CASUALTY LOSSRESERVE SEMINAR
HOW A.M. BEST EVALUATES RESERVE ADEQUACY
Matthew C. MosherManaging ActuarySeptember 28, 1998
1998 Meeting
DISCUSSION OUTLINE
Purpose
Sources of Information
Methods Used
Determining Ultimates
Discount Calculation
PURPOSE OF RESERVE ADEQUACY
Capitalization - Key to Solvency
Allocation of Capital
Determine True Profitability
INFORMATION SOURCES
Statutory Annual Statement
Actuarial Work Papers
Supplemental Rating Questionnaire
INTERNAL RESERVE MODELOVERVIEW
Three Paid Loss Development Based Methods
Three Incurred Loss Development Based Methods
LDF’s by Line
Dollar Weighted Age-to-Ultimate LDF’s
Fixed Loss Ratio Override
Credibility Weighted By-Line
INTERNAL RESERVE MODELLAYOUT
By Line, By Accident YearAdequacy Projection of Each MethodCredibility Weighted AdequacyCarried ReservesLoss & ALAE Ratios
By Line EquityNet Carried Loss & LAE ReservesStatutory DiscountEstimated DeficiencyCalculated DiscountLoss Reserve Equity
INTERNAL RESERVE MODELMETHODS
Company-BasedPaid LD - Based on Previous AY ProjectionsPaid LD - Based on Previous AY Sch P, Part 2Incurred LD - Based on Previous AY ProjectionsIncurred LD - Based on Previous AY Sch P, Part 2
Industry-BasedPaid Loss DevelopmentIncurred Loss Development
METHOD 2 - COMPANYPAID LOSS DEVELOPMENT
Prior Years and AY 1988 Part 2 Incurred equals ultimate
AY 1989AY89 Ult. = AY89 Pd@108 x AY88 Pt2
AY88 Pd@108
AY 1997AY97 Ult. = AY97 Pd@12 x AY94, AY95, AY96 Pt2
AY94, AY95, AY96 Pd@12
METHOD 4 - COMPANYINCURRED LOSS DEVELOPMENT
Prior Years and AY 1988 Part 2 Incurred equals ultimate
AY 1989AY89 Ult. = AY89 Pd+Cs@108 x AY88 Pt2
AY88 Pd+Cs@108
AY 1997AY97 Ult. = AY97 Pd+Cs@12 x AY94, AY95, AY96 Pt2
AY94, AY95, AY96 Pd+Cs@12
METHOD 1 - COMPANYPAID LOSS DEVELOPMENT
Prior Years
Req. Res. = Carr. Res. x 1 + 3Yr Dev in PY’s 2
PY Carr Res @12/94
AY 1988AY88 Ult. = AY88 Pt3 +
Carr. Res. x 1 + 3Yr Dev in PY’s & AY88 PY & AY88 Carr Res @12/94
METHOD 1 - COMPANYPAID LOSS DEVELOPMENT
AY 1989AY89 Ult. = AY89 Pd@108 x AY88 Proj Ult
AY88 Pd@108
AY 1990AY90 Ult. = AY90 Pd@96 x AY88, AY89 Proj Ult
AY88, AY89 Pd@96
AY 1997AY97 Ult. = AY97 Pd@12 x AY94, AY95, AY96 Proj Ult
AY94, AY95, AY96 Pd@12
METHOD 3 -COMPANYINCURRED LOSS DEVELOPMENT
Prior Years
Req. Res. = Carr. Res. x 1 + 3Yr Dev in PY’s 2
PY Carr Res @12/94
AY 1988AY88 Ult. = AY88 Pt3 +
Carr. Res. x 1 + 3Yr Dev in PY’s & AY88 PY & AY88 Carr Res @12/94
METHOD 3 - COMPANYINCURRED LOSS DEVELOPMENT
AY 1989AY89 Ult. = AY89 Pd+Cs@108 x AY88 Proj Ult
AY88 Pd+Cs@108
AY 1990AY90 Ult. = AY90 Pd+Cs@96 x AY88, AY89 Proj Ult
AY88, AY89 Pd+Cs@96
AY 1997AY97 Ult. = AY97 Pd+Cs@12 x AY94, AY95, AY96 Proj Ult
AY94, AY95, AY96 Pd+Cs@12
METHOD 5 - INDUSTRYINCURRED LOSS DEVELOPMENT
Prior Years Required Reserves= PY Carr. Res. x Industry Tail Factor
AY 1988 Ultimate= AY88 Pt3 + AY88 Carr. Res. x Ind. Tail Factor
AY 1989 Ultimate= AY89 Pt3 x Industry 108-to-Ult. Paid LDF
AY 1997 Ultimate= AY97 Pt3 x Industry 12-to-Ult. Paid LDF
METHOD 6 - INDUSTRYINCURRED LOSS DEVELOPMENT
Prior Years Required Reserves= PY Carr. Res. x Industry Tail Factor
AY 1988 Ultimate= AY88 Pt3 + AY88 Carr. Res. x Ind. Tail Factor
AY 1989 Ultimate= AY89 Pt2 - Pt4 x Industry 108-to-Ult. Incurred LDF
AY 1997 Ultimate= AY97 Pt2 - Pt4 x Industry 12-to-Ult. Incurred LDF
FIXED LOSS RATIO OVERRIDE
Used If LDF > 4.0
AY 1997 Loss Ratio= AY97 Ind. LR x AY95 Co. Ult. LR + AY96 Co. Ult.
LR AY95 Ind. Ult. LR + AY96 Ind. Ult.
LR
AY 1997 Ultimate= AY97 Loss Ratio x 1997 Net Earned Premium
WEIGHTING OF METHODS
Early Years vs. Latest Years
Paid vs. Incurred Methods
Company Credibility Based on Variation in Loss
Development Pattern
CREDIBILITY
Sum the Coefficient of Variance over First Six Development Periods
Compare to Industry Levels
Minimum of 40% Credibility
DISCOUNTING
Calculated By Line of Business
Uses Company Payment Patterns, if Stable
Uses IRS Payment Pattern Calculation
Three Calendar Year Average
Uses a 5% Discount Rate
QUALITATIVE/ QUANTITATIVE REVIEW
QualitativeSchedule P Development PatternAvg. Premium Per Policy vs. AY Loss Ratio
Trends
QuantitativeModel ProjectionPaid to Incurred RatiosReserves to Earned Premium
DISCUSSIONS WITH MANAGEMENT
Actuarial Work Papers
Understand Distortions in Data
Reconcile Differences, if Possible
RATING IMPLICATIONS
Confidence in Reserve Practices
Feeds into Capital Adequacy
Impacts Appraisal of Profitability
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