1 Reserving for Non-Medical Malpractice Casualty Loss Reserve Seminar September 8-9, 2003 Chicago, Illinois Jane C. Taylor, FCAS, JD
Dec 27, 2015
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Reserving forNon-Medical Malpractice
Casualty Loss Reserve SeminarSeptember 8-9, 2003
Chicago, Illinois
Jane C. Taylor, FCAS, JD
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Non-Medical Malpractice?
• Financial Managers / Business Advisors– Directors and Officers– Stock Brokers / Investment Houses– Lawyers– Accountants– Actuaries/Benefit Consultants– Insurance Agents/Brokers
Any Non-Medical Service Provider
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Non-Medical Malpractice?
• Real Property– Contractors - NOT Malpractice– Lawyers / Title Companies– Accountants– Architects and Engineers– Real Estate Agents– Appraisers / Inspectors– Lenders ?
Any Non-Medical Service Provider
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Non-Medical Malpractice?
• Miscellaneous /Other – School Boards– Travel Agents– Theatrical Agents / Media Professionals– Professional Trainers– Consultants
Any Non-Medical Service Provider
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External Influences:Financial / Investing
• Economy– Overall downturn - began in 2000– Downturn reinforced by events of 9/11
• Insurers absorbed major losses• Reinsurance tightened
– The 2003 Black Out - August 14-16• Increased oil prices• Major baby boom?
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External Influences:Financial / Investing
Stock Market - recovering?Closing Values of NYSE
01/04/99-09/02/03
7000
7500
8000
8500
9000
9500
10000
10500
11000
11500
12000
01/0
4/9
9
03/0
4/9
9
05/0
4/9
9
07/0
4/9
9
09/0
4/9
9
11/0
4/9
9
01/0
4/0
0
03/0
4/0
0
05/0
4/0
0
07/0
4/0
0
09/0
4/0
0
11/0
4/0
0
01/0
4/0
1
03/0
4/0
1
05/0
4/0
1
07/0
4/0
1
09/0
4/0
1
11/0
4/0
1
01/0
4/0
2
03/0
4/0
2
05/0
4/0
2
07/0
4/0
2
09/0
4/0
2
11/0
4/0
2
01/0
4/0
3
03/0
4/0
3
05/0
4/0
3
07/0
4/0
3
Close
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External Influences:Financial / Investing
Unemployment– Up … and Down… and Up …and
• Jobs going overseas• Hiring postponed• Varies widely by state / area
– Low South Dakota: 3.10%– High: Alaska:7.70%, Oregon: 7.50%,
Washington:7.30%
• Surprise 93,000 jobs cut week ending 09/05/03
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External Influences:Financial / Investing
Unemployment Countrywide Unemployment Percentage
4.5%4.2%
4.0%
4.7%
5.8%
6.2% 6.1%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
1998 1999 2000 2001 2002 July2003
August2003
Percent
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External Influences:Financial / Investing
• Consumer Credit– High delinquency ratio ( > 30 days)– Very high debt to asset ratio– “No payment until 2004” – “Zero interest until 2006”
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Consumer EconomyConsumer Credit Accounts 30+ Days Past Due
2.000
2.500
3.000
3.500
4.000
4.500
1Q99
2Q99
3Q99
4Q99
1Q00
2Q00
3Q00
4Q00
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
Perc
ent
of A
ccounts
Bank Card Composite Index (Closed-End)
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Effects on Insurance
• Restaurants– 9 - 18 months after downturn– Fire– Vandalism– Other Damage -Beer Flood
• Mortgage Guaranty– 18 - 36 months after downturn – Mortgage paid for as long as possible
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Effects on Non Medical Malpractice
Boom - Bust Cycles• Boom Times - Somebody messes up
– Loses money– Making too much money to care– Opportunities too great
• Remedies– None, do not care– Money to fix from future profits
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Effects on Non Medical Malpractice
Boom - Bust Cycles• Bust Times - Somebody messes up
– Losing money– Larger percent of remaining funds– Matters more
• Remedies
–Who put me in this position?
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Effects on Non Medical Malpractice
• Financial Managers / Business Advisors– Directors and Officers– Stock Brokers / Investment Houses– Lawyers– Accountants– Actuaries/Benefit Consultants– Insurance Agents/Brokers
Who put me in this position?
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Economy– Unemployment
• Delinquencies ( > 30 days) 4th Q 2001 4.67%4th Q 2002 4.53%1st Q 2003 4.52%
• New Foreclosures 4th Q 2002 0.25%1st Q 2003 0.37%
External Influences: Real Property
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• Economy– Overall downturn
• No Longer Profitable to Move Ahead• Large Commercial Bankruptcies
– Some specific areas in difficulty • Northwest - Again • Southeast
External Influences: Real Property
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External Influences: Real Property
• Real Property– Lawyers / Title Companies– Accountants– Architects and Engineers– Real Estate Agents– Appraisers / Inspectors– Lenders - Predatory Lenders
Who put me in this position?
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External Influences:Judicial
• Judicial System– American ideal
• Something bad happens• “It’s not my fault”• Someone will pay
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External Influences:Judicial
• Judicial System (Con’t)– Legal system supports “innovative”
claims• Legislation changes options• Lawyers seek new channels• Legal “Fads”
– Construction defect– Mold– Medical Malpractice - again
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External Influences:Judicial
• Judicial System (Con’t)– Texas and Florida
• No Sealed Settlements• Increase Insurance Costs?
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External Influences: Regulatory
• SEC - Misfeasance or Malfeasance?• Enron• World com• Tyco• ImClone
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External Influences: Regulatory
• Insurance– Insurance Company Insolvencies
Increasing• Reliance• Kemper• ROA and affiliated companies
– NAIC wants Independent Audit of Data Underlying Actuarial Opinion
– More Accountability for Opining Actuary
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Effects on Non Medical Malpractice
Who Sues?• Financial Advisors
– Individuals to Whom Advice Given• Options• Investments
– Shareholders - Individual or Class Action– SEC - Civil and/or Criminal
• Enron - D&O, Accountants• ImClone - D&O, “Insiders”
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Effects on Non Medical Malpractice
Who Sues?• Financial Advisors (Con’t)
– Insurance Departments - Civil and/or Criminal• Pennsylvania - Directors, Officers,
“Insiders”, Actuary, Accountants• Massachusetts - Directors, Officers, Actuary• A.M. Best??• Investment Advisors??
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Effects on Non Medical Malpractice
Who Sues?• Real Property
– Homeowners/ Homeowner Associations• Radon, Environmental• Subsidence• Mold
– Investors/Developers• Wrong Property• Odors
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Effects on Non Medical Malpractice
Who Sues?• Real Property (Con’t)
– State/Townships• Delaware Hotel
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Effects on Non Medical Malpractice
Occurrence v Claims Made Coverage
Occurrence
1/ 99 1/ 00 1/ 01 1/ 02 1/ 03
1999 2000 2001 2002
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Effects on Non Medical Malpractice
Occurrence v Claims Made Coverage
Claims Made
1/ 99 1/ 00 1/ 01 1/ 02 1/ 03
1999 2000 2001 2002
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Effects on Non Medical Malpractice
Claims Made Coverage• Reported Claims
– Know Claim Count• “John Doe” Defendants
– Embedded Problems • Past Years Exposures• Shifting Mix
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Effects on Non Medical Malpractice
Claims Made Coverage (Con’t)• Extended Reporting Endorsement -
“Tail”– Entitlement to Coverage– May Be Free– May Be Unlimited– One Policy Limit - Generally
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Effects on Non Medical Malpractice
• Data– Delay in Effect Due to Claims Made– Increased Frequency 1998-2002– Increased Severity 1998-2003– Client Security Violations 2002-2003 – Tail Claims ?
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Reserving for Non-Medical
Professional LiabilityCasualty Loss Reserve Seminar
September 8-9, 2003Chicago, IL
Kim E. Piersol, FCAS, MAAA
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State of the Insurance Marketplace
• The Marketplace is HARD– Profitability Not Perceived - Decreasing
Acceptable Combined Ratios (see Issue #3)
– Difficulty Purchasing Coverage/Coverage Narrowed, Limits Reduced, etc.
– Gravitation Away From Both Very Large and Very Small Insureds
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State of the Insurance Marketplace
• The Marketplace is HARD (Con’t)– Recognition of Large Reserve
Deficiencies (see Issue #1)– Growth in Alternative Markets– Growth in “Distressed” Risks/Gravitation
to Surplus Lines
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State of the Insurance Marketplace
• Underwriter Withdrawals (Some Involuntary)– Kemper Specialty– Virginia Surety– Lexington Insurance Company– Etc., Etc.
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Current Primary Players
State of the Insurance Marketplace
CNA Westport Zurich ARCH Capital Chubb Executive Risk ACE
Clarendon Monitor/Carolina Casualty AIGSt. Paul Great American Hartford
Lloyds of London Gulf Liberty NationalFireman’s Fund Philadelphia Ins Cos. Various Mutuals
Evanston ALAS Interstate
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State of the Insurance Marketplace
•New Players/Alternative Markets– Underwriters Come and Go– RRGs– Purchasing Groups– Captives (Difficulty Finding
Paper/Reinsurance)– Self-Insurance– Capital Markets
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State of the Insurance Marketplace
Professional Liability Insurance Lines and Sub-Lines
Medical Non-Medical ManagerialProfessional Liability Professional Liability Liabilty
Physicians Accountants D & O
Hospital Lawyers Fiduciary Liability
Allied Health Care Media EPLI
MCO Technology
Public Officials
Insuance Agents
Real Estate
Miscellaneous
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Increased Pressure on Profitability – Each LOB/Program Must Meet Owners Goals and Targets
– Tendency to Strengthen Reserves (“Prior Regime’s Fault”)
– Pressure (Perceived or Real) on Claims
• Issue #1 – Your Company Changes Ownership and/or CEOs
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Adjusters to Set-Up “Ultimate” Case Reserves
– Reverse Is Usually True in Due-Diligence Situations
• Issue #1(Con’t) – Your Company Changes Ownership and/or CEOs
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State of the Insurance Marketplace
“Unique” Reserving Issues
• Since Non-Medical PL Lines are Claims-Made, ANY CHANGE IN CASE RESERVING PHILOSOPHIES WILL DRAMATICALLY AFFECT THE RESERVING ACTUARY
• Issue #1(Con’t) – Your Company Changes Ownership and/or CEOs
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Shy Away From “Standard” LDF Reserving Approaches•Incurred Loss Development•Paid Loss Development (yes, even the
payment patterns can be affected)•Backward-Recursive
• Partial Solutions to Issue #1
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Depending on Size of Book (Stability), Using Berquist/Sherman Adjustments May Do the Trick on Loss Development Methods
– Since It Is a Claims-Made Product, Frequency (a given) x Severity May Work Well
– Pay More Attention to Large, Unpaid Losses
• Partial Solutions to Issue #1
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Many Companies Write Several Different Non-Medical Lines
– Many Companies Enter & Exit Lines Individually and/or Rate of Growth May Differ Significantly
• Issue #2 – Mix of (Sub) Lines-of-Business
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Keep Lines-of-Business Separate (Backward-Recursive Usually Works Well)
– If You Must Combine, Recognize Mix Change in Development Factor Selections
• Partial Solutions to Issue #2
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Pressure to “Not Show a Loss” on New Lines– Non-Medical PL Pricing Experience Data for
New Entrants Basically Non-Existent or Not-Applicable (See Also Issue #7)
– Pressure to Produce – Pricing Off “Lowest” Competitor
• Issue #3 – The Use of “Pegged” Loss Ratios for “New” Lines-of-Business
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State of the Insurance Marketplace
“Unique” Reserving Issues
– “Let’s Wait Until We Have the Experience to Reserve For This” – HUH??
– Historically, “Pegs” Are Usually Based on Underwriting or Economic Break-Even
• Issue #3 (Con’t.) – The Use of “Pegged” Loss Ratios for “New” Lines-of-Business
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Always Consider Murphy’s Law– Never Lose Sight That Under Reserving
Effects Will Multiply, •$50 million book pegged at a 75.0%• If it develops to a 175.0%, you’re $150
million in-the-hole after three years
• Partial Solutions to Issue #3
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State of the Insurance Marketplace
“Unique” Reserving Issues
• Importance of Range, “What If” Analyses Up-Front
• Partial Solutions to Issue #3 (Con’t)
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Exiting Carriers (Usually) Must Offer Extended Reporting if Leaving
– Exiting Carriers May Trigger Flurry of Incidence Reporting
• Issue #4 – “Tailing-Out” and/or “In-With-No-Priors”
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Programs With Significant Rate Action May Make It Advantageous for Insured to Trigger Extended Reporting and Purchase First-Year Claims-Made With Another Carrier
– Step-Rating Provides for Another Variable and Recognizes Differences in Coverage and Development Based Upon Retroactive Date
• Issue #4 (Con’t) – “Tailing-Out” and/or “In-With-No-Priors”
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Keep Track of Retroactive Dates and Claims-Made Step Factor in Data Bases – Extended Reporting and Incident Reporting Will Result in Very Different Development Patterns
– Rule-of-Thumb #1: Mass Triggering of Extended Reporting or Incident Reporting Will Produce a (Very) Unprofitable Situation
• Partial Solutions to Issue #4
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Rule-of-Thumb #2: Mass “In-With-No-Priors” Usually Produces Favorable Results
• Partial Solutions to Issue #4 (Con’t)
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State of the Insurance Marketplace
“Unique” Reserving Issues
– An Event May Trigger Multiple Non-Medical PL Coverages, e.g., A U.S. Stock Insurance Company Insolvency Will Probably Trigger:D&OAccountantsActuaries (If an Outside Consultant)Lawyers
• Issue #5: Catastrophic Claims Situations (Clash)
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Other Industries May Trigger Other P/C Lines (e.g. Enron, WorldCom, etc., etc.)SuretyFiduciaryEven W/C ??Others
• Issue #5 (Con’t): Catastrophic Claims Situations (Clash)
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Handle Big-Ticket Events Separately– Work Closely With Underwriters,
Lawyers and/or Claims Adjusters
• Partial Solutions to Issue #5:
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Degree Varies By Line– “Tailing-Out” To Maintain Broader
Coverage/Higher Limits on Prior Acts (See Issue #4)
• Issue #6: The Hard Market Has Narrowed Coverage/Lowered Limits in Many Cases
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Capture Kind-of-Loss, Deductibles, Policy Limits, etc., In Your Reserving Databases
– The Reserving Actuary Should Maintain a Close Working Relationship With the Pricing Actuary
• Partial Solutions to Issue #6:
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Be Aware That Changes in Coverage May Infer Different $ and Claim Count Development and that Historical Development and Trends May Need Modification
• Partial Solutions to Issue #6 (Con’t):
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Unlike Medical Professional, Non-Medical PL Does Not Have Its Own Schedule P Line
– No Separate Tracking by “Ratemaking” Agencies (ISO, NCCI, RAA, etc)
• Issue #7: Lack of Industry Information to Supplement Your Company’s Loss Experience History
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Obtain Rate Filings of Admitted Carriers {Theoretical – Even Admitted Company Filings are “Sparse” for Non-Medical PL}
– Communicate With Underwriters & Claims Adjusters
• Partial Solutions to Issue #7:
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Other Sources of Non-Medical PL Information:Professional Liability Underwriting
Society (PLUS)- “Professional Liability in the New Economy”
• Partial Solutions to Issue #7 (Con’t)
www.plusweb.org/foundation/GSUStudy-FinalReport.pdf
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State of the Insurance Marketplace
“Unique” Reserving Issues
Other Sources of Non-Medical PL InformationWyatt D&O StudyAmerican Bar Association – Standing
Committee on Professional LiabilitySome Brokers/Administrators Perform
“Surveys”
• Partial Solutions to Issue #7 (Con’t):
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Reluctance to Use Marker/Mohl (Backward Recursive)
– Failure to Take Advantage of the Reported Claims “Drop-Kick”
– Publication of “Nonsensical” Ultimates
• Issue #8: Observed Lack of Employment of Claims-Made Reserving Methodologies by Some Company Reserving Actuaries
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State of the Insurance Marketplace
“Unique” Reserving Issues
– At Least Look At and Acknowledge Implied IBNR/Case Reserve Ratios By Report (Accident) YearFor an Older Year With No Outstanding
Case Reserves (All Claims Have Been Paid and Closed), Don’t Show an IBNR Reserve
• Partial Solutions to Issue #8:
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State of the Insurance Marketplace
“Unique” Reserving Issues
There Should Be Some Sort of Reasonable Progression of These Ratios – At Least Question “Reversals”
– Don’t Dismiss Backward Recursive Out-of-Hand – AT LEAST TRY IT
• Partial Solutions to Issue #8 (Con’t):
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Communicate With Underwriters & Claims Adjusters
– Be Consistent With Pricing Actuary– Homogeneous Groupings
–Lines-of-Business–Extended Reporting Vs. Claims-Made
• Summary - Things Not To Forget
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State of the Insurance Marketplace
“Unique” Reserving Issues
– Avoid the Use of Pegs – If Used, Perform Sensitivity Testing and Communicate Results
– Handle Large Catastrophic Claims Separately
• Summary - Things Not To Forget
– Backward Recursive
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