Introduction

Topic I - Authorship, Copyright and Publisher

This E-Text was written by Carlton Harker, FSA, MAAA who is a principal of Actuarial Work-Products, Inc. (the Publisher) and of Self-Funding Actuarial Services, Inc. This E-Text is not copyrighted and is accessible at a dedicated Website www.claimreserves.com.

Topic 2 - Scope of Plans and Benefits

This E-Text focuses primarily on self-funded health plans. Short-term disability (under 26 weeks) with modest benefits may be included with care. Workers’ Compensation medical and fully insured plans (including HMOs) may elect to use this E-Text as they wish.

Topic 3 - Scope of Practitioner Interests

The universe of practitioners might have an interest in this E-Text. This E-Text, however, has its primary focus on the risk, actuarial and computer aspects of claim reserves. Other aspects of claim reserves (legal, taxes, accounting, e.g.) are discussed but only in abbreviated and summary manner. Attachments and Commentaries are included in the Background Reading. Also, a collection of acronyms, glossary and definitions is included.

Topic 4 – Two Computational Protocols Discussed

Traditional Protocol

Descriptive terms or phrases: (a) statistical and modelling term is deterministic, (b) extension/completion/projection algebra applied to claims lag array, (c) single computation (completed claims), (d) most-commonly used, (e) simpler in that (i) only a single computation is needed and (ii) is easy to describe but (i) lacks the stochastic feature and (ii) often involves some highly-sophisticated projection algebra.

New Millennial Protocol

Descriptive terms or phrases: (a) statistical and modeling term is stochastic (or probabilistic), (b) a lag index is computed from the submitted lag data, (c) dual computation: both the (i) lag index and (ii) best-estimate of claims to which the lag index should be applied are used, (d) least-commonly used, (e) the (i) dual computation has both advantages and disadvantages and (ii) the stochastic feature is a strong advantage.

Examples of the stochastic claim reserve protocol are set forth in Attachment A-1 (Basic Reserve) and Attachment A-2 (Reserve Amendment).

Topic Five – Taxes and Regulatory Considerations

Taxes

See Attachments F-1 through F-4 for background reading on Taxes.

Regulatory Considerations

See Attachment G-1 through G-5 for background reading on Regulatory Considerations.

Summary

Both the deterministic and stochastic protocols have merit that earn recognition. Each protocol is capable of producing identical reseres from the same lag data. Each may be amended by the so-called Reserve Amendment in the same way and for the same reason. This E-Text is not able to assert which is the preferred protocol with respect to (a) ease of audit or (b) accuracy. Both protocols yield the Incurred But Not Paid Reserve and require a special computation to divide this reserve into the three parts: (a) IBNR, (b) In Course of Settlement and (c) Due and Unpaid. A comparison of the Deterministic and the Stochastic protocols is provided in Attachment A-3.