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The Run-Off Environment – Considerations for the Reserving Actuary

Explore adjustments and data for evaluating run-off books of business with statistics and patterns analysis. Understand the causes of changes and make informed recommendations.

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The Run-Off Environment – Considerations for the Reserving Actuary

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  1. The Run-Off Environment – Considerations for the Reserving Actuary Jason Russ, FCASPrincipal Milliman, Inc.

  2. Considerations for the Reserving Actuary Question: What are some of the adjustments a reserving actuary may want to consider when evaluating a runoff book of business? Milliman

  3. Considerations for the Reserving Actuary To Answer: • Compare loss statistics for companies prior to and post runoff • Project impact of changes on standard reserving methods • Recommend adjustments to methods Milliman

  4. Considerations for the Reserving Actuary What data did we use? • Med mal line of business - Physician claims-made • Company X – in liquidation • Company Y – voluntary run-off • PIAA – control data Milliman

  5. Considerations for the Reserving Actuary Key Statistics • Claims Closing Patterns • Average Closed Claim Severity • Loss Payment Patterns Milliman

  6. Considerations for the Reserving Actuary Claim Closure Patterns Examined ratio of claims closed with payment (CWIP) in a given year to those closed with payment in prior calendar – for a given report year. Milliman

  7. Considerations for the Reserving Actuary Claims Closed with Payment - Incremental Milliman

  8. Considerations for the Reserving Actuary Milliman

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  10. Considerations for the Reserving Actuary What causes these changes? • Claimants looking for quicker settlements to avoid reduced recoveries • Pressure within company to settle claims faster and reduce uncertainty • Effect of “stay” on claims for companies in liquidation Milliman

  11. Considerations for the Reserving Actuary Average Payment Per Claim • Average loss paid per claim in a calendar year by age of reported claim Milliman

  12. Considerations for the Reserving Actuary Average Loss Paid Per Claim with Payments Milliman

  13. Considerations for the Reserving Actuary Milliman

  14. Considerations for the Reserving Actuary Milliman

  15. Considerations for the Reserving Actuary What causes these changes? • Claims are settled quicker, perhaps discount for time value of money • Concerns about financial condition could lead to claimants accepting less than “usual” • Impact of IGA limits • Assets less than liabilities Milliman

  16. Considerations for the Reserving Actuary Incremental Paid Loss Development • Combined impact of faster closing claims and decrease in average amount paid per claim • Ratio of paid loss in a given calendar year to paid loss in prior calendar year by age of claim report year Milliman

  17. Considerations for the Reserving Actuary Paid Loss – Incremental ($000s) Milliman

  18. Considerations for the Reserving Actuary Milliman

  19. Considerations for the Reserving Actuary Milliman

  20. Considerations for the Reserving Actuary Testing of Results • Compare Company X and Y results (prior to and post run-off) to those of on-going industry, as represented by PIAA. Milliman

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  23. Considerations for the Reserving Actuary • Now what? • How do we put these observations to work? Milliman

  24. Considerations for the Reserving Actuary Recommendations: • Use historic claim frequency levels to estimate ultimate claims – not development methods • For “counts and averages” reserving methods, adjust paid severities for discounting/IGA involvement • For paid loss development method, restate triangle to address speed-up in claims closing and decrease in average claim payments – Berquist-Sherman methods • Rely on paid methods more than incurred methods Milliman

  25. Considerations for the Reserving Actuary Impact of Results on: • Claimants • Estate Managers/Company Management • Other Insurers • Reinsurers Milliman

  26. Considerations for the Reserving Actuary Estimating ULAE • Does 50/50 rule still work? • Maybe take a more direct approach Milliman

  27. Considerations for the Reserving Actuary • Limitations • Further Research Milliman

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