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30 things to know to properly evaluate your claims experience


Ask A Casualty Actuary

Q: What are the most common misunderstandings people have about how claims experience should be evaluated?

Evaluating claims experience is a tricky business. Here is a true/false test to gauge your level of knowledge. Write down your answers. An answer key appears at the end.

1 The best cost-allocation plan is to charge each department or division for its actual losses.

2 Suppose you have compiled the following ratios of total losses (from claims tabulations) to payroll: accident year 2002, 7.5%; 2003, 7.3%; 2004, 6.8%; and 2005, 5.3%. Since these ratios are declining, it is good evidence that loss experience is improving.

3It is best to apply only one method to project losses to an ultimate end. This prevents uncertainty when two methods produce noticeably different projections.

4 The best way to estimate accurately the incurred-but-not-reported reserve is to "work backwards." Start with last year's projections, or budget, and subtract paid losses and case reserves.

5Report-year data is not as good as accident-year data in evaluating the adequacy of total loss reserves for occurrence coverage.

6Suppose that, on average, claims settle for 15% less than case reserves; this is strong evidence that case reserves are generally redundant.

7 A good way to estimate defense and cost-containment (allocated loss adjustment expenses) reserves is to apply the ratio of paid ALAE to paid losses to total case reserves.

8Claims tabulations provide a complete and accurate picture of ultimate claim liabilities.

9If an actuary provides projections for the next five years, there is seldom a need to get an updated study during the next several years.

10 If losses limited to $10,000 per claim have been increasing at 6% per year, losses in excess of $10,000 per claim should be increasing faster than 6% per year.

11 If two or more methods are applied, it is best to simply take the average of the projections.

12 There is usually no relationship between how long a group of claims has been open and the average claim size.

13 The goal of a claims audit and an actuarial study is the same: to provide an accurate picture of total ultimate claim liabilities.

14 By definition, an IBNR reserve cannot be negative.

15 Calendar month or year averages do not provide a reliable indicator for evaluating the adequacy of claim reserves.

16 A good way to test the adequacy of case reserves is to see if the average open claim is greater than the average closed claim.

17The annual statement now contains sufficient information to accurately assess the adequacy of the loss reserves of most insurance companies.

18 Properly evaluating the feasibility of self-insurance should only involve consideration of one scenario--the one you believe is the most likely.

19 Loss development methods do not need to be modified to reflect significant changes in the number of exposures over successive years, or the mix of exposures by deductible or self-insured retention or type of risk.

20 There is often a need to reflect the effect of retentions in limiting how large big claims can get in applying a loss development method.

21 If most of the claims for a particular accident year or report year are closed, just accept the case reserves as the best estimate of claim liabilities.

22Our case reserves are more adequate now than they have ever been in the recent past, therefore, there is no need to anticipate any potential shortfall in those reserves.

23The incurred loss development method is usually the most accurate method--even if there have been significant changes in the adequacy of case reserves in recent years.

24 You are reviewing loss experience from a small number of claims. If there are only one or two unusually large development factors, just throw them out when selecting representative factors.

25 The effect of structured settlements on paid loss development can be significant.

26 Projections based on the paid loss development method are generally accurate, even if there have been major shifts in the rate of closure of claims in the recent past.

27 In the past, all claims have closed within five years of the incident. So, there is no need to carry any IBNR for accident years more than 5 years old.

28 There is no need to carry a reserve for adjusting and other expenses (unallocated loss adjustment expenses) because it is just an ongoing current expense.

29 We won't have a claim larger than $500,000 because we never had one that big in the past.

30 The expected value of a reserve or of ultimate losses is at a confidence level higher than 50%.

Answer key: Only 5, 10, 15, 20, 25 and 30 are true. If you disagree, talk it over with an actuary, or e-mail me at There are many intuitively appealing ideas that are misleading.

Ask A Risk Manager, Ask A Benefit Actuary and Ask A Casualty Actuary answer written questions from readers on risk and benefits management issues and actuarial problems.

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