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Under-Reserving Insolvency Link. Casualty Loss Reserve Seminar September 13, 2005 Chuck Emma, Pinnacle Tom Ryan, Milliman John J. Kollar, ISO. ISO Study of Loss and Loss Adjustment Expense Reserves A. Industry Schedule P (Net) B. Analysis of Direct Losses. Casualty Loss Reserve Seminar - PowerPoint PPT Presentation
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Under-Reserving Insolvency Link
Casualty Loss Reserve SeminarSeptember 13, 2005
Chuck Emma, PinnacleTom Ryan, MillimanJohn J. Kollar, ISO
ISO Study of Loss and Loss Adjustment Expense Reserves
A. Industry Schedule P (Net)B. Analysis of Direct Losses
Casualty Loss Reserve Seminar
September 13, 2005
John J. Kollar, ISO
A. Industry Loss Reserve Analysis
• More than 900 insurer groups
• Year-ended 12/31/04
• Schedule P data compiled by A. M. Best
• More than 95% of LLAE reserves for studied lines
• PRELIMINARY RESULTS
Lines studied
• PP Auto Liability• HO/Farmowners• Com. Auto Liability• Other & Products Liab.
Claims-Made• Other Liab. Occurrence• Com. Multi-Peril
• Med Mal Occurrence• Med Mal Claims-Made• Products Occurrence• Reinsurance (Non-
Proportional Liability)• Workers Compensation
Some Key Points• Indications are PRELIMINARY; we have not
yet selected final LDFs & ranges• Excludes reserves for environmental and
asbestos (E&A) claims– Possibly $30B to $50B deficient
• Analysis assumes incurred losses from 9/11 were fully developed at year-end 2004– Estimated direct insured losses: $20B to $30B– U.S. net insured losses: $6B to $9B
• Adjustments have been made for other major catastrophes
Methodologies
• Paid link-ratio technique
• Case-incurred link-ratio technique
• Consistent with ISO study of 2003 data
Factors affecting analysis
• Data quality
• Development factors
• Tail factors
• Professional judgment
Conventions
• Each deficiency/redundancy expressed as percentage of indicated undiscounted reserve as estimated by ISO– Positive percentages indicate deficiencies– Negative percentages indicate
redundancies
Preliminary Summary Indications of Reserve Deficiencies
Paid Case Incurred
• Lines Studied + 6% +8%• All Other Lines + 4% + 4%• Total – all lines + 6% +8%
• In Dollars $26B $34B– (excluding E & A )
Perspective (Preliminary)
• Reserve adequacy has improved for 3 consecutive years– Reserves were about 3 percentage points
more adequate at year-end 2004 than at year-end 2003
– Reserves were about 12 percentage points more adequate at year-end 2004 than at year-end 2001
Preliminary Indications by Line
• Lines with deficiencies Paid Case
Inc.
• Products Occurrence + 7% +12%• Com. Multi-Peril + 1% + 5%• Workers Comp + 9% +15%• Reinsurance (Non-Prop.) +47% +39%
Preliminary Indications by Line
• Other Lines Paid Case Inc.
• Priv. Pass. Auto Liability - 4% - 6%• Homeowners/Farmowners -16% -10%• Commercial Auto Liability -10% - 1%• Other Liability Occurrence - 6% + 3%• Claims Made Other & Prod. - 8% + 1%• Medical Malpractice – Occ. - 9% + 2%• Medical Malpractice – C-M. - 15% -12%
LALAE Ratios: Accident Year vs. Calendar Year
6065707580859095
100
1996 1997 1998 1999 2000 2001 2002 2003 2004
Accident Year Calendar Year
Reserve adequacy deteriorated for at least 6 years but then improved in 2002, 2003 & 2004.
Loss Reserve Changes vs. Industry Profitability, All Lines
-5
0
5
10
15
20
25
30
35
'71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04
%
Change in LLAE Reserves / Paid LLAE
GAAP Return on Average Net Worth
Changes in reserves arecorrelated with profitability.
-10-505
1015202530
1996 1997 1998 1999 2000 2001 2002 2003 2004
%
Paid Link Ratio Case-Incurred Link Ratio
Compound Discount Factor
Retrospective Estimated Deficiencies &Economic Discount, All Studied Lines
Discounted reserves wereinadequate from 2000 to 2003.
B. Analysis of Direct Losses
• Segment Analysis– State/coverage/class group/etc.
• Benchmarking– Comparable mix of business
• Tail Factors
• Confidence Intervals
Schedule P Lines with
• Homeowners/Farmowners
- Homeowners
• Private Passenger Auto Liability/Medical
• Commercial Auto/Truck Liability/Medical
• Commercial Multiple Peril
- Commercial Multiple Peril Liability
- Commercial Multiple Peril Property
ISO Distributions
Schedule P Lines with
• Medical Malpractice - Occurrence- Hospitals- Physicians- Surgeons
• Other Liability - Occurrence• Products Liability - Occurrence• Auto Physical Damage
- Commercial Auto Physical Damage- Private Passenger Auto Physical Damage
ISO Distributions (Cont’d)
Schedule P Lines withISO Distributions (Cont’d)
• Special Property
- Fire
- Allied Lines
- Inland Marine
Segment AnalysisPeriod 1 To Ultimate
Chain Ladder Link Ratios
0
2
4
6
8
10
12
14R
atio
Sch. POth. Liab.
Occ.
ISOPrem OpsAll TablesW. CRR
ISOPrem Ops
Table 1
ISOPrem Ops
Table 2
ISOPrem Ops
Table 3
ISOPrem Ops
Tables1, 2, & 3
The Sch. P data is net, includes Composite Rated Risks (CRR), and is evaluated as of 12, 24, etc. months. The ISO data is direct, excludes CRR (except as noted), and is evaluated as of 15, 27, etc. months.
Benchmarking
• Used aggregate direct data by segment– State/coverage/class/etc.– Paid/incurred/losses/claim counts/LAE
• Weighted aggregate direct data by each insurer’s unique mix of business– Losses rather than link ratios– Separately for each accident year
Tail Factors
• Modified Bondy MethodThe ultimate factor (UF) determined using the first prior factor (FF) and the second prior factor (SF) as follows: If SF > 1 and [ 0.8 * LN(SF) >= LN(FF) >= 0 ] or SF < 1 and [ 0.8 * LN(SF) <= LN(FF) <= 0 ] then UF = FF ^ { LN(FF) / [ LN(SF) – LN(FF) ] } Otherwise, UF = FF ^ 4
• Development beyond 10 years – up to 20 years using direct data
Development of Parameters for Confidence Intervals
• By line
• By settlement lag (valuation)
Estimated parameters for claim severity and frequency separately
Development of an Insurer’s Confidence Intervals• An insurer’s loss and loss adjustment
expense reserves- By line- By accident year (latest valuation)
• Reinsurance arrangements- Retention- Coinsurance- Per claim limit
• Scale factors to reflect differences in average severity
Confidence Interval and Aggregate Loss Reserve Distribution
Aggregate Loss Reserve Distribution
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800
Loss Reserves ($Millions)
Cu
mu
lati
ve P
rob
abil
ity
50% Confidence Interval
Expected Loss
Confidence Intervals for Loss Reserves – Effect of Reinsurance
Intervals for Small Products Liability Writer
5,000,000
15,000,000
25,000,000
35,000,000
45,000,000
70% 75% 80% 85% 90% 70% 75% 80% 85% 90%Confidence Intervals
Without Reinsurance With Reinsurance
Confidence Intervals for Loss Reserves – Effect of Size
Confidence Intervals for General Liability*(Relative to the Aggregate Mean)
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
70% 75% 80% 85% 90% 70% 75% 80% 85% 90%Confidence Intervals
Smaller Insurer Larger Insurer
Aggregate Mean = 40,292,261
Aggregate Mean = 604,383,911
(15 times the smaller insurer's volume)
* A mix of Other Liability and Products Liability.
Applications
• Benchmarking triangles– Combine segments using each insurer’s
unique mix of business
• Individual segment analysis
• Tail Factors
• Confidence intervals (ranges around expected)
Future Plans
• Explore ways of improving reserve estimates
– Credibility weighing an insurer’s data with larger data sets
– Generation of more refined confidence intervals
– Additional tail factor treatments– Correlations between
lines/dependencies• What else would be valuable for loss
reserving?