1 Casualty Actuarial Society Loss Reserve Seminar ALLAN R. NEIS, FCAS, MAAA September 11, 2001 Closing the Books

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Casualty Actuarial Society Loss Reserve Casualty Actuarial Society Loss Reserve SeminarSeminar

ALLAN R. NEIS, FCAS, MAAAALLAN R. NEIS, FCAS, MAAASeptember 11, 2001September 11, 2001

Closing the BooksClosing the Books

CASUALTY LOSS RESERVE SEMINARSeptember 11, 2001

“CLOSING THE BOOKS--APPROACHES TO DETERMINE CARRIED RESERVES

Al Neis, Corporate Actuary-Progressive Insurance Co.

Tom Moylan, Vice President & Actuary -Liberty Mutual Ins. Co.

Joe Marker, Sr. Vice President & Chief ActuaryPro National Ins. Co.


Month-End ProcessFriday Night

Premium System ClosesClaim System Closes

Saturday MorningMonth-End Databases Start their update

Saturday EveningFeeds to the General Ledger Begin

Sunday AfternoonGeneral Ledger Postings are CompleteDownstream Databases Start their Updates

Sunday Evening Month-End Reports are Produced


AFTER RESERVE BALANCES ARE POSTED, SOME QUESTIONS WE FACE!

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!

WON’T GET A BONUS BECAUSE OF THE INFLATED RESERVES CANNOT CHARGE COMPETITIVE RATES SINCE THE INCCURRED

LOSSES ARE OVERSTATED ANALYSTS - IS THE COMPANY MANAGING RESULTS?

HIDING PROFITS INFLATING THE BOTTOM LINE


PROGRESSIVE

RESERVE BALANCES ARE SET PRIMARILY USING

– AVERAGE RESERVES (CASE)

– FACTORS APPLIED TO HISTORIC EARNED PREMIUM (IBNR)


PROGRESSIVE

CASE RESERVES 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)

AVERAGE RESERVE ARE ADJUSTER MONTHLY FOR EXPECTED INFLATION


PROGRESSIVE

IBNR 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


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


PROGRESSIVE

ALLOCATION OF RESERVE BALANCES TO PROFIT CENTERS HAPPENS AS A RESULT OF ROLLING UP THE DETAIL CASE RESERVES (AVERAGES) ARE AT THE CLAIMANT

LEVEL IBNR IS CALCULATED AT A PREMIUM SUMMARY LEVEL

(CO., ST., PRODUCT, LINE COVERAGE)


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


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


PROGRESSIVE

ACTUARIAL REPORT 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.


PROGRESSIVE’S ADVANTAGE

PRIMARILY PRIVATE PASSENGER AUTO 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


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

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Casualty Actuarial Society Loss Reserve Casualty Actuarial Society Loss Reserve SeminarSeminar

September 11-12, 2001September 11-12, 2001

Closing the BooksClosing the Books

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Closing the Books - CLRS 2001Closing the Books - CLRS 2001Multiple Companies/LinesMultiple Companies/Lines

OverviewOverview

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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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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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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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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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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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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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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Current AY Review Exhibit


Sample Booking Rate ExhibitCommercial Auto Liability

2000 2001Actual Planned

Direct Earn Direct EarnPremium Premium 1997 1998 1999 2000

45,000 47,500 58.6% 57.6% 55.2% 62.1%

Earned Loss & OperationalRate Exposure Changes

2000 Change Net U/ W, Agency 2001 High Low 2001Baseline Effect Trend Management Formula 2001 2001 Plan

59.0% 15.0% 4.0% 0.0% 53.4% 64.0% 58.0% 55.0%

ChangeFrom Change Variance

Current Company Final Book Financial From FromBook Rate Actuary Selected Rate Impact Plan Plan

57.0% 59.0% 60.0% 3.0% 1,425 5.0% 2,375

Selected 2001 LossRatio - Total AY

2001 Indications

Direct Accident Year Loss Ratios

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Questions & DiscussionQuestions & Discussion

CLOSING THE BOOKS WITH PARTIAL INFORMATION

By Joseph Marker, FCAS, MAAA

CLRS, New Orleans, September 2001

Closing the Books with Partial information - CLRS 2001Closing 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.


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.: 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.


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.


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.


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: May be based on quarterly development studies. For long-tail lines, the number may be close to 25%. For short-tail lines, the number may be close to 100%. Most difficult to assess for the immediate past accident year.


Exhibit 1 output

From the incurred (paid) development exhibit, we get: Projection of IBNR (Paid) emergence during the current year. Projection of IBNR (Paid) emergence during the current quarter.

Limitations of Exhibit 1: Uses only the standard age-to-age LDF methods. Does not estimate the loss amount for the current accident year.

Exhibit 1 is easily modified to handle Bornhuetter-Ferguson method.


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.


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.


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 thoughtThe revised expected future development will be upward


Revising the Ultimate Loss: XYZ Company

To validate the conclusion we may compare:

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,

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.


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: Bornhuetter-Ferguson methods rather than straight LDF methods Pricing projections will most likely be the key information used.

Common methods for estimating the current accident year are Fix the loss ratio based on pricing studies Use the fixed loss ratio along with a projected payout pattern and

adjust the loss ratio for the difference between actual and expected payments.

Use frequency-severity methods and track claim count reporting.


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.

Documents

1 Casualty Actuarial Society Loss Reserve Seminar ALLAN R. NEIS, FCAS, MAAA September 11, 2001 Closing the Books