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

Study Tips

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.

Estimated study time: 1 hour (not including subsequent review time)

BattleTable

• this reading has not been tested on any exam from the year 2012 and subsequent

reference	part (a)	part (b)	part (c)	part (d)
no prior questions

In Plain English!

5 components of the total unpaid claim estimate

Alice-the Actuary's Pro Tip

Further down I've listed the 5 components as they are listed in the source text 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:    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 by Alice is really the sum of:

• IBNER or Incurred But Not Enough Reported
• IBNYR or Incurred But Not Yet Reported

Example:

• Suppose an accident occurs on July 1 but suppose it isn't reported until July 5. Then 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

• 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)

The only significant topic where the distinction between IBYNR and IBNER is important is Chapter 17 - ULAE

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.

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 rolled into the IBNR category.

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.

Provision for Claims Incurred But Not Reported (IBNR)

This is estimated by the actuary. It is:

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

This is the narrow definition of IBNR. (In practice, IBNR often includes everything: IBNER, IBNYR, provision for reopened claims & claims in transit)

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 doesn't become "official" until the accounting system is updated overnight.

Final Point

In practice, actuaries generally do not make separate estimates for these components. It's all just rolled up into a catch-all category that is informally referred to as IBNR