Analytical spring cleaning


Analytical spring cleaning

Lori Ussery, Sigma

The captive insurance industry faces a number of unique challenges in 2021, one of which has been to do with the assessment, budgeting and financing of losses, says SIGMA’s Lori Ussery.

Many captive insurance stakeholders have experienced surprises in 2021, in terms of loss emergence. Many have been left wondering why their actuarial reserve estimates increased.

“Now is the time to develop a strategy to monitor loss reserves throughout the coming year.”

The response to that question may be related to overall loss deterioration, one-time large loss adjustments, increases in exposure or any combination of these or other items. While many of these changes happen and can be monitored throughout the course of a year, their impact may not be fully realised until the year-end actuarial analysis is completed. This is especially true if a company only completes the actuarial analysis once a year.

To address these issues head-on, many companies transition to full quarterly (or monthly) actuarial updates. Others choose alternative strategies of analysing data to monitor loss reserve changes throughout the year. Some of the key items analysed are set out below.

Loss development

Actuarial development methods measure historical patterns in loss development in order to forecast potential future losses. Often, these loss development patterns are measured on an annual basis at each year end, producing factors applicable to year-end evaluations and interpolated factors for interim evaluations.

Consideration might be given to compiling development triangles on a quarterly basis, especially in earlier stages of development, in order to recognise initial indications of loss trends compared to prior years and patterns of seasonality.

Loss emergence

These loss development factors can be used to compare the expected loss emergence to actual loss emergence during a certain time period, such as a month or quarter. The expected loss emergence represents an actuarial estimate of future losses expected over the time period.

Expected values are often calculated for incurred losses, paid losses, case reserves or claim counts. Actual loss emergence is the difference in losses shown on the loss runs for two consecutive evaluations. Often, claims administrators provide summaries of overall loss changes over a certain time period.

Large loss changes

Mature periods may be more sensitive to large loss adjustments, since these periods include older open claims which are typically more severe. These periods often include a lower volume of open claims and incurred but not reserved (IBNR) losses to absorb fluctuations in individual loss values.

Additionally, the effect of large claims which are close to settlement, regardless of the maturity of the period, should be monitored if the current anticipated settlement value differs significantly from the case reserve value shown in the loss run used for the most recent actuarial analysis.

Earlier indications of large loss changes could allow management to better prepare for the financing of these claims before year end. Large loss changes could be monitored through internal claims reviews or frequent actuarial updates.

Payout patterns

Many annual actuarial reports include estimates of the future payout of losses by quarter during the upcoming year, contemplating anticipated loss development, trend and exposure changes. These estimates allow management to budget for anticipated reserve changes throughout the year.

This is particularly important for new captives or those in growth mode. In both cases, losses added for the quarter may not be fully offset by payments made during the quarter on known claims, resulting in loss reserve increases over time. Even periods with stable exposure may experience reserve increases caused by inflation.

Exposure changes

Exposures are used as a measure of potential losses, common examples being payroll for workers’ compensation or revenue for general liability. Accurate estimates of exposures are key in forecasting losses for current and future years. For many industries (restaurant, retail and entertainment to name a few), actual exposure has changed drastically from initial pre-COVID-19 projections. This necessitates a constant restatement of exposures for recent and projected periods as actual exposure data becomes available and as anticipated reopening plans, changes in consumer patterns, supply of goods and other items are reevaluated.

Additionally, alternative exposure bases may be considered if data is available. For example, total miles driven may be a better indicator of loss exposure than numbers of insured vehicles for automobile liability for some industries.

With year-end reporting wrapping up, now is the time to develop a strategy to monitor loss reserves throughout the coming year. Continual monitoring of actuarial results is even more important during periods of extreme uncertainty such as we are currently navigating.

Early indications of loss results will better equip captive insurance stakeholders to anticipate changes in loss reserves, adequately fund for the results and avoid surprises at year end.

Lori Ussery is an actuarial consultant at SIGMA Actuarial Consulting Group. She can be contacted at:

SIGMA Actuarial Consulting, Lori Ussery

Captive International