Settlement Rate Adjustment
What is the Paid Development Adjustment?
Restates paid claims data by interpolating paid amounts between the historical disposal rate and the most recent disposal rate for each maturity.
Restates reported claims data at a common level of case outstanding adequacy.
Step 1
Paid Claim Adjustment Assumption
Assumes that disposal rates are roughly proportional to the total percentage of ultimate claims paid for each maturity
Reported Claim Development Adjustment Assumption
Assumes that annual changes in the average case outstanding at each maturity are due to changes in case outstanding adequacy or trends in claim severity.
Step 2
Mechanics of Paid Claim Development Adjustment
1. Analyze the historical disposal rates
2. Restate the cumulative paid claims
a) Select disposal rates
b) Interpolate between paid claims of consecutive maturities
3. Perform paid development method
Mechanics of Reported Claim Development Adjustment
1. Analyze the % chg in severities, % chg in av case outstanding.
2. Restate the cumulative reported claims
a) Select a severity trend
b) Adjust the average case outstanding by trending the most recent data backward
c) Restate the cumulative reported claims using the adjusted average case outstanding.
3. Perform the reported development method
Step 3
Calculate the adjusted open claims as the reported claim count - adjusted closed claim count
Adjusted Closed Claim Counts y, AY
Average Case OS formula
= Case OS/Open claim Counts
= (Reported C-Paid C)/ Reported Counts- Closed Counts)
Step 4
Calculate adjusted reported claims with both adjustments:
Adj Rep Claims= Adj Avg Case OS x Adj Open Claim Counts + Adj Paid Claims
a and b are regression parameters
If the historical claim count is above the adjusted claim count, then...
adjust paid claims downward, i.e, use a and b at the current maturity.
Adjusted Paid Claims formula
= a x exp (b x Adjusted Closed Claim Counts)
= Av Case Outstanding /( 1+ Severity Trend ) t
Speed up in claims settlement + increased case adequacy, the unadjusted approach...
significantly overstates the ultimate claims
a and b are regression parameters
If the historical claim count is below the adjusted claim count, then...
adjust paid claims upward, i.e. use a and b at the next maturity