Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E....

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Updating the Updating the Berquist Sherman Berquist Sherman Paper—Thirty Years Paper—Thirty Years Later Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc. Richard E. Sherman & Associates, Inc.
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Transcript of Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E....

Page 1: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Updating the Berquist Updating the Berquist Sherman Paper—Thirty Sherman Paper—Thirty

Years LaterYears Later

Richard E. Sherman, FCAS, MAAARichard E. Sherman, FCAS, MAAA

Richard E. Sherman & Associates, Inc.Richard E. Sherman & Associates, Inc.

Page 2: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Most Useful Parts of the PaperMost Useful Parts of the Paper

Favorite choice is Appendix B, the questions to Favorite choice is Appendix B, the questions to ask department executives.ask department executives.

Second are the claims disposed adjustments Second are the claims disposed adjustments and the adjustments to incurred triangles for and the adjustments to incurred triangles for changes in the adequacy level of reserves.changes in the adequacy level of reserves.

Application of reasonableness tests to the Application of reasonableness tests to the implied pure premiums, loss ratios or severities implied pure premiums, loss ratios or severities of selected ultimates.of selected ultimates.

Page 3: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Least Used Parts of the PaperLeast Used Parts of the Paper

Incremental paid methods (e.g., incremental Incremental paid methods (e.g., incremental paid per ultimate reported claim)paid per ultimate reported claim)

Adjusted growth rates based on weightings of Adjusted growth rates based on weightings of individual column growth rates and overall individual column growth rates and overall growth rates.growth rates.

Comparisons of estimates of incremental Comparisons of estimates of incremental amounts for each future AY-DY combinationamounts for each future AY-DY combination

Ex-ante testsEx-ante tests

Page 4: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Additional Questions for Additional Questions for Department ExecutivesDepartment Executives

Please submit in writing.Please submit in writing.Will read submissions after the formal Will read submissions after the formal presentations OR post as additional slides presentations OR post as additional slides for this session on the CAS website.for this session on the CAS website.Included in Appendix B: Qs for the Claims Included in Appendix B: Qs for the Claims Exec, UW Exec, EDP/Accounting Exec, Exec, UW Exec, EDP/Accounting Exec, Ratemaking ActuariesRatemaking ActuariesAdditional People to Interview: Reserving Additional People to Interview: Reserving Actuaries, Auditors Actuaries, Auditors

Page 5: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

More Qs for the Claims ExecMore Qs for the Claims Exec

Obtain copies of recent claims audits?Obtain copies of recent claims audits?For WC case reserves for permanently disabled For WC case reserves for permanently disabled claimants, what mortality table was used (year claimants, what mortality table was used (year and general population or disabled lives table?)and general population or disabled lives table?)For large open claims, has there been any For large open claims, has there been any revision in the reserve since the latest evaluation revision in the reserve since the latest evaluation date of the loss experience?date of the loss experience?Are case reserves set at an expected level, the Are case reserves set at an expected level, the most likely settlement amount or the minimum most likely settlement amount or the minimum possible amount (or some other standard)?possible amount (or some other standard)?

Page 6: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

More Qs for the UW ExecMore Qs for the UW Exec

For how many different programs or types of risk For how many different programs or types of risk are premium and loss experience tracked and are premium and loss experience tracked and compiled into loss ratio runs?compiled into loss ratio runs?Any summary available of the details of excess Any summary available of the details of excess policies, such as attachment points, exclusions, policies, such as attachment points, exclusions, per occurrence(?), sunset clauses, aggregate per occurrence(?), sunset clauses, aggregate caps, etc.?caps, etc.?Frequency of availability of such experience Frequency of availability of such experience summaries? How far back are these available?summaries? How far back are these available?How are new programs priced? If you are relying How are new programs priced? If you are relying on another insurer’s filings, how similar are the on another insurer’s filings, how similar are the underlying books of business?underlying books of business?

Page 7: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

More Qs for the EDP More Qs for the EDP or Accounting Executiveor Accounting Executive

How far back can the loss data be actively re-compiled How far back can the loss data be actively re-compiled by various key criteria? by various key criteria? What data elements are available for each claim? For What data elements are available for each claim? For each risk?each risk?By what key criteria could the historical loss data be By what key criteria could the historical loss data be freshly compiled?freshly compiled?Example criteria: size of loss breakdowns, type of claim Example criteria: size of loss breakdowns, type of claim breakdowns (e.g., liability vs. property for CMP or HMP), breakdowns (e.g., liability vs. property for CMP or HMP), separate compilations by policy limit or deductible or type separate compilations by policy limit or deductible or type of claim, or state.of claim, or state.Can data be compiled either by claimant or occurrence, Can data be compiled either by claimant or occurrence, if multiple claims are established for one occurrence?if multiple claims are established for one occurrence?

Page 8: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

More Qs for Ratemaking ActuariesMore Qs for Ratemaking Actuaries

Obtain copies of recent rate filings.Obtain copies of recent rate filings.

Were there any changes in statutes, court Were there any changes in statutes, court decisions, extent of coverage that necessitated decisions, extent of coverage that necessitated some reflection in the rate analysis?some reflection in the rate analysis?

How are new programs priced? If you are relying How are new programs priced? If you are relying on another insurer’s filings, how similar are the on another insurer’s filings, how similar are the underlying books of business?underlying books of business?

Page 9: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Qs for In House ActuariesQs for In House Actuaries

Request copies of any and all actuarial Request copies of any and all actuarial studies done by consultants, auditors or studies done by consultants, auditors or internal actuaries.internal actuaries.

What areas of disagreement are there What areas of disagreement are there between these different studies?between these different studies?

What specific background information did What specific background information did you take into account in making your you take into account in making your selections?selections?

Page 10: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Who is More Knowledgeable Who is More Knowledgeable & Less Biased?& Less Biased?

Are Department Executives or their Are Department Executives or their Managers or Middle Level staff the best Managers or Middle Level staff the best ones to interview?ones to interview?

Who is more likely to be the most Who is more likely to be the most knowledgeable and the least biased?knowledgeable and the least biased?

Page 11: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Beware of Quick, Slick AnswersBeware of Quick, Slick Answers

Be on the lookout for answers that are designed Be on the lookout for answers that are designed to bias your analysis in a specific direction. to bias your analysis in a specific direction. This is more likely if they have quick, slick This is more likely if they have quick, slick answers for you. answers for you. Does the respondent just seem to be trying to Does the respondent just seem to be trying to make themselves and their department/ make themselves and their department/ company look better? company look better? If the respondent has to pause to consider their If the respondent has to pause to consider their answer, it may well be a more honest, accurate answer, it may well be a more honest, accurate response.response.

Page 12: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Insights Based on Service Insights Based on Service as an Expert Witnessas an Expert Witness

Just because BerqSher adjusted triangles Just because BerqSher adjusted triangles represent a more sophisticated approach represent a more sophisticated approach than simply using the standard triangles than simply using the standard triangles doesn’t make their indications inherently doesn’t make their indications inherently more appropriate.more appropriate.

The larger the adjustments, the greater the The larger the adjustments, the greater the need to make sure the count data is solid need to make sure the count data is solid and consistent.and consistent.

Page 13: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Claims Disposed AdjustmentsClaims Disposed Adjustments

Only as reliable as the claim count data on Only as reliable as the claim count data on which the adjustment is based.which the adjustment is based.

Case Study: Insurer changes definition of Case Study: Insurer changes definition of indemnity claims in WC from those where indemnity claims in WC from those where indemnity payments are fairly certain to indemnity payments are fairly certain to also include medical only claims which also include medical only claims which merely have some potential to become merely have some potential to become indemnity claims.indemnity claims.

Page 14: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

ConsequencesConsequences

Major increases in claims disposal rates Major increases in claims disposal rates occur.occur.

Indemnity claim severities trend Indemnity claim severities trend downward.downward.

Insurer claims it is dramatically speeding Insurer claims it is dramatically speeding up the settlement of claims and has up the settlement of claims and has instituted loss control measures that instituted loss control measures that should result in declining severities.should result in declining severities.

Page 15: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Consultant’s ReactionsConsultant’s Reactions

Applies BerqSher claims disposed Applies BerqSher claims disposed adjustments, dramatically reducing the adjustments, dramatically reducing the paid projections. paid projections.

Consultant’s ultimate projections seem to Consultant’s ultimate projections seem to be corroborated by the downward trends be corroborated by the downward trends in paid and incurred severities.in paid and incurred severities.

Result: Grossly understated ultimates.Result: Grossly understated ultimates.

Page 16: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Just Another Type of ModelJust Another Type of Model

BerqSher adjustments only a model.BerqSher adjustments only a model.Need to check out the underlying Need to check out the underlying assumptions of that model.assumptions of that model.Need to assign a relative credibility to the Need to assign a relative credibility to the indications from the adjusted triangles indications from the adjusted triangles versus the credibility of other models.versus the credibility of other models.Need to review the reasonableness of the Need to review the reasonableness of the adjusted projections in terms of implied adjusted projections in terms of implied pure premiums, loss ratios & severities.pure premiums, loss ratios & severities.

Page 17: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Going Out on a BerqSher Limb?Going Out on a BerqSher Limb?

Problem: Adjusted triangle resulting from a Problem: Adjusted triangle resulting from a BerqSher method produces strange BerqSher method produces strange progressions of incremental paids or progressions of incremental paids or incurreds.incurreds.

Suggestion: Take only Y% of each indicated Suggestion: Take only Y% of each indicated adjustment. Solve for the Y% that adjustment. Solve for the Y% that produces the most reasonable adjusted produces the most reasonable adjusted triangle. For example, Y = 60% or 130%.triangle. For example, Y = 60% or 130%.

Page 18: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Representations by ManagementRepresentations by Management

Consider other possible explanations for Consider other possible explanations for patterns in data that appear to support the patterns in data that appear to support the validity of management’s representations.validity of management’s representations.

Explore ways to assess the possible Explore ways to assess the possible validity of these alternative explanations, validity of these alternative explanations, and query historical data to obtain key and query historical data to obtain key diagnostics.diagnostics.

Page 19: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Testing the Veracity of Testing the Veracity of Representations by ManagementRepresentations by ManagementObtain new cuts of data from several past Obtain new cuts of data from several past diagonals of loss experience.diagonals of loss experience.Obstacles: Added costs to the insurer, Obstacles: Added costs to the insurer, delays in obtaining the results, and a more delays in obtaining the results, and a more costly, extensive actuarial analysis.costly, extensive actuarial analysis.The actuary needs to be persuasive and The actuary needs to be persuasive and persistent regarding the value of the extra persistent regarding the value of the extra data, in spite of its additional cost and data, in spite of its additional cost and effort.effort.

Page 20: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Can Actuarial Judgment Can Actuarial Judgment Overcome Low Credibility?Overcome Low Credibility?

Problem: Credibility of LDFs drops rapidly Problem: Credibility of LDFs drops rapidly for the most mature DYs. Culminates in for the most mature DYs. Culminates in reliance on only one LDF at the tip of the reliance on only one LDF at the tip of the triangle.triangle.

Suggestion: Apply structural methods that Suggestion: Apply structural methods that pull in incremental data prior to the triangle pull in incremental data prior to the triangle to raise the credibility of the LDFs at or to raise the credibility of the LDFs at or near the tip. Examples: Adler/Kline, near the tip. Examples: Adler/Kline, Fisher/Lange & Sherman/Diss. Fisher/Lange & Sherman/Diss.

Page 21: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Dead on Arrival (DOA) DataDead on Arrival (DOA) Data

Standard Triangle

DiagonalsOnly Area(DOA)

Page 22: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Subsequent Reviews/PapersSubsequent Reviews/Papers

Joseph Thorne (1978 PCAS Discussion)Joseph Thorne (1978 PCAS Discussion)

Fleming Mayer (1988 Discussion Paper)Fleming Mayer (1988 Discussion Paper)

Richard Duvall (1992 PCAS)Richard Duvall (1992 PCAS)

Thomas Ghezzi (2001 Forum)Thomas Ghezzi (2001 Forum)

Halpert/Weinstein/Gonwa (2001 Forum)Halpert/Weinstein/Gonwa (2001 Forum)

Actuarial Review Roundtable Discussion Actuarial Review Roundtable Discussion (Nov. 2002)(Nov. 2002)

Page 23: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Thorne Discussion (1978 PCAS)Thorne Discussion (1978 PCAS)

Covers an extensive range of topics Covers an extensive range of topics presented in the original paper.presented in the original paper.

Joe will discuss his views regarding key Joe will discuss his views regarding key parts of his Discussion.parts of his Discussion.

Page 24: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Kirk Fleming / Jeffrey Mayer Kirk Fleming / Jeffrey Mayer (1988 Discussion Paper)(1988 Discussion Paper)

Adjusting Incurred Losses for Simultaneous Adjusting Incurred Losses for Simultaneous Shifts in Payment Patterns and Case Reserve Shifts in Payment Patterns and Case Reserve Adequacy Levels.Adequacy Levels.

How changes in payment patterns affect both How changes in payment patterns affect both the incurred and the paid projections.the incurred and the paid projections.

How changes in payment patterns can mask or How changes in payment patterns can mask or falsely imply changes in case reserve adequacy.falsely imply changes in case reserve adequacy.

How to test, analyze and correct for these How to test, analyze and correct for these changes.changes.

Page 25: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Richard Duvall (1992 PCAS)Richard Duvall (1992 PCAS)

Testing for Shifts in Reserve AdequacyTesting for Shifts in Reserve Adequacy

Presents regression models for testing the Presents regression models for testing the effects of changes in reserving practices.effects of changes in reserving practices.

Models include terms for exposure, trend and Models include terms for exposure, trend and loss development. An incurred triangle is used to loss development. An incurred triangle is used to estimate the regression parameters.estimate the regression parameters.

Dummy variables are introduced into the LDF Dummy variables are introduced into the LDF terms to test for shifts and trends in the LDF terms to test for shifts and trends in the LDF parameters.parameters.

Page 26: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Thomas Ghezzi (2001 Forum)Thomas Ghezzi (2001 Forum)

Loss Reserving Without Loss Loss Reserving Without Loss Development Patterns—Beyond Berquist Development Patterns—Beyond Berquist ShermanShermanGhezzi restates the current diagonal to the Ghezzi restates the current diagonal to the level implied by the older years’ estimates.level implied by the older years’ estimates.Restatement done on an implied ultimate Restatement done on an implied ultimate basis, eliminating the need to apply loss basis, eliminating the need to apply loss development patterns to the less mature development patterns to the less mature years.years.

Page 27: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Halpert / Weinstein / Gonwa Halpert / Weinstein / Gonwa (2001 Forum) (2001 Forum)

Evaluating Reserves in a Changing Evaluating Reserves in a Changing Claims EnvironmentClaims Environment

““Best practices” require the actuary to Best practices” require the actuary to identify and measure the emerging effects identify and measure the emerging effects of Claims Department initiatives.of Claims Department initiatives.

Adjustments to actuarial methodologies & Adjustments to actuarial methodologies & potential metrics to measure the impact of potential metrics to measure the impact of these initiatives are presented.these initiatives are presented.

Page 28: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Actuarial Review Roundtable Actuarial Review Roundtable (November 2002 Actuarial Review)(November 2002 Actuarial Review)

Authored by Arthur J. SchwartzAuthored by Arthur J. Schwartz

Participants were Berquist, Sherman, Participants were Berquist, Sherman, Thorne and MayerThorne and Mayer

Covers a wide range of key issuesCovers a wide range of key issues

Page 29: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Updating the Berquist Updating the Berquist Sherman Paper—Sherman Paper—Thirty Years LaterThirty Years Later

Joseph O. Thorne, ACAS, MAAAJoseph O. Thorne, ACAS, MAAA

Thorne & Thorne, Inc.Thorne & Thorne, Inc.

Page 30: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

GenesisGenesisThoughts In Thoughts In

The Paper and The DiscussionThe Paper and The Discussion

1973 to 19781973 to 1978

Page 31: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

GenesisGenesisUpdated Thoughts In Updated Thoughts In

The RoundtableThe Roundtable

1979 to 20021979 to 2002

Page 32: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Updated ThoughtsUpdated Thoughts

2003 to 20072003 to 2007

Page 33: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Some Specifics On The PaperSome Specifics On The Paper“Loss Reserving Adequacy Testing: “Loss Reserving Adequacy Testing:

A Comprehensive, Systematic A Comprehensive, Systematic Approach”Approach”

Quotes from the body of the paper (e.g., Quotes from the body of the paper (e.g., claims disposed ratio graph)claims disposed ratio graph)

The appendix (Examples)The appendix (Examples)

Page 34: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

Some Specifics On The Discussion Some Specifics On The Discussion and Roundtableand Roundtable

Quotes from the discussion (e.g., shifts in Quotes from the discussion (e.g., shifts in size of loss distribution)size of loss distribution)

Quotes from the roundtable (e.g., Quotes from the roundtable (e.g., econometrics)econometrics)

Page 35: Updating the Berquist Sherman Paper—Thirty Years Later Richard E. Sherman, FCAS, MAAA Richard E. Sherman & Associates, Inc.

SummarySummary

The PaperThe Paper

The DiscussionThe Discussion

The Combined Thoughts Taken As A The Combined Thoughts Taken As A WholeWhole