Insurance and Reinsurance Runoff James B Insurance and Reinsurance Runoff James B. Kahn, FCAS, MAAA CAS Annual Meeting Session #C16 November 14, 2007 Chicago, Illinois

Anecdotal Evidence Many of the conclusions reached are as a result of surveys and discussions as well as anecdotal information The opinions expressed here are my own and not necessarily those of Watson Wyatt Worldwide All numerical amounts shown are illustrious and should not be considered as usable information for any other purpose

Why is this the case? Not always easy to track information through Annual Statements Some companies file Annual Statements, though after 10 Years of runoff, all information is contained in the ‘Prior Years’ Line of Schedule P Sometimes, the history of the Acquired entity is integrated into the Annual Statement of the buying entity Distortions from Increased usage of commutations or changes to historical pooling percentages

Important Quotations “Those who cannot remember the past are condemned to repeat it. ” - George Santayana (1906)

Important Quotations “Actuaries who remember the past too often, may misstate ultimate loss estimates for a runoff company. ” - Jim Kahn (2007)

What Might Be Changing? Average Payments or Reserve Philosophies Reinsurance issues Loss Reporting Issues Commutations/Settlements Underwriting Standards Staffing and Operational Issues

Average Payments or Reserve Philosophies Review of Average Closed Claim severity and impact on traditional reserving methodologies Closure Rates/Settlements Trusting new case reserves? Impact to the reinsurers

Reinsurance Issues Faster or slower reporting after a runoff? Settlements could lower ultimate loss amounts below retentions Commutations Historical net triangle development patterns

Loss Reporting Issues Buying a reinsurance company going into runoff – in a worst case scenario, an increase in loss reporting Not the same long lasting relationship with brokers or cedents and motivation to increase communication may disappear without the ongoing relationships

Underwriting Standards Companies may increase volume the last couple years before runoff in an effort to ‘stay ahead of the losses’ by loosening underwriting standards Be conscious of changes in ultimate loss ratios when utilizing the BF methods

Staffing and Operational Issues What incentives are in place to keep staff when needed? As number of claims dwindle, will staff reductions follow as well? Legacy systems in place are sometime extremely old

A Specific Example 2002 Reserve Call Paper – “Reserving for Runoff Operations - A Real Life Claims Specific Methodology for Reserving a Workers Compensation Runoff Entity” Looked at specific paid patterns of individual claims that remained open rather than traditional actuarial methodologies involving triangles and LDFs Some issues not unique to runoff operations, but become more pronounced as the number of open claims dwindles

Particulars of this example Workers Compensation claims only Really no true IBNR claims Payment over many years allows time for making adjustments Benefits set by statute

Internal Factors Medical benefits Indemnity benefits Allocated Loss Adjustment Expenses Injury type classifications such as PT, PP, etc. Handling of Claims/Settlements includes incentives for settlement under new parent Implicit or Explicit Discounting of Case Reserves

External Factors Tort Reform Includes Medical in Settlement for the first time One time push for reclassification of Injury Type two years after TT benefits expired resulted in more ALAE fees Reinsurance Agreements – Commutations, Insolvencies, Change in Retention Limits and ALAE handling Outside Recoveries (2nd Injury Funds, etc.)

Methodology Particulars Lifetime reserves can be estimated relatively easily with mortality table assumptions Shift in open claimants may eventually go more towards those who have suffered PT injuries and/or will not agree to settlements – will there be a change in philosophy going forward? Definitions of Closed Claims Discounting Reserving to Ultimate or other (settlement value) Differences up to or beyond retentions (subrogation, etc.)

Claims Specific Model Development of IBNR Indemnity ALAE Medical Miscellaneous adjustments (reopens, subro, etc.) – can be seen outside the model Likely to settle claims Unlikely to settle (maximum exposure) - essentially applies a selected monthly amount by the number of remaining months from a mortality table (plus ‘adjustments’); no pdf(x) distribution around life expectancy. Reinsurance and Other Recoveries - easier to track all recoveries including Second Injury Funds by looking at individual claims. ALAE cession for each claimant – pro rata, same as loss, or not at all. Commuted or insolvent carriers? Claims open for recovery only

Indemnity Reserve In its simplest form, should be remaining months of lifetime times an amount determined by statute Consider the impact of state specific cost of living adjustments

ALAE Reserve Will need to know how ALAE treated in cessions as could depend on whether losses pierce the retentions Decrease in ALAE as a percentage of loss over the course of time is counter to common thought as claims begin to mature (Reverse Salzmann)

Medical Reserve Looked at historical CY payment by AY of remaining body of claims not already at maximum reinsurance retention Adjust claims for escalation of medical costs. Should also be aware of impact of healing and repetitive treatment costs as opposed to initial surgeries and intensive early treatments.

Average Calendar Year Payments from Accident Date for Open Claims Not Including Claims at Maximum Reinsurance Retention 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Years Since Accident Date Average Yearly Payment Amount

Other Items Duration for Economic Value of Company “Rule of thumb” that duration should decrease over time may not hold up in the short term for WC because of change in payment patterns after year 4 Claims specific calendar year payment projections can be applied to duration calculations for economic schedules

Other Items ULAE Reserves Differing philosophies as to whether ULAE costs should increase or decrease following runoff (decreasing staff vs. providing stay bonuses or considering ‘all costs’ as ULAE) Adjustments to accepted methodologies may be necessary to consider particulars of runoff or Company philosophy Different company philosophies of handling claims based on size may warrant different ULAE calculations based upon size of claim All ULAE methods using Industry statistics could have distortions based on inconsistencies of ULAE definitions among entities