Brain Fog on Payment Pattern

[McUSA]

I should be probably be shot for asking this, but:

I've got some paid age-to-ultimate LDFs and need to convert these to a payment pattern. What is the best way to do this?

Thanks!

[Mulan]

If your age-to-ultimate factors are 2, 1.25, 1.05 and 1.. the cumulative payout pattern is 1 over the UDF 1/2 = 50%, 1/1.15 = 80%, 1/1.05 = 95%, and 1/1 = 100%.... I'll leave the incremental pattern up to the reader... (get yourself a dew, man....)

:D

[McUSA]

WHAT A RELIEF!

[Wigmeister General]

It hardly matters because the duration of P/C liabilities tends to be between 3 and 4 years on average.

[Franchise]

I would expect that he asked because it IS relevant in his case.

[Wigmeister General]

And he's probably discovered his pv factor is approximately 0.83.

[Been There Done That]

Perhaps it is a liquidity question.

[IAm@Work.com]

It hardly matters because the duration of P/C liabilities tends to be between 3 and 4 years on average.

Work with WC data much?

[Wigmeister General]

I work with WC data all the time.

[Bob the Nob]

I should be shot for asking this, but just what is Water Cooler data?

[Wigmeister General]

It's the nastiest, smelliest data one can find.

[Bob the Nob]

Okay, thanks. (I feel so stupid!)

[Boomer]

LUDWIG -

On average, the duration of a P&C liability claim is DEFINITELY NOT 3 or 4 yrs. It can be as many as 25-30 yrs in WC or as short as 6 months in APD.

[Wigmeister General]

Boomer, the average duration of P/C liabilities is between 3 and 4 years. You're not arguing with only me, now, you're arguing with Sholom Feldblum.

Of course, some WC claims are paid out over 30+ years, but on average, claims are paid out between 3 and 4 years. That is why the PV factor is roughly 0.83.

Note: 1.05 ^ -4 = 0.82, where 4 is the average duration.

[Been There Done That]

The claims that he is looking at might not be average claims, for example they might be excess WC claims, a book of such claims might have an average reporting date after year 4 or 5.

[Vic Romano]

Boomer, the average duration of P/C liabilities is between 3 and 4 years. You're not arguing with only me, now, you're arguing with Sholom Feldblum.

Of course, some WC claims are paid out over 30+ years, but on average, claims are paid out between 3 and 4 years. That is why the PV factor is roughly 0.83.

Note: 1.05 ^ -4 = 0.82, where 4 is the average duration.

Just because some early, large payments can skew the average duration, why does that imply P/C payment patterns are a non-issue? Sure in the case of Comp, the MO claims make the average duration surprisingly short, but after about 18-24 months, the average duration shifts way out.

To say "It hardly matters because the duration of P/C liabilities tends to be between 3 and 4 years on average." is misleading. Like BTDT's example, it depends upon what McUSA is dealing with. If he needs a discount factor for a year at age zero, you may kind of have a point, but if he needs anything besides that, the length and shape of the payout pattern may be critical.

[Boomer]

Sory LVBIII - I STRONGLY disagree. I see excess stuff lasting as long as 30 yrs or as short as 6-18 months. A blanket statement on P&C payout patterns is very inaccurate ........ whether you, Salom, or Jesus Christ himself said it.

[r. mutt]

Sory LVBIII - I STRONGLY disagree. I see excess stuff lasting as long as 30 yrs or as short as 6-18 months. A blanket statement on P&C payout patterns is very inaccurate ........ whether you, Salom, or Jesus Christ himself said it.

He said the duration, not the length of the tail. Duration is a technical term, try looking it up. And he's right about the WC...at least guaranteed cost.

I can't believe I'm defending Ludwig.

[Wigmeister General]

R. Mutt,

While you might find it repulsive and repugnant agreeing with me, you'll discover that just on random chance everyone will agree with me some of the time. It's the Law of Large Numbers (i.e., posts).

[Wigmeister General]

R. Mutt,

While you might find it repulsive and repugnant agreeing with me, you'll discover that just on random chance everyone will agree with me some of the time. It's the Law of Large Numbers (i.e., posts).

[Boomer]

R MUTT

first of all, i don't appreciate your rudeness - this isn't the political or sports thread section.

second - how again is DURATION different from length of tail. aren't they synonomous?

[Been There Done That]

Roughly speaking, the duration is the present-value-weighted average time to payment. (There are several slight variations on this.)

It is a measure of the interest rate sensitivity of the cash flow.

If prevailing interest rates were i%, a perpetuity would have a duration of 1/i years. So, in the current interest rate environment, a perpetuity would have an infinite term, but a 25 year duration.

[Wigmeister General]

http://www.casact.org/library/finanalysis/89val117.pdf

the ... duration ... is the weighted average of the cash flow dates, where the weights are in the present value of each cash flow. - Page 128

We now understand your confusion, Boomer.

[Arlie_Proctor]

Notwithstanding the confusion about the difference between duration and length of tail, those of us in the excess business deal with much longer tails and significantly longer durations and interest rate sensitivity. I see a lot of books that don't experience their first payments until year three or four and that pay out annuities for 40 or 50 years beyond that.

When you're dealing with that kind of payout pattern, interest rate sensitivity becomes interesting.

[Wigmeister General]

I'm sure it does. High XS of loss treaties or treaties with weird commutation clauses can definitely make a huge impact on the analysis and the payout patterns.

[MNBridge]

........ whether you, Salom, or Jesus Christ himself said it.

Aren't these the same thing? except it's Shalom

Into the discussion (a little late perhaps).

I would consider a WC claim to be 'paid' as soon as the settlement is reached. While the actual claim may payout for 30 or 40 years I don't think this is the concern of the P/C actuary but more in the realm of the SOA people.

Figure out what the expected annuity cost is and purchase an annuity (even if it is from a subsidiary) to get the reserve off the books. (By books I mean the analysis you are doing not necessarily the AS)

I know there is more to the accounting than this (i.e. you have to get the plantiff to sign off to remove reserves, etc.).

My 2 cents

[Wigmeister General]

MNPoker,

That's what I'm saying. With respect to the sign-offs from the plaintiff, not every jurisdiction permits "compromise and release". And, in some jurisdictions, future medical has to be guaranteed anyway.

[Been There Done That]

MNPoker wrote:
I would consider a WC claim to be 'paid' as soon as the settlement is reached. While the actual claim may payout for 30 or 40 years I don't think this is the concern of the P/C actuary but more in the realm of the SOA people.

I doubt that your reinsurers would consider that claim "paid".

[Wigmeister General]

:lol: :rofl:

Fantastic point !! Oh Mr. Reinsurer, we have gross IBNR of $5,000,000 on case reserves of $250,000 and paid losses of $50,000. According to our treaty, you owe us 30% of losses. Pay us $1,500,000 to cover the IBNR, $75,000 to cover your portion of the case reserves. Don't forget the $15,000 for the claims we've already paid.

Invoice: $1,590,000 to Mr. Reinsurer even though we've paid out $50,000.

Tell me where I can make a treaty like that

[joeorez]

Confirming what Ludwig says, I think a lot of people are unaware that generally reinsurance does not start paying until the ceding company has PAID (not incurred) the amount of the reinsurance retention.

[MNBridge]

:lol: :rofl:

Fantastic point !! Oh Mr. Reinsurer, we have gross IBNR of $5,000,000 on case reserves of $250,000 and paid losses of $50,000. According to our treaty, you owe us 30% of losses. Pay us $1,500,000 to cover the IBNR, $75,000 to cover your portion of the case reserves. Don't forget the $15,000 for the claims we've already paid.

Invoice: $1,590,000 to Mr. Reinsurer even though we've paid out $50,000.

Tell me where I can make a treaty like that

Your IBNR claims have reached a settlement? I don't think so.

How about Mr. Reinsurer we have agreed to total disability on the Jones Case and will be paying out $40,000 per year. However we have bought an annuity with ABC Life for $300,000 the client signed off and the state approved.

Please send our $90,000.

Or do we want to go into the accounting ramafications of when an annuity is bought and not signed off on?
I didn't think that was the point of the post but what do I know.

[MNBridge]

MNPoker wrote:
I would consider a WC claim to be 'paid' as soon as the settlement is reached. While the actual claim may payout for 30 or 40 years I don't think this is the concern of the P/C actuary but more in the realm of the SOA people.

I doubt that your reinsurers would consider that claim "paid".

Where did I say they would?

I believe I mentioned there is more to the accounting than this.

[Been There Done That]

Well, it seems to me that your reinsurers (who may well have P&C actuaries working for them) would be interested in the payout pattern of that claim, especially if they were excess.

Earlier in this thread it was asserted that using 3 or 4 years as the duration of a P&C reserve was good enough --- I disagree.

My point about your reinsurers was that even if you purchased an annuity for your retention, other P&C actuaries might be interested in how the claim might pay over time.

[MNBridge]

Well, it seems to me that your reinsurers (who may well have P&C actuaries working for them) would be interested in the payout pattern of that claim, especially if they were excess.

Earlier in this thread it was asserted that using 3 or 4 years as the duration of a P&C reserve was good enough --- I disagree.

My point about your reinsurers was that even if you purchased an annuity for your retention, other P&C actuaries might be interested in how the claim might pay over time.

I agree with all of that.