Unlocking the Secrets of Your Actuarial Report 10

Unlocking the Secrets of Your Actuarial Report 10 Things Your Actuary May Not Have Told You November 20, 2019 Cheryl White, FCAS, MAAA Chris Woodruff, Director of Business Development

Who Needs An Actuarial Report? • Entities that are exposed to risk and choose to retain some portion of that risk instead of buying full coverage from an insurance company. • State, city and county governments; school districts; airports; hospitals; hotels; manufacturers; retail stores; restaurants… 1

Why Do Entities Retain Risk? • They want to save money. • They want to actively manage their claims. • They want to encourage safety in their organization. • They want to cover an unusual exposure. 2

Why Do Entities Need An Actuary? • Liability is created when an entity assumes risk. • Accounting standards require liability to be recorded on the entity’s balance sheet. • The exact amount of liability is uncertain. • Entities also need to know how much to budget for future losses. • Actuaries provide estimates. 3

Definitions/Key Terms • Accident Period – All of the events with occurrence dates during a period specified make up the corresponding accident period. The dollars associated with those events total the accident period's losses, even though they may be paid long after the end of the accident period. • Evaluation Date – The cutoff date for adjustments made to paid claims and reserve estimates in a loss report. • Maturity – Age of an accident period as of a particular evaluation date. We begin counting from the beginning of an accident period. 4

Maturity Examples • 1/1/17 -18 accident period is ___ months mature as of 9/30/17. • 4/1/15 -16 accident period is ___ months mature as of 9/30/16. • 7/1/16 -17 accident period is ___ months mature as of 6/30/19. 5

IBNR = Reported Losses IBNR Case = Paid Outstanding losses = Paid Ultimate Losses Terms Defined • Ultimate Losses: The total amount that will eventually be paid on all losses for a particular accident period (i. e. the cost to close all claims). • Paid Losses: Dollars paid as of the latest available evaluation date on losses incurred through that date. • Outstanding Losses: The losses not yet paid. Equal to the difference between the ultimate losses and the paid losses. These are also equal to the sum of the case reserves and the IBNR reserves. • Case Reserve: Reserves established on individual claims by the case adjusters, as of the latest available evaluation. The case reserve plus the amount paid to date represents the adjuster's best estimate of the ultimate value of a particular claim. • Reported Losses: Paid losses plus case reserves as of the latest available evaluation. • IBNR: This is the dollar amount which we have estimated will be added to the reported losses between the date when the losses were compiled and final settlement of all claims for the accident period. 6

Definitions/Key Terms • Trend – Changes over time in underlying costs. Trend factors are used to adjust losses and exposures from past years to the level at which they would have been, had they occurred during a future period. • Exposures – A measure of the exposure to risk. A means to compare risk from year to year. Is it growing or shrinking? Payroll, vehicles, revenues, etc. • Loss Development - The change in the paid losses or the reported losses over time. As more information is provided, individual claim estimates get closer and closer to the ultimate value of the claims. 7

#1 LOSS DEVELOPMENT PATTERNS ARE KEY

How the Claims Process Works • Claim occurs that may be the legal responsibility of entity. • Initial case reserve is set by case adjuster. • More information becomes available so new reserve is set by case adjuster. • Even more information becomes available so new reserve is set by case adjuster… • Claim is settled after possibly many years. • Entity has many claims each year. 8

Triangle Example Accident Year Losses @ 12 Months Losses @ 24 Months Losses @ 36 Months Losses @ 48 Months 2014 -15 $50, 000 $100, 000 $125, 000 2015 -16 $40, 000 $100, 000 $115, 000 2016 -17 $60, 000 $90, 000 2017 -18 $55, 000 Age-to-age Factors Accident Year 12: 24 24: 36 36: 48 48: Ult 2014 -15 2015 -16 2016 -17 Selected Cumulative 9

Triangle Example Continued Accident Year Losses @ 12 Months Losses @ 24 Months Losses @ 36 Months Losses @ 48 Months 2014 -15 $50, 000 $100, 000 $125, 000 2015 -16 $40, 000 $100, 000 $115, 000 2016 -17 $60, 000 $90, 000 2017 -18 $55, 000 Age-to-age Factors Accident Year 12: 24 24: 36 36: 48 2014 -15 2. 000 1. 250 1. 000 2015 -16 2. 500 1. 150 2016 -17 1. 500 48: Ult Selected Cumulative 10

Triangle Example Continued Accident Year Losses @ 12 Months Losses @ 24 Months Losses @ 36 Months Losses @ 48 Months 2014 -15 $50, 000 $100, 000 $125, 000 2015 -16 $40, 000 $100, 000 $115, 000 2016 -17 $60, 000 $90, 000 2017 -18 $55, 000 Age-to-age Factors Accident Year 12: 24 24: 36 36: 48 48: Ult 2014 -15 2. 000 1. 250 1. 000 2015 -16 2. 500 1. 150 2016 -17 1. 500 Selected 2. 000 1. 200 1. 000 Cumulative 2. 400 1. 200 1. 000 11

Loss Development 12

Growth Relative to 12 Months WC Reported Loss Development Months of Maturity Accident Years Selected Industry 13

Loss Development 14

Growth Relative to 12 Months WC Reported Loss Development Months of Maturity Accident Years Selected Industry 15

Loss Development Patterns are Key • Most actuarial methods rely on loss development patterns. • Industry loss development patterns may not fit your growth history. • Useful information can be obtained by building your own loss development triangles even if your entity doesn’t have a big volume of losses. 16

#2 CAREFULLY CONSIDER HOW MUCH RISK TO RETAIN

Retentions • Per Occurrence – Caps individual occurrences at a particular value. Can apply to losses only, both losses and expenses or some sharing of expenses based on a formula. • Aggregate – Caps an accident year’s total losses at a particular value. • Other – Corridor Deductibles, etc. 17

Considerations for Risk Retention • Weigh savings vs. expected costs when increasing retention. • Variability in costs introduced by increasing retention. • Have a plan for when that large loss happens. • Make sure you understand how retention works. 18

Basic Elements of Actuarial Report • Reserve for balance sheet • Forecast for budgeting 19

Reserving • Reserving: claims/losses related to events that have already happened • But they are not all reported yet (small piece). • They are not all at final settlement value (larger piece). • Reliance on selected loss development patterns & on previous forecast for recent periods • Severity driven • Accounting purpose: balance sheet 20

Outstanding Losses • Outstanding losses = Ultimate losses – Paid losses • Use 4 or 5 methods to calculate ultimate losses using loss development factors • Ultimate losses adjusted for losses actually retained by entity (per occurrence, corridor, aggregate, etc. ) 21

#3 BASIC ACTUARIAL METHODS ARE UNDERSTANDABLE

Loss Development Methods • Used to calculate ultimate losses • Use reported and paid losses • Losses x LDF (at proper maturity) • Example: $55, 000 x 2. 4 (12 months) = $132, 000 • Simple, but volatile • May need to adjust for large losses 22

Bornhuetter-Ferguson Methods • Used to calculate ultimate losses • Use reported and paid losses • Prior estimate of ultimate losses x percentage unreported (at proper maturity) + current reported • Example: $200, 000 x (1 -1/2. 4) + $55, 000 = $172, 000 • Useful for less mature years 23

Forecasting • Forecasting: claims/losses related to events that have not yet happened • Events/accidents for upcoming periods • Reliance on modeling & cost per exposure • Frequency AND severity are important • Accounting purpose: accruing expenses/set premium 24

Forecast Example Accident Year Ultimate Losses 2011 -12 $1, 200, 000 2012 -13 $900, 000 2013 -14 $1, 100, 000 2014 -15 $1, 000 2015 -16 $850, 000 2016 -17 $1, 500, 000 2017 -18 $950, 000 2018 -19 $1, 300, 000 2019 -20 ? 25

#4 TREND ADDS UP

Trend Average Annual Growth in Claim Size Year AL WC GL 2009 5. 03% 6. 31% 2. 26% 2010 3. 46% 4. 33% 2. 32% 2011 3. 91% 3. 29% 3. 68% 2012 3. 16% 3. 21% 3. 19% 2013 2. 40% 2. 33% 2. 52% 2014 3. 14% 3. 60% 2. 80% 2015 2. 94% 3. 01% 2. 77% 2016 4. 51% 4. 69% 3. 56% 2017 2. 76% 3. 45% 3. 02% 2018* 1. 81% 2. 60% 1. 61% * Estimated 26

Forecast Example Continued Accident Year Ultimate Losses Trended Ultimate Losses 2011 -12 $1, 200, 000 $1, 513, 000 2012 -13 $900, 000 $1, 104, 000 2013 -14 $1, 100, 000 $1, 313, 000 2014 -15 $1, 000 $1, 158, 000 2015 -16 $850, 000 $949, 000 2016 -17 $1, 500, 000 $1, 617, 000 2017 -18 $950, 000 $1, 000 2018 -19 $1, 300, 000 $1, 338, 000 2019 -20 ? ? 27

#5 EXPOSURES MATTER

Forecast Example Continued Accident Year Ultimate Losses Trended Ultimate Losses 2011 -12 $1, 200, 000 $1, 513, 000 3, 026 2012 -13 $900, 000 $1, 104, 000 3, 177 2013 -14 $1, 100, 000 $1, 313, 000 3, 336 2014 -15 $1, 000 $1, 158, 000 3, 503 2015 -16 $850, 000 $949, 000 3, 678 2016 -17 $1, 500, 000 $1, 617, 000 3, 862 2017 -18 $950, 000 $1, 000 4, 055 2018 -19 $1, 300, 000 $1, 338, 000 4, 258 2019 -20 ? ? 4, 471 Vehicles 28

Loss Rates Trended Ultimate Losses Trended Exposure 29

Loss Rates Per Vehicle @2019/20 Cost Level 30

Forecast Example Continued Accident Year Ultimate Losses Trended Ultimate Losses 2011 -12 $1, 200, 000 $1, 513, 000 3, 026 $500 2012 -13 $900, 000 $1, 104, 000 3, 177 $347 2013 -14 $1, 100, 000 $1, 313, 000 3, 336 $394 2014 -15 $1, 000 $1, 158, 000 3, 503 $331 2015 -16 $850, 000 $949, 000 3, 678 $258 2016 -17 $1, 500, 000 $1, 617, 000 3, 862 $419 2017 -18 $950, 000 $1, 000 4, 055 $247 2018 -19 $1, 300, 000 $1, 338, 000 4, 258 $314 2019 -20 $1, 404, 000 4, 471 $314 Vehicles Loss Rate 31

Forecast Losses • Forecast losses = loss rate x exposures • May look at small and large losses separately • Forecast losses adjusted for losses expected to be retained by entity (per occurrence, corridor, aggregate, etc. ) 32

Exposures Matter • Having good exposure data increases the accuracy of forecast. • Shortfall/excess in forecast estimate varies directly with forecast exposure shortfall/excess. • Have a consistent source for exposures and document it. 33

#6 THERE IS VARIABILITY IN ACTUARIAL ESTIMATES

Percentiles Percentile Ultimate Losses 50% $1, 365, 000 60% $1, 450, 000 70% $1, 547, 000 80% $1, 668, 000 90% $1, 853, 000 Expected 55% $1, 404, 000 34

Variability in Actuarial Estimates • Expected forecast and reserve estimates typically fall somewhere between the 50 th and 60 th percentiles. • Larger retention leads to more variability. 35

#7 DATA IS VALUABLE

Data Retention Recommendations • Keep electronic annual loss runs. • Keep exposure audits. • Keep excess policies that show coverages. • If changing to new TPA (third party administrator) or database, take all historical claims including closed claims. If this is not possible, save electronic loss run as of the date the change in TPA/database is made. 36

#8 DATA INTEGRITY IS IMPORTANT

Data Integrity • Take time to collect good data so estimates are as accurate as possible. • Be consistent in the way you set case reserves for claims. • Don’t just capture losses limited to your retention – capture the full loss amount. • Distinguish between excess and non-excess recoveries in your loss run. 37

#9 ACTUARIAL REPORTS ARE MORE THAN JUST RESERVE AND FORECAST ESTIMATES

Other Elements of Actuarial Report • Projections of paid and reported losses • Comparison to prior analysis • Frequency and severity • Long term vs. short term liabilities • Claim closure patterns • Allocations 38

#10 FACE-TO-FACE MEETINGS ARE USEFUL

Reasons to Meet With Your Actuary • Unknown information may come to light in discussions. • Helps actuary to understand your program better. • Actuary should be able to assist you in understanding the actuarial report. • Builds relationship. 39

Thank You! Questions & Discussion Cheryl White, FCAS, MAAA 615 -620 -7583 Cheryl. White@Select. Actuarial. com Chris Woodruff 615 -620 -7587 Chris. Woodruff@Select. Actuarial. com 40