Transcript Closing the Books Casualty Actuarial Society Loss Reserve Seminar

Closing the Books
Casualty Actuarial Society Loss Reserve
Seminar
ALLAN R. NEIS, FCAS, MAAA
September 11, 2001
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CASUALTY LOSS RESERVE SEMINAR
September 11, 2001
“CLOSING THE BOOKS-APPROACHES TO DETERMINE CARRIED RESERVES
Al Neis, Corporate ActuaryProgressive Insurance Co.
Tom Moylan, Vice President & Actuary Liberty Mutual Ins. Co.
Joe Marker, Sr. Vice President & Chief Actuary
Pro National Ins. Co.
CASUALTY LOSS RESERVE SEMINAR
September 11, 2001
Month-End Process
Friday Night
Premium System Closes
Claim System Closes
Saturday Morning
Month-End Databases Start their update
Saturday Evening
Feeds to the General Ledger Begin
Sunday Afternoon
General Ledger Postings are Complete
Downstream Databases Start their Updates
Sunday Evening
Month-End Reports are Produced
CASUALTY LOSS RESERVE SEMINAR
September 11, 2001
AFTER RESERVE BALANCES ARE POSTED, SOME QUESTIONS WE FACE!
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IS THE FINAL BALANCE WHAT YOU EXPECTED?
WILL THE STATE OF OHIO THINK BALANCE IS NOT ENOUGH?
OUTSIDE AUDITORS WILL QUESTION THE ADEQUACY!
IRS THINKS THE BALANCE IS OVERSTATED (10%)
GENERAL MANAGERS - AMOUNT IS TOO HIGH!
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WON’T GET A BONUS BECAUSE OF THE INFLATED RESERVES
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CANNOT CHARGE COMPETITIVE RATES SINCE THE INCCURRED
LOSSES ARE OVERSTATED
 ANALYSTS - IS THE COMPANY MANAGING RESULTS?
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HIDING PROFITS
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INFLATING THE BOTTOM LINE
CASUALTY LOSS RESERVE SEMINAR
September 11, 2001
PROGRESSIVE
RESERVE BALANCES ARE SET PRIMARILY USING
–
AVERAGE RESERVES (CASE)
–
FACTORS APPLIED TO HISTORIC EARNED PREMIUM (IBNR)
CASUALTY LOSS RESERVE SEMINAR
September 11, 2001
PROGRESSIVE
CASE RESERVES
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AVERAGE RESERVES
• VARY BY AGE OF CLAIM
• DIFFER BY POLICY LIMIT GROUPS
• ADJUSTED MONTHLY FOR EXPECTED INFLATION
• ADJUSTER ESTIMATES ARE USED IF GREATER THAN
THRESHHOLD
• ADJUSTER ESTIMATES ARE INFLATED BY A FACTOR
TO COVER CASE DEVELOPMENT IN LAYER ABOVE
THRESHOLD (ANCR)
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AVERAGE RESERVE ARE ADJUSTER MONTHLY FOR
EXPECTED INFLATION
CASUALTY LOSS RESERVE SEMINAR
September 11, 2001
PROGRESSIVE
IBNR
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BOOKED TO GENERAL LEDGER FROM THE RESERVE
DATABASE
DETERMINED AS % OF EARNED PREMIUM BY AGE
IBNR IS GENERALLY CALCULATED FOR UP TO FOUR
YEARS
LAE IBNR IS SET AS A % OF LOSS IBNR
CASUALTY LOSS RESERVE SEMINAR
September 11, 2001
PROGRESSIVE
AVERAGE RESERVES AND IBNR FACTORS MAY VERY BY A
COMBINATION OF :
• COMPANY
• STATE
• REGION
• PRODUCT (AUTO, MOTORCYCLES, COMMERCIAL
VEHICLE, ETC.
• COVERAGE (BI, PD, ETC.
THE CASE TABLE IN THE CLAIM SYSTEM INCLUDES OVER
120,000 LINES
THE IBNR TABLE INCLUDES OVER 80,000 LINES
CASUALTY LOSS RESERVE SEMINAR
September 11, 2001
PROGRESSIVE
ALLOCATION OF RESERVE BALANCES TO PROFIT CENTERS

HAPPENS AS A RESULT OF ROLLING UP THE DETAIL
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CASE RESERVES (AVERAGES) ARE AT THE CLAIMANT
LEVEL
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IBNR IS CALCULATED AT A PREMIUM SUMMARY LEVEL
(CO., ST., PRODUCT, LINE COVERAGE)
CASUALTY LOSS RESERVE SEMINAR
September 11, 2001
PROGRESSIVE RESERVE REVIEWS
CONDUCTED ON SEGMENTS THAT SUPPORT INCOME
STATEMENT FOR GENERAL MANAGERS
LARGE ENOUGH SEGMENTS TO BE CREDIBLE, BUT
SEGMENTED TO BE HOMOGENEOUS - THUS TO PROVIDE
MORE ACCURACY OVERALL
A SEGMENT’S SCOPE ALLOWS PROCESS CHANGES (CLAIMS)
WITHIN A REGION/STATE TO BE REFLECTED IN THE
INDICATIONS
CASUALTY LOSS RESERVE SEMINAR
September 11, 2001
PROGRESSIVE RESERVE REVIEWS (CONTINUED)
GENERATE
• OVERAL NEEDS USING ACCIDENT PERIOD DATA
• CASE RESERVE INDICATIONS USING RECORD PERIOD
DATA
• IBNR INDICATIONS USING ACCIDENT WITHIN
RECORD PERIOD DATA
• RECONCILE THE DIFFERENT INDICATIONS
MULTIPLE SEGMENT RESERVE REVIEWS ALLOW
• INPUT TO PRICING ON OVERALL TRENDS
• CHANGE IN RESERVES IMPACT ON INCOME
STATEMENT ARE DRIVEN BY PROCESSES AND
EXPERIENCE WITHIN PROFIT CENTER
CASUALTY LOSS RESERVE SEMINAR
September 11, 2001
PROGRESSIVE
ACTUARIAL REPORT
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COMPLETED AFTER YEAR END CLOSE
AT COMPANY LEVEL AND GENERALLY AT THE ANNUAL
STATEMENT LINE OF BUSINESS
INCLUDES INDICATION OF NEEDED RESERVES NET OF
REINSURANCE
ISSUES MAY ARISE WHEN MORE THAN ONE COMPANY IS
WRITING IN A STATE WHICH IS THEIR PRIMARY STATE.
CASUALTY LOSS RESERVE SEMINAR
September 11, 2001
PROGRESSIVE’S ADVANTAGE
PRIMARILY PRIVATE PASSENGER AUTO
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CASE RESERVES MAKE UP 80-85% OF LOSS RESERVES
LAE RESERVES ARE APPROXIMATELY 15% OF TOTAL
LIABLITY
POLICY LIMITS ARE LOW ENOUGH TO LIMIT
DEVELOPMENT IN EXTREME TAIL
COMPARATIVELY HIGH FREQUENCY, LOW SEVERITY
ALLOWS EASY ROLL UP TO VARIOUS PROFIT CENTER
CASUALTY LOSS RESERVE SEMINAR
September 11, 2001
PROGRESSIVE
 RESERVES ARE OPENLY DISCUSSED AT ALL LEVELS OF
MANAGEMENT
 REPORTED ON IN THE “ANNUAL REPORT”
 “REPORT ON RESERVING PRACTICES” IS AVAILABLE ON
WEBSITE “PROGRESSIVE.COM”
 RESERVES ARE NOT SET BY MANAGEMENT, THEY ARE SET
BY THE CORPORATE ACTUARY
Closing the Books
Casualty Actuarial Society Loss Reserve
Seminar
September 11-12, 2001
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Closing the Books - CLRS 2001
Multiple Companies/Lines
Overview
I.
History - Where were we?
II.
Objectives - Where do we want to be?
III .
Process - How do we get there?
IV.
Questions & Answers
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Closing the Books - CLRS 2001
Multiple Companies/Lines
History - Regional Agency Markets
• Between 1997 and 2000 Liberty created it’s Regional Agency Market (RAM)
Strategic Business unit, primarily through acquisitions
• RAM currently writes approximately $2 Billion in premium, through seven
regional companies using independent agents as the sole distribution channel
• The majority of the business is comprised of smaller commercial lines accounts
and personal lines
• The acquired companies varied in size, scope and sophistication.
• Each followed different approaches to closing the books.
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Closing the Books - CLRS 2001
Multiple Companies/Lines
History - Some Approaches to Booking IBNR
• “Put all the data in (commercial reserving package - name deleted) and book
what comes out”
• “Wait until we get the Actuarial Report and book the indicated”
• “Book to our planned loss ratio, review annually”
• Book long tail lines to a loss ratio, short tail lines to a factor off of earned
premium
• Build up current AY IBNR as a factor off earned premium, run-off prior year
IBNR based on schedule, allowing prior year case activity better or worse than
anticipated to run through income.
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Closing the Books - CLRS 2001
Multiple Companies/Lines
Objectives - Where do we want to be?
• Maintain reserve adequacy in aggregate
• Allow for judgement, but don’t fool ourselves
• Efficient - five day close
• Provide operating entities monthly income statements with minimal distortions
• Allocation of IBNR to very fine segments (state/product/legal entity etc.)
• Consistency between direct and ceded IBNR
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Closing the Books - CLRS 2001
Multiple Companies/Lines
Process - How do we get there?
Region/Summary Line
• Current Accident Year - Long Tail lines (WC, CMP Liability, Umbrella,
Commercial and Personal Auto Liability) - Book both direct and ceded to
planned loss ratios (updated quarterly).
• Prior Accident Years - Long Tail Lines - Reduce direct IBNR by case activity in
primary layer plus scheduled amount in excess (ceded) layer. Reduce ceded
IBNR by same scheduled amount.
• Short tail lines (CMP Other, Homeowners, Other Property, Commercial and
Personal Auto Physical Damage) - IBNR determined by factor off of trailing 12
months earned premium. Case activity allowed to flow through income
statement.
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Closing the Books - CLRS 2001
Multiple Companies/Lines
Process - How do we get there?
State/Product Line/Legal Entity
• Total IBNR by Region/Line is then allocated to finer levels of detail
• Current Accident Year based on earned premium.
• Prior Accident Years based on prior month ending case reserves
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Closing the Books - CLRS 2001
Multiple Companies/Lines
Process - How do we get there?
Review Process
• Quarterly Reserve reviews performed by RAM home office actuarial within six
weeks of quarter close, peer reviewed by Liberty corporate. Standard lines,
exhibits, methodologies. Specialized approaches where appropriate.
• Company Actuaries have two weeks to recommend revised booking ratios for
the current accident year.
• RAM Actuary & CFO make final selections in time for close of 2nd month after
end of quarter.
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Closing the Books - CLRS 2001
Multiple Companies/Lines
Current AY Review Exhibit
Sample Booking Rate Exhibit
Commercial Auto Liability
2000
2001
Actual
Planned
Direct Earn Direct Earn
Premium
Premium
45,000
47,500
2000
Baseline
59.0%
Earned
Rate
Change
Effect
15.0%
Direct Accident Year Loss Ratios
1997
1998
1999
58.6%
57.6%
55.2%
Loss &
Operational
Exposure
Changes
Net
U/W, Agency
Trend
Management
4.0%
0.0%
Selected 2001 Loss
Ratio - Total AY
Current
Company
Final
Book Rate
Actuary
Selected
57.0%
59.0%
60.0%
Change
From
Book
Rate
3.0%
2000
62.1%
2001 Indications
2001
Formula
53.4%
Financial
Impact
1,425
High
2001
64.0%
Low
2001
2001
Plan
58.0% 55.0%
Change
Variance
From
From
Plan
Plan
5.0%
2,375
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Questions & Discussion
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CLOSING THE BOOKS WITH
PARTIAL INFORMATION
By Joseph Marker, FCAS, MAAA
CLRS, New Orleans, September 2001
Closing the Books with Partial information - CLRS 2001
Loss and LAE Reserves
The loss and loss expense reserve is the balance sheet item with the most uncertain
value.
This reserve is studied in great detail at periodic intervals.
Often the books are closed with no reserve study done in time for the closing, such as
 At quarterly valuations, when reviews are not done every quarter,
 At quarterly valuations, if current reserve review cannot be done in time.
 At monthly intervals, if reviews are done every quarter.
From here on, assume that we are dealing with quarterly closings.
Closing the Books with Partial information - CLRS 2001
Information Available at Closing
At closing time, various levels of information may be available:
1. A full reserve review on data as of the current quarter, or
2. No reserve review, but actual loss development through the current quarter, e.g.:
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Paid and outstanding loss and loss expense by accident year.
Paid and outstanding claim counts.
Earned premiums and earned exposures.
3. Payment information only.
We assume that information described in (2) is available.
Closing the Books with Partial information - CLRS 2001
Expected Loss Development: Exhibit 1
Company XYZ is closing its books as of 3/31/2001.
A full loss reserve review is available as of 12/31/2000.
XYZ uses Exhibit 1 to determine its expected development during the 1st quarter.
·Shows the “chain ladder” methods (paid and incurred) through 2/31/2000.
·Separates calendar period development into current year vs. future.
·Separates current calendar year development into current quarter vs future.
Requires a “selected” ultimate loss as of 12/31/2000 by accident year.
Closing the Books with Partial information - CLRS 2001
Loss development: Current quarter vs. Future
Additional development on each accident year equals
selected ultimate minus developed loss to date (12/31/2000)
The proportion developing in the next calendar year (2001) is given by:
[ LDF (to next age) – 1.0 ] divided by [ LDF (to ultimate) – 1.0 ]
We need to know the proportion of the annual development expected in the 1st
quarter.
Closing the Books with Partial information - CLRS 2001
Loss development: Current quarter vs. Future
We need to know the proportion of calendar year 2000 development expected
to emerge in the 1st quarter.
This proportion is determined externally:
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May be based on quarterly development studies.
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For long-tail lines, the number may be close to 25%.
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For short-tail lines, the number may be close to 100%.
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Most difficult to assess for the immediate past accident year.
Closing the Books with Partial information - CLRS 2001
Exhibit 1 output
From the incurred (paid) development exhibit, we get:
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Projection of IBNR (Paid) emergence during the current year.
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Projection of IBNR (Paid) emergence during the current quarter.
Limitations of Exhibit 1:
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Uses only the standard age-to-age LDF methods.
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Does not estimate the loss amount for the current accident year.
Exhibit 1 is easily modified to handle Bornhuetter-Ferguson method.
Closing the Books with Partial information - CLRS 2001
Expected Claim Counts
Applying Exhibit 1 logic to claim counts rather than loss dollars, we get:
 Projection of number of new claims in the current year and partial year.
 Projection of number of claims paid in the current year and partial
year.
Apply projected counts to estimated severity to project loss dollars.
Closing the Books with Partial information - CLRS 2001
Actual Development
Exhibit 2 brings in the actual paid and developed loss for the quarter.
Differences between actual and expected development lead to Recalculation of the
ultimate loss
It is important that the exhibit show quantities meaningful to management.
• Exhibit 2 uses expected quarterly development, actual development
and expected future development.
• It asks for the revised development expected after the current quarter.
Closing the Books with Partial information - CLRS 2001
Revising the Ultimate Loss: XYZ Company
How might we revise our estimate of ultimate loss?
Look at several methods for clues.
Exhibit 2 implies that payments are accelerating.
However, payments are greater than the corresponding reserve takedowns.
The temptation is to conclude that:
The revised expected future payments will be faster than previously thought
The revised expected future development will be upward
Closing the Books with Partial information - CLRS 2001
Revising the Ultimate Loss: XYZ Company
To validate the conclusion we may compare:
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Development on reported claims versus reporting of new claims.
Expected versus actual claim counts.
It is important to separate case development vs “pure” IBNR. To do this,
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Separate development between case and IBNR in the exhibits, or
Run the exhibits by report year rather than accident year.
Talk with Claims to gain insight into unexpected development.
Closing the Books with Partial information - CLRS 2001
Current Accident Year
We have not discussed setting reserves for the current accident year 2001.
To do this, use exhibits where projections are based on:
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Bornhuetter-Ferguson methods rather than straight LDF methods
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Pricing projections will most likely be the key information used.
Common methods for estimating the current accident year are
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Fix the loss ratio based on pricing studies
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Use the fixed loss ratio along with a projected payout pattern and
adjust the loss ratio for the difference between actual and expected
payments.
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Use frequency-severity methods and track claim count reporting.
Closing the Books with Partial information - CLRS 2001
Summary
When closing the books without a current reserve evaluation, Use the actual
development to date to modify previous reserve estimates.
Deal with quantities that make sense to management, such as
Actual versus expected development.
Keep the explanatory exhibits simple and few.
Use the exhibits to enlist help from other departments in explaining variances.