View source for Friedland01 - Overview - Comprehensive Version

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

'''Chapter 1''': Overview ''(with links to topics in chapters 1-6)''

==Pop Quiz==

Does ''Alice-the-Actuary'' wear glasses? <span style="background-color: lightblue; border-radius: 5px;"> ''[https://www.battleacts5.ca/images/alice.jpg Click for Answer]''&nbsp;</span>

==Study Tips==

[https://www.battleactsmain.ca/battleacts5.ca/forum5/index.php?p=/categories/r-01-overview<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>] &nbsp; The Friedland source text is divided into 4 parts:

: '''Part 1''': Introduction &ndash; ''Chapters 1-2''
: '''Part 2''': Information Gathering &ndash; ''Chapters 3-6''
: '''Part 3''': <span style="color: green;">Basic Methods for Estimating Unpaid Claims &ndash; ''Chapters 7-15'''''</span>
: '''Part 4''': <span style="color: green;">Estimating Unpaid Claims Adjustment Expenses &ndash; ''Chapters 16-17'''''</span>

Parts 3 and 4 are highlighted in green because that's where 85-90% of the reserving questions come from. Although there is important basic information in Parts 1 & 2, we're going to cover it quickly. You'll get plenty of opportunities to solidify your understanding of that basic material as you work through Parts 3 & 4.

This wiki article provides links to everything you need to know from Parts 1 & 2 ''(Chapters 1-6)''. You may not need to spend a lot of time here if you're already familiar with the concept of development triangles.  Make sure you at least scan the material however and go over the old exam problems. Other than that, you'll absorb the important information as you work problems in chapters 7-17.

:{| class='wikitable' style='background-color: navajowhite; width: 1000px'
|-
|| <span style="color: green;">'''Alice's Introductory Pro-Tip #1!'''</span> Each wiki article shows a <u>BattleTable</u> at the beginning of the chapter. It includes a links old exam questions from material in the chapter. It's an easy way to see at a glance the kinds of questions that typically appear on the exam. If you click on the <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>, you'll see the examiner's report question <u>and</u> answer on consecutive pages so you don't have to go hunting for the answer.
|} 

'''Estimated study time''': 30 minutes for Chapter 1 then about 1 week for all of Parts 1 & 2, which is Chapters 1-6 ''(then review as needed)''

==BattleTable==

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* <u>groups</u> for whom accurate unpaid claims estimates ''(reserve estimates)'' are important
* <u>reasons</u> these groups need accurate estimates

: {| class='wikitable' style='width: 1000px;'

|-
! style='width: 175px;' | reference !! style='width: 175px;' | part (a) !! style='width: 175px;' | part (b) !! style='width: 175px;' | part (c) !! part (d)

|-
|| [https://www.battleacts5.ca/pdf/Exam_(2019_2-Fall)/(2019_2-Fall)_(16).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style="color: red;">'''(2019.Fall #16)'''</span>
|| [[Friedland02.ClmsProcess]]
|| '''inadequate reserves''': <br> - why this is bad
| style='background-color: lightgrey;' |
| style='background-color: lightgrey;' |

|-
|| [https://www.battleacts5.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(13).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style='color: red;'>'''(2014.Fall #13)'''</span>
|| '''redundant reserves''': <br> - why this is bad
|| '''inadequate reserves''': <br> - why this is bad
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

==In Plain English!==

===Intro===

''Alice-the-Actuary'' is going to help me teach you about reserving. I've hidden her curriculum vitae as an ''Easter Egg'' within the system. I'll give a shout-out to the first person who emails me where she went to school. She is totally not a made-up person. ;-)

There is a separate wiki article for each of chapters 1 through 6 in Friedland that you can access through the links on the ''[[BattleBriefings | Ranking Table]]'' page. But this Chapter 1 article ''(which is what you're reading now)'' also has a concise listing of topics from chapters 1-6 with links to the appropriate material. Your aim is to get a quick overview of these first 6 chapters then use them as a reference on an ''as-needed'' basis. Most of the testable material is in chapters 7-17.

===Part 1 - Chapter 1 - Overview===

{| class='wikitable' style='background-color: powderblue;'
|-
|| '''# pages in source text''' || 13
|}

This half of Exam 5 is all about estimating ''reserves'' or equivalently ''unpaid claims'' so you should probably know what that is.

Let's say you you work at an auto insurer and one of your insureds bumps another car while trying to parallel park. <span style="color: green;">''(thx GH!)''</span> When he calls to report the accident, the claims adjuster may ask a few questions, then estimate the damage at $900. If his deductible is $500 then the ''reserve'' or ''unpaid claim estimate'' is $900 - $500 = $400. This is a liability for the insurer that appears on the insurer's balance sheet. If a check for $400 is mailed out the following week, then the claim is ''paid & closed'' and the ''unpaid claim estimate'' or ''reserve'' becomes 0.

Note that the ''unpaid amount'' in the example above included only loss dollars but it would normally also include ''Loss Adjustment Expenses'' or ''LAE''. LAE is further broken out into ''Allocated'' and ''Unallocated.'' This is covered later in ''[[Friedland16.ALAE | Chapter 16 Estimating ALAE]]'' and ''[[Friedland17.ULAE | Chapter 17 Estimating ULAE]]''.

So a ''reserve'' or ''unpaid claim estimate'' is the amount of money an insurer sets aside for paying future claims. As claims are paid, the unpaid claims estimate is reduced. This is discussed in great detail in ''[[ASOP.43 | ASOP 43 - Property/Casualty Unpaid Claim Estimates]]'' but you don't need all that detail for now.

:{| class='wikitable'
|-
|| '''Question''': define the term <u>unpaid claims estimate</u> or <u>reserve</u>
|}

:* the actuary’s estimate of the obligation for future payment resulting from claims due to past events.

The unpaid claims liability is the single biggest liability on a company's balance sheet. That's why accuracy is so important. This next fact sometimes shows up on the exam so pay attention.

:{| class='wikitable'
|-
|| '''Question''': identify 3 <u>groups</u> for whom accurate reserve estimates are important and provide a <u>reason</u> for each
|}

:* internal management
:: &rarr; need accurate reserves <u>for</u> proper decision-making ''(pricing, underwriting, strategic/financial plans,...)''
:* investors
:: &rarr; need accurate reserves <u>because</u> balance sheet liabilities are important in deciding whether to invest in a company
:* regulators
:: &rarr; need accurate reserves <u>to perform</u> supervisory & regulatory roles ''(solvency monitoring)''

Most of the rest of chapter 1 covers reserving practices in other countries as well as terminology surrounding the reserving process. It's good bedtime reading but for now don't get sidetracked. Here are a few things you should keep in mind however:

: '''claims or losses''': These terms mean the same thing. The term ''loss'' is more traditional but the official term now is ''claims''. Both refer to <u>dollar-values</u>. This is different from the term ''counts'' which refers to ''<u>number</u> of claims''.

: '''ultimate claims / losses''': Estimating the ''ultimate value'' of claims or losses is the whole point of reserving. It's:
:* the total dollar value after all claims are settled and closed without any chance of reopened claims
:: ''(Once you've estimated the ultimate value, it's easy to get the <u>unpaid</u> amount. Just subtract the reported claims. Much more on this later.)''

: '''reported versus incurred claims''': In practice, these terms are used interchangeably, but strictly speaking they don't mean the same thing. The source text uses the term ''reported claims'' to mean exactly that - claims that have been reported to the insurer. More specifically:
:* the sum of <u>cumulative paid</u> claims and <u>case outstanding</u> estimates at a particular point in time
:: ''(we'll cover this more fully in [[Friedland02.ClmsProcess | Friedland Chapter 2 - The Claims Process]])''

: '''redundant / deficient''': If reserves are ''redundant'' it means they're <u>too high</u>. If reserves are ''deficient'' it means they're <u>too low</u>.

That's really all you need to know to move on to the next chapter.

[https://www.battleacts5.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Friedland01&suffix=Overview&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz &ndash; Chapter 1]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>

===Part 1 - Chapter 2 - The Claims Process===

{| class='wikitable' style='background-color: navajowhite; width: 1000px'
|-
|| <span style="color: green;">'''Alice's Introductory Pro-Tip #2!'''</span> This wiki article includes links below to the topics in each of the first 6 chapters in the Friedland reserving text. This is different from the other wiki articles which only contain 1 chapter's worth of material. Some users prefer to navigate to other chapters using the ''[[BattleBriefings | Ranking Table]]''. Just click the link. This link is always available near the top of the left sidebar when you're in the wiki area of the BattleActs website. You might have to scroll up to see it.
|} 

{| class='wikitable'  style='background-color: powderblue;'
|-
|| '''# pages in source text''' || 10
|-
|| '''Direct link to wiki article'''|| ''[[Friedland02.ClmsProcess | Chapter 2 - The Claims Process]].''
|}

If you've been working at an insurance company for a few years then much of this chapter covers material you already know. The BattleQuiz has a web-based practice problem so be sure to check that out. ''(Click on the "123" button inside the BattleQuiz.)''

* ''[[Friedland02.ClmsProcess#Five_Components_of_the_Total_Unpaid_Claim_Estimate | 5 Components of the Total Unpaid Claim Estimate]]''

* ''[[Friedland02.ClmsProcess#A_Claim_is_Reported | A Claim is Reported]]''

* ''[[Friedland02.ClmsProcess#Life_of_a_Claim | Life of a claim]]''

* ''[[Friedland02.ClmsProcess#Basic_Formulas | Basic Formulas]]''

[https://www.battleacts5.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Friedland02&suffix=ClmsProcess&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz &ndash; Chapter 2]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>

===Part 2 - Chapter 3 - Understanding the Data===

{| class='wikitable'  style='background-color: powderblue;'
|-
|| '''# pages in source text''' || 16
|-
|| '''Direct link to wiki article'''|| ''[[Friedland03.Data | Chapter 3 - Understanding the Data]]
|}

This is more material you're probably at least somewhat familiar with already. The BattleQuiz is fairly long but you can return to it later from time to time. You don't have to learn it all perfectly the first time through.

* ''[[Friedland03.Data#Source_of_Data | Sources of Data]]''
* ''[[Friedland03.Data#Homogeneity_and_Credibility | Homogeneity and Credibility]]''
* ''[[Friedland03.Data#Types_of_Data_Used_by_Actuaries | Types of Data Used by Actuaries]]''
* ''[[Friedland03.Data#Organizing_the_Data | Organizing the Data]]''

[https://www.battleacts5.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Friedland03&suffix=Data&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz - Chapter 3]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>

===Part 2 - Chapter 4 - Meeting with Management===

{| class='wikitable'  style='background-color: powderblue;'
|-
|| '''# pages in source text''' || 7
|-
|| '''Direct link to wiki article'''|| ''[[Friedland04.Meetings | Chapter 4 - Meeting with Management]]''
|}

To do a reserve analysis properly, you need more than just the numerical data. You have to know what's going on within your company. To get this information, you'll need to meet with management in different operational areas. Chapter 4 provides guidance for things to ask during these meetings.

This chapter is super-simple and has no subsections.

[https://www.battleacts5.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Friedland04&suffix=Meetings&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz - Chapter 4]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>

===Part 2 - Chapter 5 - The Development Triangle===

{| class='wikitable'  style='background-color: powderblue;'
|-
|| '''# pages in source text''' || 7
|-
|| '''Direct link to wiki article'''|| ''[[Friedland05.Triangles | Chapter 5 - The Development Triangle]]
|}

Chapter 5 has lots of foundational material but if you are already familiar with triangles, you may not have to spend much time here. There are a couple of videos to watch, including one that demonstrates the solution to an exam problem.

* ''[[Friedland05.Triangles#The_Development_Triangle:_Layout | The Development Triangle: Layout]]''
* ''[[Friedland05.Triangles#The_Development_Triangle:_Information | The Development Triangle: Information]]''
* ''[[Friedland05.Triangles#The_Development_Triangle:_Construction | The Development Triangle: Construction]]''
* ''[[Friedland05.Triangles#The_Development_Triangle:_Use | The Development Triangle: Use]]''

[https://www.battleacts5.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Friedland05&suffix=Triangles&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz - Chapter 5]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>

===Part 2 - Chapter 6 - The Development Triangle as a Diagnostic Tool===

{| class='wikitable'  style='background-color: powderblue;'
|-
|| '''# pages in source text''' || 17
|-
|| '''Direct link to wiki article'''|| ''[[Friedland06.Diagnostics | Chapter 6 - The Development Triangle as a Diagnostic Tool]]
|}

This chapter is one you'll almost certainly refer to several times as you cover later chapters. The effect on triangles and reserving methods of changes in case reserve adequacy and changes in the settlement rate of claims is a central theme in Friedland. Correcting for these effects is the subject of ''[[Friedland13.BerqSherm | Chapter 13 - The Berquist-Sherman Method]]''.

* ''[[Friedland06.Diagnostics#Diagnostics | Diagnostics]]''
* ''[[Friedland06.Diagnostics#Background_Information | Background Information]]''
* ''[[Friedland06.Diagnostics#Changes_in_Case_Reserve_Adequacy | Changes in Case Reserve Adequacy]]''
* ''[[Friedland06.Diagnostics#Changes_in_Settlement_Rate | Changes in Settlement Rate]]''
* ''[[Friedland06.Diagnostics#10_Diagnostic_Scenarios | 10 Diagnostic Scenarios]]''

[https://www.battleacts5.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Friedland06&suffix=Diagnostics&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz - Chapter 6]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>

==POP QUIZ ANSWERS==

* ''[https://www.battleacts5.ca/images/alice.jpg Alice]'' (Yes, Alice wears glasses!)

<html><a href="javascript:history.go(-1)">Go back</a></html>

[[Friedland01 - Overview - Comprehensive Version]]