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 (with links to topics in chapters 1-6)

Pop Quiz

Does Alice-the-Actuary wear glasses? Click for Answer 

Study Tips

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.

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.

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:

• 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. 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 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

# 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. (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 paying future claims. 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 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 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.

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Part 1 - Chapter 2 - The Claims Process

# pages in source text	10
Direct link to wiki article	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.)

• 5 Components of the Total Unpaid Claim Estimate

• A Claim is Reported

• Life of a claim

• Basic Formulas

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Part 2 - Chapter 3 - Understanding the Data

# pages in source text	16
Direct link to wiki article	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.

• Sources of Data
• Homogeneity and Credibility
• Types of Data Used by Actuaries
• Organizing the Data

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Part 2 - Chapter 4 - Meeting with Management

# pages in source text	7
Direct link to wiki article	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.

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Part 2 - Chapter 5 - The Development Triangle

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Direct link to wiki article	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.

• The Development Triangle: Layout
• The Development Triangle: Information
• The Development Triangle: Construction
• The Development Triangle: Use

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

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Direct link to wiki article	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 Chapter 13 - The Berquist-Sherman Method.

• Diagnostics
• Background Information
• Changes in Case Reserve Adequacy
• Changes in Settlement Rate
• 10 Diagnostic Scenarios

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POP QUIZ ANSWERS

• Alice (Yes, Alice wears glasses!)

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