Odomirok 15

Question 1

List some uses of Schedule P (in addition to being used by outside parties to assess the reserve adequacy):

Answer 1

• Supports and provides disclosure for the SAO
• Shows how reserves have developed over time, and indicates where the development is coming from
• Provides the source of payment patterns to be used in the tax discounting calculations
• Shows the split between case reserves and IBNR
• Provides historical claim count data to help review trends in frequency & severity, and changes in claims handling & reserving
• Provides the data to calculate the RBC loss sensitive discount

Question 2

List the parts of Schedule P:

Answer 2

• Part 1: loss & LAE experience as of 12/31 of the current year.
• Part 2: historical net loss & DCC estimates
• Part 3: historical net paid loss & DCC
• Part 4: historical net IBNR for loss & DCC (before tabular discount
• Part 5: historical claim counts (closed with payment, open and reported)
• Part 6: historical earned premium
• Part 7: loss and premium data on loss sensitive contracts

Question 3

How are losses in Part 1 grouped:

Answer 3

• Occurrence policies: Accident Year
• Claims Made policies: Report Year
• Tail policies: Policy Year
• Fidelity & Surety policies: Discovery Year

Question 4

2 components of LAE:

Answer 4

1. Defense & Cost Containment (DCC)

2. Adjusting and Other (A&O)

Question 5

List some examples of DCC:

Answer 5

• surveillance expenses
• fixed amounts for medical cost containment
• litigation management expenses (eg audit of bills)
• LAE for pools, if reported by AY
• fees & salaries for appraisers, private investigators, hearing representatives, reinspectors, fraud inspectors; if working in defense of a claims
• fees & salaries for rehabilitation nurses (if not included in losses)
• attorney fees incurred due to duty to defend
• cost of engaging experts (if not included in losses)

Question 6

List some examples of A&O:

Answer 6

• fees of adjusters & settling agents
• LAE for pools, if reported by CY
• fees & salaries for appraisers, private investigators, hearing representatives, reinspectors, fraud inspectors; if working in the capacity of an adjuster
• attorney fees incurred in determination of coverage

Question 7

How was LAE historically segmented:

Answer 7

• Allocated Loss Adjustment Expenses (ALAE): expenses that can be allocated to a specific claim
• Unallocated Loss Adjustment Expenses (ULAE): expenses that can not be allocated to individual claims

Question 8

How are S&S expenses recorded:

Answer 8

• Paid losses are recorded net of S&S received

* Unpaid losses can be net or gross of anticipated S&S

Question 9

How are tabular & non tabular discounts treated in Part 1:

Answer 9

• Net of tabular discount

* Gross of non tabular discounts (until columns 32 & 33) and Net (in columns 35 & 36)

Question 10

List 2 things that the claim count data from Schedule P can be used to identify/ analyze:

Answer 10

1. changes in losses

2. changes in claims settlement or reserving philosophy

Question 11

What types of changes should actuaries look out for, when analyzing trends:

Answer 11

• Mix of business (type of exposure, geography)
• Policy limits
• Reinsurance attachment points & limits
• The way that the company counts its claims

Question 12

How is discounting reflected in Parts 2-4:

Answer 12

Data is gross of all discounting.

Question 13

Issues with using the information in Parts 2 to 4 to develop losses:

Answer 13

• Various allocations in the creation of Schedule P are based on the interpretation of the person completing it
• Internal pooling or reinsurance arrangements that may have an impact on the data set may not be very obvious by looking exclusively at Schedule P
• Schedule P includes business from participation in voluntary and involuntary pools and/ or associations: many of these pools record IBNR as case reserves/ the level of participation in the pool may have changed over time
• Schedule P only contains 10 accident years of data, but long tail lines may experience development later than 10 years.
• Commutations will distort the reserves
• The data combines losses and DCC, potentially hiding trends in either component

Question 14

What changes should be considered when using the information in Parts 2 to 4 to develop losses:

Answer 14

• Retentions
• Claims settlement & reserving
• Business mix
• Underlying exposures

Question 15

Formula to populate the right most column of the Prior Years Row of Part 3:

Answer 15

It equals the Part 3 2nd right most column, plus the following from Part 1:

D&A loss - ceded loss + D&A DCC - ceded DCC = Col 4 - 5 + 6 - 7

Question 16

3 sections of Part 5:

Answer 16

1. Cumulative number of claims closed with loss payment
2. Number of claims outstanding
3. Cumulative number of claims reported

Question 17

What inconsistency should users be aware of when comparing Part 5 data of different companies:

Answer 17

Some companies record counts on a per claim basis, whereas others record them on a per claimant basis.

Question 18

List some metrics that can be derived from the claim count data (in addition to other data from the Annual Statement):

Answer 18

• Claim closure rates
• CWP ratios
• Claim Frequency
• Avg Claim Severity

Question 19

Formula for closure rate:

Answer 19

Closed claims / total reported claims

Question 20

2 advantages of closing claims early:

Answer 20

1. Minimize chance that the claim will develop adversely

2. Allow to insured to receive medical treatment/ repair property damage/ recover from loss

Question 21

3 reasons that settlement rates may reduce:

Answer 21

1. Reduction in staff
2. Growth in the book without a corresponding increase in staff
3. Surge in claims from a catastrophe

Question 22

Expected impact to ultimate loss projection if a slow down in settlement rates is not reflected:

Answer 22

This will result in an understated projection.

Question 23

CWP ratio equation:

Answer 23

CWP claims / total closed claims

Question 24

Claims Frequency equation:

Answer 24

Claim Counts (from Part 5) divided by Earned Premiums (from Part 1)

Question 25

Average Claim Severity formula:

Answer 25

Net paid loss & DCC (from Part 3) / direct and assumed claims closed with payment (from Part 5, Section 1)

Question 26

Average Case Outstanding Severity formula:

Answer 26

Net case outstanding loss and DCC (Part 2 - 3 - 4) / direct and assumed open counts (Part 5, Section 2)

Question 27

Average Reported Claim Severity formula

Answer 27

Net reported loss & DCC (from Part 2 - 4) / direct & assumed reported counts (Part 5, Section 3)

Question 28

Factors that may cause loss trends:

Answer 28

• Inflation
• Law changes
• One time catastrophic claims
• Changes in deductibles/ retentions
• Internal factors

Question 29

List some metrics that can be calculated from the Part 5 data to perform reasonableness checks on the unpaid claim estimates (by comparing actual to expected):

Answer 29

• Average claim frequency = Ultimate claim count by AY / Corresponding EP
• Average ultimate severity = Ultimate loss and DCC by AY / Ultimate Claim Counts
• Average unpaid claim severity = Unpaid loss and DCC by AY / Unpaid Claims

Question 30

List some reasons that premiums in Part 6 may change over time:

Answer 30

• Premium audits
• Retrospective rated policies
• Lags in reporting/ accounting for premiums

Question 31

When would an insurer populate Part 7:

Answer 31

Only if it is using the loss sensitive adjustment to RBC.

Question 32

List the 2 parts of Part 7:

Answer 32

• Part A: Primary Contracts (direct business)

* Part B: Reinsurance Contracts (assumed business)

Question 33

List the five sections of each part of Part 7:

Answer 33

• Section 1: net loss & LAE unpaid and NWP on loss sensitive contracts, relative to all contracts, for each Schedule P line
• Section 2: incurred loss & DCC on loss sensitive contracts, in the same format as Part 2
• Section 3: loss & DCC IBNR on loss sensitive contracts, in the same format as Part 4
• Section 4: net earned premiums on loss sensitive contracts, in the same format as Part 6
• Section 5: triangle of net reserves for premium adjustments & accrued retrospective premiums for each of the last ten years that the policies were issued

Question 34

Briefly describe the Schedule P Interrogatories:

Answer 34

Series of seven questions that the insurer needs to answer, that add insight to the other information reported in Schedule P.

Question 35

What topics does Interrogatory 1 cover:

Answer 35

Extended reporting endorsements (EREs) arising from death, disability or retirement (DDR). There are six parts:

• The first asks whether the insurer offered the endorsement for free (or at a reduced rate)
• The remaining parts are about how the company reports the DDR

Question 36

Main purpose of Interrogatory 1:

Answer 36

Ensure that the ERE coverage has been reserved for.

Question 37

What topics does Interrogatory 2 cover:

Answer 37

Asks if the LAE is being defined as DCC and A&O

Question 38

What topics does Interrogatory 4 cover:

Answer 38

Asks for disclosure about whether the reserves are net of non-tabular discounts.

Question 39

What topics does Interrogatory 6 cover:

Answer 39

Whether the insurer reports claim counts per claim or per claimant.

Question 40

What topics does Interrogatory 7 cover:

Answer 40

Asks if there are any changes or anything special that the user needs to be aware of if she relies on the Schedule P data to assess the adequacy of recorded loss & LAE reserves