(i) Tabular methods
(ii) Case reserve methods
(iii) Projection methods
(iv) Loss ratio methods
(v) Development methods
USSAGE OF "IBNR"
1. Incurred But Not Reported Claim Liabilities—Liabilities for claims that are anticipated but have not been reported to the health plan as of the valuation date. In this report, if we want to refer to this narrow formal definition, we will use the phrase “true IBNR.”
2. In Course of Settlement (ICOS) Claim Liabilities—Liabilities for claims reported and received but not yet adjudicated and paid as of the valuation date.
3. Due and Unpaid (D&U) Liabilities—Liabilities for claims that have been reported, adjudicated and processed, but for which final payment has not been recorded as of the valuation date. An example is a claim that has been adjudicated but as of the valuation date is being held until the next date on which the health plan processes claim checks.
4. Outstanding Accounting Feeds—Liabilities which have been acknowledged as payments, but for which no check has yet been cut as of the valuation date. The most common examples are payments agreed to be made to pharmacy benefit managers who process pharmacy claims at the point of sale and then bill the health plan monthly or bi-monthly for the claims. This liability definition overlaps with the D&U definition, with the distinction possibly being a system-tosystem interface or batch processing claims versus payments made directly to a third party (e.g., claimant).
5. Disputed or Resisted Claims—Liabilities for claims that are in dispute, such as those for which a known litigation situation exists.
6. Margin—Liability for a reasonable and prudent level of conservatism to cover adverse claim deviation. Such a margin can be an explicit amount or implicitly provided for in the various actuarial calculations.
TABULAR METHODS
1. These methods are applied to develop reserves for Present Value of Amount Not Yet Due (PVANYD) based on a claim continuance table with an appropriate discount rate applied. The tabular method is applied to reported and known claims.
2. For these coverages, it is more common to separately establish the additional needed claim reserves of “true” IBNR and In Course of Settlement (ICOS) claims reserves. Also, these additional claim reserves are typically produced from internal studies developing historical averages or per contract estimates that reflect the carrier’s procedures and claims paying practices.
CASE RESERVES METHODS
1. These methods are also known as the direct enumeration method or the examiners’ method. Claims examiners or other similarly qualified personnel attempt to estimate an amount to be paid based on specific information about a claim and historical experience with similar claims.
2. Once this estimate has been developed, the reserve is calculated as the estimated claim amount minus amounts already paid. This method is applied on a claim-by-claim basis, so it is typically only used for very large claims, litigated claims or other small groups or subsets of claims
3. It is impractical to try to develop reserves for an entire book of claims using these methods. Additionally, these methods only generate a reserve for reported claims, an ICOS reserve.
PROJECTION/EXPOSURE METHODS
1. Exposure methods estimate incurred claims by analyzing the historical claims rate of a line of business against a measure of the company's exposure to liability for that line. The estimate of the claim rate is multiplied by the exposure for the appropriate time period, and paid claims are then deducted to develop the reserve estimate.
2. These methods are most often used when the data does not allow for the use of another method. This could be due to a low volume of data, low claims incidence, a relatively new block of business with immature data, or concerns about claims data credibility for developing reliable claim development patterns.
3. These methods are often used in conjunction with the development methods to estimate claims for the more recent incurral months where the development methods are considered not credible.
4. Per Capita Exposure Method
(i) The exposure basis for this method is some capita count, either the number of primary insureds, members or member-months. Pricing estimates and/or historical claims and membership data are used to develop an expected per capita claims amount
(ii) This per capita claims cost is then applied to capita counts for a particular time period to determine expected incurred claims.
5. Loss Ratio Exposure Methods
(i) These methods develop an estimate of incurred claims by applying an estimated loss ratio (incurred claims over earned premiums) to earned premiums and then subtracting incurred and paid claims to develop the claim reserve. That estimated loss ratio will generally be developed based upon either the company’s experience of similar lines of business, the assumptions used in pricing the coverage or the experience of other companies with similar lines of business.
(ii) The loss ratio method is also ideal when membership data is not available or when the claim costs are not available or not credible as the pricing loss ratio can be used.
(iii) When using this method, it is important to always be cognizant of material rate increases that can change the underlying premium possibly without affecting the estimated incurred losses. If expected loss ratios are applied without recognizing material rate increases, then overstated reserves can occur.
6. Average Claim Size Method
(i). This approach multiplies the predicted number of ultimate claims by an estimated ultimate average loss for each exposure period to produce ultimate loss estimates.
(ii). If development methods produce volatile estimates for recent periods, the average loss method, like the way the loss ratio method is often used, can provide more stable results or even results more responsive to recent claim activity levels.
(iii). This method is very sensitive to how claims are counted, the stability of the underlying benefits and unusually large claims
DEVELOPMENT METHODS
1. Development methods use various analyses of the historical claim payment pattern of a line of business to estimate ultimate paid claims for relatively recent incurral periods that are “incomplete,” or for which the claims payer hasn’t paid all eventual claims.
2. These methods rely on the basic assumption that historical payment patterns (i.e., the time lag between the date of a particular medical service and the date on which the claim is paid) for a particular line of business are consistent and can be used to estimate future claims.
3. These analyses are typically based on claim “triangles” which categorize claims according to both the period in which they were incurred and the period in which they were paid, adjudicated or reported.
4. The end result is a triangle of known data that is used to develop known completion ratios and factors. These factors are analyzed in one of a number of ways to determine the completion factors to be used to estimate the ultimate expected incurred claims. Claims paid-to-date are then subtracted from the ultimate incurred claims to calculate the IBNR reserve.
5. Cross-Incurral Method
(i)While rarely used because of its unreliable premise, it is most likely used when a block is too “young” for which credible ultimate completed claims and thus completion factors can be gauged.
(ii)Typical development methods calculate factors based on a particular incurral month, examining the pattern in which the claims, specific to that incurral month, are paid over time. The cross-incurral method develops factors by looking at a particular paid month and examining the pattern in which the claims are applied to different incurral months.
(iii) This method’s premise you are “allowed to mix and match” incurral months in order to develop a complete series of lagged payments and thus develop a rough estimated set of completion factors.
(iv) The method is implemented on an aggregate basis over a defined period of months as opposed to the development method, which does calculations for each incurral month and then averages the values. The cross-incurral method takes the entire amount of claims paid, regardless of incurral period, over a certain period of time.
PAID PMPM METHODS
1. This method is a way to reduce variance in claim reserve estimates. This method focuses solely on the paid amounts in the claims triangle and attempts to estimate each unknown “cell” of the triangle based on Per Member Per Month (PMPM) paid amounts.
2. There are two variations, respectively called the “Simple Paid Lag Method” or the “Regressed Paid Lag Method.”
3. For the simple method, the future Paid PMPM amount for a given duration is simply the average of all previous PMPM amounts for that duration
4. A more sophisticated method involves regressing the prior paid amounts for a given duration against the cumulative paid amounts
5. When all cells have been filled, the previously unknown PMPMs are multiplied by the membership for their respective incurral months to generate the IBNR reserve directly.
STOCHASTIC METHODS
1. stochastic methods also model not only the expected value of future claims but also the variation about the expected value of the future claims already incurred. Stochastic models can also allow for random variation in the value of variables that contribute to incurred claims and/or claim reserves. Stochastic models are useful because
(i) Factors affecting actuarial problems do vary and stochastic models account for this.
(ii) Probabilities can be attached to outcomes.
(iii) Complex financial problems can be modeled, often using simulation, using the computing power of modern computers.
(Source: SOA)
