Friedland01.Overview

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

Chapter 1: Overview

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Study Tips

VIDEO: F-01 (001) Introduction to Reserving → 5:00 Forum  

The Friedland source text is divided into 4 parts:

Part 1: Introduction – Chapters 1-2

Part 2: Information Gathering – Chapters 3-6

Part 3: Basic Methods for Estimating Unpaid Claims – Chapters 7-15

Part 4: Estimating Unpaid Claims Adjustment Expenses – Chapters 16-17

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.

You may not need to spend a lot of time on the introductory chapters from Part 1 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.

Alice's Introductory Pro-Tip #1! Each wiki article shows a BattleTable at the beginning of the chapter. It includes links to old exam questions relevant to that 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 E, you'll see the examiner's report question and answer on consecutive pages so you don't have to go hunting for the answer.

Estimated study time: 30 minutes (then review as needed)

BattleTable

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

• groups for whom accurate unpaid claims estimates (reserve estimates) are important
• reasons these groups need accurate estimates

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Fall #16)	Friedland02.ClmsProcess	inadequate reserves: - why this is bad
E (2014.Fall #13)	redundant reserves: - why this is bad	inadequate reserves: - why this is bad

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. She is totally not a made-up person. ;-)

Part 1 - Chapter 1 - Overview

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 work at an auto insurer and one of your insureds bumps another car while trying to parallel park. (thx GH!) 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 Chapter 16 Estimating ALAE and Chapter 17 Estimating ULAE.

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

Question: define the term unpaid claims estimate or reserve

• 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.

Question: identify 3 groups for whom accurate reserve estimates are important and provide a reason for each

• internal management

→ need accurate reserves for proper decision-making (pricing, underwriting, strategic/financial plans,...)

• investors

→ need accurate reserves because balance sheet liabilities are important in deciding whether to invest in a company

• regulators

→ need accurate reserves to perform 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 dollar-values. This is different from the term counts which refers to number 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 unpaid & unreported amounts. Just remember the ultimate can be expressed either as "paid + unpaid" or "reported + unreported". Then the unpaid amount equals "ultimate - paid" and the unreported amount equals "ultimate - reported".)

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 cumulative paid claims and case outstanding estimates at a particular point in time

(we'll cover this more fully in Friedland Chapter 2 - The Claims Process)

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

That's really all you need to know to move on to the next chapter. After you've done the quiz below, you can navigate back to the Ranking Table to select the next chapter. The link to the ranking table is always available in the left sidebar when you're in the wiki area of the BattleActs website, although you'll have to scroll to the top of the page to see it. Slay the beast!

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POP QUIZ ANSWERS

• Alice (Yes, Alice wears glasses!)

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