WIN Magazine - Summer 2014 - (Page 16)

FEATURE CLAIMS LEAKAGE: PLUGGING THE HOLE WITH PREDICTIVE MODELING BY RONALD T. KUEHN FCAS, MAAA, CPCU, ARM, FCA AND KIM PIERSOL FCAS, MAAA A DVANCED USE OF predictive modeling has altered the traditional approach as to when and how claim leakage is measured. One of the main benefits of relying on these models is earlier recognition of potential adverse/favorable development in the expected cost of claims. Earlier recognition can result in loss mitigation processes applied to claims with potential 16 | v i e w t h i s i s s u e a t | claim leakage before that leakage occurs. Early application of mitigation strategies could reasonably allow for capture and recovery of 25%-50% of adverse development that would have occurred without the use of predictive modeling techniques. The traditional approach to measuring claim leakage has typically involved review of closed claim files. The approach usually involved identifying a proper claim size sample that was representative of the entire claims population. Often, a questionnaire was then completed for each sample claim that captured specific characteristics about the claim. The results of the questionnaire were then reviewed in detail to identify overall leakage issues as well as specific issues that may contribute to the overall leakage. The issue(s) that resulted in the most leakage then became the subject(s) of revisions to the claims handling process that were communicated to all claims handlers, in order to reduce or eliminate the effect of those issues on leakage in future claims. Predictive modeling is now being used to better identify claim characteristics that may indicate the potential for adverse development on the ultimate cost of a claim. Rather than relying solely on closed claim data, predictive modeling can be used at the various stages of a claim to identify potential leakage. Some models examine claims at stages as claim occurrence, claim reporting, adjustment (development) period and settlement. Other issues that can be

Table of Contents for the Digital Edition of WIN Magazine - Summer 2014

Cover Story: High Risks on the High Seas
The Rising Importance of Property Catastrophe Risk in the “New Normal” of the Nonadmitted Market
Claims Leakage: Plugging the Hole with Predictive Modeling
Managing Casualty Risks
Understanding the Data Viability and Uses for Underwriting Commercial Auto
2014 AAMGA Wholesale Insurance White Paper Winner: Pandemic Insurance in the Excess and Surplus Lines Insurance Industry
2014 AAMGA Wholesale Insurance White Paper Winner: Catastrophe Bonds: Looking Forward
Organizing Emerging Risks: AAMGA Formalizes a Collaborative Approach
In the WIN-ner’s Circle
Index to Advertisers

WIN Magazine - Summer 2014