Case Reserving Methodologies and Procedures (PwC)

Case Reserving Methodologies and ProceduresPalm Beach County Chapter of RIMS

September 14, 2005

Insurance Risk Management Solutions (IRMS)2

Case Reserving Methodologies and ProceduresAgenda

Definition of Case Reserves

Administrative costs versus claims costs

Short-tail versus long-tail liabilities

The actuary’s role


Case Reserving Methodologies and ProceduresAgenda (continued)

Management reporting – identifying trends and hot spots

Claims management issues

Methodologies & procedures

Monitoring reserves

Insurer/TPA/Self-administered employer responsibilities


Definition of Case ReservesThe estimated ultimate value of an individual claim or case when that claim closes.

The first reserve estimate, typically input within a few days of receiving the claim notice, is based on the little information known at that time.

As the claim matures, this estimated value should be established for the claim based on the information known at any point.

Reserve changes should be made when additional information is obtained that changes the claim handler’s judgment with respect to the claim’s ultimate value when it is closed.


Definition of Case ReservesBe sure you understand the terminology used by your insurer, TPA, accountant, or actuary. Their terminology might be different!

Paid to Date + Estimated Future Cost = Total Incurred Cost

Finance/accounting staff will use the word reserves to mean the Estimated Future Cost (outstanding reserves).

Your Insurer/TPA might use the word reserves to mean Estimated Future Cost OR to mean Total Incurred Cost.

For purposes of this presentation, reserves will mean Estimated Future Cost


Administrative Costs versus Claims Costs Administrative Costs – typically 10 to 20% of cost of risk

Insurance premiums (primary and excess),

third party administration (TPA) fees,

Risk Management Information System Fees,

State self-insurance fees and assessments

Claims Costs – typically 80 to 90% of cost of risk

Costs specific to individual claims


“Short-Tail” Liabilities” High frequency, low value claims

Claims typically mature and close in a relatively short period of time (e.g., 90 days)

Types of claims include

Automobile property damage claims

Automobile collision/comprehensive claims

Damage to claimants’ property

Workers’ Compensation Medical Only claims

Reserve accuracy may not be an issue since the claims will close quickly and the ultimate claim value will be known very soon


“Long-Tail” Liabilities” Many claims may take weeks, months, or even years before

they close

Types of claims include

Bodily Injury (BI) claims

Workers’ Compensation Lost Time (Indemnity) Claims

Reserve accuracy may be a major issue since many of the claims may not close for a long period of time, and the claimants’ condition may evolve during that period, making it difficult to accurately account for these projected costs.


The Actuary’s RoleReview the payment and reserving trends of the claims and project the liabilities

Adverse Development

The increasing value of open claims that remain from a prior period

Incurred but not reported (IBNR) values

Incidents that have occurred but haven’t been reported yet


What the Actuary Relies On Reasonable reserving methodologies

Consistent reserving practices

Accurate data from the insurer, TPA, or self-administered entity

Preferably several years of history

Industry data if your data is inadequate

Changes in the reporting procedures, claims management practices, or reserving methodology can make past trends unreliable with respect to estimating future payment patterns and/or liabilities. This may occur when changing insurers or TPAs, or when new programs are implemented.


Workers’ Compensation Reserve ComponentsClaims Costs

Indemnity (temporary disability, permanent disability)

Medical benefits

Allocated Loss Adjustment Expenses (ALAE) – e.g., legal defense, medical case management, independent investigations, surveillance

These are the costs that make up most of your Workers’ Compensation program costs. Accurate reserve estimates allow the appropriate recognition of these liabilities.


Liability Reserve ComponentsAutomobile or General Liability

Indemnity

Property Damage (typically short-tail)

Bodily Injury (may be long-tail)

Allocated Loss Adjustment Expenses (ALAE)

Claim Management Expenses (e.g., appraisers, investigators, surveillance specialists, public records)

Legal Expenses (e.g., defense attorney, court costs, court reporters)


Potential Outcomes of Inaccurate Reserving Too little – insufficient allowance to pay future liabilities,

inadequate budget

Too much – reserves deflect funds that could be used more beneficially elsewhere, budget surplus

A big increase in case reserves can be a major contributing factor in bankruptcies (e.g., Interstate Foods)

State self-insurance agencies monitor reserves and partially base the ability to self-insure, the ability to continue self-insurance, assessments, and security requirements (e.g., bonds, letters of credit) on the case reserves

Premium calculations are improperly calculated


Potential Outcomes of Inaccurate Reserving Reinsurers are not timely notified (XS carriers typically require

reporting when Total Incurred Cost = 50% of retention)

Entity does not have an accurate baseline to compare future claims results

Internal claims cost allocations are inaccurate

Amount of unrecoverable reinsurance/excess reimbursements may not be properly estimated


Best Practices Approaches to Reserving Ensure prompt reporting, prompt investigations, and prompt

decision-making about the claim

Complete and timely information provides a basis for a more well-informed reserve estimate

or, conversely, A lack of information means that more uninformed

assumptions and “guesstimates” must be used, which may ultimately differ significantly from the ultimate claim facts

Be realistic (not the worst case scenario or the best case scenario, but the best estimate at that point in time with the information that has been obtained)

Base the estimate on what the claim will cost when it closes, not some time before then.


Best Practices Approaches to Reserving Promptly investigate, gather the facts, and develop an action

plan to conclude the claim as soon as possible

Be methodical in the reserving approach

Utilize a reserve analysis worksheet that provides a place for the major reserve categories and the thought process behind the estimate

Make changes in the reserves when the known facts change

Require systematic “fresh” looks at regular intervals (e.g., 90 days)

Require supervisors to evaluate the basis for the reserve estimates and the reasonableness of the estimate

The validity of the case reserve should improve as the claim matures, because more information becomes known


Best Practices Approaches to Reserving Monitor case reserves

Track significant reserve changes - increases or decreases that are equal to or greater than X, (e.g., $25,000)

Track large losses with a Total Incurred Value in excess of X (e.g., $100,000)


Best Practices Approaches to ReservingPerform periodic claim reviews

Evaluate claims handling quality and timing, since that affects the claim handler’s ability to establish realistic estimates

Evaluate whether case reserves appear to be within a reasonable range

Ensure that there are no unreasonable pressures on maintaining reserves at a certain point or level


ContactGary Jennings, CPCU, ARM, ALCM, AIC, ARe, SCLADirector, Casualty Claims Advisory ServicesInsurance Risk Management SolutionsPricewaterhouseCoopers LLP10 Tenth Street, Suite 1400Atlanta, GA 30309

Telephone: (678) 419-3004RightFax: (813) 207-3466Email: [email protected]

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Case Reserving Methodologies and Procedures (PwC)