- TIA EXAM 5 - FRIEDLAND CH 17

• ULAE expenditures track with loss dollars
• Implies that the general timing of ULAE costs follows timing of the reporting or payment of loss dollars

• Same kind of transaction costs the same amount of ULAE
• Regardless of claim size
• Longer the claim stays open, the more it costs due to parameter to reflect cost of ongoing management and maintenance of claims

• 1. Specific company's ULAE-to-claim relationship have achieved a steady state
• *Provides reasonable approximation of relationship of ultimate ULAE to ultimate claims

2. Relative volume and cost of future claims-management activity on unreported and open reported claims will be proportional to IBNR and case outstanding dollars

3. Additional assumption: 50% of the ULAE occurs when claim is reported, 50% when closed

• 1. Calculate historical CY paid ULAE to CY paid claims
• 2. Review historical paid ULAE to paid claims ratios for trends or patterns
• 3. Select ratio of ULAE-to-claims for future claims payments
• 4. Apply 50% of ratio to case outstanding and 100% to IBNR= Ratio * (50% * Case OS + IBNR)

1. "Closing" and "paying" a claim may not mean the same thing

• 2. Definition of IBNR
• In practice IBNR typically includes both IBNYR and IBNER
• Correct application would be to apply full ULAE-to-loss ratio to IBNYR and half the ratio to the sum of Case reserves and IBNER

• Very short-tailed, stable lines of business
• Low cost inflation

• Long-tail lines of business
• Times of changing inflationary forces - past or expected future
• Rapid change in volume
• When 50/50 assumption is not appropriate

• ULAE incurred with the reporting of claims, with or without payment
• ULAE payments during a CY are related to both reporting and payment of claims
• Relative volume and cost of future claims-management activity on unreported and open reported claims will be proportional to IBNR and case outstanding dollars
• 50% of the ULAE occurs when claim is reported, 50% when closed

• Calculate historical CY paid ULAE to average of CY paid and CY incurred claims
• Review historical ratios for trends or patterns
• Select ratio of ULAE-to-claims for future claims payments
• Apply 50% of ratio to case outstanding and 100% to IBNR= Ratio * (50% * Case OS + IBNR)

Can handle growing insurer situation that classical technique cannot

• Maintains 50/50 assumption: Doesn't allow particular allocation of ULAE to opening, maintaining, and closing
• Times of changing inflationary forces - past or expected future

• Recognize an insurer's rapid growth
• Be consistent with patterns of the insurer's ULAE over a claim's life
• Reproduce key concepts behind Johnson method
• Use commonly available and reliable aggregate payment and unpaid claims data
• Develop an extension to the Kittel renement which could allow for alternatives to the traditional 50/50 assumption

weighted average of the ultimate cost of claims reported during the period, the ultimate cost of claims closed during the period, and losses paid during the period

• Generalized method assumes expenditure of ULAE resourcesis proportional to dollars of claims being handled
• ULAE amounts spent opening claims are proportional to the ultimate cost of claims being reported
• ULAE amounts spent maintaining claims are proportional to payments made
• ULAE amounts spent closing claims are proportional to the ultimate cost of claims being closed

• Select an overall ratio of ULAE to loss (W*)
• ULAE payments are typically measured and reported ona calendar year basis
• U1, U2, and U3 are estimated or selected{ R, P, and C determined from actuarial claims reserveanalysis
• Compute W = M / B by calendar year then select overall ratio W*
• Can estimate ultimate ULAE (U) for a group of accident years as U = W* x L
• Where L = independently estimated ultimate claims for group of accident years

• Generalized methodology assumes claims adjusting activities associated w/ reopening and reclosing a claim have no cost
• Estimation of R and C may not be trivial
• Claim inflation can cause material distortions in projection of future ULAE
• Effect of reopened claims on accuracy of estimates of unpaid ULAE
• How to modify approach to properly reflect the change overtime in the quantity or cost of resources dedicated to the handling of a claim as it ages

• Suggest possible variation of the Kittel refinement to the classical technique when actual historical calendar year paid claims are volatile
• Suggest replacing actual calendar period claims with "expected" claims for historical calendar periods

• ULAE-to-claim relationship is derived using paid ULAE toexpected paid claims
• Relative volume and cost of future claims-management activity on unreported and open reported claims will beproportional to IBNR and case outstanding dollars
• 50% of the ULAE occurs when claim is reported, 50% whenclosed

• Five Steps:
• 1. Estimate CY expected paid claims
• 2. Calculate historical CY paid ULAE to expected CY paid claims
• 3. Review historical ratios for trends or patterns
• 4. Select ratio of ULAE-to-claims for future claims payments
• 5. Apply 50% of ratio to case outstanding and 100% to IBNR= Ratio * (50% * Case OS + IBNR)

• Good option for insurers with:
• *Limited experience
• *Highly volatile claims payment experience

• May not be good for insurers with sufficient volume of paid claims experience
• *Additional effort may not be justied

• ULAE amount does not solely depend on claim dollars
• ULAE responds to volatility present in estimate of ultimate claims
• If ultimate claims drop in a year, you don't expect an immediate drop in overhead expenses or number of claims management personnel

• Method suggests using reporting and maintenance as the key transactions
• Estimates cost of each transaction by comparing historical aggregate ULAE expenditures to number of transactions occurring in same period

• Project the following components
• *Future CY opened, closed, and pending claims(OCP)
• *Future CY claim staff workloads expressed as OCP claims per staff member
• *Future CY claim staff count
• *Future CY ULAE per claim staff member

• Future CY ULAE payments, which include consideration of inflation
• = Future clm staff count * Future ULAE per clm staff member

• Reasonable proxy for claims department activity
• Claim count based
• Derivable from typical reserve study information

• Likely quite sensitive to the magnitude of the selected parameters
• Estimates will be influenced by parameters not explicitly considered

• Focus on situation in which annual (or quarterly) cost of maintaining and managing a claim varies over the life of the open claim
• Claims open for long periods of time likely to be complex requiring more claim adjuster time from a senior claim adjuster

• Claim management systems can track amount of time spent on claim by level of employee
• Feasible to calculate average cost of each type of claim transaction
• Benefit - Allows for more detailed analysis of the claim activity costs
• Can determine which types of claims, claim transactions,and stages of a claim have similar costs

• 1. Paid ULAE by AY and evaluation year triangle used to calculate development factors
• 2. Slifka describes method that projects ultimate or unpaid ULAE based on historical ULAE payments
• **Use time-and-motion study to estimate claim department's allocation of resources between current AY claims and prior AY claims
• 3. Construct paid ULAE triangles by restating allocations to AY using current time-and-motion studies and/or relationships to loss payment patterns