Basic Concepts Regarding Data Used in Estimating Unpaid Claims: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Estimating Unpaid Claims Using Basic Techniques, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers. This is meant to give the student practice in answering questions of the format that will appear on Exam 6. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Sources:
Friedland, Jacqueline F. Estimating Unpaid Claims Using Basic Techniques. Casualty Actuarial Society. July 2009. Chapter 3, pp. 28-33.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S6-3-1. Give three ways in which external data may differ from an insurance company's internal data so as to render the two data sets non-comparable. (See Friedland, p. 29.)

Solution S6-3-1. The following are ways in which external data may substantively differ from an insurance company's internal data (Friedland, p. 29):

1. Differences in insurance products being monitored

2. Differences in case outstanding and settlement practices

3. Differences in insurers' operations

4. Differences in coding

5. Different geographical areas

6. Differences in mix of business

Any three of the above suffice as an answer. Other valid answers may also be possible.

Problem S6-3-2. To achieve homogeneous data sets, actuaries often separate insurance data into groups based on certain characteristics. Give four examples of desirable attributes for a single group of data. (See Friedland, p. 29.)

Solution S6-3-2. The following are examples of desirable attributes for a single group of data (Friedland, p. 29):

1. Large volume of observations/claim counts

2. Consistent coverage triggers

3. Similar length of time for reporting the claims after they occur

4. Ability to quickly develop appropriate case outstanding estimates

5. Similar lengths of time to settle the claims

6. Similar likelihoods of claims reopening

7. Similar average settlement values

Any four of the above suffice as an answer. Other valid answers may also be possible.

Problem S6-3-3. Insurers often use both internal (staff) claim adjusters and external (independent) adjusters. For which of these two types of adjusters is it typically easier to allocate adjustment expenses to a specific claim? Why? (See Friedland, p. 31.)

Solution S6-3-3. It is easier to allocate claim adjustment expenses to external adjusters, because external adjusters are often hired to adjust specific claims, as when the insurer's claim volume is higher than its staff adjusters can handle. For internal adjusters, it is often not clear how the relevant salaries and overhead expenses are to be distributed among individual claims, so the claim expenses are more easily categorized as unallocated.

Problem S6-3-4. Friedland, p. 32, lists five criteria that actuaries consider in establishing thresholds for what is deemed a "large claim" and might have different unpaid claim estimation techniques applied to it. List four of these criteria.

Solution S6-3-4. The following are the five criteria for determining the large claim threshold, as provided in Friedland, p. 32:

1. Number of claims exceeding the threshold per year

2. Claim size compared to policy limits

3. Claim size compared to reinsurance limits

4. Credibility of internal large claim data

5. Degree to which relevant external data are available

Any four of the above suffice as an answer. Other valid answers may also be possible.

Problem S6-3-5. Briefly describe four kinds of recoveries that might be relevant in determining unpaid claim estimates. (See Friedland, pp. 33-34.)

Solution S6-3-5. The following are four kinds of recoveries that might be relevant in determining unpaid claim estimates:

1. Deductible recoveries: Insurer pays the entire claim and seeks reimbursement from the insured for the deductible.

2. Salvage recoveries: Insurer takes possession of damaged property and sells it to recoup some of the claim costs.

3. Subrogation recoveries: Insurer seeks money from the third party responsible for a loss so as to recoup some of its claim costs.

4. Reinsurance recoveries: Insurer's liability for losses is reduced by having had certain claims ceded to a reinsurer.

See other sections of The Actuary's Free Study Guide for Exam 6.