Intermediate Track III WC Case Study 2010 CLRS September 20-21, 2010 Lake Buena Vista, FL 2010 CLRS 1
Background Information WC Insurance Company is a small, stock insurance company that has been insuring businesses against Workers ’ Compensation exposures for over 15 years. Management of the company has been relatively stable over the years and the company has seen moderate, prudent growth. 2010 CLRS 2
Background Information The insurance department of the company ’ s state of domicile arrived at the company in June 2010 in order to perform its review of statutory financial condition as of December 31, 2009. Its financial examiners began their review of loss reserves by requesting actuarial data triangles of incurred and paid losses as of December 31, 2009. These were provided by the Chief Financial Officer, after being prepared by the company ’ s financial reporting department. 2010 CLRS 3
Background Information You are a recent Associate in the Casualty Actuarial Society and were hired by the Chief Financial Officer in late July to create a small actuarial department at WCIC. The company has been using actuarial consultants for the past few years to fulfill reserve certification requirements; but the CFO has decided that this approach has become too expensive. 2010 CLRS 4
Background Information Your first assignment at WCIC is to follow the progress of the insurance department ’ s review, answer questions and provide any additional data they request, as well as compile additional data and information you think will be necessary to your department in order to estimate reserves in the future. The insurance department examiners presented you with the results of their review in early August. Their analysis indicated that the company booked a rather large reserve deficiency (15%) in this coverage. 2010 CLRS 5
WC Insurance Company Workers Compensation - Loss Data ($000) Paid Losses Evaluation Age in Months 12 24 36 48 60 72 84 96 108 120 2000 580 1,423 1,635 1,764 1,813 1,873 1,908 1,937 1,969 1,991 2001 743 1,656 1,907 2,045 2,100 2,171 2,214 2,246 2,279 2002 967 2,087 2,398 2,610 2,680 2,756 2,816 2,854 2003 1,121 2,600 3,041 3,299 3,398 3,506 3,575 2004 1,531 3,306 3,892 4,197 4,337 4,456 2005 1,958 4,200 4,892 5,325 5,499 2006 2,266 4,872 5,697 6,171 2007 2,608 5,618 6,604 2008 3,270 7,238 2009 4,001 Incurred Losses Accident Evaluation Age in Months Year 12 24 36 48 60 72 84 96 108 120 2000 1,222 1,847 1,959 2,023 2,061 2,081 2,097 2,112 2,167 2,174 2001 1,278 2,128 2,263 2,331 2,378 2,403 2,423 2,497 2,504 2002 1,682 2,709 2,879 2,961 3,022 3,054 3,158 3,175 2003 2,213 3,484 3,669 3,767 3,843 3,999 4,017 2004 2,859 4,390 4,645 4,799 5,060 5,083 2005 3,524 5,591 5,912 6,316 6,430 2006 4,232 6,497 7,197 7,305 2007 4,529 8,023 8,293 2008 6,794 10,151 2009 8,590 2010 CLRS 6
WC Insurance Company Workers Compensation - Loss Development Method Insurance Department Analysis Paid Loss Development Accident Evaluation Interval in Months Year 12-24 24-36 36-48 48-60 60-72 72-84 84-96 96-108 108-120 120+ 2000 2.453 1.149 1.079 1.028 1.033 1.019 1.015 1.017 1.011 2001 2.229 1.152 1.072 1.027 1.034 1.020 1.014 1.015 2002 2.158 1.149 1.088 1.027 1.028 1.022 1.013 2003 2.319 1.170 1.085 1.030 1.032 1.020 2004 2.159 1.177 1.078 1.033 1.027 2005 2.145 1.165 1.089 1.033 2006 2.150 1.169 1.083 2007 2.154 1.176 2008 2.213 2009 3 Yr Avg 2.173 1.170 1.083 1.032 1.029 1.020 1.014 1.016 1.011 3 Yr Wtd 2.177 1.170 1.084 1.032 1.029 1.020 1.014 1.016 1.011 Average 2.220 1.163 1.082 1.030 1.031 1.020 1.014 1.016 1.011 Wtd Avg 2.194 1.167 1.083 1.031 1.030 1.020 1.014 1.016 1.011 Select 2.195 1.170 1.085 1.033 1.030 1.020 1.015 1.015 1.010 1.125 Cumulative 3.540 1.613 1.378 1.270 1.230 1.194 1.171 1.153 1.136 1.125 2010 CLRS 7
WC Insurance Company Workers Compensation - Loss Development Method Insurance Department Analysis Incurred Loss Development Accident Evaluation Interval in Months Year 12-24 24-36 36-48 48-60 60-72 72-84 84-96 96-108 108-120 120+ 2000 1.511 1.061 1.033 1.019 1.010 1.008 1.007 1.026 1.003 2001 1.665 1.063 1.030 1.020 1.011 1.008 1.031 1.003 2002 1.611 1.063 1.028 1.021 1.011 1.034 1.005 2003 1.574 1.053 1.027 1.020 1.041 1.005 2004 1.536 1.058 1.033 1.054 1.005 2005 1.587 1.057 1.068 1.018 2006 1.535 1.108 1.015 2007 1.771 1.034 2008 1.494 2009 3 Yr Avg 1.600 1.066 1.039 1.031 1.019 1.016 1.014 1.014 1.003 3 Yr Wtd 1.586 1.064 1.038 1.030 1.018 1.015 1.014 1.013 1.003 Average 1.587 1.062 1.033 1.025 1.015 1.014 1.014 1.014 1.003 Wtd Avg 1.582 1.062 1.034 1.027 1.016 1.014 1.014 1.013 1.003 Select 1.600 1.065 1.035 1.030 1.015 1.015 1.015 1.010 1.005 1.030 Cumulative 1.986 1.241 1.165 1.126 1.093 1.077 1.061 1.046 1.035 1.030 2010 CLRS 8
WC Insurance Company Workers Compensation - Ultimate Losses Results of Insurance Department Analysis (Dollars in Thousands) Paid Incurred Cumulative LDF's Est. Ultimate Losses Ultimate Loss Ratio Accident Earned Losses Losses Paid Incurred Paid Incurred Paid Incurred Year Premium @ 12/31/09 @ 12/31/09 LDM LDM LDM LDM LDM LDM (1) (2) (3) slide 6 (4) slide 6 (5) slide 7 (6) slide 8 (7)=(3)x(5) (8)=(4)x(6) (9)=(7)/(2) (10)=(8)/(2) 2000 2,698 1,991 2,174 1.125 1.030 2,240 2,239 83.0% 83.0% 2001 3,029 2,279 2,504 1.136 1.035 2,590 2,592 85.5% 85.6% 2002 3,821 2,854 3,175 1.153 1.046 3,292 3,319 86.1% 86.9% 2003 4,883 3,575 4,017 1.171 1.061 4,185 4,263 85.7% 87.3% 2004 5,981 4,456 5,083 1.194 1.077 5,320 5,475 89.0% 91.5% 2005 7,588 5,499 6,430 1.230 1.093 6,763 7,030 89.1% 92.6% 2006 8,981 6,171 7,305 1.270 1.126 7,840 8,226 87.3% 91.6% 2007 10,725 6,604 8,293 1.378 1.165 9,103 9,665 84.9% 90.1% 2008 14,171 7,238 10,151 1.613 1.241 11,673 12,600 82.4% 88.9% 2009 17,881 4,001 8,590 3.540 1.986 14,163 17,059 79.2% 95.4% Total 79,758 44,668 57,722 67,168 72,468 84.2% 90.9% (11) Insurance Department Selected Ultimate Losses (average of (7)&(8)) 69,818 (12) Indicated Loss Reserve Need at 12/31/09 ((11) - (3)) 25,150 (13) Company Booked Reserves at 12/31/09 21,389 (14) Insurance Department Indicated Redundancy/(Deficiency) ((13) - (12)) -3,761 -15.0% 2010 CLRS 9
Background Information You know that this large difference will necessitate that you do your own actuarial review, so you begin immediately. You decide to meet with the actuarial consulting firm which signed the current Statement of Actuarial Opinion and then immediately follow up with some interviews of key people in the underwriting and claims departments. Finally, you decide to take a look at the data yourself. You hope that the data processing department will be able to quickly compile some additional information on claim counts and exposures that you think will be helpful…. 2010 CLRS 10
Actuarial Consultants 1. The company has very qualified management and has been fairly stable over time. 2. Except for the last couple of years, estimating reserves has always been relatively straightforward. Recently, the incurred and paid loss development methods have begun to diverge. 3. The consultants have moved more toward believing the paid loss development estimates, because they suspect a change in case reserve adequacy. The company ’ s booked reserves at year-end were based on the consultant ’ s recommendations. 2010 CLRS 11
Claims Vice President 1. Claims management has been relatively stable over the past several years. Staffing has been able to keep up with claim volumes. 2. No specific problems come to mind in the handling of claims. Claim sizes continue to go “ through the roof, ” especially in medical coverages. Historically, it has been difficult to keep up with the increasing claim sizes. 3. The VP implemented a claim training program in late 2006. It focuses on pension-type (long-term) cases. The main thrust of training was to be better able to take inflation into account when setting case reserves for long-term cases. Both indemnity, but especially medical, reserves have been chronically under-reserved in the past. 2010 CLRS 12
Underwriting Vice President 1. The volume of the company ’ s business has grown, but nothing too dramatic. It made a “ mild ” marketing push in the late 1990 ’ s, and started another one about 18 months ago. Most of the effort was geared toward referrals from existing customers, so she finds it unlikely that the character of the overall business has changed very much. 2. Underwriting guidelines and training have remained relatively stable over the last several years. She would characterize the underwriting philosophy as “ conservative ” . 3. Rates have been changed every year to keep up with inflation. Inflation in medical coverage has been atrocious, however, and sometimes hard to keep up with. The company generally follows the rating bureau ’ s rating plan, but has actuarial consultants look over the plan changes every year to make sure the company is following a reasonable path. 2010 CLRS 13
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