Section Two - Work-Product Changes

Part 1 – Margin-of-Error Analysis

Overview

This E-Text asserts that whenever possible, good computational protocol requires that the results be shown statistically (a political poll has a 7% error range, e.g.). It is important that such analysis be made because it will be the basis of the Plan Sponsor (and ERISA fiduciary) in setting the error margin required by the new ERM mandates.

Computation

The computational protocol computes a laggedness index for each paid month in the computer-prepared lag report. A lag report with 18 months of paid claims may become a sample with 18 items; such sample then becomes the basis for the required statistical mean and standard deviation. Attachment A is a sample claim reserve work-product, at the end of which is a sample of the actual computations the are made. See Attachment A-3.

Practical Application

Thus it is that the user of the work-product is capable of making the informed risk management decision that is required by ERM.

Part 2 – Run-Out Analysis

This E-Text asserts that each work-product should provide an analysis which compares the prior year computations and the applicable claims run-out experience. Such claims run-out will usually require completion factors so as to provide a meaningful comparison. It should be expected that the experience shows the run-out to be randomly too-high and too-low.

Part 3 – Two-Part Claim Reserve

Overview

This E-Text asserts that each of the parties involved with the claim reserve have the option of receiving the work-product in either of two formats: (a) basic reserve alone or (b) basic reserve plan an amendment. Both formats constitute an acstuarial work-product s contemplated by the American Academy of Actuaries.

Purpose of the Amendment

The basic reserve is the result of projecting the lag data so as to get a no-margin estimate of the claims incurred but unpaid. This is good beginning but what is needed is the no-margin estimate adjust for numerous increases and increases, some of which are measurable and some of which are not. The amendment treats each such adjustment individually and combines them into a single adjustment.

Candidate Adjustments Enumerated

Reasons for such adjustments include: (a) when lag claims include amounts paid in excess of the stop-loss specific, (b) for claims settlement expenses, (c) for outlier claims, (d) for margin-of-error, (e) for claims made (v. claims paid), (f) for stime-value on money, (g) for claims in course of settlement, (h) for claims due and unpaid and (i) for special incurred dates (e.g., maternity, institutional care pr Rx).

Part 4 – Modified Database

This E-Text limits its suggested database changes to the following:

Change One: Permit the user to designate the incurred date from a menu of choices.

Change Two: Permit two new dates to be selected by the user: (a) date claim was reported and (b) date claim changed from an ongoing status to an outlier status.

Change Three: Expand the date of claim settlement to include both (a) approval date and (b) paid date (in legal sense).