KenFikes

KenFikes - 1 Ken Fikes, FCAS, MAAA Introduction to Casualty...

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Unformatted text preview: 1 Ken Fikes, FCAS, MAAA Introduction to Casualty Actuarial Science Ken Fikes, FCAS, MAAA Director of Property & Casualty Email: ken@theinfiniteactuary.com 2 Ken Fikes, FCAS, MAAA Casualty Actuarial Science Two major areas are measuring 1. Written Premium Risk z Pricing 2. Earned Premium Risk z Reserving 3 Ken Fikes, FCAS, MAAA z What is a Loss Reserve? Amount necessary to settle unpaid claims z Why are Loss Reserves Important? Accurate evaluation of financial condition & underwriting income Definitions 4 Ken Fikes, FCAS, MAAA Definitions z Accounting Aspects of Loss Reserves Assets Liabilities Surplus Balance Sheet 5 Ken Fikes, FCAS, MAAA Definitions z Case Reserves Claim reported but not yet paid Assigned a value by a claims adjuster or by formula z Bulk + IBNR reserves include: Reserves for claims not yet reported (pure IBNR) Claims in transit Development on known claims Reserves for reopened claims 6 Ken Fikes, FCAS, MAAA Life Cycle of a Claim Reserve 8/1/01 Accident entered into records as $1,000 Formula Reserve 7/11/01 Accident reported Claims in Transit 10/5/01 Individual reserve established $10,000 Case Reserve 1/1/02 Estimate revised $25,000 Case Reserve 8/18/02 Settlement agreed $30,000 Case Reserve 8/25/02 Payment sent $30,000 Case Reserve 9/2/02 Claim draft clears Closed 4/2/01 Accident occurs Pure IBNR 7 Ken Fikes, FCAS, MAAA Other Considerations z Factors Affecting Loss Reserves External or Environmental Society Regulation Judiciary Seasonality Residual Market Inflation Economy 8 Ken Fikes, FCAS, MAAA Basic Reserving Techniques z Expected Loss Ratio Method z Loss Development Method z Bornhuetter/Ferguson Method 9 Ken Fikes, FCAS, MAAA Expected Loss Ratio Method EXPECTED LOSS RATIO (ELR) The anticipated ratio of projected ultimate losses to earned premiums. Sources: Pricing assumptions Industry data 10 Ken Fikes, FCAS, MAAA Expected Loss Ratio Method EXAMPLE OF ELR USING PRICING ASSUMPTIONS Commissions 20% Taxes 5% General Expenses 12% Profit (2%) Total 35% Amount to pay for loss & loss expense ---- 65% of premium 11 Ken Fikes, FCAS, MAAA Expected Loss Ratio Method Estimating Reserves Based on ELR - Example Earned Premium = $100,000 Expected Loss Ratio = 0.65 Paid Losses = $10,000 Total = ($100,000 x 0.65) - $10,000 Reserve = $65,000 - $10,000 = $55,000 12 Ken Fikes, FCAS, MAAA Estimating Reserves Based on ELR Use when you have no history such as: New product lines Radical changes in product lines...
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KenFikes - 1 Ken Fikes, FCAS, MAAA Introduction to Casualty...

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