1. Casualty Actuarial Society Loss Reserve Seminar
Closing the Books
Casualty Actuarial Society Loss Reserve Seminar
ALLAN R. NEIS, FCAS, MAAA
September 23-24, 2002

2. CASUALTY LOSS RESERVE SEMINAR September 23-24, 2002
“CLOSING THE BOOKS--
APPROACHES TO DETERMINE CARRIED RESERVES
Al Neis, Corporate Actuary-
Progressive Insurance Co.
Tom Moylan, Vice President & Actuary -
Liberty Mutual Ins. Co.
Joe Marker, Sr. Vice President & Chief Actuary
Marker Actuarial Services, LLC
Adam Hartman, Associate Actuary
USAA

3. CASUALTY LOSS RESERVE SEMINAR September 23-24, 2002
Month-End Process
Friday Night
Premium System Closes
Claim System Closes
Saturday Morning
Month-End Databases Start their update
Saturday Evening
Feeds to the General Ledger Begin
Sunday Afternoon
General Ledger Postings are Complete
Downstream Databases Start their Updates
Sunday Evening
Month-End Reports are Produced

4. CASUALTY LOSS RESERVE SEMINAR September 23-24, 2002
AFTER RESERVE BALANCES ARE POSTED, SOME QUESTIONS WE FACE!
IS THE FINAL BALANCE WHAT YOU EXPECTED?
WILL THE STATE OF OHIO THINK BALANCE IS NOT ENOUGH?
OUTSIDE AUDITORS WILL QUESTION THE ADEQUACY!
IRS THINKS THE BALANCE IS OVERSTATED (10%)
GENERAL MANAGERS - AMOUNT IS TOO HIGH!
WON’T GET A BONUS BECAUSE OF THE INFLATED RESERVES
CANNOT CHARGE COMPETITIVE RATES SINCE THE INCCURRED LOSSES ARE OVERSTATED
ANALYSTS - IS THE COMPANY MANAGING RESULTS?
HIDING PROFITS
INFLATING THE BOTTOM LINE

5. GATES OF HELL The Far Side
“OK, Sir, Would you like inferno or non-inferno?…
Ha! Just Kidding. It’s all inferno, of course—
I just get a kick out of saying that.”

6. Like your reserves increased Or do you just want them to go up?…
OK, Sir, Would you
Like your reserves increased
Or do you just want them to go up?…
Ha! I just like asking that .

7. CASUALTY LOSS RESERVE SEMINAR September 23-24, 2002
PROGRESSIVE
RESERVE BALANCES ARE SET PRIMARILY USING
AVERAGE RESERVES (CASE)
FACTORS APPLIED TO HISTORIC EARNED PREMIUM (IBNR)

8. CASUALTY LOSS RESERVE SEMINAR September 23-24, 2002
PROGRESSIVE
CASE RESERVES
AVERAGE RESERVES
VARY BY AGE OF CLAIM
DIFFER BY POLICY LIMIT GROUPS
ADJUSTED MONTHLY FOR EXPECTED INFLATION
ADJUSTER ESTIMATES ARE USED IF GREATER THAN THRESHHOLD
ADJUSTER ESTIMATES ARE INFLATED BY A FACTOR TO COVER CASE DEVELOPMENT IN LAYER ABOVE THRESHOLD (ANCR)
AVERAGE RESERVE ARE ADJUSTER MONTHLY FOR EXPECTED INFLATION

9. CASUALTY LOSS RESERVE SEMINAR September 23-24, 2002
PROGRESSIVE
IBNR
BOOKED TO GENERAL LEDGER FROM THE RESERVE DATABASE
DETERMINED AS % OF EARNED PREMIUM BY AGE
IBNR IS GENERALLY CALCULATED FOR UP TO FOUR YEARS
LAE IBNR IS SET AS A % OF LOSS IBNR

10. CASUALTY LOSS RESERVE SEMINAR September 23-24, 2002
PROGRESSIVE
AVERAGE RESERVES AND IBNR FACTORS MAY VERY BY A COMBINATION OF :
COMPANY
STATE
REGION
PRODUCT (AUTO, MOTORCYCLES, COMMERCIAL VEHICLE, ETC.
COVERAGE (BI, PD, ETC.
THE CASE TABLE IN THE CLAIM SYSTEM INCLUDES APPROXIMATELY 3,000 LINES
THE IBNR TABLE INCLUDES APPROXIMATELY 1500 LINES

11. CASUALTY LOSS RESERVE SEMINAR September 23-24, 2002
PROGRESSIVE
ALLOCATION OF RESERVE BALANCES TO PROFIT CENTERS
HAPPENS AS A RESULT OF ROLLING UP THE DETAIL
CASE RESERVES (AVERAGES) ARE AT THE CLAIMANT LEVEL
IBNR IS CALCULATED AT A PREMIUM SUMMARY LEVEL (CO., ST., PRODUCT, LINE COVERAGE)

12. CASUALTY LOSS RESERVE SEMINAR September 23-24, 2002
PROGRESSIVE RESERVE REVIEWS
CONDUCTED ON SEGMENTS THAT SUPPORT INCOME STATEMENT FOR GENERAL MANAGERS
LARGE ENOUGH SEGMENTS TO BE CREDIBLE, BUT SEGMENTED TO BE HOMOGENEOUS - THUS TO PROVIDE MORE ACCURACY OVERALL
A SEGMENT’S SCOPE ALLOWS PROCESS CHANGES (CLAIMS) WITHIN A REGION/STATE TO BE REFLECTED IN THE INDICATIONS

13. CASUALTY LOSS RESERVE SEMINAR September 23-24, 2002
PROGRESSIVE RESERVE REVIEWS (CONTINUED)
GENERATE
OVERAL NEEDS USING ACCIDENT PERIOD DATA
CASE RESERVE INDICATIONS USING RECORD PERIOD DATA
IBNR INDICATIONS USING ACCIDENT WITHIN RECORD PERIOD DATA
RECONCILE THE DIFFERENT INDICATIONS
MULTIPLE SEGMENT RESERVE REVIEWS ALLOW
INPUT TO PRICING ON OVERALL TRENDS
CHANGE IN RESERVES IMPACT ON INCOME STATEMENT ARE DRIVEN BY PROCESSES AND EXPERIENCE WITHIN PROFIT CENTER

14. CASUALTY LOSS RESERVE SEMINAR September 23-24, 2002
PROGRESSIVE
ACTUARIAL REPORT
COMPLETED AFTER YEAR END CLOSE
AT COMPANY LEVEL AND GENERALLY AT THE ANNUAL STATEMENT LINE OF BUSINESS
INCLUDES INDICATION OF NEEDED RESERVES NET OF REINSURANCE
ISSUES MAY ARISE WHEN MORE THAN ONE COMPANY IS WRITING IN A STATE WHICH IS THEIR PRIMARY STATE.

15. CASUALTY LOSS RESERVE SEMINAR September 23-24, 2002
PROGRESSIVE’S ADVANTAGE
PRIMARILY PRIVATE PASSENGER AUTO
CASE RESERVES MAKE UP 80-85% OF LOSS RESERVES
LAE RESERVES ARE APPROXIMATELY 15% OF TOTAL LIABLITY
POLICY LIMITS ARE LOW ENOUGH TO LIMIT DEVELOPMENT IN EXTREME TAIL
COMPARATIVELY HIGH FREQUENCY, LOW SEVERITY ALLOWS EASY ROLL UP TO VARIOUS PROFIT CENTER

16. CASUALTY LOSS RESERVE SEMINAR September 23-24, 2002
PROGRESSIVE
RESERVES ARE OPENLY DISCUSSED AT ALL LEVELS OF MANAGEMENT
REPORTED ON IN THE “ANNUAL REPORT”
“REPORT ON RESERVING PRACTICES” IS AVAILABLE ON WEBSITE “PROGRESSIVE.COM”
RESERVES ARE NOT SET BY MANAGEMENT, THEY ARE SET BY THE CORPORATE ACTUARY

17. Casualty Actuarial Society Loss Reserve Seminar
Closing the Books
Casualty Actuarial Society Loss Reserve Seminar
September 23-24, 2002

18. Overview I. History - Where were we?
Closing the Books - CLRS 2002
Multiple Companies/Lines
Overview
I. History - Where were we?
II. Objectives - Where do we want to be?
III . Process - How do we get there?
IV. Questions & Answers

19. History - Regional Agency Markets
Closing the Books - CLRS 2002
Multiple Companies/Lines
History - Regional Agency Markets
Between 1997 and 2002 Liberty created it’s Regional Agency Market (RAM) Strategic Business unit, primarily through acquisitions
RAM currently writes approximately $3 Billion in premium, through nine regional companies using independent agents as the sole distribution channel
The majority of the business is comprised of smaller commercial lines accounts and personal lines
The acquired companies varied in size, scope and sophistication.
Each followed different approaches to closing the books.

20. History - Some Approaches to Booking IBNR
Closing the Books - CLRS 2002
Multiple Companies/Lines
History - Some Approaches to Booking IBNR
“Put all the data in (commercial reserving package - name deleted) and book what comes out”
“Wait until we get the Actuarial Report and book the indicated”
“Book to our planned loss ratio, review annually”
Book long tail lines to a loss ratio, short tail lines to a factor off of earned premium
Build up current AY IBNR as a factor off earned premium, run-off prior year IBNR based on schedule, allowing prior year case activity better or worse than anticipated to run through income.

21. Objectives - Where do we want to be?
Closing the Books - CLRS 2002
Multiple Companies/Lines
Objectives - Where do we want to be?
Maintain reserve adequacy in aggregate
Allow for judgement, but don’t fool ourselves
Efficient - five day close
Provide operating entities monthly income statements with minimal distortions
Allocation of IBNR to very fine segments (state/product/legal entity etc.)
Consistency between direct and ceded IBNR

22. Process - How do we get there? Region/Summary Line
Closing the Books - CLRS 2002
Multiple Companies/Lines
Process - How do we get there?
Region/Summary Line
Current Accident Year - Long Tail lines (WC, CMP Liability, Umbrella, Commercial and Personal Auto Liability) - Book both direct and ceded to planned loss ratios (updated quarterly).
Prior Accident Years - Long Tail Lines - Reduce direct IBNR by case activity in primary layer plus scheduled amount in excess (ceded) layer. Reduce ceded IBNR by same scheduled amount.
Short tail lines (CMP Other, Homeowners, Other Property, Commercial and Personal Auto Physical Damage) - IBNR determined by factor off of trailing 12 months earned premium. Case activity allowed to flow through income statement.

23. Process - How do we get there? State/Product Line/Legal Entity
Closing the Books - CLRS 2002
Multiple Companies/Lines
Process - How do we get there?
State/Product Line/Legal Entity
Total IBNR by Region/Line is then allocated to finer levels of detail
Current Accident Year based on earned premium.
Prior Accident Years based on prior month ending case reserves

24. Process - How do we get there? Review Process
Closing the Books - CLRS 2002
Multiple Companies/Lines
Process - How do we get there?
Review Process
Quarterly Reserve reviews performed by RAM home office actuarial within six weeks of quarter close, peer reviewed by Liberty corporate. Standard lines, exhibits, methodologies. Specialized approaches where appropriate.
Company Actuaries have two weeks to recommend revised booking ratios for the current accident year.
RAM Actuary & CFO make final selections in time for close of 2nd month after end of quarter.

25. Current AY Review Exhibit
Closing the Books - CLRS 2002
Multiple Companies/Lines
Current AY Review Exhibit

26. Questions & Discussion

27. CLOSING THE BOOKS WITH PARTIAL INFORMATION
By Joseph Marker, FCAS, MAAA
CLRS, Arlington,VA, September 2002

28. Closing the Books with Partial information - CLRS 2002
Loss and LAE Reserves
The loss and loss expense reserve is the balance sheet item with the most uncertain value.
This reserve is studied in great detail at periodic intervals.
Often the books are closed with no reserve study done in time for the closing, such as
· At quarterly valuations, when reviews are not done every quarter,
· At quarterly valuations, if current reserve review cannot be done in time.
· At monthly intervals, if reviews are done every quarter.
From here on, assume that we are dealing with quarterly closings.

29. Closing the Books with Partial information - CLRS 2002
Information Available at Closing
At closing time, various levels of information may be available:
1. A full reserve review on data as of the current quarter, or
2. No reserve review, but actual loss development through the current quarter, e.g.:
Paid and outstanding loss and loss expense by accident year.
Paid and outstanding claim counts.
Earned premiums and earned exposures.
3. Payment information only.
We assume that information described in (2) is available.

30. Closing the Books with Partial information - CLRS 2002
Expected Loss Development: Exhibit 1
Company XYZ is closing its books as of 3/31/2001.
A full loss reserve review is available as of 12/31/2000.
XYZ uses Exhibit 1 to determine its expected development during the 1st quarter.
·Shows the “chain ladder” methods (paid and incurred) through 12/31/2000.
·Separates calendar period development into current year vs. future.
·Separates current calendar year development into current quarter vs future.
Requires a “selected” ultimate loss as of 12/31/2000 by accident year.

31. Closing the Books with Partial information - CLRS 2002
Loss development: Current quarter vs. Future
Additional development on each accident year equals
selected ultimate minus developed loss to date (12/31/2000)
The proportion developing in the next calendar year (2001) is given by:
[ LDF (to next age) – ] divided by [ LDF (to ultimate) – 1.0 ]
We need to know the proportion of the annual development expected in the 1st quarter.

32. Closing the Books with Partial information - CLRS 2002
Loss development: Current quarter vs. Future
We need to know the proportion of calendar year 2000 development expected to emerge in the 1st quarter.
This proportion is determined externally:
May be based on quarterly development studies.
For long-tail lines, the number may be close to 25%.
For short-tail lines, the number may be close to 100%.
Most difficult to assess for the immediate past accident year.

33. Closing the Books with Partial information - CLRS 2002
Exhibit 1 output
From the incurred (paid) development exhibit, we get:
Projection of IBNR (Paid) emergence during the current year.
Projection of IBNR (Paid) emergence during the current quarter.
Limitations of Exhibit 1:
Uses only the standard age-to-age LDF methods.
Does not estimate the loss amount for the current accident year.
Exhibit 1 is easily modified to handle Bornhuetter-Ferguson method.

34. Closing the Books with Partial information - CLRS 2002
Expected Claim Counts
Applying Exhibit 1 logic to claim counts rather than loss dollars, we get:
Projection of number of new claims in the current year and partial year.
Projection of number of claims paid in the current year and partial year.
Apply projected counts to estimated severity to project loss dollars.

35. Closing the Books with Partial information - CLRS 2002
Actual Development
Exhibit 2 brings in the actual paid and developed loss for the quarter.
Differences between actual and expected development lead to Recalculation of the ultimate loss
It is important that the exhibit show quantities meaningful to management.
Exhibit 2 uses expected quarterly development, actual development and expected future development.
It asks for the revised development expected after the current quarter.

36. Closing the Books with Partial information - CLRS 2002
Revising the Ultimate Loss: XYZ Company
How might we revise our estimate of ultimate loss?
Look at several methods for clues.
Exhibit 2 implies that payments are accelerating.
However, payments are greater than the corresponding reserve takedowns.
The temptation is to conclude that:
The revised expected future payments will be faster than previously thought
The revised expected future development will be upward

37. Closing the Books with Partial information - CLRS 2002
Revising the Ultimate Loss: XYZ Company
To validate the conclusion we may compare:
Development on reported claims versus reporting of new claims.
Expected versus actual claim counts.
It is important to separate case development vs “pure” IBNR. To do this,
Separate development between case and IBNR in the exhibits, or
Run the exhibits by report year rather than accident year.
Talk with Claims to gain insight into unexpected development.

38. Closing the Books with Partial information - CLRS 2002
Current Accident Year
We have not discussed setting reserves for the current accident year 2001.
To do this, use exhibits where projections are based on:
Bornhuetter-Ferguson methods rather than straight LDF methods
Pricing projections will most likely be the key information used.
Common methods for estimating the current accident year are
Fix the loss ratio based on pricing studies
Use the fixed loss ratio along with a projected payout pattern and adjust the loss ratio for the difference between actual and expected payments.
Use frequency-severity methods and track claim count reporting.

39. Closing the Books with Partial information - CLRS 2002
Summary
When closing the books without a current reserve evaluation, Use the actual development to date to modify previous reserve estimates.
Deal with quantities that make sense to management, such as
Actual versus expected development.
Keep the explanatory exhibits simple and few.
Use the exhibits to enlist help from other departments in explaining variances.

42. Casualty Actuarial Society Loss Reserve Seminar
Closing the Books
Casualty Actuarial Society Loss Reserve Seminar
Adam D. Hartman, ACAS
September 23-24, 2002

43. Closing the Books – CLRS 2002 USAA
Outline
What is USAA?
USAA’s short-tailed book of business
USAA’s reserving philosophy
Evolution of financial reporting process
Mechanics of current reserving process
Concluding remarks

44. Closing the Books – CLRS 2002 USAA
USAA Background
United Services Automobile Association
1922: Reciprocal, founded by a group of 25 Army officers in San Antonio, TX.
2002: Property & Casualty, Life, Federal Savings Bank, Investment Management
Seeking to “become the provider of choice for the military community”

45. Closing the Books – CLRS 2002 USAA
USAA Recent Accolades
2001: American Banker rates USAA #1 financial services company
2002: J.D. Power & Associates Chairman’s Award
2001: Fortune 500 (215th in U.S.)
2001: Worth Readers’ Choice Survey rates USAA #1 life, auto, and home insurance
2002: Ward 50 benchmark company for both USAA P&C and USAA Life

46. Closing the Books – CLRS 2002 USAA
USAA P&C Vital Statistics – at 12/31/2001
7th largest writer of Private Passenger Auto with $4.5 billion in direct written premium
5th largest writer of Homeowners/Renters with $1.4 billion in direct written premium
A.M. Best  Superior (A++)
Moody’s  Exceptional (Aaa)
Standard & Poor’s  Extremely Strong (AAA)

47. Closing the Books – CLRS 2002 USAA
Estimated Ultimate Losses as of 6/30/02
(Excludes Catastrophes and Flood)

48. Distribution of Losses as of 12/31/2001
Closing the Books – CLRS 2002 USAA
Distribution of Losses as of 12/31/2001
Total Paid Losses
Total Loss Reserves
Note: x-cats, LTD, Flood, Gross of Sal/Sub

49. USAA P&C Loss Reserving Mission Statement
Closing the Books – CLRS 2002 USAA
USAA P&C Loss Reserving Mission Statement
Establish required liabilities for accurate statutory and GAAP financial reporting and provide timely and pertinent internal loss and loss adjustment expense information to enable prudent management decision-making.

50. Closing the Books – CLRS 2002 USAA
Loss Reserving Philosophy
Establish accident year ultimate losses & LAE as accurately as possible, balancing these constraints:
Data availability/legacy systems
Inherent volatility of experience
Analysis time
Consistency of message from one valuation to the next
Communicate trend changes and variances of Actual from Plan concisely, in terms of fundamental cost drivers (in non-actuarial terms)

51. Closing the Books – CLRS 2002 USAA
Management desires for financial reporting
The right answer, right now, in English
Little change in prior accident year estimates
Fast, frequent, & consistent financial closing
Explanations tailored to the “lay” audience
No surprises
Nominal variances to Plan
Knowledge/control of the CYTD incurred for the upcoming financial statement

52. Closing the Books – CLRS 2002 USAA
Recording Monthly Losses – Options
Option #1: Incurred Losses
- Paid Losses
- Case Reserves
= IBNR
Management sets Incurred Losses and “solves” for IBNR.
Option #2: IBNR
+ Paid Losses
+ Case Reserves
= Incurred Losses
Management sets IBNR and “solves” for Incurred Losses.
Option Selected

53. Speeding up the financial reporting process
Closing the Books – CLRS 2002 USAA
Speeding up the financial reporting process
Valuation
Dates
Financial Statement
Revision of ultimates
Freq
Deadline
Mar 97 <
Qtr
workday +15
workday +7
Jun,Sep 97
calendar day +10
workday +2
Oct97-Sep01
Month
workday +4/5
> Oct 01
workday +4

54. Closing the Books – CLRS 2002 USAA
The Closing Process as of September, 2002
Monthly financial statements
In full detail, every month
Close the books by working day +4
Pre-approval of the calendar period incurred
Estimates of ultimate approved prior to month-end
IBNR “falls out” of month-end processing, but…
IBNR not allowed to be negative for a “cell”
IBNR “gaps” diagnosed and “filled in” on day +1

55. Reserving process at September, 2002
Closing the Books – CLRS 2002 USAA
Reserving process at September, 2002
Non-Cat Auto
Material Damage
Non-Cat
All Other
Catastrophes
Organization of loss data
20 AQ’s
@2,5,8,11,12
15 AY’s
@3,6,9,12
Cat within AY
@ daily
Analysis Lag
1-3 months, varies by month
Days to 1 month, varies by cat

56. Closing the Books – CLRS 2002 USAA
Preventing “negative IBNR”
On working day +1 after mm/dd/yyyy, for a particular analysis cell:
IBNR(cell) = MAX(0, Est Ult–Paid–Case Res),
Where
Est Ult is based upon detailed analysis of data 1 to 3 months old (or the Plan)
Paid, Case Reserves are as of mm/dd/yyyy

57. Closing the Books – CLRS 2002 USAA
Guidelines for “filling in” IBNR “gaps”
In addition to preventing negative IBNR.
In general, IBNR reserves should be increasing from the oldest accident year to the most recent full accident year.
On months between quarterly analyses, IBNR reserves for a cell can be adjusted upward or downward, using an exponential fit across AYs.
IBNR reserves will be trued-up during standard quarterly analysis.

58. Closing the Books – CLRS 2002 USAA
Special characteristics allowing IBNR curve fit
Monotonically increasing volume of business.
Consistency in book of business resulting from very low cancellation rate. (Little turnover.)
Comparatively stable pure premium trends from accident year to the next for personal lines.

59. Closing the Books – CLRS 2002 USAA
Judgmental considerations
Materiality of the indicated change.
Changes in underwriting.
Variations in growth (some cells may actually have decreasing volume over time).
Changes in Claims practices.
Distorting impact of individual large claims.

60. Closing the Books – CLRS 2002 USAA
Concluding remarks
Pressure to close books more often, more quickly, and more accurately will only increase as technology, management, regulation, and P&C insurance market players evolve.
Reserving actuaries must guard against “over-analysis”, yet make quick adjustments that anticipate results of upcoming analysis while still maintaining actuarial standards of practice.