Health Insurance Claim Reserves

Transcription

1 Health Insurance Claim Reserves Valuation Actuary Symposium Session 2 PD Austin, Texas Sept. 17, 2007 Health Insurance Claim Reserves - Basics Mark E. Billingsley, FSA, MAAA American Financial Group

2 Health Insurance Claim Reserves Statutory Elements Exhibit 6B Present Value of Amounts Not Yet Due Disabled Life Reserves Exhibit 8 Incurred But Not Reported In Course of Settlement / Reported Not Paid Goal is Adequacy of the Total CL&R Provision for Adverse Deviation Margins Explicit Implicit Range of Values Understand the Conservatism in Your Process Loss Adjustment Expenses Implications for Statutory, GAAP, Tax

3 Health Insurance Claim Reserves Estimation of Future Claim Payments for Claims Incurred Prior to Valuation Date Completion of Triangle Definition of Incurred Date Definition of Incurred Date Policy Language Date Liability Established Continuation of Claim Provision Various Definitions First Diagnosis of Covered Condition First Treatment of Covered Condition Date of Service First Date of Continuous Service Start of Benefit Period as defined in policy Consistency of Claim Processing

4 Claim Triangle Paid Month Oct-06 Incurred Month: Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr- 07 May-07 Jun-07 Oct-06 1,302 Nov-06 9,453 1,707 Dec-06 4,196 9,251 1,297 Jan-07 1,561 3,125 9,288 2,254 Feb ,265 2,652 9,736 1,130 Mar ,050 3,382 9,300 1,880 Apr-07 May-07 Jun-07 Short Tail Methodologies Loss Ratio Method Factor Method Estimate Incidence & Severity Claim Inventory Estimation Pending Claim Count Oldest Claim Received Number of Unprocessed Items Weight of Mail Bags Examiners Method Lag / Developmental Method

5 Developmental Method Formulas Actex publication Introduction to Ratemaking and Loss Reserving for Property and Casualty Insurance by Robert L. Brown, FSA, FCIA, ACAS Chapter 4 Loss Reserving Developmental Method Segment Business by Types of Payments Completion / Lag Factors Average of several months of payout patterns Sensitivity of Results Seasonality Age of Business Claim Backlog Issues Number of Months of Averaging Large Claims in the Tail

6 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Percentage of Claim Complete Months Since Incurral A B C D E F G 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Percentage of Claim Complete Dental First Occurrence Cancer Cancer Treatment Long Term Care Hospitalization Medical (Non-Hospital) Short Term Disability Months Since Incurral A B C D E F G

7 Percentage of Claim Complete 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% G=Dental C=First Occurrence Cancer B=Cancer Treatment A=Long Term Care E=Hospitalization F=Medical (Non-Hospital) D=Short Term Disability Months Since Incurral A B C D E F G Health CL&R Metrics Recent Month Loss Ratio Total Estimated Incurred Claims Per Policy Per Member Per Life Seasonal Adjustments 12 month Rolling Loss Ratio CL&R expressed as Months of Paid Claims CL&R Validation

8 CL&R Validation Hindsight Analysis Go beyond Schedule H Part 3 Look for Consistencies Measure Variability Establish Appropriate Provision for Adverse Deviation Insights on Changes in Claim Payment Patterns Ensure Adequacy of Results Validation Report Valuation Date: Dec-06 Mar-07 Jun-07 Jul-07 Original Claim Liability 65,175 63,530 61,671 60,545 Original Total Claim Liability with PAD 68,434 66,707 64,754 63,572 Paid Since 66,515 54,916 30,777 - Current Claim Liability 2,577 7,098 28,650 60,545 Current Claim Liability with PAD 2,706 7,453 30,082 63,572 Excess or (Deficiency) of: Original CL&R (3,917) 1,516 2,244 - Original CL&R with PAD (787) 4,337 3,895 -

9 Long-Tailed Claim Reserves James C. Berger, FSA, MAAA GE / Employers Reassurance Corporation Nature of Long-Tailed Claims Disability and Long Term Care Bifurcations Timing: liability / reserve Information: known / unknown Known: pending / open / closed Re-opened

10 Nature of Long-Tailed Claims Liabilities Valuation Date Reserves Unknown claims Known claims Accrued IBNR (retrospective IBNR) In Course of Settlement (ICOS) Prospective IBNR Case reserve (re-opened rsv) Re-opened reserve can be based on recently closed claims or seen as an addition to IBNR Nature of Long-Tailed Claims Liabilities Data Date Liabilities Valuation Date Reserves Unknown claims Known claims Accrued IBNR How will the datadate-to-valuation-date lag be dealt with? LR/CC/Past experience? Decremented ICOS of benefit amount from claim service-end date to valuation date or termination date Prospective IBNR Decremented Case reserve Decrement for period from Data Date to Valuation Date

11 Nature of Long-Tailed Claims Unknown Claims Some IBNR methods 1. Claim completion triangles, aka Chain Ladder (CL) Calculate completion factor for lag t, CF(t)» Usually make an assumption of longest lag IBNR(lag t) CL = [Paid Claims(t) / CF(t)] x [1 - CF(t)] = Ultimate claims x [1 - CF(t)] Claim dollars Claim count with average liability/reserve per lag Can be volatile (some say responsive ) Alternate method for initial volatile months, e.g. CC or LR Nature of Long-Tailed Claims Unknown Claims Some IBNR methods 2. Loss Ratio: LR x exposure Paid Claims = Ultimate claims Paid Claims 3. Claim cost: Expected CC Paid Claims = Ultimate claims Paid Claims Good benchmarking method for projections 4. Bornhuetter-Ferguson: Combines LR method with completion factor approach: IBNR(lag t) BF = [LR(t) x Exposure] x [1 - CF(t)] = Ultimate claims x [1 - CF(t)] How will the liability/reserve allocation be done?

12 Nature of Long-Tailed Claims Known Claims Need case reserves and ICOS (a liability) Think of ICOS as a completion of paid claims Use estimate of daily benefit x days from last-paid date Case reserve Discounted continuance table is standard approach though others are possible. See ASOP. When is a claim open? 1 st payment? 1 st notification? Adjust What is the incurral date? How is continuance table designed?» Date of first covered benefit» Date of first covered nursing benefit» Date of first covered benefit post-ep Does incurral date change in LTC if going from HHC to Fac? Nature of Long-Tailed Claims Known Claims Case reserve Continuance table may vary by IDI / GLTD - standard valuation tables exist» GLTD has offsets (SS, other coverages)» IDI may, too» IDI can be lifetime» Consider reinsurance & other benfs, e.g. survivor and COLA» Accident or sickness; some companies consider diagnosis» Company/market adjustments to tables may be appropriate

13 Nature of Long-Tailed Claims Known Claims Case reserve Continuance table may vary by LTC» Nursing Facility Care vs. Home Care vs. Assisted Living Facility» Cognitive vs. non-cognitive vs. short LOS (e.g., cancer, fractures)» Parameters needed for claim reserve include daily benefit (DBA), remaining days (need paid history), ICOS days - salvage factor (varies over time and dependent on size of DBA) extends BP if pool-of-money and full DBA not used» Company/market adjustments to tables may be appropriate Nature of Long-Tailed Claims Known Claims Case reserve Should be regularly tested for adequacy Retrospective analysis including IBNR and ICOS Continuance experience study with test of restated rsvs Period-to-period roll-forward» Look at roll-forward reserve less actual reserve for continuing claims. Does it have a random appearance? See Western Electric Rules at ical_process_control.htm or elsewhere

14 Sample claim Reserve Roll-forward Test Annual Investment Income Rate 6.00% /30/2004 9/30/ /31/2004 3/31/2005 6/30/2005 9/30/ /31/2005 3/31/2006 6/30/2006 9/30/ /31/2006 3/31/2007 Beginning Reserve (no IBNR) 3,000,000 5,500,000 5,400,000 6,500,000 8,500,000 10,500,000 6,000,000 12,500,000 13,000,000 14,500,000 15,000,000 Investment Income 61, , , , , , , , , ,067 Payments 150, , , , , , , , , ,000 Commutations / Settlements Reserve for New Claims 2,500,000 2,700,000 3,500,000 3,000,000 3,700,000 3,700,000 5,000,000 4,300,000 4,000,000 3,500,000 Ending Reserve 4,653,550 6,769,988 7,445,636 7,776,367 9,905,885 11,381,244 9,256,781 13,359,802 13,539,942 14,130,684 Pool Mgr Reported 5,500,000 5,400,000 6,500,000 8,500,000 10,500,000 6,000,000 12,500,000 13,000,000 14,500,000 15,000,000 GAAP Reserve Roll-forward less Pool Mgr Reported Reserve (846,450) 1,369, ,636 (723,633) (594,115) 5,381,244 (3,243,219) 359,802 (960,058) (869,316) Six Sigma Test (see below) problem?? problem?? problem?? #DIV/0! 6,000,000 Roll-forward Error Terms 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 - (1,000,000) (2,000,000) (3,000,000) (4,000,000) 1) One point beyond zone A #DIV/0! 2) 8 points in a row in zone C or beyond (all on one side) #DIV/0! 3) 6 points in a row, all increasing or decreasing ) 14 points in a row, alternating up and down 5) 2 out of three points in a row in zone A or beyond #DIV/0! 6) 4 our of 5 points in a row in zone B or beyond #DIV/0! 7) 8 points in a row beyond zone C, above or below center #DIV/0! 9 Std Dev Definition 859, , , ,965 1,199,987 1,296,307 1,488, ,032 1,359,555 1,459,184 1,753,827 #DIV/0! Zone A = +/- 3 Std Dev =0.0275*(1000/beginning claim count)*beginning rsv/1.96 Zone B = +/- 2 Std Dev 2.75% will change with claim count Zone C = +/- 1 Std Dev The std dev is based on the ValAct symposium presentation from Sept 2006: "Long Term Care Claim Reserves". The 95% confidence interval is about 2.75% x sqrt(1000# of clms) x claim reserve. To get the std dev, divide by 1.96, the normal distribution fact Nature of Long-Tailed Claims Known Claims Case reserve If claim is pending approval, use discount for probability of being approved Once claim is closed, a re-open reserve may be appropriate. Perhaps use estimate of probability of re-opening per months since closure Σ [Pr ( Reopen months since closure) x claim rsv if still open] Other short-cut methods may be appropriate if this value is small and no credibility in above method inputs Litigation, contestability

15 Nature of Long-Tailed Claims Considerations in picking a reserving methods Accuracy Responsiveness to emerging experience Stability over time Ease of calculation Timeliness of reporting results Have all material risks been identified and quantified? Nature of Long-Tailed Claims Accuracy Responsive Stability Ease of Calc Timeliness Chain Ladder? High Low Med Med B-F? Med Med Med Med Claim Cost? Med- Low Med- High Low Med- Low Loss Ratio? Low High High High

16 Statutory, Tax, GAAP, Internal Statutory Appropriate methods and assumptions are given in regulations Assumptions may include tables and discount rate and may vary by year Disability has tables; LTC does not (though it has been proposed) Provision for Adverse Deviation?? Requirements can vary by state though typically not by much Statutory, Tax, GAAP, Internal Tax Appropriate methods and assumptions are given in IRC Tend to mimic statutory with varying discount rates Sometimes unclear Is discount rate for claim incurral year or policy issue year? Seek expert guidance. (This discussion gets even deeper for ALRs)

17 Statutory, Tax, GAAP, Internal GAAP Uses best estimate for claim reserves PAD or no PAD? What discount rate? Depends on asset segmentation? Be internally consistent Internal If GAAP is unpadded best estimate, then it may be what is wanted internally