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Using Claim Department Work Measurement Systems to Determine Claim Adjustment Expense Reserves

Using Claim Department Work Measurement Systems to Determine Claim Adjustment Expense Reserves. 1999 Casualty Loss Reserve Seminar Joanne S. Spalla, FCAS, MAA. Popular ULAE Methods. Paid-to-Paid Methods Methods Based on Claim Reporting and Closing Patterns (The Johnson Method)

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Using Claim Department Work Measurement Systems to Determine Claim Adjustment Expense Reserves

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  1. Using Claim Department Work Measurement Systems to Determine Claim Adjustment Expense Reserves 1999 Casualty Loss Reserve Seminar Joanne S. Spalla, FCAS, MAA

  2. Popular ULAE Methods • Paid-to-Paid Methods • Methods Based on Claim Reporting and Closing Patterns (The Johnson Method) • Transaction-Based Methods

  3. Definition of LAEDefense & Cost Containment (DCC) • Fees or salaries for • appraisers • private investigators • hearing representatives • reinspectors • fraud investigators • rehabilitation nurses,

  4. Definition of LAEDefense & Cost Containment (DCC) • Surveillance expenses • Medical cost containment expenses; • Litigation management expenses; • LAE for participation in voluntary and involuntary pools if reported by accident year; • Attorney fees incurred owing to a duty to defend • The cost of engaging experts.

  5. Definition of LAEAdjusting & Other (AO) • Fees of adjusters and settling agents • LAE for participation in voluntary and involuntary market pools if reported by calendar year • Attorney fees incurred in the determination of coverage, including litigation between the insurer and the policyholder • Fees or salaries for appraisers, private investigators, hearing representatives, reinspectors and fraud investigators, if working in the capacity of an adjuster.

  6. Steps in Performing a Claim Department Study 1. Collect Duration of Claim Transactions by Position 2. Determine Raw Costs by Multiplying Durations by Average Costs for Each Claim Position 3. Load Standards for Unrecorded Time 4. Divide Costs by Claim Volumes to Determine Average Cost 5. Load Standards for Other Field Office Claim Overhead 6. Load Standards for Home Office Overhead

  7. Example: Monthly Intake Cost: Workers Compensation Lost Time Claims

  8. Step 1:Durations by Claim Position Number of Hours Inside Claim Representative 387.54 Outside Claim Representative 74.22 Clerical 129.89 Supervisor 112.05 Claim Processor 122.04 Total 825.75

  9. Step 2:Determine Raw Costs Inside Claim Representative (1) Number of Hours 387.54 (2) Hourly Cost $ 29.95 (3) Total Recorded Cost = (1)/(2) 11,607

  10. Example:Inside Claim Representative Expenses ($000) Salary & Benefits 20,827 Auto - Travel - Other 7,021 Total Expenses 27,848

  11. Example:Inside Claim Representative Number of Staff 513 # Hours per Week 36.25 # Weeks 50 Available Hours 929,813

  12. Example:Inside Claim Representative Total Expenses 27,848 Available Hours 929,813 Average Hourly Cost $ 29.95

  13. Step 3:Load Standards for Unrecorded Time Inside Claim Representative (1) Total Recorded Cost 11,607 (2) Percent of Total Time Recorded at Claim Level 66.6% (3) Total Costs Grossed Up for Unrecorded Time = (1) / (2) 17,428

  14. Step 4:Average Intake Cost per Claim Total Costs Grossed Up for Unrecorded Time Inside Claim Representative 17,428 Outside Claim Representative 4,683 Clerical 10,153 Supervisor 6,325 Claim Processor 4,229 Total 42,818 Number of Intake Claims 585 Average Intake Cost per Claim $73.19

  15. Average Intake Cost (1) (2) (1) / (2) Total Costs Average Grossed Up for Number Cost per Unrecorded of Intake Time Claims Claim Office #1 42,818 585 $ 73.19 Office #2 39,292 304 $ 129.25 Office #3 34,194 654 $ 52.28 Office #4 86,259 650 $ 132.71 Office #5 70,942 452 $ 156.95 Total 273,505 2,645 $ 103.40

  16. Steps 5 & 6:Load Standards for Overhead Intake Claim Study Costs Excl. Field Overhead $103.40 Field Office Overhead 1.555 Standards Including Field Overhead $160.84 Home Office Overhead 1.383 Fully Loaded Standards $222.42

  17. WC Lost TimeMonthly Standards Including Overhead Intake $222.42 Outstanding 31-90 Days $111.56 Outstanding 90 Days - 60 Mos. $49.80 Outstanding > 60 Months $17.00

  18. Practical Considerations • Scope • Duration • Credibility • Adjusting the Data for Anomalies • Participants in the Study

  19. Practical Considerations • Changes in Claim Department Work Flow • Workers’ Compensation Claims Greater Than 60 Months Old • Final Validation • Adjusting for Inflation and Trend

  20. Validation of Standards Standard Indicated # Claims Cost Costs WC Intake 500 $222.42 111,208 O/S 5,000 $56.66 283,291 Auto Intake 1,000 $150.00 150,000 O/S 4,000 $25.00 100,000 Total Indicated Costs 644,499

  21. Validation of Standards Indicated Costs 644,499 Actual Cost 613,809 Adjustment Factor 1.05

  22. Calculating the Reserve 1. Project Ultimate Claim Counts 2. Project Outstanding Claim Counts 3. Project Future Expense per Outstanding Claim 4. Calculate Future Claim Adjuster Expenses 5. Determine Reserve for Reported Claims 6. Determine Reserve for IBNR Claims

  23. Other Applications • Allocation of Claim Adjuster Expense • Allocation of Adjusting and Other Expense Payments in Schedule P • Pricing Claim Service • Claim Department Expense Planning, Monitoring and Control

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