughout the year as appropriate (See Exhibit) Prior accident year : 1.Reduce prior accident year IBNR balances by paid and case activity in the month (No financial impact in month) 2.Adjust balances when appropriate after in-depth reserve review Closing the Books - CLRS 2003

11. 11 Current AY Review Exhibit Closing the Books - CLRS 2003

12. 12 Questions & Discussion