1999 Reserves Call Papers Reviewed
by David A. Foley
At the Casualty Loss Reserve Seminar on September 13-14, 1999 in Scottsdale, Arizona, six sessions were devoted to the 1999 Call for Papers sponsored by the Committee on Reserves. The topic of this year's call was "Evaluation of Non-Loss Reserves." The thirteen papers submitted in response to the call explored such issues as unallocated loss adjustment expenses, uncollectible reinsurance, declaratory judgements, and unearned premium reserves for long duration contracts. A $1,000 prize for the best paper was awarded to Thomas Struppeck for his paper, "Premium Earning Patterns for Multi-Year Large Deductible Accounts."
On Monday morning, Victoria Lusk kicked off the Call Paper Program with her paper "Unearned Premium for Long Term Policies." Victoria's presentation focused on the treatment of aggregation across policy years, discount date, and risk margin in the statutory rule for unearned premium reserves for long-term polices. Roger Hayne then discussed "Unearned Premium Reserves for Long Term Contracts," which explored the impact on earned premiums as a result of the new statutory requirements for unearned premium reserves.
In the second session, Grover Edie presented his paper "Evaluating the Unearned Premium Reserve for Automobile Extended Service Contracts." Grover explored the importance of data segmentation in discussing a methodology of estimating the adequacy of the unearned premium for extended service contracts for automobiles. Joseph Change then presented an approach to calculate the unearned premium reserves for an automobile extended warranty insurance program, test the adequacy of the calculated reserves, and determine the allowable deferred policy acquisition expenses as described in his paper "Automobile Warranty Unearned Premiums and Deferred Policy Acquisition Costs."
On the last session on Monday, Bruce Ollodart, author of "Reserves for Uncollectible Reinsurance," discussed a variety of issues pertaining to uncollectible reinsurance such as a methodology to estimate the uncollectible reserve, data sources, legal concepts, and financial reporting issues. Lee Steeneck discussed issues regarding the recognition and measurement of declaratory judgment action (DJA) expenses. His paper, "Declaratory Judgment Reserving," includes a case study application of the DJA expense reserving using a simplified report year count and amount methodology. In a concurrent session, Robert Walling presented his paper "A Dynamic Approach to Modeling Free Tail Coverage." This paper presents two completely different methodologies to estimate the free tail coverage unearned premium reserves. One approach starts with an existing deterministic model and the second approach uses stochastic simulation.
On Tuesday, prize-winning author Thomas Struppeck presented his paper, "Premium Earning Patterns for Multi-Year Large Deductible Accounts." As an example, Tom used a catastrophe cover with a multiple trigger to illustrate some unusual earning patterns that can occur when the pure premium portion of the unearned premium reserve is exactly adequate to cover the remaining risk of the policy.
In the next session on "Reserving for Loss Sensitive Premium Items," Brian Brown examined the importance of using probability distributions to reflect the range of potential outcomes when estimating the accrual for loss sensitive premium items. He illustrated how the use of expected outcomes could result in a biased estimate. Annette Goodreau discussed the advantages of calculating the retrospective premium reserve on an account basis versus a bulk basis. Her paper "Accrued Retrospectively Rated Premiums by Individual Accounts" describes a method to calculate this reserve by individual policyholder.
In the final session, Joanne Spalla presented her paper "Using Claim Department Work Measurement Systems to Determine Claim Adjuster Expense Reserves." Joanne shared with the audience the process and tools used at her company to capture the type of data necessary to use a "transaction-based" method for calculating the ULAE reserve. Craig Allen presented the paper he wrote with Donald Mango, "Two Alternative Approaches to Unallocated Loss Adjustment Expense Reserving." In their paper, Craig and Donald discuss the possible shortcomings of the paid-to-paid and Johnson methods and propose two alternative methods to overcome these potential shortcomings in estimating the ULAE reserves.
Readers interested in learning more about these papers are directed to the fall edition of the CAS Forum , which was distributed in September 1999. The papers are also available on the CAS Web Site.