using claim department work measurement systems to determine claim adjustment expense reserves 1999...

Using Claim Department Work Measurement Systems to Determine Claim Adjustment Expense Reserves

1999 Casualty Loss Reserve Seminar

Joanne S. Spalla, FCAS, MAA

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Popular ULAE MethodsPopular ULAE Methods

Paid-to-Paid Methods Methods Based on Claim

Reporting and Closing Patterns (The Johnson Method)

Transaction-Based Methods

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Definition of LAEDefense & Cost Containment (DCC)

Fees or salaries for appraisers private investigators hearing representatives reinspectors fraud investigators rehabilitation nurses,

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Definition of LAEDefense & Cost Containment (DCC)

Surveillance expenses Medical cost containment expenses; Litigation management expenses; LAE for participation in voluntary and involuntary

pools if reported by accident year; Attorney fees incurred owing to a duty to defend The cost of engaging experts.

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Definition of LAEAdjusting & Other (AO)

Fees of adjusters and settling agents LAE for participation in voluntary and involuntary

market pools if reported by calendar year Attorney fees incurred in the determination of

coverage, including litigation between the insurer and the policyholder

Fees or salaries for appraisers, private investigators, hearing representatives, reinspectors and fraud investigators, if working in the capacity of an adjuster.

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Steps in Performing a Claim Steps in Performing a Claim Department StudyDepartment Study

1. Collect Duration of Claim Transactions by Position

2. Determine Raw Costs by Multiplying Durations by Average Costs for Each Claim Position

3. Load Standards for Unrecorded Time

4. Divide Costs by Claim Volumes to Determine Average Cost

5. Load Standards for Other Field Office Claim Overhead

6. Load Standards for Home Office Overhead

Example:Example:

Monthly Intake Cost:

Workers Compensation

Lost Time Claims

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Step 1Step 1::Durations by Claim PositionDurations by Claim Position

Number of Hours

Inside Claim Representative 387.54Outside Claim Representative 74.22Clerical 129.89Supervisor 112.05Claim Processor 122.04

Total 825.75

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Step 2Step 2::Determine Raw CostsDetermine Raw Costs

(1) Number of Hours 387.54

(2) Hourly Cost 29.95$

(3) Total Recorded Cost = (1)/(2) 11,607

Inside Claim Representative

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Example:Example:Inside Claim RepresentativeInside Claim Representative

Salary & Benefits 20,827 Auto - Travel - Other 7,021 Total Expenses 27,848

Expenses ($000)

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Example:Example:Inside Claim RepresentativeInside Claim Representative

Number of Staff 513# Hours per Week 36.25# Weeks 50

Available Hours 929,813

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ExampleExample::Inside Claim RepresentativeInside Claim Representative

Total Expenses 27,848

Available Hours 929,813

Average HourlyCost 29.95$

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Step 3Step 3::Load Standards for Unrecorded Load Standards for Unrecorded TimeTime

(1) Total Recorded Cost 11,607

(2) Percent of Total TimeRecorded at Claim Level 66.6%

(3) Total Costs Grossed Upfor Unrecorded Time = (1) / (2) 17,428

Inside Claim Representative

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Step 4Step 4::Average Intake Cost per ClaimAverage Intake Cost per Claim

Total Costs Grossed Up for Unrecorded TimeInside Claim Representative 17,428Outside Claim Representative 4,683Clerical 10,153Supervisor 6,325Claim Processor 4,229

Total 42,818

Number of Intake Claims 585Average Intake Cost per Claim $73.19

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Average Intake CostAverage Intake Cost

(1) (2) (1) / (2)Total Costs Average

Grossed Up for Number Cost perUnrecorded of Intake

Time Claims ClaimOffice #1 42,818 585 73.19$ Office #2 39,292 304 129.25$ Office #3 34,194 654 52.28$ Office #4 86,259 650 132.71$ Office #5 70,942 452 156.95$

Total 273,505 2,645 103.40$

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Steps 5 & 6Steps 5 & 6::Load Standards for OverheadLoad Standards for Overhead

Intake

Claim Study Costs Excl. Field Overhead $103.40Field Office Overhead 1.555Standards Including Field Overhead $160.84Home Office Overhead 1.383Fully Loaded Standards $222.42

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WC Lost TimeWC Lost TimeMonthly Standards Including OverheadMonthly Standards Including Overhead

Intake $222.42Outstanding 31-90 Days $111.56Outstanding 90 Days - 60 Mos. $49.80Outstanding > 60 Months $17.00

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Practical ConsiderationsPractical Considerations

Scope Duration Credibility Adjusting the Data for Anomalies Participants in the Study

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Practical ConsiderationsPractical Considerations

Changes in Claim Department Work Flow

Workers’ Compensation Claims Greater Than 60 Months Old

Final Validation Adjusting for Inflation and Trend

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Validation of StandardsValidation of Standards

Standard Indicated# Claims Cost Costs

WC Intake 500 $222.42 111,208O/S 5,000 $56.66 283,291

Auto Intake 1,000 $150.00 150,000O/S 4,000 $25.00 100,000

Total Indicated Costs 644,499

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Validation of StandardsValidation of Standards

Indicated Costs 644,499

Actual Cost 613,809

Adjustment Factor 1.05

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Calculating the ReserveCalculating the Reserve

1. Project Ultimate Claim Counts

2. Project Outstanding Claim Counts

3. Project Future Expense per Outstanding Claim

4. Calculate Future Claim Adjuster Expenses

5. Determine Reserve for Reported Claims

6. Determine Reserve for IBNR Claims

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Other ApplicationsOther Applications

Allocation of Claim Adjuster Expense Allocation of Adjusting and Other

Expense Payments in Schedule P Pricing Claim Service Claim Department Expense Planning,

Monitoring and Control