2. A minor adjustment to the tail factor can have a significant impact on the unpaid claim liability.
3. We will demonstrate the selection of tail factors that consider three key variables: retention, location, and industry.
4. We will use examples of triangles at several different retentions for countrywide losses and state-specific losses.
ASSUMPTIONS
1. A new company was formed in 2010 and now has six years of hospital &Surgical compensation data.
2. The company has a $500,000 per occurrence large deductible.
3. 2010 year is only six years old (72 months) and the company has no experience before that point. What tail factor should be selected?
DATA ANALYSIS
1. The countrywide unlimited tail factor from 72 months to ultimate is 1.12.
2. The 72 to ultimate factor is then multiplied by the 60 to 72 month factor (1.02) to get the 60 to ultimate factor of 1.14.
3. This process is continued to estimate the remaining cumulative development factors at 12, 24, 36, and 48 months.
4. The resulting incurred but not reported (IBNR) figures are in the above table. However, the unique characteristics of each company are not captured and there are two critical adjustments (Retention and Location) that can be made to the tail factor to more accurately estimate the future development.
RETENTION
1. Hospital and surgical are paid sequentially. This is somewhat unique to this compensation. Other lines of coverage such as general liability, as the result of a verdict or settlement, often pay the last dollar of losses at the same time as the first.
2. In a large Hospital and Surgical compensation, the first $500,000 of losses will be paid significantly before the next $500,000 of losses. Where else for liabilities claims, The verdict or settlement will be the entirety of the loss.
3. The loss development factors need to be adjusted to account for the retention of a self-insured or large deductible.
4. The difference between using an unlimited tail factor and a tail factor adjusted for a $500,000 retention significantly changes the estimated IBNR is shown below.
LOCATION
1. The loss development patterns for each state are unique and the development patterns between states are very different. The 72-month loss development tail for Bangkok, from our database, is 1.25 whereas the 72-month factor for Pattaya is 1.04.
2. Applying a countrywide pattern to a Bangkok risk would significantly understate the IBNR. Similarly, applying a countrywide pattern to an Pattaya risk would significantly overstate the IBNR.
3. It is critically important to any actuarial analysis that the loss development factors accurately reflect the geographical composition of the company’s H&S’ compensation exposure.
THOUGHTS
1. It is critical that the loss development tail be adjusted to reflect the uniqueness of each company.
2. Actuaries should also be considering the industry in their analyses. An adjustment for the company’s retention is absolutely necessary to ensure that the IBNR is not overstated. An example of industries would be white vs blue collar claims which might result in different H&S claims.
(Source: milliman)
