Page 1 Recording of this session via any media type is strictly prohibited. Page 1 Loss Forecasting for Beginners – Know Thy Enemy Stephen L Upshaw, Vice President of Risk Management, Equity Residential Ann M Conway FCAS MAAA CERA, Director, Towers Watson Steven W Sachs, ARM, Executive Vice President, Director Real Estate and Hotel Practice, Willis Group
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Loss Forecasting for Beginners – Know Thy Enemy
Stephen L Upshaw, Vice President of Risk Management, Equity ResidentialAnn M Conway FCAS MAAA CERA, Director, Towers WatsonSteven W Sachs, ARM, Executive Vice President, Director Real Estate and Hotel Practice, Willis Group
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Session Objectives
• To view Loss Forecasting in the context of the Risk Management Process
• Gain ability to understand how insurers (underwriters) and actuaries set pricing
• To effectively be able to communicate the “Big Picture” to management as well as actions required to effect change
• Provide use friendly and practical information that session attendees can use
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“It is an Opportunity to Communicate with Management Using Their Language
1. Why Forecast Loss?A. It enables Risk Managers to effectively
communicate the big picture to management and then to focus on the interventions or actions that can change the outcome
B. It is how insurers/actuaries set pricingC. Credible data is a Risk Manager’s friend and
can (unfortunately) be trusted.
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Loss Forecasting for Beginners2. How Do We Forecast Losses
A. Collect Quality DataB. Loss Development
i. Historicalii. Industry
C. Loss Projectionsi. Importance of Relevant Exposure Dataii. Loss Trending Factors
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Loss Forecasting for Beginners
Loss Development
Purpose•Predicts Future Loss Trends•Improve Analysis of Historical Losses
Loss Development Factors•Traces Historical Growth Over Time
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Case HistoryTom Doe
Incident occurred at a Shopping CenterDate of Loss
• June 15, 2004Background
• Claimant was riding a motorcycle in parking lot at 5 AM, hit a light pole and was killed. It was suspected that claimant was under the influence of alcohol or drugs.
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Settlement• 10/09/2008 – Property Owner’s portion of jury award was
$290,000• An additional $38,650 was spent in legal fees
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Loss Development
Limitations• Does Not Reflect Future Changes In:
o Operationso Legal Environmento Societal Changeso Inflationo Case Reserve Adequacy
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Loss Forecasting for Beginners
Other Issues that it allows you to communicateA. Premium Allocation Process
I. MethodologyII. Loss Sensitivity
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Loss Forecasting for Beginners
How Does One Change the Results
A. CommunicationB. AccountabilityC. Loss PreventionD.Loss ReductionE. Goals and Objectives
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Standards, Accountability and Measurement
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Case Study: Hook’em-Slice’em Industries
Hook’em-Slice’em Industries, manufacturers of golf clubs, is a qualified self-insurer in the State of Minnefornia since January 1, 2004. Minnefornia requires that Hook’em-Slice’em Industries maintain a Letter of Credit (LOC) to secure the liabilities in its self-insured workers compensation program. The outstanding amount of the LOC is set at the lower of 175% of case reserves or 110% of the unpaid losses (case plus IBNR).
Your CFO has asked you to evaluate which of these two methods produces the lowest indicated LOC for the company. The CFO has also asked you to provide an estimate of the expected ultimate losses for 2014 claims for budget analysis.
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Case Study: Hook’em-Slice’em Industries
In order to provide this information, you need to calculate the total program reserves as of December 31, 2013, and also to project ultimate losses for 2014 claims based on historical ultimate losses. Due to the short timeframe you have to work under, you have elected to perform these calculations internally, rather than use your outside actuary.
Based on the information contained in the attached sheets and following the methodologies outlined on these sheets, calculate the indicated LOCs as of December 31, 2013 under the two methodologies and project ultimate losses for 2014.
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Miscellaneous Information1. Your claims administration firm (TPA) changed as of January 1,
2008. You are confident that reserves are stronger under the new TPA.
2. The State of Minnefornia passed workers compensation reform legislation in 2008 which was expected to lower costs by 10% in 2010.
3. Your self-insured retention (SIR) is $500,000. The SIR has not changed since 2004.
4. Losses are inflating at 4% per year and payroll is inflating at 3% per year
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Important Definitions
• Paid Losses • Case Reserves • Reported Losses• IBNR - Incurred But Not Reported• Accident Year• Ultimate Losses• Unpaid Losses
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Important Relationships• Reported Loss =
Paid Loss + Case Reserve• Ultimate Loss =
Reported Loss + IBNR • Ultimate Loss =
Paid Loss + Case Reserve + IBNR• Unpaid Losses =
Ultimate Losses - Paid Loss
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Hook ‘em - Slice ‘em Industries Workers Compensation Program
Reported Losses ($000’s)
As of (months) - Latest evaluation is December 31, 2013