Reserving: An Art, A Science, or a Calculated Combination?
Is reserving an art, science, some form of witchcraft, or a combination of all three? Pretty sure we can rule out the last option, although we were once told by a head of claims that their boss wondered if their reserve selections were being made with a crystal ball 😳. He responded that he wished he had a crystal ball to perform that task - especially if it was 100% accurate.
The “art or science” debate in claim reserving has been around forever. It’s been well established that both facets are involved. The “art” label comes from a combination of experience with similar case types, the gut-instincts one must have in claims management, and from other sources such as roundtable discussions with others who are familiar with the process. “Science” however, especially in the form of historical data, analytics, and model predictions is rapidly becoming recognized as the key to successful reserving, and it has been extended to claim valuation for both injury value and projected Loss Adjustment Expense (LAE).
A scientific approach ensures a higher degree of accuracy, timeliness, and confidence in reserve estimates. This is especially true when the data supporting this method is extensive and carefully aligned with critical aspects of a claimant profile so one can be certain that the right injury description, venue, and other important factors are applied to decisions. The Quaker Analytics exposure recognition and exposure valuation tools make it abundantly easier to explain reserve and claim value recommendations, especially to CEOs, COOs, and other non-claims/c-suite management.
Since actuaries are concerned with stability and consistency in claim reserving and the ultimate settlement payments, another essential component of Quaker’s data-driven approach is that the results can increase case reserve accuracy and can positively impact incurred but not reported (IBNR) calculation.
While in some cases LAE trends may be less of a concern, it’s also important to be able to explain how projected future LAE is selected in a case. When additional consideration should be given to increasing an offer based on this factor, having the data to back up an LAE projection is paramount. Without the proper tools, claims handlers and managers may find themselves cobbling together projected future LAE. This process can sometimes feel like a guessing game when considering legal and expert high-dollar components based on a combination of experience, budgets provided by outside counsel, and the length of time and activity remaining in a case under various scenarios.
There are several drawbacks to setting LAE without hard supportive data, such as having to justify overpaying on a claim to avoid the risk associated with change in value, including a jury verdict. A data-driven approach to projecting future LAE provides assurance that the decision is not based on the bias of the claim handler or manager(s), but on historical paid LAE. This scientific analysis eliminates any impression that claims handlers will project high future LAE on claims they are trying to rationalize a substantial increase in the offer “in consideration of future costs.” On the other hand, there may be an impression that a low estimate of future LAE signals that the claim handler/manager is dug-in, sometimes for the wrong reason, and wants very little additional consideration for projected LAE added to the offer.
Quaker Analytics addresses all of these concerns with an LAE projection calculator. Its models provide historical paid LAE by specific expense category, to which the claim handler could apply one of the following (or any other) probable case resolution expectations:
Probability that either suit will be filed and discovery will be limited
Suit will be followed by lengthy discovery and the hiring of expensive experts
Projection that a case is likely to be tried and appealed by one side or the other
Figure 1: Quaker Analytics LAE Calculator demonstration
This is “science” at work once again, ensuring LAE projection is highly accurate and consistent - components that actuaries typically insist upon.
With Quaker Analytics’ models and tools employed as the copilot to any claims management system, providing case value projections that are truly data-driven just might change the minds of those who view the process as arbitrary guesswork. Our goal is to allow anyone who touches a claim to spend more time engaged with getting cases resolved and less time explaining “crystal ball” results. We love to hear when Quaker clients impress their c-suite with improvement in results and claim closure rates, LAE control, and the increase in staff productivity.