Reserving - ULAE

Question 1

Approaches to Estimating ULAE

Answer 1

• can be grouped categorically as either dollar based techniques that relates ULAE dollars to claims dollars, count based tech that assign ULAE cost per claim or transaction, or triangle based tech that rely on ULAE payment pattern
• can also use market value approach which = cost that TPA would require to take over handling book of claims

Question 2

Dollar-based Tech: Generalized Approach

Answer 2

-common assumption: ULAE cost track with claims cost in both timing and amount

Question 3

selecting ratio W*

Answer 3

-after obtaining M and B for several past CYs, can calc W=M/B for each year and use judgment to obtain selected ratio W*

Question 4

3 ways to estimate unpaid ULAE for group of AYs as of given ultimate claims for same group (L)

Answer 4

Question 5

When is approach not appropriate?

Answer 5

it does not account for when ULAE inflation is different than claims inflation

Question 6

Simplified Generalized approach

Answer 6

Question 7

Classical Approach: key assumptions

Answer 7

ULAE costs are proportional to $s of claims being handled

• half of ULAE is spent when opening and half spent when closing (U1=50% and U3=50%)
• no partial payments
• when estimating B, need additional assumption that insurer’s BOB has reached stead state so R=P

Question 8

Classical Approach formulas

Answer 8

Question 9

Classical Approach: not appropriate

Answer 9

-approach does not work well for long-tailed LOBs, when ULAE inflation rates differ from claims, when insurer is significantly growing/shrinking, or when 50/50 not appropriate

Question 10

Kittel Approach & its assumptions

Answer 10

• only difference from Classical is claims basis estimation, B
• steady state assumption of R=P would lead to inaccurate results for BOB growing/shrinking

2 assumptions:

1. change in pure IBNR during any given CY is 0 (same assumption made under generalized approach)
2. prior year total reserves are accurate

Question 11

Kittel Approach formulas

Answer 11

Question 12

Kittle appropriateness

Answer 12

• improvement over classical when book is growing/shrinking and for long tailed
• not good when 50/50 not appropriate or inflation differs

Question 13

Mango-Allen

Answer 13

• only difference from classical is that expected paid claims are used instead of actual paid when estimating B
• useful when insurers have limited or volatile CY paid

Question 14

Count-Based Techniques: recognizes 2 issues

Answer 14

Recognizes 2 issues with dollar-based approaches

1. ULAE is not directly proportional to claims
2. Using ULAE-to-claims ratios results in volatile ULAE when claims are volatile

Question 15

Count-based Techniques: assumption

Answer 15

Key assumption = same kind of transaction costs the same ULAE regardless of claims size

Question 16

Count-Based Challenge

Answer 16

Challenge = obtaining accurate and consistent claim count data

Question 17

Brian Tech

Answer 17

• ULAE split into 5 types: opening, maintaining open, making payments, closing, and reopening claims
• ULAE costs for each of these transactions was similar and could be estimated using historical ratios of ULAE to number of transactions

Question 18

Wendy Johnson

Answer 18

• ULAE split into 2: opening and maintaining claims
• ULAE could be estimated using historical ratios
• allowed cost per transaction to vary for different types unlike Brian