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1999 CLRS September 1999 Scottsdale, Arizona

Basic Track III. 1999 CLRS September 1999 Scottsdale, Arizona. THIS SESSION WILL DISCUSS. I. Expected Loss Ratio Techniques II. Allocated Loss Adjustment Expenses III. Unallocated Loss Adjustment Expenses

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1999 CLRS September 1999 Scottsdale, Arizona

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  1. Basic Track III 1999 CLRS September 1999 Scottsdale, Arizona

  2. THIS SESSION WILL DISCUSS I. Expected Loss Ratio Techniques II. Allocated Loss Adjustment Expenses III. Unallocated Loss Adjustment Expenses IV. Schedule P - Part 1 Summary

  3. EXPECTED LOSS RATIO TECHNIQUE EXPECTED LOSS RATIO (ELR) The anticipated ratio of projected ultimate losses to earned premiums. Sources: (1) Pricing assumptions. (2) Historical data such as Schedule P. (3) Industry data.

  4. EXPECTED LOSS RATIO TECHNIQUE EXAMPLE OF ELR USING PRICING ASSUMPTIONS Commissions 20% Taxes 5% General Expenses 15% Profit (2%) Total 38% Amount to pay for loss & loss expense ---- 62% of premium

  5. EXPECTED LOSS RATIO TECHNIQUESExample of ELR from Schedule PEZ INSURANCE COMPANY AUTO LIABILITYSchedule P -Part 1BPrivate Passenger Auto Liability/Medical

  6. EXPECTED LOSS RATIO TECHNIQUES Estimating Reserves Based on ELR

  7. EXPECTED LOSS RATIO TECHNIQUESEstimating Reserves Based on ELR

  8. EXPECTED LOSS RATIO TECHNIQUES Estimating Reserves Based on ELR

  9. EXPECTED LOSS RATIO TECHNIQUES Reserves Based on ELR and Reported Incurred (Bornhuetter-Ferguson Approach)

  10. EXPECTED LOSS RATIO TECHNIQUESReserves Based on ELR and Reported Incurred EZ INSURANCE COMPANY AUTO LIABILITY CUMULATIVE INCURRED LOSSES (In Thousands) Accident ---------------- ---------------- DEVELOPMENT STAGE IN MONTHS ------------------ ------------------ Year 12 24 36 48 60 72 84 1992 $8,382 $9,781 $10,110 $10,219 $10,268 $10,280 $10,292 1993 9,337 10,847 11,092 11,192 11,235 11,250 1994 10,540 12,205 12,551 12,690 12,725 1995 11,875 13,832 14,238 14,413 1996 13,343 15,542 16,066 1997 14,469 16,776 1998 16,561 Accident ---------INCURRED LOSS DEVELOPMENT FACTORS ------------------ ------------------ ------------------ Year 12-24 24-36 36-48 48-60 60-72 72-84 84-Ult 1992 1.167 1.034 1.011 1.005 1.001 1.001 1993 1.162 1.023 1.009 1.004 1.001 1994 1.158 1.028 1.011 1.003 1995 1.165 1.029 1.012 1996 1.165 1.034 1997 1.159 1998 ALL YEARS AVERAGE 1.163 1.030 1.011 1.004 1.001 1.001 SELECTED LDF'S 1.163 1.030 1.011 1.004 1.001 1.001 1.000 CUMULATIVE LDF'S 1.219 1.048 1.017 1.006 1.002 1.001 1.000 1.000 IBNR FACTOR = (1.000 - ------) = % OF EXPECTED LOSSES WHICH ARE UNREPORTED LDF 0.180 0.046 0.017 0.006 0.002 0.001 0.000

  11. EXPECTED LOSS RATIO TECHNIQUESReserves Based on ELR and Reported Incurred

  12. EXPECTED LOSS RATIO TECHNIQUESCOMPARISON OF RESERVE METHODOLOGIES

  13. BORNHUETTER-FERGUSON APPROACH APPLIED TO A NON INSURANCE EXAMPLE Given the following, how many home runs will Ken Griffey, Jr. hit this year? • He has hit 20 home runs through 40 games. • There are 160 games in a season Three pieces of information are need to perform a B-F projection: • Expected Ultimate Value • Cumulative Loss Development Factor • Amount Incurred To Date The three pieces of information for our example : • Before the season started, how many home runs would we have expected Ken Griffey, Jr. to hit? Expected Ultimate Value = 40 • To project season total from current statistics, multiply the current statistics by 4 since the season is 1/4 completed. Cumulative Loss Development Factor = 4.000 • He has already hit 20 home runs. Amount Incurred To Date = 20

  14. BORNHUETTER-FERGUSON APPROACH APPLIED TO A NON INSURANCE EXAMPLE B-F Projection: Ultimate Value = (Expected Value*IBNR Factor)+(Inc. to Date) IBNR Factor = 1.000 - (1.000/LDF) = 1.000 - (1.000/4.000) = .75 (In Other Words, 75% of the season is left to be played) Ultimate Value = (40 * .75) + 20 = 50 The B-F Method projects that Ken Griffey, Jr. will hit 50 home runs this year. Games 0-40 Games 41-80 Games 81-120 Games 121-160 20 Home Runs 10 Home Runs 10 Home Runs 10 Home Runs Comparison of B-F with Two Other Methods Incurred Loss Development Method Ultimate Value = Incurred To Date * Cumulative LDF = 20 * 4.000 = 80 Home Runs Games 0-40 Games 41-80 Games 81-120 Games 121-160 20 Home Runs 20 Home Runs 20 Home Runs 20 Home Runs Expected Loss Ratio Method Ultimate Value = Expected Value = 40 Home Runs Games 0-40 Games 41-80 Games 81-120 Games 121-160 10 Home Runs 10 Home Runs 10 Home Runs 10 Home Runs

  15. EXPECTED LOSS RATIO TECHNIQUESReserves Based on ELR and Reported Incurred(BORNHUETTER-FERGUSON)

  16. EXPECTED LOSS RATIO TECHNIQUESReserves Based on ELR and Reported Incurred(BORNHUETTER-FERGUSON) ADVANTAGES Compromises between loss development and expected loss ratio methods Avoids overreaction to unexpected incurred losses to date Suitable for new or volatile line of business Can be used with no internal loss history Easy to use DISADVANTAGES Assumes that case development is unrelated to reported losses Relies on accuracy of expected loss ratio and reporting pattern Less responsive to losses incurred to date Relies on accuracy of earned premium

  17. ALAE RESERVING METHODS ALLOCATED LOSS ADJUSTMENT EXPENSE (ALAE) Previous Definition : Expenses that are specifically assigned to an individual claim Current Definition (eff. 1/1/98) : Limits ALAE to internal or external expenses relating to the following · Defense · Litigation · Medical Cost Containment Therefore, the ability to assign a particular type of expense to a single claim is no longer the determining factor as to whether the expense is ALAE or ULAE “Loss Adjustment Expenses” other than allocated expenses are assigned to the group Unallocated Loss Adjustment Expense

  18. ALAE RESERVING METHODS 1. PAID ALAE DEVELOPMENT 2. CUMULATIVE PAID ALAE TO CUMULATIVE PAID LOSSES

  19. ALAE RESERVING METHODS Cumulative Paid ALAE ($ in thousands) EZ INSURANCE COMPANY AUTO LIABILITY Accident ------------DEVELOPMENT STAGE IN MONTHS------------------- ---------------- ------------------ Year 12 24 36 48 60 72 84 1992 $71 $166 $286 $416 $527 $611 677 1993 83 189 313 458 584 672 1994 93 213 361 523 657 1995 103 226 394 581 1996 108 245 437 1997 128 280 1998 132 Accident ---------------- ---------------- PAID ALAE DEVELOPMENT FACTORS------------ ------------------ Year 12-24 24-36 36-48 48-60 60-72 72-84 84-Ult 1992 2.338 1.723 1.455 1.267 1.159 1.108 1993 2.277 1.656 1.463 1.275 1.151 1994 2.290 1.695 1.449 1.256 1995 2.194 1.743 1.475 1996 2.269 1.784 1997 2.188 1998 AVERAGING METHODS Average 2.259 1.720 1.461 1.266 1.155 1.108 4 point avg. 2.235 1.720 1.461 Avg. excl. high/low 2.258 1.720 1.459 Time wght. average 2.239 1.734 1.463 1.264 1.154 Vol. wght. average 2.251 1.724 1.461 1.266 1.155 1.108 SELECTED LDF'S 2.251 1.724 1.461 1.266 1.155 1.108 1.108 CUMULATIVE LDF'S 10.175 4.520 2.622 1.795 1.418 1.228 1.108

  20. ALAE RESERVING METHODS

  21. ALAE RESERVING METHODS

  22. ALAE RESERVING METHODS Cumulative Paid ALAE to Cumulative Paid Losses ($ In Thousands) EZ INSURANCE COMPANY AUTO LIABILITY Accident ---------------- ---------------- CUMULATIVE PAID ALAE --------------- ---------------- ------------------ Year 12 24 36 48 60 72 84 1992 $ 71 $ 166 $ 286 $ 416 $ 527 $ 611 $ 677 1993 83 189 313 458 584 672 1994 93 213 361 523 657 1995 103 226 394 581 1996 108 245 437 1997 128 280 1998 132 Accident ---------------- ---------------- CUMULATIVE PAID LOSSES-------- ---------------- ------------------ Year 12 24 36 48 60 72 84 1992 3,361 5,991 7,341 8,259 8,916 9,408 9,759 1993 3,780 6,671 8,156 9,205 9,990 10,508 1994 4,212 7,541 9,351 10,639 11,536 1995 4,901 8,864 10,987 12,458 1996 5,708 10,268 12,699 1997 6,093 11,172 1998 6,962 Accident ------CUMULATIVE PAID ALAE TO CUMULATIVE PAID LOSSES------- Year 12 24 36 48 60 72 84 1992 0.021 0.028 0.039 0.050 0.059 0.065 0.069 1993 0.022 0.028 0.038 0.050 0.058 0.064 1994 0.022 0.028 0.039 0.049 0.057 1995 0.021 0.025 0.036 0.047 1996 0.019 0.024 0.034 1997 0.021 0.025 1998 0.019

  23. ALAE RESERVING METHODS Cumulative Paid ALAE to Cumulative Paid Losses EZ INSURANCE COMPANY AUTO LIABILITY Accident --------------- CUMULATIVE PAID ALAE TO CUMULATIVE PAID LOSSES--- ------------------- Year 12 24 36 48 60 72 84 1992 0.021 0.028 0.039 0.050 0.059 0.065 0.069 1993 0.022 0.028 0.038 0.050 0.058 0.064 1994 0.022 0.028 0.039 0.049 0.057 1995 0.021 0.025 0.036 0.047 1996 0.019 0.024 0.034 1997 0.021 0.025 1998 0.019 Accident --------------- --------------- PAID TO PAID DEVELOPMENT FACTORS---- ------------------- Year 12-24 24-36 36-48 48-60 60-72 72-84 84-Ult 1992 1.312 1.406 1.293 1.173 1.099 1.068 1993 1.290 1.355 1.297 1.175 1.094 1994 1.279 1.367 1.273 1.159 1995 1.213 1.406 1.301 1996 1.261 1.442 1997 1.193 19998 AVERAGING METHODS Average 1.258 1.395 1.291 1.169 1.097 1.068 4 point avg. 1.237 1.393 1.291 Avg. excl. high/low 1.261 1.393 1.295 Time wght. average 1.240 1.403 1.291 1.167 1.096 Vol. wght. average 1.258 1.393 1.291 1.169 1.096 1.068 SELECTED LDF'S 1.237 1.393 1.291 1.169 1.096 1.068 1.068 CUMULATIVE LDF'S 3.252 2.629 1.887 1.462 1.251 1.141 1.068

  24. ALAE RESERVING METHODS

  25. ALAE RESERVING METHODS

  26. ULAE RESERVING UNALLOCATED LOSS ADJUSTMENT EXPENSE (ULAE) Previous Definition : Expenses incurred in connection with settling claims which are not readily assigned to specific claims Current Definition (eff. 1/1/98) : Those expenses, other than allocated expenses, assigned to the expense group “Loss Adjustment Expense”. Unallocated expenses include but are not limited to the following : · Fees of adjustors and settling agents · Attorney fees incurred in the determination of coverage, including litigation between insurer and policyholder · Fees or salaries for appraisers, private investigators, hearing representatives, reinspectors and fraud investigators

  27. ULAE RESERVING

  28. ULAE RESERVING

  29. ULAE RESERVING

  30. ULAE RESERVING

  31. ULAE RESERVING

  32. ULAE RESERVING Assumptions in Applying “50/50” Rule Age of claim does not affect the ratio of paid ULAE to Losses ULAE and Losses are paid at the same rate These assumptions should be reviewed for each situation where the “50/50” rule is used

  33. ULAE RESERVING Recent Developments in ULAE Reporting Effective with the 1997 Annual Statement, the “50/50” rule no longer underlies annual statement Schedule P reporting of paid unallocated expenses. Rather, unallocated loss expenses payments and reserves should be allocated to the years in which the losses were incurred based on the number of claims reported, closed and outstanding in those years. An insurer is permitted to use the “50/50” rule or some other reasonable procedure when suitable claim information is not available.

  34. SCHEDULE P - PART 1 SUMMARYANNUAL STATEMENT FOR THE YEAR 1998 OF THE TYPICAL P&C INSURANCE COMPANY

  35. DATA AVAILABLE FROM SCHEDULE P Losses Direct+Assumed, Ceded Cumulative Paid Losses, Net of Salvage and Subrogation (columns 5-6) Case Reserves Held (columns 14-15) Bulk + IBNR Reserves Held (columns 16-17) Incurred Losses = Paid + Case Reserves + IBNR Reserves Claim Counts Reported (column 13) Outstanding (column 26) Closed = Reported - Outstanding Loss Adjustment Expenses Direct+Assumed, Ceded Paid, Case Reserves, Bulk + IBNR Reserves Earned Premium (columns 2-4)

  36. SCHEDULE P TERMINOLOGY Bulk + IBNR reserves include: Reserves for claims not yet reported (pure IBNR) Claims in transit Development on known claims Reserves for reopened claims Reserves = Liabilities = Accruals = Unpaid = Case Reserves + IBNR Incurred losses may have various meanings!

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