The impact on actuarial reserving from COVID-19

A person works at an Apple Inc. laptop computer on a bed in this arranged photograph taken in Bern, Switzerland, on Saturday, Aug. 22, 2020. The biggest Wall Street firms are navigating how and when to bring employees safely back to office buildings in global financial hubs, after lockdowns to address the Covid-19 pandemic forced them to do their jobs remotely for months. Photographer: Stefan Wermuth/Bloomberg
A person works at an Apple Inc. laptop computer on a bed in this arranged photograph taken in Bern, Switzerland, on Aug. 22, 2020.

The stay-at-home mandates, school and business closings, and increased remote work arrangements emanating from COVID-19 resulted in a significant decrease in motor vehicle accident frequency in 2020, with that trend continuing into 2021. Business interruption claim submissions skyrocketed as commercial operations were forced to close for extended periods. While these impacts on insurers from the above trends are clear, there are many other, less obvious forces that actuaries and company management should consider as 2021 year-end reserves are analyzed.

In a review of more than three dozen Statement of Actuarial Opinions for 2020, multiple disparities in how the impacts of the global pandemic were accounted for or identified. In some cases, there was no mention of COVID-19 in the opinion at all, while in other cases, only the issue of reduced frequency was identified.

Depending on the state and line of business written by the company this approach may be appropriate, but management should be aware of the potential hidden impacts of COVID-19 on reserves and should have discussions with their actuary to ensure these impacts are being considered - they may be negligible or significant enough to warrant changes in either assumptions or methodologies used at year-end 2021. In either case, actuaries should have pointed discussions with the claims team to understand the trends in the book of business and management should be fully educated on how those issues and their impacts were considered before selecting their best estimate of reserves for the balance sheet.

Actuaries should be examining data and communicating with claim professionals in their organization to identify anomalies in claim transactions due to the pandemic. Questions to explore include:

Has the time between accident and report date lengthened due to remote working conditions or delays in insureds seeking medical treatment?
For most companies, the former would only lengthen the reporting time by a few days. While important from a claim process perspective and concerning claim management, it would likely not have a significant impact on loss reserving patterns. The latter, however, could be many months and impact not only the initial loss report for claims incurred in 2020 but also outstanding claims from 2019, and prior, where insureds took a break from pursuing medical treatment. This could cause a slowdown in the paid loss pattern and result in significantly higher ultimate paid losses if a delay in treatment exacerbated the insured’s injuries.

Are claims settling at different speeds than prior to COVID due to unprecedented supply chain delays or court closures?
Breakdowns in the global supply chain resulted in longer repair times for properties and automobiles. It is important to consider closure rates and how such a change would impact loss development patterns. With regard to court closures, shut-downs may have lengthened settlement times on some casualty cases; alternatively, parties may have been more open to settlement conferences which could have reduced settlement times. It’s vital to have discussions with the claims team to understand what forces have acted on your claims and what the distribution by claim type looks like now versus what it would have looked like with COVID.

Has the time between the accident date and subrogation request lengthened due to longer repair time and payment from the primary carrier?
If you’re seeing slower closure times due to longer repair times, likely other companies are as well. You should consider that they will be submitting subrogation claims later than in the past, so improvements you’re seeing in these payments may not be permanent.

Has the steep rise in building costs been incorporated in case reserves?
Lumber prices soared beginning in the latter half of 2020, reaching a peak in May of 2021. While prices have since come down, they are still well above the average weekly price of $372 seen in 2019. If your case reserves are still contemplating those prices, while the price for the week ending October 15, 2021 averaged $619, you could be significantly under-reserved.

Some of these questions and issues will disproportionately affect accident years 2020 and 2021, while others may have a calendar year impact. While it is tempting to simply ignore the 2020 data as an outlier, there may be ongoing effects such that simply using pre-2020 development alone would also not be appropriate. Repair delays, for example, may exist for some time in the future making the development of paid losses longer in 2022 and beyond than it was pre-2020.

It’s more important than ever for actuaries to consider not only company operations but also the external environment when establishing reserves. The company’s claim organization could be doing a great job settling claims quickly and at better than anticipated settlement amounts, but are they settling the less complex or simpler claims that would likely not have gone into litigation anyway? Are the lingering, to-be-litigated claims likely to have higher severity due to a shift in jury mindset in a post-COVID world?

There likely could be unresolved liability issues regarding the potential for compensable employee illness claims, business interruption claims, and wrongful termination, and others, that will be working their way through the court system for years to come. One must also be careful in interpreting claim statistics that are based on calendar year data. For example, all companies will likely see deterioration in 2021 subrogation rates if measured on calendar year subrogation recoveries compared to calendar year paid loss. This by itself does not portend bad news and should be carefully communicated.

There is, undoubtedly, increased variability in reserves since the onset of COVID-19. Actuaries and company management must look beyond the observable trends and consider the potential for hidden landmines that could result in deficient reserves if not properly identified and accounted for.

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COVID-19 Insurance Claims Risk analysis
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