Bickerstaff , Whatley, Ryan & Burkhalter Consulting Actuaries: Loss Reserve Projection Systems

The key ingredient of most of the items in the Bickerstaff, Whatley, Ryan & Burkhalter repertoire is the evaluation of loss and loss expense reserves. Building on experience dating back to the 1960's and the 1970's, the BWR&B team has developed a loss reserve model which utilizes the latest technology and incorporates the most advanced actuarial methodology.

The Bickerstaff, Whatley, Ryan & Burkhalter loss reserve systems include most of the standard and commonly recognized actuarial techniques which are accepted in the profession and provide adequate results for most property/casualty lines. However, we have found that for the more complex loss reserving problems particularly those involving long-tailed, slow closing lines many of the standard techniques can sometimes be unreliable and produce spurious results. For such reserving problems, we have developed a model which we believe is superior to the standard techniques, while at the same time adhering to basic standards of practice. This model, which we have periodically refined over the past 15-20 years, is particularly effective for second opinion assignments, often revealing things which are concealed in the traditional methodology. The model can be outlined briefly as follows:

Basic Process:

Estimate number of IBNR's by accident year (quarter)
For each year (accident year subdivided into report year, or vice versa) start with the number of open claims (a given) and estimate the proportion of these claims expected to be closed (a) with indemnity, (b) with expense only, or (c) with no payment.
For expected claims with indemnity, estimate the average indemnity and average ALAE and for claims expected to close with expense only estimate average ALAE. These averages are estimated using two basic families of methods: one based on the past history of case reserve development and one based on the history of average paid claims, irrespective of case reserves.
Repeat steps (2) and (3) for IBNR's.

IBNR's and Case Reserve Development Separately

Although the three-dimensional (accident year by report year by calendar year) structure leads to more complex documentation, the basic process of the model could not be more straightforward: You start with the inventory of open claims, estimate the number of IBNR's (if applicable), and then estimate how much, on average, the remaining claims will cost. The three-dimensional structure allows the model to track IBNR's and case reserve development independently, a significant improvement over methods which lump the two together.

Data Base used:

As a general rule, we use individual detail claim files, consisting of a condensed master file or a condensed transaction file, or both. These are sometimes supplemented by an exposure file. The files are generally provided to us via e-mail or on diskette, using the format most convenient to the client. All conversion and summarization is performed by BWR&B. Rarely is any special programming required by the client.

From the data base the system generates and tracks for each line/coverage the following loss components (direct basis, initially) on the three-dimensional basis:

Indemnity paid
ALAE paid, separately for claims closed with indemnity, with expense only, and for open claims
Salvage/subrogation recoveries
Closed claim counts, separately for claims closed with indemnity, with expense only, and with no payment.
Number of open claims
Case reserves, indemnity and ALAE separately

Net/direct reserve estimates

For each accident or report year the ratio of net to direct reserves is estimated using a separate model to incorporate varying retentions by year (e.g., fixed, indexed, CLASH, aggregate deductibles, etc.). This procedure is far more reliable than simply projecting net losses from a data base of net losses.

Reserve ranges

We have developed a Monte Carlo simulation model to approximate the probability distribution of a loss reserve value, with which the confidence levels of various reserve estimates, on either side of the "best" estimate, or mean value, can be determined. This supplement is included now in every loss reserve assignment.

Basic Output:

Completely documented report with final reserve summary by line by accident year totals, report year totals (for claims-made lines), and by accident year BY report year (2 dimensions).
Supplemental Loss Arrays and Hindsight Loss Arrays Separately bound histories of above-listed loss components by accident year by report year by development year, with various measurements of average claim cost, frequency, etc. These supplements are available in hard copy or in diskette form.
Payout patterns for present value discounting and cash flow projections.



	Loss Reserve Projection Systems


	The key ingredient of most of the items in the Bickerstaff, Whatley, Ryan & Burkhalter repertoire is the evaluation of loss and loss expense reserves. Building on experience dating back to the 1960's and the 1970's, the BWR&B team has developed a loss reserve model which utilizes the latest technology and incorporates the most advanced actuarial methodology. The Bickerstaff, Whatley, Ryan & Burkhalter loss reserve systems include most of the standard and commonly recognized actuarial techniques which are accepted in the profession and provide adequate results for most property/casualty lines. However, we have found that for the more complex loss reserving problems particularly those involving long-tailed, slow closing lines many of the standard techniques can sometimes be unreliable and produce spurious results. For such reserving problems, we have developed a model which we believe is superior to the standard techniques, while at the same time adhering to basic standards of practice. This model, which we have periodically refined over the past 15-20 years, is particularly effective for second opinion assignments, often revealing things which are concealed in the traditional methodology. The model can be outlined briefly as follows: Basic Process: Estimate number of IBNR's by accident year (quarter) For each year (accident year subdivided into report year, or vice versa) start with the number of open claims (a given) and estimate the proportion of these claims expected to be closed (a) with indemnity, (b) with expense only, or (c) with no payment. For expected claims with indemnity, estimate the average indemnity and average ALAE and for claims expected to close with expense only estimate average ALAE. These averages are estimated using two basic families of methods: one based on the past history of case reserve development and one based on the history of average paid claims, irrespective of case reserves. Repeat steps (2) and (3) for IBNR's. IBNR's and Case Reserve Development Separately Although the three-dimensional (accident year by report year by calendar year) structure leads to more complex documentation, the basic process of the model could not be more straightforward: You start with the inventory of open claims, estimate the number of IBNR's (if applicable), and then estimate how much, on average, the remaining claims will cost. The three-dimensional structure allows the model to track IBNR's and case reserve development independently, a significant improvement over methods which lump the two together. Data Base used: As a general rule, we use individual detail claim files, consisting of a condensed master file or a condensed transaction file, or both. These are sometimes supplemented by an exposure file. The files are generally provided to us via e-mail or on diskette, using the format most convenient to the client. All conversion and summarization is performed by BWR&B. Rarely is any special programming required by the client. From the data base the system generates and tracks for each line/coverage the following loss components (direct basis, initially) on the three-dimensional basis: Indemnity paid ALAE paid, separately for claims closed with indemnity, with expense only, and for open claims Salvage/subrogation recoveries Closed claim counts, separately for claims closed with indemnity, with expense only, and with no payment. Number of open claims Case reserves, indemnity and ALAE separately Net/direct reserve estimates For each accident or report year the ratio of net to direct reserves is estimated using a separate model to incorporate varying retentions by year (e.g., fixed, indexed, CLASH, aggregate deductibles, etc.). This procedure is far more reliable than simply projecting net losses from a data base of net losses. Reserve ranges We have developed a Monte Carlo simulation model to approximate the probability distribution of a loss reserve value, with which the confidence levels of various reserve estimates, on either side of the "best" estimate, or mean value, can be determined. This supplement is included now in every loss reserve assignment. Basic Output: Completely documented report with final reserve summary by line by accident year totals, report year totals (for claims-made lines), and by accident year BY report year (2 dimensions). Supplemental Loss Arrays and Hindsight Loss Arrays Separately bound histories of above-listed loss components by accident year by report year by development year, with various measurements of average claim cost, frequency, etc. These supplements are available in hard copy or in diskette form. Payout patterns for present value discounting and cash flow projections.