Workers Compensation: Emerging Issues WC Industry Reserve Adequacy

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Workers Compensation Emerging IssuesWC Industry
Reserve Adequacy

• Karen Ayres, FCAS, MAAA
• karen_ayres_at_ncci.com
• Casualty Loss Reserve Seminar
• September 23, 2002

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Overview of NCCI Analysis

• Computations based on Schedule P data
• Industry-wide reported losses and LAE
• Analyze and select paid and incurred loss and LAE
  development factors
• Analyze ultimate loss projections and select
  final estimate of ultimate incurred losses and
  LAE
• Redundancy/Inadequacy Reported - Selected
  Ultimate

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WC Industry Underwriting Ratios
The NCCI estimate and the latest report are
based on data from the 2001 Annual Statement.
The Initial Report is based on the respective
annual statement for each accident year.
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The Discount Has Remained Constant While the
Deficiency Has Increased
Numbers are based on the respective annual
statement for each accident date.
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WC Loss and LAE Reserve Adequacy
Based on data from the 2001 Annual Statement
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Estimated WC Reserve Deficiency Continues to
Increase
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NCCI Uses a Variety of Methods to Estimate
Ultimate Losses

• Methods 1-4 reflect computed development factors
  using paid loss and LAE data
• Methods 5-7 reflect computed development factors
  using paid losses/LAE and company reserve
  estimates
• Methods 8-9 incorporate selected loss and LAE
  development factors
• Ultimate losses and LAE selected based on results
  of all methods

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Comparison of MethodsAccident Year
2000Evaluated _at_2000 vs _at_ 2001
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Comparison of Methods - An Alternate View-AY
2000Evaluated _at_2000 vs _at_2001
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Comparison of Methods Over TimeAccident Year
1998
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Comparison of Methods Over TimeAccident Year
1999
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Tail Methodology

• Based on NCCI countrywide financial call data
• Similar to method used in ratemaking

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And Prior Row

• Development in years prior to ten years displayed
• Compare latest paid to prior reserve (p)
• Compare latest reserve to prior reserve (q)
• Geometric Series of reserve decay, where sum
  p/(1-q)
• When p q 1, reserves assumed adequate.

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Challenges in Estimating Industry Reserves

• Tail Factor
• And Prior Row
• Reinsurance
• Changes in market composition
• Mergers, insolvencies, etc.

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Reserve Estimation vs. Ratemaking

• Data sources
• Reserve Estimation Schedule P (10 years)
• Ratemaking Financial Call (20 Years)
• Reinsurance Issues
• Loss Development

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Questions and Answers?