Friedland02.ClmsProcess

Reading: Friedland, J.F., Estimating Unpaid Claims Using Basic Techniques, Casualty Actuarial Society, Third Version, July 2010. The Appendices are excluded.

Chapter 2: The Claims Process

Pop Quiz

What is the difference between the terms claims and losses? Click for Answer 

Study Tips

VIDEO: F-02 (001) The Claims Process → 6:00 Forum

If you've been working at an insurance company for a few years then much of this chapter covers material you already know. The 2 items to pay close attention to are:

• 5 elements of the unpaid claim/loss estimate
• formula for reported claims/losses

Aside from that, the wiki provides a brief summary of each subsection within the chapter. If you want more detail, you can use the source text for bedtime reading. But remember, don't spend too long here. Your aim is to get to chapters 7-17 ASAP because that's where almost all the exam questions come from.

Estimated study time: ½ day (not including subsequent review time)

BattleTable

• This chapter is rarely tested.

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Fall #16)	unpaid claim estimate: - components	Friedland01.Overview

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In Plain English!

Five Components of the Total Unpaid Claim Estimate

Alice-the Actuary's Pro Tip

The 5 components are listed a little further down but Alice-the-Actuary has a tip for you:

Alice's tip: Usually, we work with only with 2 components: case O/S and IBNR.

• Case O/S is just a short way of writing Case Outstanding. It's also referred to as Case Reserves. The definition is given in the next subsection.
• IBNR is a short way of writing Incurred But Not Reported.

And here's a nifty formula that will be mega-useful:

Alice's mega-useful formula #1:    total unpaid   =   Case O/S   +   IBNR

But note that the IBNR in Alice's formula is not quite the same as the IBNR defined in chapter 2 in the source text. Strictly speaking, the term IBNR as used above is really the sum of:

• IBNER or Incurred But Not Enough Reported
• IBNYR or Incurred But Not Yet Reported
• (and also reopened claims and claims in transit but these are generally very small categories)

Example:

• Suppose an accident occurs on July 1 but isn't reported until July 5. On July 5 the claims adjuster sets a case O/S of $1,000.

→ from July 1 to July 4, there would be $1,000 of IBNYR (because for those 4 days the claim was not yet reported)

• Suppose this claim is settled for $1,400 on July 20.

→ from July 5 to July 20 there would $400 of IBNER (because the original case O/S was not enough by $400)

But wait, Alice has more...

Alice's mega-useful formula #2:    ultimate   =   paid   +   total unpaid

• Note that if you put formula #1 and formula #2 together you get:

→    ultimate   =   paid   +   (Case O/S + IBNR)

• And yet another way of writing the formula using the fact that reported = paid + Case O/S is:

→    ultimate   =   reported   +   IBNR

These mega-useful formulas will become second nature to you as you begin working problems in this and later chapters.

The only significant topics where the distinction between IBNYR and IBNER is important are Reserving Chapter 17 - ULAE and Pricing Chapter 16 - Claims-Made Policies

Component #1: Case outstanding

Case outstanding (also called case reserves) is estimated by the claims adjuster. It is:

• the estimated amount the claimant will be paid to settle this particular claim

• (This amount also includes expenses associated with the claim. This could include legal defense costs or independent adjusters, although large companies generally have their own claims adjusters on staff. This amount is rarely accurate for individual claims. It's often set using tables of longer-term averages for particular types of claims.)

Component #2: Provision For Future Development on Known Claims

This is estimated by the actuary. It is:

• the IBNER discussed above

• (This quantity is often combined with IBNYR and referred to as the total IBNR.)

Component #3: Estimate for Reopened Claims

This is estimated by the actuary. It is:

• an allowance for when closed claims are later re-opened (maybe due to an error or the claimant deciding they want more than they originally got)

• (This quantity is often rolled into the IBNR category.)

Component #4: Provision for Claims Incurred But Not Yet Reported (IBNYR)

This is estimated by the actuary. It is:

• a provision for claims that have happened (have been incurred) but have not yet been reported to the insurer

• (This could be for a an accident that occurs on Jan 1, but is not reported to the insurer until Jan 10.)

Component #5: Provision for Claims In Transit (incurred and reported but not recorded)

This is estimated by the actuary. It is:

• a provision for claims that are "in the system" but are not yet showing as a liability in the data

• (This could be for a claim reported in the morning but that doesn't become "official" until the accounting system is updated overnight.)

Final Point

→ In practice, actuaries generally do not make separate estimates for components 2,3,4,5. → It's all just rolled up into a catch-all category that is usually just referred to as IBNR

A Claim is Reported

This section explains what happens when a claim is reported to the insurer (by phone, website, email, agent,...). The insurer first has to decide whether it's a valid claim by checking things like:

• policy effective date
• terms & conditions
• policy exclusions
• deductibles
• and several others...

If the insurer determines the claim is valid, they'll "put up a reserve". For fast-settling lines like auto physical damage, there may be a table or formula for the initial amount of case O/S. This amount may be later adjusted up or down depending on the individual characteristics of the claim.

Life of a Claim

Intro

The source text has a very detailed example explaining the different types of transactions that can occur in the life of a claim. I've put a direct link to the text example further down and you can glance at it, but it likely isn't important to study it in very much detail. Here are a few simpler examples to give you the idea:

Simple Example 1

This is as simple as it gets:

• An auto physical damage claim is reported and is given an initial case reserve of $1,000.

→ reported loss = $1,000

→ Case O/S = $1,000

→ total unpaid = $1,000

→ paid = $0

• A few days later the claim is paid and closed for the current case reserve of $1,000.

→ reported loss = $1,000

→ Case O/S = $0

→ total unpaid = $0

→ paid = $1,000

Simple Example 2

Let's add a couple of things to our first example:

• A claim is reported and is given an initial case reserve of $1,000.

→ reported loss = $1,000

→ Case O/S = $1,000

→ total unpaid = $1,000

→ paid = $0

• An independent agent is paid $300 for further investigating the claim. (so there was $300 of IBNER that's now part of reported loss)   

→ reported loss = $1,000 + $300 = $1,300

→ Case O/S = $1,000

→ total unpaid = $1,000

→ paid = $300

• The case reserve is increased by $1,400 to $2,400 because there was more than average damage to the car. (so there was another $1,400 of IBNER that's now part of Case O/S)

→ reported loss = $1,300 + $1,400 = $2,700

→ Case O/S = $2,400

→ total unpaid = $2,400

→ paid = $300

• A few days later the claim is paid and closed for the current case reserve of $2,400.

→ reported loss = $2,700

→ Case O/S = $0

→ total unpaid = $0

→ paid = $2,700

Full Example from Source Text

The text example has several more types of transactions between initial report and final closure of the claim is finally closed. It's all pretty self-explanatory. Here's the direct link:

EXAMPLE:   Claim Fact Summary

Here's the quiz for the above material...

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Basic Formulas

There's a web-based problem in the quiz at the end of this section.

Quick-Vid: F-02 (020) Basic Formulas ~ 1:00

Below is what you need to get awesome with the basic formulas.

Example 1:

• Let

PC₁ = $500 = cumulative value of Paid Claims at t₁ (beginning value)

PC₂ = $850 = cumulative value of Paid Claims at t₂ (ending value)

• Then the incremental value of paid claims over the interval from t₁ to t₂ is

PC_1,2   =   PC₂ – PC₁   =   $850 – $500   =   $350

• Side Note:

→ if paid claims is calculated over an interval, that's called an incremental amount

→ if paid claims is calculated from t = 0, that's called a cumulative amount

• Another Side Note:

→ Reported claims works the same way in terms of incremental and cumulative amounts

Example 2:

• Let

RC₁ = $600 = cumulative value of Reported Claims at t₁ (beginning value)

RC₂ = $925 = cumulative value of Reported Claims at t₂ (ending value)

• Then the incremental value of reported claims over the interval from t₁ to t₂ is

RC_1,2   =   RC₂ – RC₁   =   $925 – $600   =   $325   (see Example 4 for an alternate way to calculate this)

Example 3:

• Let

Case₁ = the value of Case O/S at t₁ (point-in-time value, neither cumulative nor incremental)

• Then we can use the following cumulative reported claims formula to calculate the case amounts using the data from the first 2 examples.

RC1   =   PC1 + Case1

To be absolutely clear which quantities are cumulative amounts, we can write the above formula as follows:

→ cumulative RC₁   =   cumulative PC₁ + Case₁

• So

Case₁   =   RC₁ – PC₁   =   $600 - $500   =   $100

Case₂   =   RC₂ – PC₂   =   $925 - $850   =   $75

Example 4:

• There is also a very useful formula for incremental reported claims. Another way of saying incremental is the value of reported claims during a time period.

RC1,2   =   PC1,2 + chg(Case)

To be absolutely clear which quantities are cumulative amounts, we can write the above formula as follows:

→ incremental RC_1,2   =   incremental PC_1,2 + chg(Case)

• So,

RC_1,2   =   $350 + ($75 – $100)   =   $325   (note that this is the same answer as in Example 2)

• Note that:

→ chg(Case)   =   Case₂ – Case₁

Pop Quiz A!    :-o

• Given the following information, calculate the incremental and cumulative reported claims. Use both methods for cumulative reported claims. Click for Answer 

• paid claims at beginning of period = $19,000
• paid claims at end of period = $25,000
• case O/S at beginning of period = $5,000
• case O/S at end of period = $4,300

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POP QUIZ ANSWERS

There is no difference between the terms claims and losses. The source text uses the term claims but actuaries traditionally use the term losses. Both are $-values.

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Pop Quiz A - Answer

We were given:

PC₁ = $19,000 (cumulative value)

PC₂ = $25,000 (cumulative value)

Case₁ = $5,000 (point-in-time value)

Case₂ = $4,300 (point-in-time value)

Then

RC₁   =   PC₁ + Case₁   =   $19,000 + $5,000   =   $24,000   (cumulative reported claims)

And

RC_1,2   =   PC_1,2 + chg(Case)   =   ($25,000 – $19,000) + ($4,300 – $5,000)   =   $5,300  (incremental reported claims)

or equivalently

RC_1,2   =   RC₂ – RC₁   = ($25,000 + $4,300) – $24,000   =   $5,300 (incremental reported claims)

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