Hello, I don't agree with the examiners report on this question and wondered if anyone could correct me. The question: "Discuss how the longer delays will impact the PMI claim reserves and their calculation, which is based on a claim run-off triangle approach. " The answer: " Impact on reserves The recent development factors would not be relevant for the latest claim paid data and the estimated outstanding claims will be too low as these development factors assume that claims have developed more than is the case." Now I agree that, due to the reduction in claims management staff, claims will take longer to process. I also agree that the previous "development factors assume that claims have developed more than is the case" insofar that outstanding claims will now take longer to process from this date forwards. I don't see how this could affect how far developed these cases are to date though? I don't understand why "outstanding claims will be too low" necessarily. I guess that taking longer to make claim payments may mean health problem may worsen thus ultimately increasing the overall claim size - but this isn't mentioned in the solution ! Moreover, I would have thought the extra discounting would reduce the reserves required. The solution goes on to assume that reserves will need to increase but I don't see how this is justified or exlained either in the solution or otherwise. Christopher
Christopher Development factors represent the progress of claims payments. For example, suppose that before the change, the claims payment pattern was as follows: Month 1 - 50% of ultimate claims Month 2 - 25% of ultimate claims Month 3 - 25% of ultimate claims So if we had 100 of claims paid in month 1, we would estimate the outstanding claims to be 100 for the following two months. Now suppose the delays mean that the genuine underlying payment pattern changes to: Month 1 - 25% of ultimate claims Month 2 - 25% of ultimate claims Month 3 - 20% of ultimate claims Month 4 - 20% of ultimate claims Month 5 - 10% of ultimate claims If claims paid in month 1 are 50, then the actual outstanding claims would be 150. But if we used the OLD development pattern, then we would only estimate them to be 50. So, the insurer will need to hold a larger reserve for outstanding claims if there are delays in paying claims. If discounting is used the reserves would be reduced, but only by a small amount. You might find the mini ASET useful - this just covers the April 2014 paper and offers more explanations of the solutions than the examiners' report. Thanks Sarah
Sarah, Thank you for your reply. My issue lies with the fact that the claim development factors change mid-way through development of outstanding claims. I believe the development factor changes should only affect the future progression of the claim and don't understand where the justification arises for reworking the past progression of the claim. Using the old claim dev figures in your example: Month 1 - 50% of ultimate claims Month 2 - 25% of ultimate claims Month 3 - 25% of ultimate claims If we consider a claim XYZ to be 1 month in: 50% is assumed to have developed. Now assume we get the staff change at this point in XYZ's development, the development factors for PMI policies (in general) have now changed to: Month 1 - 25% of ultimate claims Month 2 - 25% of ultimate claims Month 3 - 20% of ultimate claims Month 4 - 20% of ultimate claims Month 5 - 10% of ultimate claims Your example suggests that we regress claim XYZ's development and assume that it is now (at this point) only 25% developed. However I don't see how it is reasonable. 50% development occurred (or assumed to occur) whilst the original staff were in place. They worked more effectively than the new staff arrangements so 50% is reasonable. After 1 month staff cuts are introduced. Surely only the future progression of the claim should be affected by these staff cuts. I don't see how we can re-work month 1. Perhaps ASET explains this so I may have to consult there if I have to resit. Regards, Christopher
Hi Chris, If I understand your post, it looks like you're assuming that development factors change at the same point in time that the claims team reduced in size. Of course, this will be true of actual development factors, but it will almost certainly not be true of the development factors used to calculate the reserves. So I think the point is that the change in the claims team occurred 2 months ago, but the development factors that will be used to calculate the reserves will not be completely up-to-date. (Apart from anything else, it's going to take a while for the new development factors to become clear.) Does that help? Anna
