Long-Term Reserves

Question 1

Features of LTD and LTC contracts to consider when setting reserves (6)

Answer 1

1. ) Periodic benefits - benefits typically equal some specified monthly or daily amount
2. ) Long-term benefit periods
3. ) Elimination periods
4. ) Optional benefits - these may affect the timing or amount of monthly payments (e.g. partial disability benefits & COLA)
5. ) Integration of benefits - these plans often coordinate benefits w/ SS and Medicare
6. ) Limitations & exclusions - some claims are excluded (such as self-inflicted injuries) or subject to limited periods (such as mental & nervous claims)

Question 2

Types of long-term claims & reserve methods (3)

Answer 2

1.) Open claims - claims currently being paid (uses tabular reserves)
Rsv = sum (of benefitcontinuanceinterest discount) for the time period

2.) Pending claims - claims that have been reported but payments have not yet begun
Rsv clms in elimination = pending factor * tabular rsv
Rsv clms complete elimination prd = pending factor*(tabular rsv + AV of past payments not yet made)

3.) IBNR claims - claims that have been incurred but have not been reported to the company. The reserve can be estimated using either the lag method or the loss ratio method.

Question 3

Methods for evaluating claim reserve adequacy (3)

Answer 3

1. ) Runoff studies (commonly done by incurral year) - previous reserve balances are compared to the subsequent claim payments and reserve balance, with adjustments for interest
2. ) Actual to expected claim termination rate studies (commonly done by claim duration) - compares the actual claim terminations to the expected claim terminations based on the table used for reserving.
3. ) Experience studies - typically involves a gross premium valuation. The reserve is adequate if (PV of future gross premiums + reserve) > (PV of future claim cost)