2002 ncci holdings, inc. workers compensation: emerging issues wc industry reserve adequacy karen...
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2002 NCCI Holdings, Inc.
Workers Compensation: Emerging Issues
WC Industry Reserve AdequacyKaren Ayres, FCAS, MAAA
karen_ayres@ncci.com
Casualty Loss Reserve SeminarSeptember 23, 2002
2 2002 NCCI Holdings, Inc.
Overview of NCCI Analysis
• Computations based on Schedule P data
• Industry-wide reported losses and LAE
• Analyze and select paid and incurred loss and LAE development factors
• Analyze ultimate loss projections and select final estimate of ultimate incurred losses and LAE
• Redundancy/Inadequacy = Reported - Selected Ultimate
3 2002 NCCI Holdings, Inc.
WC Industry Underwriting Ratios
80%
90%
100%
110%
120%
130%
140%
1997 1998 1999 2000 2001
Accident Year
Und
erw
ritin
g R
atio
Initial Report Latest Report NCCI Estimate
The NCCI estimate and the latest report are based on data from the 2001 Annual Statement.
The Initial Report is based on the respective annual statement for each accident year.
4 2002 NCCI Holdings, Inc.
The Discount Has Remained Constant While the Deficiency Has Increased
5.3 5.0 5.4 5.34.9
1.1 1.0 1.1 1.10.8
10.0
14.5
18.320.0 21.0
0
5
10
15
20
25
1997 1998 1999 2000 2001
Evaluation Date
Bill
ions
Tabular Non-Tabular Deficiency
Numbers are based on the respective annual statement for each accident date.
5 2002 NCCI Holdings, Inc.
WC Loss and LAE Reserve Adequacy
0
1
2
3
4
Prior 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Accident year
Res
erve
Def
icie
ncy
(Bill
ions
)
Loss reserve LAE Reserve
Based on data from the 2001 Annual Statement
6 2002 NCCI Holdings, Inc.
Estimated WC Reserve Deficiency Continues to Increase
0%
5%
10%
15%
20%
25%
30%
35%
1997 1998 1999 2000 2001
Evaluation Date
Def
icie
ncy/
Car
ried
Res
erve
7 2002 NCCI Holdings, Inc.
NCCI Uses a Variety of Methods to Estimate Ultimate Losses
• Methods 1-4: reflect computed development factors using paid loss and LAE data
• Methods 5-7: reflect computed development factors using paid losses/LAE and company reserve estimates
• Methods 8-9: incorporate selected loss and LAE development factors
• Ultimate losses and LAE selected based on results of all methods
8 2002 NCCI Holdings, Inc.
Comparison of MethodsAccident Year 2000
Evaluated @2000 vs @ 2001
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
Method #1
Method #2
Method #3
Method #4
Method #5
Method #6
Method #7
Method #8
Method #9
Selecte
d
Ult.
Los
s &
LA
E/Pr
emiu
m
@2000 @2001
9 2002 NCCI Holdings, Inc.
Comparison of Methods - An Alternate View-
AY 2000Evaluated @2000 vs @2001
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
@2000
@2001
Ult.
Los
s &
LA
E/Pr
emiu
m
method 1 method 2 method 3 method 4 method 5 method 6 method 7 method 8 method 9 Selected
10 2002 NCCI Holdings, Inc.
Comparison of Methods Over TimeAccident Year 1998
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1998
1999
2000
2001
Evaluation Date
Ult.
Los
s &
LA
E/Pr
emiu
m
Method 1 Method 3 Method 6 Method 8
11 2002 NCCI Holdings, Inc.
Comparison of Methods Over TimeAccident Year 1999
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1999
2000
2001
Evaluation Date
Ult.
Los
s &
LA
E/Pr
emiu
m
Method 1 Method 3 Method 6 Method 8
12 2002 NCCI Holdings, Inc.
Tail Methodology
• Based on NCCI countrywide financial call data
• Similar to method used in ratemaking
13 2002 NCCI Holdings, Inc.
“And Prior” Row
• Development in years prior to ten years displayed
• Compare latest paid to prior reserve (p)
• Compare latest reserve to prior reserve (q)
• Geometric Series of reserve decay, where sum = p/(1-q)
• When p + q = 1, reserves assumed adequate.
14 2002 NCCI Holdings, Inc.
Challenges in Estimating Industry Reserves
• Tail Factor
• “And Prior” Row
• Reinsurance
• Changes in market compositionMergers, insolvencies, etc.
15 2002 NCCI Holdings, Inc.
Reserve Estimation vs. Ratemaking
• Data sources:Reserve Estimation = Schedule P (10 years)Ratemaking = Financial Call (20 Years)
• Reinsurance Issues
• Loss Development
2002 NCCI Holdings, Inc.
Questions and Answers?
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