Reserving: How and When Should You Slice The Cake

1. Reserving: How and When Should You Slice The Cake Casualty Loss Reserve Seminar Concurrent Session September 10-11, 2001 Kevin L. Russell, FCAS, MAAA Erie Insurance Group

2. Statement of Principles • Homogeneity • Similar characteristics • Products • Development patterns • Size of loss distribution • Combination/Subdivision to minimize effects of operational changes

3. Statement of Principles • Credibility • Increase credibility • Increase homogeneity (combination/subdivision) • Increase volume • Decrease credibility • Subdivision which decreases volume

4. Statement of Principles • Homogeneity and Credibility • Objectives may (often) conflict • “,… balancing of the homogeneity and amount of data in each grouping.” • Abstract guidance

5. Management Requirements • Arguably, always the starting point • By product versus annual statement line • Personal products versus commercial products • Direct versus assumed business • Voluntary versus involuntary business • Geographic area • Profit center

6. Operational Practice • Underwriting and Sales • Market channel (independent agent, exclusive agent, direct marketing, …)? • Uniformity across profit center and geographic area by product and/or line of business

7. Operational Practice • Claims • Approach (third party administrator, distance, face-to face, …)? • Personnel (specialized claims representatives, multiline claims representatives, third party vendors, …)? • Uniformity: across profit center and geographic area by product and/or line of business

8. Detailed Data • Current technology allows “easy” manipulation of “large” amounts of data • Most refined level contemplated • Summing of separate items “easy” • Cannot decompose

9. Assumptions • Maximize credibility • Minimize “variation” • Combine “similar” data segments • Combine “dissimilar” data segments • If mix is constant over time • If mix is NOT expected to change

10. Variation • Development pattern • Percentage accumulation to ultimate • Variation in average time to settlement • Reserve amount

11. Criteria • Satisfies Management requirements • Directly or indirectly • Available resources adequate • Minimum variation with maximum credibility

12. Example: Direct Auto Business • Management Requirements • Separate voluntary and involuntary business • Separate personal and commercial lines of business • Separate products within line of business • Separate coverage: • Liability: BI, PD, UMBI&UIMBI, MP • No-Fault • Physical Damage: COMP, COLL

13. Example: Direct Auto Business • Adequacy of Available Resources • Inadequate • Six Line of Business/Product Combinations • Minimum of Seven Coverage Combinations • Must Consolidate • Allocate After Analysis

14. Example: Direct Auto Business • Review Magnitude of Miscellaneous Coverages • Insignificant IBNR • Intuitive Approach • UMPD and UIMPD: Combine with PD • Death and Disability: Combine with MP • LOU, Rental: Combine with COMP, COLL

15. Example: Direct Auto Business • Review Magnitude of Detailed Pieces: Involuntary • Commercial Involuntary in Runoff: Immaterial • Personal Involuntary Rapidly Declining: Insignificant • Remain Separate • Apply Mechanical Process

16. Example: Direct Auto Business • Review Characteristics • Limit and deductible distributions stable: past and expected • Tort elections stable: past and expected • UM & UIM coverage elections stable: past and expected • Consistent across geographic areas

17. Example: Direct Auto Business • Review Geographic Segmentation • PA is major state, unique laws: NY is unique, small volume • Same distribution system (independent agents) • Consistent underwriting and claims handling • Countrywide: large volume states similar to Pennsylvania; different states very small

18. Example: Direct Auto Business • Combination: Commercial Auto • Fleet, Non-Fleet, and Garage • Mix stable: past and expected • Development quite similar except for BI, UMBI, UIMBI

19. Example: Direct Auto Business • Combination: Commercial Auto BI • Fleet, Non-Fleet, and Garage • Development similar for Fleet and Non-Fleet • Development different for Garage

20. Example: Direct Auto Business • Combination: Commercial Auto BI

21. Example: Direct Auto Business • Combination: Commercial Auto BI • Garage proportionately small; stable

22. Example: Direct Auto Business • Combination: Commercial Auto • Combine Fleet, Non-Fleet, and Garage • Combine for all coverages • Allocate IBNR to products - Management requirement

23. Example: Direct Auto Business • Combination: Vol Pers Auto UMBI, UIMBI • Intuition: do separately • Development is different

24. Example: Direct Auto Business • Combination: Vol Pers Auto UMBI, UIMBI

25. Example: Direct Auto Business • Combination: Vol Pers Auto UMBI, UIMBI • No Management requirement to separate • Resources scarce • Characteristics stable: past and expected • Maximize credibility, minimize “variation”

26. Example: Direct Auto Business • Combination: Vol Pers Auto UMBI, UIMBI • Development pattern variation • Variation in average time pending • Variation in reserve (Mack)

27. Example: Direct Auto Business • Combination: Vol Pers Auto UMBI, UIMBI

28. Example: Direct Auto Business • Combination: Vol Pers Auto UMBI, UIMBI

29. Example: Direct Auto Business • Combination: Vol Pers Auto UMBI, UIMBI

30. Example: Direct Auto Business • Combination: Vol Pers Auto UMBI, UIMBI

31. Example: Direct Auto Business • Combination: Vol Pers Auto UMBI, UIMBI • Combine UMBI and UIMBI • No advantage to separation

32. Comments • Reliance on visual analysis and intuition • Consider DCC and SalSub

33. Review • Data at greatest detail • Market channels • Underwriting • Claims • Coverage characteristics

34. Review • Combine subject to constraints • Management requirements • Available resources

35. Review • Maximize credibility, minimize variance • Volume • Homogeneity • Variation in development patterns • Variation in average time pending • Variation in reserve (Mack, 1994)