Actuarial Notes

Property/Casualty Unpaid Claim Estimates

By Actuarial Standards Board · 2007 · ASOP No. 43

Study guides: Exam 5, Exam 6U

The Actuarial Standards Board's guidance for actuaries estimating loss and loss adjustment expense for unpaid claims on property/casualty coverages. Adopted in June 2007, when no standard guided the development of unpaid claim estimates, and updated for deviation language effective May 1, 2011 (Doc. No. 159), it applies to actuarial work products produced on or after September 1, 2007.

On the syllabus

  • Exam 5 — objectives A4 and B2; the standard as adopted in 2007 and updated for deviation language in 2011.
  • Exam 6U — objective C6.

Transmittal Memorandum

1 Purpose, Scope, Cross References, and Effective Date

  • 1.1 Purpose
    • "Unpaid claims" includes the associated unpaid claim adjustment expense.
  • 1.2 Scope
    • Applies to unpaid claim estimates for events that have occurred as of an accounting date, for all classes of entities — self-insureds, insurance companies, reinsurers and governmental entities — excluding estimates developed solely for ratemaking.
    • Covers estimates gross of recoverables such as deductibles, ceded reinsurance and salvage and subrogation, estimates net of them, and estimates of the recoverables; for discounted estimates it addresses the undiscounted value.
  • 1.3 Cross References
  • 1.4 Effective Date

2 Definitions

  • 2.1 Actuarial Central Estimate
    • An estimate that represents an expected value over the range of reasonably possible outcomes.
  • 2.2 Claim Adjustment Expense
  • 2.3 Coverage
  • 2.4 Event
  • 2.5 Method
  • 2.6 Model
  • 2.7 Model Risk
    • Model Risk: the risk that the methods are not appropriate to the circumstances or the models are not representative of the specified phenomenon.
  • 2.8 Parameter Risk
    • Parameter Risk: the risk that the parameters used in the methods or models are not representative of future outcomes.
  • 2.9 Principal
  • 2.10 Process Risk
    • The risk associated with the projection of future contingencies that are inherently variable, even when the parameters are known with certainty.
  • 2.11 Unpaid Claim Estimate
    • The actuary's estimate of the obligation for future payment resulting from claims due to past events.
  • 2.12 Unpaid Claim Estimate Analysis

3 Analysis of Issues and Recommended Practices

  • 3.1 Purpose or Use of the Unpaid Claim Estimate
  • 3.2 Constraints on the Unpaid Claim Estimate Analysis
  • 3.3 Scope of the Unpaid Claim Estimate
    • The actuary identifies the intended measure (for example a high or low estimate, median, mean, actuarial central estimate, or specified percentile), whether it is gross or net of recoverables, collectibility risk, the claim adjustment expenses covered, and the claims covered; "best estimate" and "actuarial estimate" do not identify a measure.
  • 3.4 Materiality
  • 3.5 Nature of Unpaid Claims
  • 3.6 Unpaid Claim Estimate Analysis
    • 3.6.1 Methods and Models
      • Consider the use of multiple methods or models unless reliance on a single one is reasonable; if a material component uses only one, disclose the rationale.
    • 3.6.2 Assumptions
    • 3.6.3 Data
    • 3.6.4 Recoverables
    • 3.6.5 Gross vs. Net
    • 3.6.6 External Conditions
    • 3.6.7 Changing Conditions
    • 3.6.8 Uncertainty
      • The standard neither requires nor prohibits measuring uncertainty, whose sources may include model risk, parameter risk and process risk.
  • 3.7 Unpaid Claim Estimate
    • 3.7.1 Reasonableness
    • 3.7.2 Multiple Components
    • 3.7.3 Presentation
      • A point estimate, a range of estimates, a point estimate with a margin for adverse deviation, or a probability distribution of the unpaid claim amount.
  • 3.8 Documentation

4 Communications and Disclosures

  • 4.1 Actuarial Communication
    • Disclosures include the intended purpose or use, significant constraints, the scope, and three dates — the accounting date, the valuation date and the review date — with significant risks and uncertainties and material events, assumptions or reliances.
  • 4.2 Additional Disclosures
    • The basis of any range of estimates and, for an update of a previous estimate, changes in assumptions, procedures, methods or models with a material impact, and the reasons for them.

Appendix 1 Background and Current Practices

  • Background
  • Current Practices

Appendix 2 Comments on the Second Exposure Draft and Responses

Appendix 3 Comments on Actuarial Central Estimate

  • Background
  • Comments and Responses

Related readings

  • ASOP 23 - Data Quality (ASB - 2016) — ASOP No. 23, Data Quality, to which §3.6.3 refers for selecting, relying on, reviewing and using data
  • Estimating Unpaid Claims Using Basic Techniques (Friedland - 2010) — assigned with it for Exam 5's reserving objectives, and reprinted as that text's Appendix B

Sources