CATASTROPHE RESERVING Reserving Actuary / Claims Partnership

1. adam.hartman@usaa.com CATASTROPHE RESERVINGReserving Actuary / Claims Partnership A Personal Lines Perspective Adam D. Hartman, ACAS Casualty Loss Reserve Seminar

2. What I’m Going to Tell You • Reserving Actuary/Claims relationship • Why cat reserving is important • Why vendor cat models are an incomplete starting point for reserving • Benefits of geocoding • Personal Lines Issues • Modeling issues & example Casualty Loss Reserve Seminar

3. See Appendix A for more detailed slide Cat Cost EstimationWho Makes The Call? 1. Claims OR 2. Reserving Actuary OR 3. Claims - smaller events, Reserving Actuary - “material” events. OR 4. Cat costs are not segregated from non-cat Casualty Loss Reserve Seminar

4. Why is this important? • No matter who makes the call, all catastrophe costs hit the financial statements • Emphasis upon monthly GAAP financial reporting • If large portion of book is property -->> cat experience segregated from non-cat • History shows room for improvement Casualty Loss Reserve Seminar

5. See Appendix A for more detailed slides Why Vendor Models are an Incomplete Starting Point • Most common/costly cat peril: hailstorms • (see next two slides) • Ignores actual claims data. • Little refinement of estimate over time • Monthly financial statements • Model output of little use to Claims catastrophe management Casualty Loss Reserve Seminar

6. Casualty Loss Reserve Seminar

7. Casualty Loss Reserve Seminar

8. Why should the Reserving Actuary work with Claims? • Consistency of methodology • Cross-pollination of perspectives • Actuary familiarizes himself with operational and “outside” issues driving loss and LAE • Claims sees the financial implications • BOTH perspectives are crucial to the construction of a robust and flexible model to use company data to estimate cat loss and LAE Casualty Loss Reserve Seminar

9. Benefits of Geocoding • Can “overlay” policies in force, claims, and damage maps • More accurate knowledge and estimation of claim counts by “relative severity” and geographic location. • Proper staffing of adjusters: number, skill sets, geographic locations Casualty Loss Reserve Seminar

10. Casualty Loss Reserve Seminar

11. See Appendix A for more detailed slides Personal Lines Issues • High claim volume and more late reporting • Efficient assignment of adjusters (#, where) • ACV payment / RCC hold-back issues • House cladding, roof types • Remote cat site “command centers” • “Write your own” flood coverage Casualty Loss Reserve Seminar

12. See Appendix A for more detailed slides Modeling issues • Available data detail • Data quality - U/W and Claims • External Factors • Include “x” in the model or not? - striking the balance Casualty Loss Reserve Seminar

13. “case” = set by an adjuster, NOT a “formula average” See Appendix B Modeling Example • Estimate ultimate reported claims & ultimate paid claims • Estimate ultimate cost of • pending claims without case reserves • pending with case reserves, without payment • pending with case reserves, with payment • IBNR claims Casualty Loss Reserve Seminar

14. See Appendix B Modeling Example • #Reported = #CWP + #CWOP + #PWP + #PWOP w/ and w/o Case Rsv • Estimate # pending claims that will close with pay • IBNR claims • Early: geocoded input, frequency assumptions • Later: claim reporting curves applied to actuals • Longer tail on reporting smaller claims Casualty Loss Reserve Seminar

15. Casualty Loss Reserve Seminar

16. See Appendix B Modeling Example • Segregate claims data by relative severity grouping (light,…, total loss) • Relate severity to amount of insurance • Adjust case reserves in aggregate for demand surge inflation • deductibles, payments leverage impact on net reserve • Impact of not pursuing replacement cost Casualty Loss Reserve Seminar

17. See Appendix B Modeling Example • Severity for Narrow IBNR and pending w/o case reserve severity • Early: default % of AOI (by peril, relative sev.) • Later: % of AOI for closed & pending w/case. • LAE • % of indemnity • forecasted independent adjuster staffing and company adjuster staffing times per diem Casualty Loss Reserve Seminar

18. What I told you • Reserving Actuary and Claims have much to learn/gain from each other • Cat reserve estimation impacts monthly financial statements • Vendor models need to be supplemented with company claims information • Modeling - flexibility, model what’s most important, make most of data you have Casualty Loss Reserve Seminar

19. Appendix A Casualty Loss Reserve Seminar

20. Cat Cost EstimationWho Makes The Call? 1. Claims is responsible for estimating costs for all catastrophes OR 2. Reserving Actuary is responsible for estimating costs for all catastrophes OR 3. Claims is responsible for estimating costs for smaller events, while Reserving Actuary estimates costs for “material” events. OR 4. Cat costs are not segregated from non-cat Casualty Loss Reserve Seminar

21. Why Vendor Models are an Incomplete Starting Point • Most vendor models don’t model the most common/costly cat peril: hailstorms • Vendor models use company’s policy in- force data, but ignore actual claims data as it comes in. • There is little refinement of estimate over the time, because there is little (if any) additional input after the event. Casualty Loss Reserve Seminar

22. Why Vendor Models are an Incomplete Starting Point • Wind/hail catastrophe events far outnumber hurricanes and earthquakes, and in many years cost more in the aggregate • Though most wind/hail events occur before June 30 and are mostly settled before year end, the reserve estimates can greatly impact monthly financial statements • Vendor model output of little use to Claims Casualty Loss Reserve Seminar

23. Claim Reporting Issues • Evacuated insureds may not be able to return to property • Power/phone outages • Hail damage: “neighboritis” • Cats in northern states: construction season restricted by winter -> delayed neighboritis Casualty Loss Reserve Seminar

24. Claim Reporting Issues • Latent damage • more prevalent for EQ peril • may drive significant reopen activity • Closes without payment • claims still have to be worked • drives additional LAE • increased time to close other claims • Statute of limitations Casualty Loss Reserve Seminar

25. Assignment of Adjusters • Factors that drive decision of how many, which adjusters to hire/send to cat site(s) • Claim volume • Severity • Geographic concentration • Roof pitch • Cat Peril Casualty Loss Reserve Seminar

26. Assignment of Adjusters • Decision usually has to be made quickly • Quality of available independent adjusters decreases quickly as time passes after event • Opportunity for reserving actuary to add value to operational cat management process • Accurate estimation of claim counts (by location) leads to proper staffing and establishment of cat sites Casualty Loss Reserve Seminar

27. Assignment of Adjusters • Geocoded data can be used to efficiently assign workload to individual adjusters within an area • less drive time • more productivity • less LAE Casualty Loss Reserve Seminar

28. Resiliency of Roofs and Cladding varies by Peril • Brick is a good thing… unless the peril is EQ • Aluminum siding is very vulnerable to hail damage • Is it manufactured any more? • How many sides do you re-wrap? Casualty Loss Reserve Seminar

29. Resiliency of Roofs and Cladding varies by Peril • Steeply-pitched, complicated roofs take longer to adjust • harnesses and other equipment required • lower productivity of adjusters ---> more LAE • slower more expensive repairs ---> hi severity • longer of “tail” of claim reporting Casualty Loss Reserve Seminar

30. Other issues • Amounts of Insurance • Deductibles • Lines of business, policy forms, coverages • “Demand surge” inflation • Rebuild to code? • Reinsurance recoveries • State assessments Casualty Loss Reserve Seminar

31. How good is your data? • Underwriting data - how current is it? • Claims data • How is “relative severity” determined initially? • How experienced are your claim handlers? • Is the catastrophe code being assigned properly as claims are reported? • How detailed is it? Casualty Loss Reserve Seminar

32. Include in model or not? • Balance must be struck between level of detail modeled and credibility, simplicity • Material factors not explicitly modeled must be handled by post-model adjustments Casualty Loss Reserve Seminar

33. Appendix B Cat Model - Fictitious Example Casualty Loss Reserve Seminar