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  #1  
Old 09-07-2012, 12:30 PM
brandeeno brandeeno is offline
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Default Incurral Adjustment to Paid Claims

Why does an insurance carrier adjust paid claims to be on an incurred basis for a fully insured contract when the claims are already mature? It seems that they add ~3% to net paid claims to make them "incurred" claims. Is this actuarially necessary?
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Old 09-07-2012, 12:40 PM
Dr T Non-Fan Dr T Non-Fan is online now
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Underwriters understand it better that way.

I can't think of any other reason to do so. Sounds like a fudge factor. Who's to say that claims paid in a period are not actually more than the incurred claims for the period?
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Old 09-07-2012, 12:43 PM
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I agree. I can't think of any other reason to do it. If the carrier has had the account for a few years, then they should have a good mature claims basis to underwrite from. However, I see this adjustment on every fully insured renewal from some carriers.
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Old 09-07-2012, 01:13 PM
Not Mike Not Mike is offline
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Quote:
Originally Posted by brandeeno View Post
I agree. I can't think of any other reason to do it. If the carrier has had the account for a few years, then they should have a good mature claims basis to underwrite from. However, I see this adjustment on every fully insured renewal from some carriers.
Essentially, it's a trend adjustment. There is a lag from incurred to paid, so you are theoretically capturing claims that need to be trended forward to the experience period. For medical, if we think it's 1.5 months and trend is 9%, then the adjustment should be something like (1+ 1.5/12*.09).

In any case 3% seems awfully high.

In reality, you should be using incurred claims, not paid claims to do the underwriting. It's much cleaner.
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Old 09-07-2012, 01:21 PM
brandeeno brandeeno is offline
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Thanks Not Mike. That makes perfect sense.
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Old 09-07-2012, 01:58 PM
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In reality, you should be using incurred claims, not paid claims to do the underwriting. It's much cleaner.
I agree. But:
1. Incurred claims have to be completed.
2. Completion factors for a block of business might not be applicable to a group within that block.
3. Underwriters are still stuck at #1.
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Old 09-07-2012, 02:09 PM
Not Mike Not Mike is offline
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I agree. But:
1. Incurred claims have to be completed.
2. Completion factors for a block of business might not be applicable to a group within that block.
3. Underwriters are still stuck at #1.
1. Sure, but it's simple to build an IBNR model and throw the triangle in there.
2. So just complete the group, don't use the block's factors.
3. Yeah, I understand it's the path of least resistance for UWers, and it saves them a lot of work.

I'm dealing with self-funded groups and using paid claims drives me crazy. Then you are applying design changes and trying to figure out how much is run-out versus incurred, making up factors, trying to account for changes in discounts year over year, etc.

I always opt to build the triangle and completion factors.
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Old 09-07-2012, 02:14 PM
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If the group is large enough, then you should. Most groups are not big enough.

And then there is the question of "how big is 'big enough'?" to be a credible completion analysis.
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Old 09-07-2012, 02:21 PM
brandeeno brandeeno is offline
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Quote:
Originally Posted by Not Mike View Post
1. Sure, but it's simple to build an IBNR model and throw the triangle in there.
2. So just complete the group, don't use the block's factors.
3. Yeah, I understand it's the path of least resistance for UWers, and it saves them a lot of work.

I'm dealing with self-funded groups and using paid claims drives me crazy. Then you are applying design changes and trying to figure out how much is run-out versus incurred, making up factors, trying to account for changes in discounts year over year, etc.

I always opt to build the triangle and completion factors.

I almost always deal with self funded groups. Would you not have those same adjustments when dealing with claims on an incurred basis as well?
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Old 09-07-2012, 05:29 PM
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You don't "price" self-funded groups. You should tell them how much liability they should be holding, though. And you tell them how much to pay you for your services.
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