Quantitative Skills
- Five years of experience is typical. Underwriters must be able to use numbers to quantify losses over time.
Loss Run
Is a summary or report of loss experience fro a risk over a specified period of time.
What a Loss Run Tells an Underwriter
- Financial information, such as reserves and payments that can be used to determine the profitability of a risk.
- Insight into a risk, such as the types and size of claims the account experiences.
- Determines the acceptability of the account, as well as the needed premium and other conditions.
Typical Captions on a Loss Run
- Date of loss
- Date reported
- Type of loss (Auto, premises liability, products liability)
- Description of loss
- Location
- Outstanding reserve
- Paid
- Incurred
- Open, closed, re-opened
- Date of closure
Date of Report
- Can look for patterns of late reporting. Major gaps may arise because the insured tens to wait for small losses to become larger losses.
- May give rise to anomalies in experience.
Types, Description and Location of Loss
- More detailed information should be requested on larger losses. Typically insurers have guidelines for the amounts in excess of a certain value.
- Allow the underwriter to determine if losses are the type to be expected from this risk, and whether a certain type of loss is reoccurring because of the insured’s management not learning from experience.
- Underwriter might wonder if the experience suggests and kinds of suspicious, or unexpected losses (moral hazards)
- Frequency and loss severity. Change in this may alert to risk management being needed.
- Large loss - will it occur again? Or is it highly unlikely?
- Claim counts - have claims increased in the number of years? Decreased? What cause the change? Change in ops? Change in deductible?
Outstanding Reserves
- Open claims: If a renewal, may be comfortable knowing insurer’s reserve philosophy. If new business, may need to ask their claims department and ask for an estimate of how much a given open claim might settle for.
- Underwriter could reach out to claims and see if they know anything about another insurer’s claims handling practices.
- Longstanding reserves for smaller claims are unusual. Litigation?
Losses Incurred and Claims Paid
- Underwriter needs to know whether loss reserves include deductibles, or is in net of them. If paid, has there been any change in the deductible level?
- Do the figures include adjustment expenses? What is the split between the loss settlement and adjustment expenses (which include legal expenses).
- Does anything seem odd about what figures are supplied?
Open and Closed Claims
- When claims are open for a long time, an underwriter should be looking for anomalies.
- Small first party property claims should only take 6-8 months to settle.
Quantitative Skills
- Assessment of risk is only in part a statistical analysis. Quantitative skills are also important.
- Underwriters must go “beyond the book”, i.e. not strictly confine their analysis to mathematics.
- Examples where using mathematical might not yield useful conclusions for an underwriter:
1. Insufficient statistical data
2. Familiarity with the industry (what to do in regards to slip and falls - junior underwriter vs. senior underwriter)
3. Sufficient data but difficulty in comparing risks
4. Statistical improbability of loss that does not rule out the possibility of it (i.e ruling out a large loss - floods)
5. An absence of loss, yet an occurrence of some kind the underwriter should still know about (quirks or anomalies that have had some effect on the insured’s coverage - lessening of a deductible)
Combining Quantitative and Qualitative Skills
- Losses must be analyzed for patters in the experience that will lead the underwriter to an assessment of the experience and a judgement about whether and how the risk could be made more acceptable.
- Long lists of losses, underwriter should look at the root of those claims.
- If a deductible is contemplated, the underwriter needs to adjust the claim payments for inflation and then apply the deductible to determine the impact it may have on claims.
Putting Numbers in Context
“Digging beneath the surface” allows the underwriter to assess statistical information in the context of actual events.
Ex. A building being declined for a one million dollar loss - what information may change their mind? An analysis must be done as the building may have previously not had sprinklers, but now does given the loss that occurred, making it highly unlikely for a fire loss to occur again.
Undue Pessimism
Might incline an underwriter to consider a risk with no reported losses to decline the risk.
Loss Development Factors
An underwriter must understand that those losses will continue to develop (ones that are reported), and there may have also been losses that have been incurred but not reported. Makes loss rating based only on losses reported merely provisional.
IBNR
Incurred but not reported (losses)
Undeveloped Numbers
Incurred numbers as of today (paid claims and outstanding reserves), and have not had development factors applied to reflect future changes in claims reported, reopened, and additional case reserves.
Case Study - Loss Development Factors
- Underwriter must summarize the incurred losses
- Underwriter must calculate the incurred loss ratio (while looking at the earned premiums vs losses)
- Develop the incurred losses by applying a loss development factor (both for incurred losses, and by such measures as trend factors to adjust for closed claims for inflation).
- Trend factors must be applied first.
Loss Development Factor (LDF)
Is a number applied to the losses evaluated at a certain time to project the amounts at which they will ultimately be settled.
Are derived from loss triangles.
Loss Triangle
- Groups losses by year over successive time periods to show a history of change in the amount of all losses.
- This helps to estimate future losses.
- Illustrates loss development.
- Should represent one line of coverage only.
- Can be created for reported losses, paid claims, claim counts.
Accident Year
Matches all losses, regardless of when they were reported, to the 12 month period in which they occurred.
Incurred Losses
The sum of paid claims and outstanding reserves.
Link Ratio or Age-to-age Factor
Incremental development factor.
Short Tail Claims
Losses that do not take a long time to report, develop or settle.
Cumulative Factor or Age-to-ultimate Factor
A factor that can be applied to any evaluation period to project the ultimate settlement value.
