Industry Reserve Adequacy Kevin Wick FCAS MAAA Casualty

Industry Reserve Adequacy Kevin Wick, FCAS, MAAA Casualty Loss Reserve Seminar September 10 -11, 2001 Pw. C

Approach to Evaluation • “An indicated loss reserve for a given accounting date likely will change from one valuation to another. ” – CAS Reserving Principles • Runoff statistics – Schedule P - Parts 2 and 3 – Over 2, 500 Companies • Focus on distribution of individual company results – Overall industry reserves not evaluated Pricewaterhouse. Coopers

Example of Calculation Pricewaterhouse. Coopers

1991 Booked Reserves - 1 Year Hindsight (1992) All Lines Excludes companies with initial booked reserves less than $1 million Statistics Median -1% % Favorable 57% Within +/- 5% 48% Within +/- 10% 69% Within +/- 25% 92% Pricewaterhouse. Coopers

1991 Booked Reserves - 2 Year Hindsight (1993) All Lines Excludes companies with initial booked reserves less than $1 million Statistics Median -2% % Favorable 58% Within +/- 5% 31% Within +/- 10% 55% Within +/- 25% 85% Pricewaterhouse. Coopers

1991 Booked Reserves - 3 Year Hindsight (1994) All Lines Excludes companies with initial booked reserves less than $1 million Statistics Median -3% % Favorable 60% Within +/- 5% 27% Within +/- 10% 45% Within +/- 25% 79% Pricewaterhouse. Coopers

1991 Booked Reserves - 4 Year Hindsight (1995) All Lines Excludes companies with initial booked reserves less than $1 million Statistics Median -4% % Favorable 59% Within +/- 5% 24% Within +/- 10% 40% Within +/- 25% 74% Pricewaterhouse. Coopers

1991 Booked Reserves - 5 Year Hindsight (1996) All Lines Excludes companies with initial booked reserves less than $1 million Statistics Median -3% % Favorable 59% Within +/- 5% 20% Within +/- 10% 34% Within +/- 25% 71% Pricewaterhouse. Coopers

1991 Booked Reserves - 6 Year Hindsight (1997) All Lines Excludes companies with initial booked reserves less than $1 million Statistics Median -3% % Favorable 59% Within +/- 5% 19% Within +/- 10% 33% Within +/- 25% 68% Pricewaterhouse. Coopers

1991 Booked Reserves - 7 Year Hindsight (1998) All Lines Excludes companies with initial booked reserves less than $1 million Statistics Median -3% % Favorable 58% Within +/- 5% 19% Within +/- 10% 31% Within +/- 25% 66% Pricewaterhouse. Coopers

1991 Booked Reserves - 8 Year Hindsight (1999) All Lines Excludes companies with initial booked reserves less than $1 million Statistics Median -4% % Favorable 58% Within +/- 5% 18% Within +/- 10% 30% Within +/- 25% 65% Pricewaterhouse. Coopers

1991 Booked Reserves - 9 Year Hindsight (2000) All Lines Excludes companies with initial booked reserves less than $1 million Statistics Median -4% % Favorable 59% Within +/- 5% 17% Within +/- 10% 31% Within +/- 25% 65% Pricewaterhouse. Coopers

Median - 50% developed below and 50% developed above these levels All Lines Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Percentage that experienced favorable development All Lines Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 5% All Lines Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 10% All Lines Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 25% All Lines Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Other Areas Explored • All Lines – by size of reserve • Private Passenger Auto (Part 2 B & 3 B) • Workers’ Compensation (Part 2 D & 3 D) • Commercial Multi-Peril (Part 2 E & 3 E) • Medical Malpractice - Claims Made (Part 2 F & 3 F) • Other Liability - Occurrence (Part 2 H & 3 H) Pricewaterhouse. Coopers

1995 Booked Reserves - 5 Year Hindsight (2000) All Lines Companies with initial booked reserves greater than $500 million Statistics Median -10% % Favorable 80% Within +/- 5% 30% Within +/- 10% 45% Within +/- 25% 90% Pricewaterhouse. Coopers

1995 Booked Reserves - 5 Year Hindsight (2000) All Lines Companies with initial booked reserves between $50 million and $500 million Statistics Median -11% % Favorable 77% Within +/- 5% 21% Within +/- 10% 36% Within +/- 25% 72% Pricewaterhouse. Coopers

1995 Booked Reserves - 5 Year Hindsight (2000) All Lines Companies with initial booked reserves between $10 million and $50 million Statistics Median -11% % Favorable 73% Within +/- 5% 17% Within +/- 10% 33% Within +/- 25% 70% Pricewaterhouse. Coopers

1995 Booked Reserves - 5 Year Hindsight (2000) All Lines Companies with initial booked reserves between $1 million and $10 million Statistics Median -14% % Favorable 71% Within +/- 5% 10% Within +/- 10% 20% Within +/- 25% 49% Pricewaterhouse. Coopers

1995 Booked Reserves - 5 Year Hindsight (2000) All Lines Companies with initial booked reserves less than $1 million Statistics Median -23% % Favorable 72% Within +/- 5% 12% Within +/- 10% 17% Within +/- 25% 37% Pricewaterhouse. Coopers

50% of the booked reserves developed above these levels, + or -, after 5 years Pricewaterhouse. Coopers

1991 Booked Reserves - 1 Year Hindsight (1992) Medical Malpractice - Claims Made Excludes companies with initial booked reserves less than $1 million Statistics Median -10% % Favorable 77% Within +/- 5% 17% Within +/- 10% 37% Within +/- 25% 80% Pricewaterhouse. Coopers

1991 Booked Reserves - 2 Year Hindsight (1993) Medical Malpractice - Claims Made Excludes companies with initial booked reserves less than $1 million Statistics Median -20% % Favorable 82% Within +/- 5% 10% Within +/- 10% 25% Within +/- 25% 55% Pricewaterhouse. Coopers

1991 Booked Reserves - 3 Year Hindsight (1994) Medical Malpractice - Claims Made Excludes companies with initial booked reserves less than $1 million Statistics Median -28% % Favorable 88% Within +/- 5% 7% Within +/- 10% Within +/- 25% 35% Pricewaterhouse. Coopers

1991 Booked Reserves - 4 Year Hindsight (1995) Medical Malpractice - Claims Made Excludes companies with initial booked reserves less than $1 million Statistics Median -30% % Favorable 82% Within +/- 5% 7% Within +/- 10% 14% Within +/- 25% 36% Pricewaterhouse. Coopers

1991 Booked Reserves - 5 Year Hindsight (1996) Medical Malpractice - Claims Made Excludes companies with initial booked reserves less than $1 million Statistics Median -36% % Favorable 85% Within +/- 5% 11% Within +/- 10% 17% Within +/- 25% 32% Pricewaterhouse. Coopers

1991 Booked Reserves - 6 Year Hindsight (1997) Medical Malpractice - Claims Made Excludes companies with initial booked reserves less than $1 million Statistics Median -39% % Favorable 88% Within +/- 5% 8% Within +/- 10% 19% Within +/- 25% 34% Pricewaterhouse. Coopers

1991 Booked Reserves - 7 Year Hindsight (1998) Medical Malpractice - Claims Made Excludes companies with initial booked reserves less than $1 million Statistics Median -41% % Favorable 87% Within +/- 5% 9% Within +/- 10% 17% Within +/- 25% 32% Pricewaterhouse. Coopers

1991 Booked Reserves - 8 Year Hindsight (1999) Medical Malpractice - Claims Made Excludes companies with initial booked reserves less than $1 million Statistics Median -43% % Favorable 87% Within +/- 5% 6% Within +/- 10% 14% Within +/- 25% 32% Pricewaterhouse. Coopers

1991 Booked Reserves - 9 Year Hindsight (2000) Medical Malpractice - Claims Made Excludes companies with initial booked reserves less than $1 million Statistics Median -43% % Favorable 87% Within +/- 5% 12% Within +/- 10% 17% Within +/- 25% 34% Pricewaterhouse. Coopers

Percentage of companies that experienced favorable development after one year Pricewaterhouse. Coopers

Percentage of companies that experienced favorable development after one year Pricewaterhouse. Coopers

Median percentage change after one year Pricewaterhouse. Coopers

Median percentage change after one year Pricewaterhouse. Coopers

Implications for Reserve Adequacy • Two statistics measured trend in reserve adequacy – % Favorable – Median • Both suggested decrease in reserve adequacy in recent years • “Are reserves becoming less adequate or more accurate? ” Pricewaterhouse. Coopers

Median - 50% developed below and 50% developed above these levels Private Passenger Auto Liability Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Median - 50% developed below and 50% developed above these levels Workers’ Compensation Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Median - 50% developed below and 50% developed above these levels Commercial Multiple Peril Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Median - 50% developed below and 50% developed above these levels Medical Malpractice - Claims Made Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Median - 50% developed below and 50% developed above these levels Other Liability - Occurrence Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Percentage that experienced favorable development Private Passenger Auto Liability Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Percentage that experienced favorable development Workers’ Compensation Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Percentage that experienced favorable development Commercial Multiple Peril Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Percentage that experienced favorable development Medical Malpractice - Claims Made Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Percentage that experienced favorable development Other Liability - Occurrence Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 5% Private Passenger Auto Liability Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 5% Workers’ Compensation Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 5% Commercial Multiple Peril Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 5% Medical Malpractice - Claims Made Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 5% Other Liability - Occurrence Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 10% Private Passenger Auto Liability Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 10% Workers’ Compensation Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 10% Commercial Multiple Peril Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 10% Medical Malpractice - Claims Made Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 10% Other Liability - Occurrence Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 25% Private Passenger Auto Liability Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 25% Workers’ Compensation Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 25% Commercial Multiple Peril Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 25% Medical Malpractice - Claims Made Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers

Within +/- 25% Other Liability - Occurrence Excludes companies with initial booked reserves less than $1 million Pricewaterhouse. Coopers