1. CATASTROPHE RESERVING Reserving Actuary / Claims Partnership
CATASTROPHE RESERVING Reserving Actuary / Claims Partnership
A Personal Lines Perspective
Adam D. Hartman, ACAS
September, 2000
Casualty Loss Reserve Seminar

2. What I’m Going to Tell You
Reserving Actuary/Claims relationship
Why cat reserving is important
Why vendor cat models are an incomplete starting point for reserving
Benefits of geocoding
Personal Lines Issues
Modeling issues & example
September, 2000
Casualty Loss Reserve Seminar

3. Cat Cost Estimation Who Makes The Call?
See Appendix A for more detailed slide
Cat Cost Estimation Who Makes The Call?
1. Claims OR
2. Reserving Actuary OR
3. Claims - smaller events, Reserving Actuary - “material” events. OR
4. Cat costs are not segregated from non-cat
September, 2000
Casualty Loss Reserve Seminar

4. Casualty Loss Reserve Seminar
Why is this important?
No matter who makes the call, all catastrophe costs hit the financial statements
Emphasis upon monthly GAAP financial reporting
If large portion of book is property -->> cat experience segregated from non-cat
History shows room for improvement
September, 2000
Casualty Loss Reserve Seminar

5. Why Vendor Models are an Incomplete Starting Point
See Appendix A for more detailed slides
Why Vendor Models are an Incomplete Starting Point
Most common/costly cat peril: hailstorms
(see next two slides)
Ignores actual claims data.
Little refinement of estimate over time
Monthly financial statements
Model output of little use to Claims catastrophe management
September, 2000
Casualty Loss Reserve Seminar

6. Casualty Loss Reserve Seminar
September, 2000
Casualty Loss Reserve Seminar

7. Casualty Loss Reserve Seminar
September, 2000
Casualty Loss Reserve Seminar

8. Why should the Reserving Actuary work with Claims?
Consistency of methodology
Cross-pollination of perspectives
Actuary familiarizes himself with operational and “outside” issues driving loss and LAE
Claims sees the financial implications
BOTH perspectives are crucial to the construction of a robust and flexible model to use company data to estimate cat loss and LAE
September, 2000
Casualty Loss Reserve Seminar

9. Casualty Loss Reserve Seminar
Benefits of Geocoding
Can “overlay” policies in force, claims, and damage maps
More accurate knowledge and estimation of claim counts by “relative severity” and geographic location.
Proper staffing of adjusters: number, skill sets, geographic locations
September, 2000
Casualty Loss Reserve Seminar

10. Casualty Loss Reserve Seminar
September, 2000
Casualty Loss Reserve Seminar

11. Casualty Loss Reserve Seminar
See Appendix A for more detailed slides
Personal Lines Issues
High claim volume and more late reporting
Efficient assignment of adjusters (#, where)
ACV payment / RCC hold-back issues
House cladding, roof types
Remote cat site “command centers”
“Write your own” flood coverage
September, 2000
Casualty Loss Reserve Seminar

12. Casualty Loss Reserve Seminar
See Appendix A for more detailed slides
Modeling issues
Available data detail
Data quality - U/W and Claims
External Factors
Include “x” in the model or not? - striking the balance
September, 2000
Casualty Loss Reserve Seminar

13. Casualty Loss Reserve Seminar
See Appendix B
“case” = set by an adjuster, NOT a “formula average”
Modeling Example
Estimate ultimate reported claims & ultimate paid claims
Estimate ultimate cost of
pending claims without case reserves
pending with case reserves, without payment
pending with case reserves, with payment
IBNR claims
September, 2000
Casualty Loss Reserve Seminar

14. Casualty Loss Reserve Seminar
See Appendix B
Modeling Example
#Reported = #CWP + #CWOP + #PWP #PWOP w/ and w/o Case Rsv
Estimate # pending claims that will close with pay
IBNR claims
Early: geocoded input, frequency assumptions
Later: claim reporting curves applied to actuals
Longer tail on reporting smaller claims
September, 2000
Casualty Loss Reserve Seminar

15. Casualty Loss Reserve Seminar
September, 2000
Casualty Loss Reserve Seminar

16. Casualty Loss Reserve Seminar
See Appendix B
Modeling Example
Segregate claims data by relative severity grouping (light,…, total loss)
Relate severity to amount of insurance
Adjust case reserves in aggregate for demand surge inflation
deductibles, payments leverage impact on net reserve
Impact of not pursuing replacement cost
September, 2000
Casualty Loss Reserve Seminar

17. Casualty Loss Reserve Seminar
See Appendix B
Modeling Example
Severity for Narrow IBNR and pending w/o case reserve severity
Early: default % of AOI (by peril, relative sev.)
Later: % of AOI for closed & pending w/case.
LAE
% of indemnity
forecasted independent adjuster staffing and company adjuster staffing times per diem
September, 2000
Casualty Loss Reserve Seminar

18. Casualty Loss Reserve Seminar
What I told you
Reserving Actuary and Claims have much to learn/gain from each other
Cat reserve estimation impacts monthly financial statements
Vendor models need to be supplemented with company claims information
Modeling - flexibility, model what’s most important, make most of data you have
September, 2000
Casualty Loss Reserve Seminar

19. Casualty Loss Reserve Seminar
Appendix A
September, 2000
Casualty Loss Reserve Seminar

20. Cat Cost Estimation Who Makes The Call?
1. Claims is responsible for estimating costs for all catastrophes OR
2. Reserving Actuary is responsible for estimating costs for all catastrophes OR
3. Claims is responsible for estimating costs for smaller events, while Reserving Actuary estimates costs for “material” events. OR
4. Cat costs are not segregated from non-cat
September, 2000
Casualty Loss Reserve Seminar

21. Why Vendor Models are an Incomplete Starting Point
Most vendor models don’t model the most common/costly cat peril: hailstorms
Vendor models use company’s policy in- force data, but ignore actual claims data as it comes in.
There is little refinement of estimate over the time, because there is little (if any) additional input after the event.
September, 2000
Casualty Loss Reserve Seminar

22. Why Vendor Models are an Incomplete Starting Point
Wind/hail catastrophe events far outnumber hurricanes and earthquakes, and in many years cost more in the aggregate
Though most wind/hail events occur before June 30 and are mostly settled before year end, the reserve estimates can greatly impact monthly financial statements
Vendor model output of little use to Claims
September, 2000
Casualty Loss Reserve Seminar

23. Claim Reporting Issues
Evacuated insureds may not be able to return to property
Power/phone outages
Hail damage: “neighboritis”
Cats in northern states: construction season restricted by winter -> delayed neighboritis
September, 2000
Casualty Loss Reserve Seminar

24. Claim Reporting Issues
Latent damage
more prevalent for EQ peril
may drive significant reopen activity
Closes without payment
claims still have to be worked
drives additional LAE
increased time to close other claims
Statute of limitations
September, 2000
Casualty Loss Reserve Seminar

25. Assignment of Adjusters
Factors that drive decision of how many, which adjusters to hire/send to cat site(s)
Claim volume
Severity
Geographic concentration
Roof pitch
Cat Peril
September, 2000
Casualty Loss Reserve Seminar

26. Assignment of Adjusters
Decision usually has to be made quickly
Quality of available independent adjusters decreases quickly as time passes after event
Opportunity for reserving actuary to add value to operational cat management process
Accurate estimation of claim counts (by location) leads to proper staffing and establishment of cat sites
September, 2000
Casualty Loss Reserve Seminar

27. Assignment of Adjusters
Geocoded data can be used to efficiently assign workload to individual adjusters within an area
less drive time
more productivity
less LAE
September, 2000
Casualty Loss Reserve Seminar

28. Resiliency of Roofs and Cladding varies by Peril
Brick is a good thing… unless the peril is EQ
Aluminum siding is very vulnerable to hail damage
Is it manufactured any more?
How many sides do you re-wrap?
September, 2000
Casualty Loss Reserve Seminar

29. Resiliency of Roofs and Cladding varies by Peril
Steeply-pitched, complicated roofs take longer to adjust
harnesses and other equipment required
lower productivity of adjusters ---> more LAE
slower more expensive repairs ---> hi severity
longer of “tail” of claim reporting
September, 2000
Casualty Loss Reserve Seminar

30. Casualty Loss Reserve Seminar
Other issues
Amounts of Insurance
Deductibles
Lines of business, policy forms, coverages
“Demand surge” inflation
Rebuild to code?
Reinsurance recoveries
State assessments
September, 2000
Casualty Loss Reserve Seminar

31. Casualty Loss Reserve Seminar
How good is your data?
Underwriting data - how current is it?
Claims data
How is “relative severity” determined initially?
How experienced are your claim handlers?
Is the catastrophe code being assigned properly as claims are reported?
How detailed is it?
September, 2000
Casualty Loss Reserve Seminar

32. Casualty Loss Reserve Seminar
Include in model or not?
Balance must be struck between level of detail modeled and credibility, simplicity
Material factors not explicitly modeled must be handled by post-model adjustments
September, 2000
Casualty Loss Reserve Seminar

33. Cat Model - Fictitious Example
Appendix B
Cat Model - Fictitious Example
September, 2000
Casualty Loss Reserve Seminar