Short-Term Reserves

Question 1

Additional considerations in establishing claim reserves (13)

Answer 1

These are in addition to ASOP #5:

1. ) Incurral dating method
2. ) Reserve basis - statutory, GAAP, and tax bases differ in their use margin, interest rates, etc.
3. ) Interest - reserves for claims with long payouts may be discounted to reflect interest
4. ) Controls & reconciliation - the data used should be tested for accuracy
5. ) Insurance characteristics - reserves vary depending on the type of risk covered
6. ) Reserve cells - set up separate cells for each homogeneous category of business
7. ) Managed care features - such as discounts & provider risk sharing arrangements
8. ) Trends
9. ) Seasonality
10. ) Claims admin expenses - set up a reserve equal to a % of the claim reserve
11. ) Morbidity assumptions - for long-term claims, morbidity is reflected in continuance tables
12. ) Diagnosis-based tabular reserves - some companies have begun using different morbidity bases for different causes of disability
13. ) Use of the case reserves method - very labor intensive, so only recommended for small blocks

Question 2

ASOP #5: Considerations for estimating incurred claims (7)

Answer 2

ASOP #5 - Incurred Health & Disability Claims:

1. ) Plan provision & business practices - reflect practices that materially affect the cost, frequency or severity of claims
2. ) Economic influences - such as unemployment levels, cost shifting, and catastrophic events
3. ) Organizational claims admin - lag factors may vary due to staffing levels, computer system changes, or seasonal backlogs
4. ) Risk characteristics & organizational practices by block of business - consider the effects of marketing & underwriting practices can affect incurred claims
5. ) Legislative requirements - consider how regulations mandating benefits, risk characteristics, rating, reserving, and underwriting practices can affect incurred claims
6. ) Carve outs - consider the effect of carved-out benefits on incurred claims level
7. ) Special considerations for long-term products - such as cost of living adjustments & inflation effects

Question 3

Advantages of stochastic approaches for reserving (4)

Answer 3

1. ) Provides explicit guidance for establishing provisions for adverse deviation in the reserves
2. ) Provides guidance on potential variability in reported earnings and reserve levels
3. ) Allows for quantification of variability in items such as seasonality and claim trend
4. ) Allows for improved evaluation of reserve estimates (by knowing the variability of the estimates)

Question 4

Disadvantages of stochastic approaches for reserving (3)

Answer 4

1. ) Some audiences that are unfamiliar with this approach may have a false sense of confidence in the approach because of its sophistication
2. ) May be too complex to be used by all individuals who must perform related functions (such as forecasting & pricing)
3. ) Not every process can be modeled rigorously

Question 5

Stochastic modeling techniques for reserving (5)

Answer 5

1. ) Fitting a parametric distribution to the data - works best when process being modeled is stationary over time
2. ) Ordinary least squares regression (OLS) - allows for investigation of the effects of specific explanatory variables, such as trend or seasonality
3. ) Generalized linear models - these models improve upon OLS b/c they allow for cases where the dependent variable being modeled is either bounded (e.g. must be greater than 0) or not normally distributed.
4. ) Stochastic time series models - these are useful for handling situations where values are correlated across time (e.g. seasonal or cyclical patterns)
5. ) Monte Carlo simulation - this approach is of significant practical value when combining results from any of the other techniques

Question 6

Considerations when developing a stochastic approach to reserve estimation (5)

Answer 6

1. ) Availability of data - historical data is needed to validate the model & assumptions
2. ) Appropriateness of data - consider whether the processes reflected in the historical data are representative of the process being modeled going forward
3. ) Access to statistical software - lack of access to or understanding of modeling software will limit the available choices for modeling techniques
4. ) Appropriateness of the model - this can be validated through goodness-of-fit testing, residual analysis, and hold-out sample evaluation
5. ) Covariances of modeled estimates - when reserve estimates are calculated through component estimates the covariance between these components must be estimated