Using Claim Department Work Measurement Systems to Determine Claim Adjustment Expense Reserves 1999 Casualty Loss Reserve Seminar Joanne S. Spalla, FCAS, MAA

2 Popular ULAE Methods  Paid-to-Paid Methods  Methods Based on Claim Reporting and Closing Patterns (The Johnson Method)  Transaction-Based Methods

3 Definition of LAE Defense & Cost Containment (DCC)  Fees or salaries for  appraisers  private investigators  hearing representatives  reinspectors  fraud investigators  rehabilitation nurses,

4 Definition of LAE Defense & 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.

5 Definition of LAE Adjusting & 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.

6 Steps in Performing a Claim Department 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: Monthly Intake Cost: Workers Compensation Lost Time Claims

8 Step 1: Durations by Claim Position Number of Hours Inside Claim Representative Outside Claim Representative74.22 Clerical Supervisor Claim Processor Total825.75

9 Step 2: Determine Raw Costs (1)Number of Hours (2)Hourly Cost29.95$ (3)Total Recorded Cost = (1)/(2)11,607 Inside Claim Representative

10 Example: Inside Claim Representative Salary & Benefits20,827 Auto- Travel- Other7,021 Total Expenses27,848 Expenses ($000)

11 Example: Inside Claim Representative Number of Staff513 # Hours per Week36.25 # Weeks50 Available Hours929,813

12 Example: Inside Claim Representative Total Expenses27,848 Available Hours929,813 Average Hourly Cost29.95$

13 Step 3: Load Standards for Unrecorded Time (1)Total Recorded Cost11,607 (2)Percent of Total Time Recorded at Claim Level66.6% (3)Total Costs Grossed Up for Unrecorded Time = (1) / (2)17,428 Inside Claim Representative

14 Step 4: Average Intake Cost per Claim Total Costs Grossed Up for Unrecorded Time Inside Claim Representative17,428 Outside Claim Representative4,683 Clerical10,153 Supervisor6,325 Claim Processor4,229 Total42,818 Number of Intake Claims585 Average Intake Cost per Claim$73.19

15 Average Intake Cost (1)(2)(1) / (2) Total CostsAverage Grossed Up forNumberCost per UnrecordedofIntake TimeClaimsClaim Office #142, $ Office #239, $ Office #334, $ Office #486, $ Office #570, $ Total273,5052, $

16 Steps 5 & 6: Load Standards for Overhead Intake Claim Study Costs Excl. Field Overhead$ Field Office Overhead1.555 Standards Including Field Overhead$ Home Office Overhead1.383 Fully Loaded Standards$222.42

17 WC Lost Time Monthly Standards Including Overhead Intake$ Outstanding Days$ Outstanding 90 Days - 60 Mos.$49.80 Outstanding > 60 Months$17.00

18 Practical Considerations u Scope u Duration u Credibility u Adjusting the Data for Anomalies u Participants in the Study

19 Practical Considerations u Changes in Claim Department Work Flow u Workers’ Compensation Claims Greater Than 60 Months Old u Final Validation u Adjusting for Inflation and Trend

20 Validation of Standards StandardIndicated # ClaimsCostCosts WCIntake500$ ,208 O/S5,000$ ,291 AutoIntake1,000$ ,000 O/S4,000$ ,000 Total Indicated Costs644,499

21 Validation of Standards Indicated Costs644,499 Actual Cost613,809 Adjustment Factor1.05

22 Calculating 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

23 Other Applications u Allocation of Claim Adjuster Expense u Allocation of Adjusting and Other Expense Payments in Schedule P u Pricing Claim Service u Claim Department Expense Planning, Monitoring and Control