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ISO Study of Industry Loss and Loss Adjustment Expense Reserve s

ISO Study of Industry Loss and Loss Adjustment Expense Reserve s. Spring 2003 CAS Meeting John Kollar, ISO. Loss Reserve Analysis. Experience of more than 900 insurer groups for year ended 12/31/01 Schedule P data as compiled by A. M. Best

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ISO Study of Industry Loss and Loss Adjustment Expense Reserve s

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  1. ISO Study of Industry Loss and Loss Adjustment Expense Reserves Spring 2003 CAS Meeting John Kollar, ISO

  2. Loss Reserve Analysis • Experience of more than 900 insurer groups for year ended 12/31/01 • Schedule P data as compiled by A. M. Best • Covers more than 95% of the reported loss and loss adjustment expense reserves (LLAE) for studied lines

  3. PP Auto Liability HO/Farmowners Com. Auto Liability GL & Products Claims-Made GL Occurrence Com. Multi-Peril Med Mal Occurrence Med Mal Claims-Made Products Occurrence Reinsurance (Non-Proportional Liability) Workers Comp Lines studied

  4. Loss Reserve Analysis • Excludes reserves for environmental and asbestos (E&A) claims • Treats reserve discounts as deficiencies relative to indicated full-value reserves • Special treatment of losses related to 9/11/01 terrorist attack

  5. Conventions • Each deficiency/redundancy expressed as percentageof indicated undiscounted reserve • Positive percentages indicate deficiencies • Negative percentages indicate redundancies

  6. Summary Indications Paid LinkCase Incurred • Lines Studied +17.6% +15.6% • All Other Lines +14.8% +14.8% • Total – all lines +17.3% +15.5% • Industry reserves deficient by $63B to $72B • (excl. E & A )

  7. Perspective • Reserve adequacy weakened in 2001: • Reserves 2 to 3 percentage points less adequate at year-end 2001 than at year-end 2000 • Reserve adequacy has deteriorated for 8 consecutive years

  8. Subsequent Developments • More than $3B in additional deterioration in 2002 • Adding in estimates for E&A Reserves suggests total deficiency exceeds $100B • Recent well-publicized reserve strengthenings for E&A

  9. Methodologies • Paid link-ratio technique • Case-incurred link-ratio technique

  10. Methodologies • Paid Link Ratio Technique Advantages • Development up to 10 years based on actual paid LALAE(no estimates) • Not influenced by changes in LALAE reserves Drawbacks • Slow to pick up changes in payout patterns • Sensitive to fluctuations in latest paid LALAE • Ignores additional info used in setting case reserves

  11. Methodologies • Case-Incurred Link Ratio Technique Advantages • Uses case-reserve information • Through 10 years, does not use reported IBNR reserves Drawbacks • Sensitive to fluctuations in latest case-incurred LALAE • Changes in adequacy of case reserves may affect development patterns

  12. Factors affectinganalysis • Data • Development factors • Tail factors • Professional judgment

  13. Ranges of indicationsWorkers Comp Example • Indicated deficiencies • Paid 13.7% to 27.9% • Selected 24.8% • Case-Incurred 20.8% to 33.0% • Selected 27.0% • Choice of technique, tail factors, etc. yields much wider range than selections made

  14. Composite Estimates • P/C industry reported LLAE reserves were 12% to 21% deficient at YE ’01 for lines • Deficiency translates to $48B to $92B • Deficiency includes $14B in discounts • Deficiency related to industry surplus before taxes: 17% to 32%

  15. Composite Estimates • Most adequate lines: • PP Auto Liability -6% to +4% • Home/Farm/owners -2% to +8% • GL & Products Claims-Made -3% to +7%

  16. Composite Estimates • Lines with substantive deficiencies: • Com. Auto Liability +10% to +20% • GL Occurrence +13% to +28% • Products Occurrence +18% to +33% • Com. Multi-Peril +15% to +25% • Workers Comp +20% to +35% • Med Mal Occurrence +10% to +25% • Med Mal Claims-Made 0% to +15% • Reinsurance (Non-Prop) +20% to +40%

  17. LALAE Ratios – Accident Year vs. Calendar Year LALAE Ratios – Accident Year vs. Calendar Year

  18. Loss Reserve Changes vs. Industry Profitability, All Lines

  19. Insurer Return on Net Worth (RONW) Insurer Return on Net Worth (RONW)

  20. Adjustment for 9/11 Losses Reserves include unpaid losses arising from September 11, 2001 terrorist attack • Lines sustaining significant losses: Com. Property, Com. Multi-Peril, Workers Compensation, General Liability, Aviation, and Reinsurance – Non-Proportional Liability Assumed

  21. Adjustment for 9/11 Losses • Inappropriate to use traditional development factors • ISO removed net LALAE due to attack from accident year 2001 LLAE by line • Developed remaining losses traditionally • Estimated overall AY 2001 losses by combining ultimate losses from attack estimate with other losses at ultimate • Calculated overall reserve deficiencies

  22. Perspective on 9/11 • Insurer results deteriorated • Reserve strengthening • Less than $9B carried but more than $11B indicated in terrorist loss reserves • Where are the losses – US, Overseas? • Litigation – 1 or 2 events? • Rating downgrades

  23. Individual Insurer Analysis • Aggregate loss distributions for 19 insurers • Unpaid losses for accident years prior to current one • All p/c lines • Compared range of ultimate losses to expected • Insurer differences by size/type of business

  24. ISO Loss Reserve Analysis • Results by line of insurance, as well as methodology and selections for each line, available in Loss and Loss Adjustment Expense Reserves at Year-End 2001: Technical Analysis (April 2003) • Details on loss adjustment expenses in: Loss and Loss Adjustment Expense Reserves at Year-End 2001: ALAE Supplement (April 2003)

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