actuarial reserving and data management frank h. chang, ph.d., fcas richard a. fuller, acas, maaa ©...

Actuarial Reserving and Data Management

Frank H. Chang, Ph.D., FCASRichard A. Fuller, ACAS, MAAA

© CLM Litigation Management Institute 2013. All rights reserved. The course material presented herein does not represent the views or opinions of any of the individual faculty members or instructors or of any of the companies or entities with which they may be employed or affiliated. Nothing in the course materials presented should be construed as legal or professional advice or the rendering of a legal or professional opinion on any specific factual situation. Always seek appropriate legal and professional business advice in the context of specific cases.

What Is Data Management?

Collection, storage, and use of data Managing the data-information continuum Emphasis on big-picture, vendor-neutral

approach

Data ManagementWhat Makes Insurance Data

Unique? Products are promises, not widgets Crucial to estimating balance sheet liabilities Heavy emphasis on dates

Data Management:The Data-Information Continuum

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Data ManagementWho Are All These Guys, Anyway?

(Could this be an exercise in obfuscation?)

What Is An Actuary?

Wikipedia: Business professional who deals with the financial impact of risk and uncertainty. Actuaries need data to quantify risk!

Property/Casualty ActuariesMajor Types of Work

Ratemaking and Pricing Loss Reserving

Loss Reserves

Also referred to as “Unpaid Claim Estimate.” Actuarial Standards Board (ASOP 43) –

Definition: The actuary's estimate of the obligations for future payments resulting from claims due to past events.

Liability item on balance sheet (usually the largest).

Commonly Used Terms

Paid Loss (known) Paid indemnity and medical May include defense and cost containmentLoss Reserves (estimated) Case reserves May include defense and cost containment IBNR – Incurred But Not Reported

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Commonly Used Terms

Case Incurred = Paid Loss + Case Reserves Ultimate = Paid Loss + Case Reserves + IBNR Loss Reserves = Case Reserves + IBNR

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Case Reserves Estimate of value of future claim payments on

an individual claim. Case reserves are set by claim professionals

(company claim adjusters, TPAs). Case reserves are typically set based on known

facts of the claim. Case reserves are adjusted as facts change on

the claim.

Case Reserve Philosophies Vary by company Most likely outcome Best-case / Worst-case Formula approach – based on historical Technical approach Actuaries like to see a consistent philosophy

over time. Communication is important if there is a

change in philosophy.

IBNR Estimated by actuaries Provision for late-reported claims, case

reserves increases on known claims, reopened claims, claims in transit

Best's Aggregates and Averages 2008 Study

Case reserves typically represent less than 50% of the total unpaid claim costs.

IBNR is needed to cover the remainder of the loss reserve provision.

Important Data Dates

Accident Date (Year) – Date on which the event occurred that triggered the policy coverage. This is the most important date for an actuarial loss reserve review.

Report Date (Year) – Date on which the claim was reported to the company.

Valuation Date – Date through which underlying data transactions are valued.

Loss Development Triangle

Losses in the triangle could be paid or case incurred and may include defense and cost containment

Accident Age in MonthsYear

12 24 36 48 60 72 84 96 108 1202003 625 1,214 1,571 1,792 1,917 2,056 2,134 2,207 2,275 2,3192004 882 1,688 2,070 2,284 2,499 2,641 2,747 2,838 2,9322005 1,103 1,879 2,422 2,797 3,045 3,221 3,365 3,4522006 1,011 1,876 2,500 2,900 3,158 3,366 3,5132007 925 1,914 2,520 2,886 3,165 3,3692008 778 1,690 2,283 2,681 2,9852009 680 1,380 1,800 2,0682010 584 1,188 1,6702011 552 1,1962012 437

Sample Claim LifeTRANSACTIONS3/20/2007 claim occurs, case reserve set up with $5,000 reserves.6/30/2007 payment of $1,000.9/30/2007 payment of $1,000.6/30/2008 payment of $1,000.4/30/2009 case reserve increased to $8,000.9/30/2009 payment of $1,000.4/30/2010 settlement payment of $8,000, claim file closed and case

reserve reduced to $0.

Loss amounts for AY 2007 at different valuation dates:• As of 12/31/07: Paid = $2,000, Reserves = $5,000, Incurred = $7,000• As of 12/31/08: Paid = $3,000, Reserves = $5,000, Incurred = $8,000• As of 12/31/09: Paid = $4,000, Reserves = $8,000, Incurred = $12,000• As of 12/31/10: Paid = $12,000, Reserves = $0, Incurred = $12,000

Paid Triangle based onSample Claim

Accident Year 12 24 36 48 60 72

2006 XXX XXX XXX XXX XXX XXX

2007 2,000 3,000 4,000 12,000 12,000

2008 XXX XXX XXX XXX

2009 XXX XXX XXX

2010 XXX XXX

2011 XXX

Age in Months

Loss amounts for AY 2007 at different valuation dates:• As of 12/31/07: Paid = $2,000, Reserves = $5,000, Incurred = $7,000• As of 12/31/08: Paid = $3,000, Reserves = $5,000, Incurred = $8,000• As of 12/31/09: Paid = $4,000, Reserves = $8,000, Incurred =

$12,000• As of 12/31/10: Paid = $12,000, Reserves = $0, Incurred = $12,000

Case Incurred Triangle based on Sample Claim

Loss amounts for AY 2007 at different valuation dates:• As of 12/31/07: Paid = $2,000, Reserves = $5,000, Incurred = $7,000• As of 12/31/08: Paid = $3,000, Reserves = $5,000, Incurred = $8,000• As of 12/31/09: Paid = $4,000, Reserves = $8,000, Incurred =

$12,000• As of 12/31/10: Paid = $12,000, Reserves = $0, Incurred = $12,000

Accident Year 12 24 36 48 60 72

2006 XXX XXX XXX XXX XXX XXX

2007 7,000 8,000 12,000 12,000 12,000

2008 XXX XXX XXX XXX

2009 XXX XXX XXX

2010 XXX XXX

2011 XXX

Age in Months

IBNR Calculation – Loss Development Factors

Accident Year 12 24 36 48 60 72 84

2005 774 1,104 1,135 1,228 1,305 1,337 1,3492006 607 717 747 726 884 9182007 666 1,255 1,625 1,842 1,9842008 931 1,570 2,001 2,2232009 1,091 1,950 2,4772010 816 1,3972011 660

12 - 24 24 - 36 36 - 48 48 - 60 60 - 72 72 - 84 84 - 2005 1.426 1.028 1.082 1.063 1.024 1.0092006 1.182 1.042 0.972 1.217 1.0392007 1.884 1.295 1.134 1.0772008 1.685 1.275 1.1102009 1.788 1.2702010 1.712

Age in Months

Age-to-Age Loss Development Factors

Case Incurred Losses (in $000s)

IBNR Calculation – Project Losses

Accident Year 12 24 36 48 60 72 84 Ultimate

2005 774 1,104 1,135 1,228 1,305 1,337 1,349 1,4842006 607 717 747 726 884 918 926 1,0192007 666 1,255 1,625 1,842 1,984 2,047 2,066 2,2722008 931 1,570 2,001 2,223 2,487 2,565 2,589 2,8482009 1,091 1,950 2,477 2,661 2,978 3,071 3,100 3,4102010 816 1,397 1,651 1,774 1,985 2,047 2,066 2,2732011 660 1,065 1,259 1,352 1,513 1,561 1,575 1,733

12 - 24 24 - 36 36 - 48 48 - 60 60 - 72 72 - 84 84 - UltAverage 1.613 1.182 1.074 1.119 1.031 1.009 1.100

Age in Months

Age-to-Age Loss Development Factors

IBNR Calculation – Calculate IBNRAccident

Year Ultimate

Latest Case

Incurred IBNR2005 1,484 1,349 1352006 1,019 918 1012007 2,272 1,984 2882008 2,848 2,223 6252009 3,410 2,477 9332010 2,273 1,397 8762011 1,733 660 1,073

Total 4,031

IBNR Calculation - Considerations Type of business, length of ‘tail’ Change in case reserve philosophy Change in settlement philosophy Change in reinsurance structure Change in underwriting (new classes of

business, changes in terms, conditions, or limits)

Impact of large claims

Key Personnel

Claims Department Legal Underwriting Reinsurance Pricing Actuaries Other

Loss Reserves – Financial and Regulatory Impact

Ultimate loss and loss reserve estimates have significant variability

Changes in the estimate of ultimate loss will impact both the income statement and balance sheet

Loss reserves play a huge factor in regulatory calculations of required capital and solvency

Questionable transactions involving loss reserves have landed one famous actuary in hot water (convicted in 2008, conviction thrown out in 2011 pending re-trial)

Case StudiesFor each case we provide:

An outline of the general facts of the case Examples of data details and analytical

snapshots Considerations for individual case reserving

and actuarial (bulk) reserve analysis Claim life cycle changes and financial

implications

Case Study No.1:Liability Scenario

Around 10:05 am on 12/1/10, John Doe, 37, an employee of Subcontractor A, leaned his ladder on a temporary bracing put in place by Subcontractor B at a construction site owned by Acme Investors. The general contractor, Smith and Sons, was overseeing work at the job site. The bracing collapsed and Mr. Doe fell nine feet, sustaining multiple injuries.

After a stay at the hospital, John Doe contacts a lawyer specializing in construction-related personal injury. Summons and Complaint are served on A, B, Acme Investors, and Smith and Sons.

Initial reported injury: Lower back strain and a fractured tibia. X-Rays at ER indicate degeneration in the lumbar spine. An ORIF of the tibia was performed.

ABC Indemnity is the insurer for Smith and Sons.


Data Considerations:

• Accident date vs Report Date vs Creation Date• Formula reserve vs Case Reserve• How can historical data help us gauge possible outcomes?

• Apples to Apples• Median vs Mean• Variability

• How do we control for other variables?


Claims Processing System Sample Screen Print

Reserves Paid to Date Recovered IncurredINDEMNITY $100,000.00 $0.00 $0.00 $100,000.00MEDICAL $0.00 $0.00 $0.00 $0.00EXPENSE $30,000.00 $0.00 $0.00 $30,000.00TOTAL $130,000.00 $0.00 $0.00 $130,000.00

Claim Number: 12541012394 Handling Office: 254 - BETHLEHEM CHOInsured Name: SMITH AND SONS Claimant Name: JOHN DOEFile Handler:Phone:Email:

1302 CHELSEA JOHNSON Supervisor:Phone:Email:

939 - HANK JEFFERSON

Claim Type: OBIOO Sub-Type: TORTPolicy No:Risk Bearing Company:

CGL20312010ABC INDEMNITY CO

Policy Period: 01/01/2010 - 12/31/2010

Producer Code: 820055 Producer Name: SPECIALTY RISK SERVICESLoss Date: 12/01/2010 Claim Status: OPEN Report Date: 12/13/2010 Date Closed:Create Date: 12/15/2010 Subrogation: NOLoc Code: 51973 Salvage: NOAccident State: NJ Cat Number:Litigated? Y Reinsurance:


Sample Loss Runs, construction-related falls, closed claimsClaim State AccDate RptDate CloseDate PaidAmt PaidExp AccDesc

12540312956 NJ 20030816 20030910 20050331 500,000$ 240,911$ Claimant fell off ladder at work site

12540367732 NY 20030513 20030524 20080220 1,000,000$ 125,704$

Claimant fell off temporary scaffolding at construction site, CGL 2010 1185 Additional Insured endorsement, insured is general contractor

12540395273 CA 20030707 20030901 20060730 157,312$ 22,120$ Claimant was cleaning gutters, fell 14'

12540406598 CO 20040603 20040803 20070605 575,000$ 230,109$ Claimant fell two stories off roof, inadequate supervision

12540455292 CA 20040610 20040810 20091211 1,500,000$ 690,742$ Claimant working on roof and fell through skylight, insured is property owner / manager

12540469056 NJ 20040701 20040820 20101005 1,895,536$ 798,727$

Claimant fell from inadequately constructed scaffolding, CGL 2010 1185 Additional Insured endorsement

12540482893 NJ 20040716 20040821 20060412 180,176$ 75,006$ Claimant working on roof, slipped and fell, no harnass

12540575700 NY 20050104 20050314 20110301 2,000,000$ 765,897$

Claimant fell 15' from beam, CGL 2010 1185 endorsement, insured is general contractor, NY Labor Law applies

12540589733 NJ 20050311 20050331 20110202 1,500,000$ 811,355$

Claimant working on top of elevator, another worker activated elevator and claimant fell, AI endorsement, insured is general contractor

12540602048 NY 20060716 20060827 20110515 2,000,000$ 645,012$

Claimant fell 15', working without harnass, CGL 2010 1185 Additional Insured endorsement, insured is general contractor, NY Labor Law applies


Sample Summary Report

Avg Avg Pd Median

SIC Group State # of Clms Amt Paid Exp Paid Paid ($1m Cap) Paid

All Other PA 172 5,002,546 862,439 29,085 29,085 2,700

NY 360 31,019,688 5,159,852 86,166 83,355 15,000

Total 532 36,022,234 6,022,291 67,711 65,809 10,000

Masonry, etc. PA 15 394,346 201,124 26,290 26,290 4,500

NY 451 51,654,725 7,699,017 114,534 111,430 23,500

Total 466 52,049,071 7,900,141 111,693 108,689 22,500

Total PA PA 187 5,396,891 1,063,563 28,860 28,860 2,883

Total NY NY 811 82,674,414 12,858,869 101,941 98,967 20,000

Grand Total 998 88,071,305 13,922,432 88,248 85,831 15,000

Case Study No. 1:Liability Scenario

What factors are considered by the claims examiner when setting the initial reserves on this claim?

Reserve philosophy to be used: Most likely outcome Expected Loss Worst Case Scenario

Liability and Damages Venue Age of the claimant Plaintiff's attorney's reputation Defense counsels evaluation

Liability evaluation (comparative negligence, actual/constructive notice, potential third-party actions, legal defenses).

Damages evaluation (jury verdict value, appellate sustainable value, settlement value, prior settlement demands).


Factors to consider in reserving• General Liability Policy Limits for Smith and Sons

is $2M per occurrence with no annual aggregate

• Indemnity Reserve

• Expense (defense and cost containment) Reserve


Comparison of Reserve Philosophies • Expected Value

• Most Likely Outcome

• Worst Case

A BOutcome Payout Probability A x BFavorable Settlement 100,000 80.0% 80,000Policy Limits 2,000,000 20.0% 400,000Expected Value 480,000


How does this claim at Year 1 impact the Actuarial analysis and company financials?

Consistent implementation of reserve philosophy is critical

Role of IBNR at macro (company) and micro (profit center / account) level

Reinsurance considerations


Other considerations: Timing & Ethics of reserve Communications with Pricing and

Underwriting

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Case Study No. 2:Workers' Compensation Scenario

February 17, 2006. Joe DaPlumber, age 45, injures his right knee while installing plumbing fixtures in a home located in Charlotte, NC.

February 20, 2006 Joe files a workers' compensation claim with his employer, Snippy Plumbing Corporation.

February 21, 2006. Snippy Plumbing tenders Joe's right knee claim to ABC Indemnity Company, the workers' compensation carrier.

February 23, 2006. ABC Indemnity verifies coverage and creates claim. The initial accepted injury is right knee strain. Joe is initially classified as Temporary Total Disability and is placed on modified duty.

Initial Report


Claims Processing System: Data Screen

Case Study No. 2:Workers' Compensation ScenarioClaims Processing System: Sample Payment Details


Data Management Considerations Benefit State Interim Payments Reserve history and “stair-stepping” Loss trends & components of inflation


Reserve philosophy to be used: Ultimate payout based on most likely outcome For workers comp, usually reserve is based on current facts of the

claim, not what might happen What is worst case scenario?

Lost time wage replacement (Indemnity) Average weekly wage and comp rate / State regulations Anticipated return-to-work date

Medical expenses Prescription usage Medical treatment plan – does the carrier have the right to direct

care? Is this a “panel” state? Is there a medical provider network? Is there a fee schedule in that state?

Reserving Considerations


Case Reserving Worksheet-Indemnity


Case Reserving Worksheet-Medical


Joe continued to experience pain in his right knee and was not able to return to work at full capacity.

An MRI was done on the right knee on January 18, 2007, which indicated a torn meniscus.

Joe was treated by an orthopedist who recommended surgery to repair the knee.

Reserving Considerations: Medical reserves should be revised to account for the cost

of the surgery and anticipated related treatment. Indemnity reserves to reflect increased lost time wage

replacement based on anticipated disability period and MMI date

Subsequent treatment


A year later (2008), Joe has right total knee replacement. His attorney files for a hearing requesting that Joe's injury be classified as Permanent Total Disability.

After a fierce legal battle, Joe is classified as Perm Total and awarded lifetime indemnity and medical benefits.

Reserving Considerations Life expectancy Rated age/co-morbidities RX usage Anticipated medical treatment Statistical calculation of benefits

Progression to lifetime claim


Cumulative Case Reserve and Payment History for One Claim


How does this claim impact actuarial analysis and financials at various points in the claim lifecycle?

• Indemnity vs Medical• Business Segment• IBNR vs case reserve• Triangles• Reinsurance

Case Study No. 3:Construction Defect Scenario

ICU Glass company installed shower doors and enclosures in a number of new homes for many years. In 1999 and 2000, they were insured by Alwayspay Insurance.

Quickbuilt Homes was the developer for Creaking Timbers, which is a modest subdivision of 100 homes built between May 1999 and July 2001 in Bonura, CA. ICU Glass was the subcontractor of choice for shower door installation.

In a survey sent to all Creaking Timber residents in 2004, a paralegal was able to determine that most homes had various types of construction deficiencies, including water damage.


QuickBuilt Homes is sued by the group of 100 Creaking Timbers homeowners for $20,000 each, or $2M total for repair costs stemming from water damages.

The attorneys for QuickBuilt Homes quickly realize shower doors are often near water, and therefore our insured's “products, operations, services, and/or materials may have led, in whole or in part, to the claims of the owners and alleged resultant damages.”

Tender of Defense request is received by Alwayspay Insurance on 2/4/2005.

The insured's per-claim policy limits are $2M with a $4M aggregate limit.

The insured has a $50,000 deductible.


Property Damage Liability Reported Claims Typical property damage liability claims

are reported quickly. Peak claim volume is within the first year of occurrence.

Construction Defect PD Liability claims are reported over long periods of time. The data often suggests “feeding frenzies” where a high volume of claims are reported from multiple accident years during a given calendar year.


Liability claims in general may have a high percentage of legal defense costs compared to other claim types.

Construction defect claims, in particular, have high legal costs, partly due to “Additional Insured” defense.

Legal Paid as a Percentage of Total Paid


What factors does the claims examiner consider when setting the initial reserves on this claim?

Coverage analysis Is there coverage, i.e., for property damage that occurred as a result

of the insured's work that is not damage to the insured's work during the policy period?

Are there other carriers for the insured that will also provide coverage for the continuing loss?

Determine time on risk or the apportionment between the policies as dictated by the local rules.

Policy Limits — the policy limits of every triggered policy are exposed to the claim

Type of policy involved (expense within limits, wrap policy, etc.) Deductible/SIR issues

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Reserve philosophy to be used: Ultimate payout based on most likely outcome Worst case scenario In CD claims, there are often established norms of value

for the work performed, e.g., flooring installer might pay $100 per home worked on. Multiplying this factor by the number of homes in the claim can provide a total value of the claim with reasonable accuracy. Applying the apportioned percentage, one can develop an accurate indemnity reserve.


Additional Insured Considerations: Who is the insured? Is the insured owed an additional insured obligation or does your

insured owe an additional insured obligation to another party? How is the additional insured status conveyed?

Named as an additional insured under the policy? Through contractual language such as an insurance procurement

clause where one party agrees to obtain insurance for another party.

What are the obligations? What are the defense costs? How do we reserve for this consideration?

Estimate share of the expenses of the party to whom additional insured endorsements are owed and the number of parties that will be sharing that obligation


Liability What work did the insured perform on the project? Expert reports (standard of care) Contribution, cross-claims, common law/contractual indemnity issues Legal and statutory defenses Venue Joint and several considerations

Damages What type of damages is the plaintiff entitled to (i.e., delay/liquidated

damages)? Remediation costs Percentage of liability attributable to the insured Are the other defendants insured?


Shelf life of CD claims are closely monitored to ensure dismissals are handled efficiently.

Open claims inventory is impacted as much by incoming claim volume as closure activity.

Sample Shelf Life Exhibits


Property Damage Liability – Excluding CD

Property Damage Liability – CD Only

Property Damage Liability Reported Claims


What factors does the actuary consider when analyzing construction defect liability claims?

Report year vs. Accident year

Frequency/severity

Statutes of limitations

Close with Pay vs. Close No Pay

Reinsurance triggers

Richard A. Fuller, ACAS, MAAAFrank H. Chang, Ph.D., FCAS

Actuarial and Data Management

actuarial reserving and data management frank h. chang, ph.d., fcas richard a. fuller, acas, maaa ©...

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