September 27, 2018

Christopher M. Holt, ACAS, MAAA

Legaré W. Gresham, FCAS, MAAA

Loss Reserving 201—It's More Than Just Numbers

1

• Legaré W. Gresham, FCAS, MAAA

• Consulting Actuary

• Charleston, SC

• 10+ years in property/casualty

About the Presenters

• Christopher M. Holt, ACAS, MAAA

• Consulting Actuary

• Atlanta, GA

• 18+ years in property/casualty

2

• Background/Loss Reserving 101

• Loss Drivers

– Claims Handling

– Rates and Underwriting

– Reinsurance

– External Influences

– Other Key Information

• Actuarial Considerations

Agenda

3

Background/Loss Reserving 101

INCURRED LOSS TRIANGLE

Accident Months of Maturity

Year 12 24 36 48 60 72 84 96 108 120

2008 10 20 30 40 50 60 70 80 90 95

2009 10 20 30 40 50 60 70 80 90

2010 10 20 30 40 50 60 70 80

2011 10 20 30 40 50 60 70

2012 10 20 30 40 50 60

2013 10 20 30 40 50

2014 10 20 30 40

2015 10 20 30

2016 10 20

2017 10

4

Background/Loss Reserving 101

AGE TO AGE FACTORSAccident 12 24 36 48 60 72 84 96 108 120

Year 24 36 48 60 72 84 96 108 120 Ultimate2008 2.000 1.500 1.333 1.250 1.200 1.167 1.143 1.125 1.0562009 2.000 1.500 1.333 1.250 1.200 1.167 1.143 1.1252010 2.000 1.500 1.333 1.250 1.200 1.167 1.1432011 2.000 1.500 1.333 1.250 1.200 1.1672012 2.000 1.500 1.333 1.250 1.2002013 2.000 1.500 1.333 1.2502014 2.000 1.500 1.3332015 2.000 1.5002016 2.000

Average 2.000 1.500 1.333 1.250 1.200 1.167 1.143 1.125 1.056Selected 2.000 1.500 1.333 1.250 1.200 1.167 1.143 1.125 1.056 1.053

Cumulative LDF 10.000 5.000 3.333 2.500 2.000 1.667 1.429 1.250 1.111 1.053% of Ultimate 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 95.0%

5

Background/Loss Reserving 101Incurred

Accident Expected Incurred Percent of Expected Loss Dev B-FYear Premium Loss Ratio Losses Ultimate Losses Method Method(1) (2) (3) (4) (5) (6) (7) (8)

2008 200 50% 95 95.0% 100 100 1002009 200 50% 90 90.0% 100 100 1002010 200 50% 80 80.0% 100 100 1002011 200 50% 70 70.0% 100 100 1002012 200 50% 60 60.0% 100 100 1002013 200 50% 50 50.0% 100 100 1002014 200 50% 40 40.0% 100 100 1002015 200 50% 30 30.0% 100 100 1002016 200 50% 20 20.0% 100 100 1002017 200 50% 10 10.0% 100 100 100

Total 2,000 545 1,000 1,000 1,000

Col (6) = Col (2) x Col (3)Col (7) = Col (4) / Col (5)Col (8) = Col (4) + Col (6) x { 1 - Col (5) }

6

• Change in procedures

– How initial case reserves are set up

– Relative adequacy of case reserves

– Emphasis on speed of closing claims

– Desire to fight claims

– Staffing, number of claims per adjuster

– Different Third Party Administrator (TPA)

Claims Handling Procedures

7

• Change in reporting of claims

– Changes in how the accident date or report date is assigned

– Changes in the process of how incidents are labeled claims

• Underlying claims trends

– Changes in industry wide trends for claim frequency or severity

– Changes in trends specific to a coverage or region (FL PIP, CA WC)

Claims Handling Procedures

8

Claims Handling Procedures Example

Incurred

Accident Expected Incurred Percent of Expected Loss Dev B-F

Year Premium Loss Ratio Losses Ultimate Losses Method Method

(1) (2) (3) (4) (5) (6) (7) (8)

2008 200 50% 95 95.0% 100 100 100

2009 200 50% 90 90.0% 100 100 100

2010 200 50% 80 80.0% 100 100 100

2011 200 50% 70 70.0% 100 100 100

2012 200 50% 60 60.0% 100 100 100

2013 200 50% 50 50.0% 100 100 100

2014 200 50% 40 40.0% 100 100 100

2015 200 50% 30 30.0% 100 100 100

2016 200 50% 50 20.0% 100 250 130

2017 200 50% 40 10.0% 100 400 130

Total 2,000 605 1,000 1,450 1,060

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• Changes in case reserve adequacy distort methods based on reported incurred losses

• Methods based on paid losses ignore case reserves

• Berquist-Sherman adjusts average case reserves to remove distortions

• Thus, valuable information in case reserves is not lost

Berquist-Sherman Method

10

• Rates

– Rate level increases/decreases

– Changes in schedule rating

– Concern with adverse selection

• Underwriting

– Changes in what’s acceptable to write

– Change in focus on profit or growth

– New markets/rates

– Changes in mix of business

– Geographical mix

– Limits or deductibles written

Rates and Underwriting

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Rates ExampleIncurred

Accident Expected Incurred Percent of Expected Loss Dev B-FYear Premium Loss Ratio Losses Ultimate Losses Method Method(1) (2) (3) (4) (5) (6) (7) (8)

2008 200 50% 95 95.0% 100 100 1002009 200 50% 90 90.0% 100 100 1002010 200 50% 80 80.0% 100 100 1002011 200 50% 70 70.0% 100 100 1002012 200 50% 60 60.0% 100 100 1002013 200 50% 50 50.0% 100 100 1002014 200 50% 40 40.0% 100 100 1002015 200 50% 30 30.0% 100 100 1002016 300 50% 20 20.0% 150 100 1402017 450 50% 10 10.0% 225 100 213

Total 2,350 545 1,175 1,000 1,153

Col (6) = Col (2) x Col (3)Col (7) = Col (4) / Col (5)Col (8) = Col (4) + Col (6) x { 1 - Col (5) }

12

• Growing book of business

– Compare long-term & short-term averages of age-to-age factors

– Be careful about overreacting

– Volume weighted average

• Shrinking book of business

– Recent age-to-age factors may show different trend, more volatility

– Volume weighted average

• Stability vs responsiveness

• Growth/shrinkage in a certain subdivision

Growth

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• New block of business acquired

– Segmentation of current analysis (e.g. new state added to a by-state analysis)

– Difference in historical patterns

– Differences systematic or not

– Relative size

– Differences in claims handling and underwriting

– Persistence of differences after acquisition

• Distinct from organic growth (one-time vs gradual shift)

Acquisitions

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• Changes in program structure

• Commutations

• Change in reinsurance premiums

• Impact on large claims or potential exposure above reinsurance layers

• Handling of expenses

Reinsurance

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• Specific contract details

– Quota share percentage

– Retention

– Risk limiting features

• Loss ratio caps

• Loss corridors

• Swing rated premiums or commissions

• Risk transfer concerns

• Reinsurer ability to pay claims

Reinsurance

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100,000

300,000

450,000

1,000,000

750,000

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

12 24 36 48 60

Months of Maturity

Cumulative Gross Reported Loss for Claim #123

Retention Example

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100,000

300,000

450,000

1,000,000

750,000

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

12 24 36 48 60

Months of Maturity

Cumulative Gross Reported Loss for Claim #123

Retention Example

Claim Entered Litigation

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100,000

300,000

450,000

1,000,000

750,000

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

12 24 36 48 60

Months of Maturity

Cumulative Gross Reported Loss for Claim #123

Retention Example

Claim Entered Litigation Claim Settled

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100,000

300,000

450,000

1,000,000

750,000

500,000

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

12 24 36 48 60

Months of Maturity

Cumulative Gross Reported Loss for Claim #123

Retention Example

Claim Entered Litigation Claim Settled

20

100,000

300,000

450,000

1,000,000

750,000

500,000

250,000

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

12 24 36 48 60

Months of Maturity

Cumulative Gross Reported Loss for Claim #123

Retention Example

Claim Entered Litigation Claim Settled

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• As retentions increase, development patterns can…

– …project more future development and…

– …be more volatile…

Retention Example

AGE TO AGE FACTORS

12 24 36 48

Losses 24 36 48 60

Unlimited 3.00 1.50 2.22 0.75

Ltd to $500K 3.00 1.50 1.11 1.00

Ltd to $250K 2.50 1.00 1.00 1.00

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• Most accurate – separate triangles for each retention

• Most conservative – use highest historical retention

• Most responsive – use current retention

– Recent periods expected to experience most development

• Blended – use historical retentions by period (“Net”)

• Availability – may be limited historical data, augment with benchmarks

• Document!

Retention Example – Which Development Factors?

AGE TO AGE FACTORS

12 24 36 48

Losses 24 36 48 60

Unlimited 3.00 1.50 2.22 0.75

Ltd to $500K 3.00 1.50 1.11 1.00

Ltd to $250K 2.50 1.00 1.00 1.00

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Retention Example

Incurred

Accident Expected Incurred Percent of Expected Loss Dev B-F

Year Exposure Loss Cost Losses Ultimate Losses Method Method

(1) (2) (3) (4) (5) (6) (7) (8)

2008 200 0.50 95 95.0% 100 100 100

2009 200 0.50 90 90.0% 100 100 100

2010 200 0.50 80 80.0% 100 100 100

2011 200 0.50 70 70.0% 100 100 100

2012 200 0.50 60 60.0% 100 100 100

2013 200 0.50 50 50.0% 100 100 100

2014 200 0.50 40 40.0% 100 100 100

2015 200 0.50 30 30.0% 100 100 100

2016 200 0.70 20 20.0% 140 100 132

2017 200 0.90 10 10.0% 180 100 172

Total 2,000 545 1,120 1,000 1,104

Expected loss costs increase as retentions increase

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• Law changes

– FL PIP

– FL sinkhole

– SCHIP

– ACA

– FL Workers Compensation

• Tort reforms

• Inflation or other economic factors

• New competitors

• New claims sources

– FL public adjusters

External Influences

25

• DDR – Death, Disability, and Retirement

• Extra Contractual Obligations (ECO) claims

• Large claims/specific claim detail

• Subrogation and salvage

• Treatment of Expenses

Other Key Information Items

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• Trust BUT Verify

• Tools

• Documentation

Actuarial Considerations

27

Questions

28

Join Us for the Next APEX Webinar

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• Visit the Resource Knowledge Center at Pinnacleactuaries.com

Final Notes

Commitment Beyond Numbers 30

Thank You for Your Time and Attention

cholt@pinnacleactuaries.com

678-894-7265

Christopher M. Holt

lgresham@pinnacleactuaries.com

678-367-2683

Legaré W. Gresham