Section 3

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

G. Stolyarov II
July 6, 2010 - Republished July 11, 2014

This section is part of Mr. Stolyarov's Free Study Materials for the CAS Exam 5B.

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 based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5B (Old 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.

Source:
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.

Gennady Stolyarov II (G. Stolyarov II) is an actuary, science-fiction novelist, independent philosophical essayist, poet, amateur mathematician, composer, and Editor-in-Chief of The Rational Argumentator, a magazine championing the principles of reason, rights, and progress.

In December 2013, Mr. Stolyarov published Death is Wrong, an ambitious children’s book on life extension illustrated by his wife Wendy. Death is Wrong can be found on Amazon in paperback and Kindle formats.

Mr. Stolyarov has contributed articles to the Institute for Ethics and Emerging Technologies (IEET), The Wave Chronicle, Le Quebecois Libre, Brighter Brains Institute, Immortal Life, Enter Stage RightRebirth of Reason, The Liberal Institute, and the Ludwig von Mises Institute. Mr. Stolyarov also published his articles on Associated Content (subsequently the Yahoo! Contributor Network) from 2007 until its closure in 2014, in an effort to assist the spread of rational ideas. He held the highest Clout Level (10) possible on the Yahoo! Contributor Network and was one of its Page View Millionaires, with over 3.1 million views.

Mr. Stolyarov holds the professional insurance designations of Associate of the Society of Actuaries (ASA), Associate of the Casualty Actuarial Society (ACAS), Member of the American Academy of Actuaries (MAAA), Chartered Property Casualty Underwriter (CPCU), Associate in Reinsurance (ARe), Associate in Regulation and Compliance (ARC), Associate in Personal Insurance (API), Associate in Insurance Services (AIS), Accredited Insurance Examiner (AIE), and Associate in Insurance Accounting and Finance (AIAF).

Mr. Stolyarov has written a science fiction novel, Eden against the Colossus, a philosophical treatise, A Rational Cosmology,  a play, Implied Consent, and a free self-help treatise, The Best Self-Help is Free. You can watch his YouTube Videos. Mr. Stolyarov can be contacted at gennadystolyarovii@yahoo.com.

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