Actuarial Report 2023

City of Chandler — Regular Meeting (2024-01-31)

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ANALYSIS OF UNPAID
LOSSES AND ALAE AS OF

JUNE 30, 2023

City of Chandler

September 13, 2023

A business of Marsh McLennan

Actuarial Analysis Contents

Contents
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Actuarial Findings
Unpaid Losses and ALAE....
Forecasted Ultimate Losses and ALAE for Future Period..

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Loss Development Methods .
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Estimated Ultimate Losses and ALAE at Retained Limits...
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Estimates at Various Probability Levels ....

5. Distribution and Use...

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Actuarial Analysis Executive Summary

1. Executive Summary

Purpose and Scope

Oliver Wyman Actuarial Consulting, Inc. (Oliver Wyman) has been engaged by the City of Chandler (the City) to
review its retained workers compensation (WC) exposures. The purpose of this analysis is to estimate the City’s
unpaid losses and allocated loss adjustment expense (ALAE?) as well as claim cost projections. |

It is intended that this analysis will be used by the City of Chandler solely as a guide in its determination of its
financial statement liabilities related to its self-insured exposures and for forecasting loss costs for budgeting

purposes.

The conclusions in this report are related to its stated purpose only and may not be applicable for other purposes.
Specifically, the scope of services includes the following items:

« Unpaid losses and ALAE as of June 30, 2023 for claims incurred through that same date.

¢ Projected ultimate losses and ALAE for policy period July 1, 2023-24.

e Estimates of the 70%, 80% and 90% probability levels of the unpaid losses and ALAE as well as the projected
ultimate losses as of June 30, 2023,

The estimates as of June 30, 2023 (accounting date) are based on data evaluated as of June 30, 2023 (valuation
date) and additional information provided to Oliver Wyman through July 22, 2023 (review date}.

The estimates are prepared on a nominal (undiscounted) basis, i.e. without considering the time value of money.

Additionally, estimates are presented as actuarial central estimates. An actuarial central estimate is defined as i
an expected value over the range of reasonably possible, as opposed to all conceivable, outcomes. i

Estimates are also provided at varying probability levels which are either above or below the actuarial central
estimate,

Amounts are provided net of non-insurance recoveries (e.g., salvage and subrogation) and are limited to the
City’s per occurrence retention. All insurance is considered to be valid and fully collectable.

Unless otherwise stated, all references to losses throughout this report and accompanying exhibits should be
understood to include ALAE.

The scope of this project did not include the estimation of any expenses other than ALAE and ULAE that are
sometimes associated with insurance programs. Such expenses include unallocated loss adjustment expense
(ULAE), reinsurance premiums, the costs of trustee, legal, administrative, risk management and actuarial services,
taxes, fees and assessments, and costs for surety bonds or letters of credit pertaining to outstanding liabilities
or capital requirements. ULAE is the insurance industry term generally used to refer to any claims-handling costs
that cannot be attributed to individual claims. Fees paid to third party administrators (TPAs} and salaries paid to
in-house claim adjusters and in-house defense attorneys represent examples of this type of expense.

1 ALAE Is an insurance industry term which generally refers to defense, litigation and cost containment amounts

Actuarial Analysis Executive Summary

This report sets forth the results of Oliver Wyman’s analysis and is accompanied by exhibits which should be
considered integral parts of this report.

For limitations on distribution of this report please see the Distribution and Use section of this report.

Please note that all values in this report are in U.S. currency.
Actuarial Findings

Unpaid Losses and ALAE

Table 1 below summarizes the nominal unpaid losses & ALAE, at the appropriate self-insured retention (SIR)
levels as of June 30, 2023. Estimates are presented both at an actuarial central estimate and the 70%, 80% and

90% probability levels.
Table 1: Estimated Unpaid Losses & ALAE

Evaluation Actuarial Probability Levels
Central
Date .
Estimate 70th 80th 90th
As of June 30, 2023 11,105,144 12,704,285 14,747,631 18,145,805
As of June 30, 2022 10,504,362 11,985,477 13,718,696 16,533,865
Change 600,782 718,808 1,028,935 1,611,940

The estimate of approximately $11.1 million as of June 30, 2023 represents an increase of approximately S600K
since the actuarial analysis performed as of June 30, 2022. This increase is driven by the inclusion of policy year
7/1/22 ~ 6/30/23 (which is at an increased retention level), largely offset by payments made and decreases in
the estimated ultimates for previous policy periods driven by better than expected development. Actual incurred
loss development over the last twelve months across policy years 7/1/21 — 6/30/22 and prior was $101K,
significantly less than the expected $591K.

The increase is further amplified at the higher probability levels, as the increased retention brings additional
volatility.

Forecasted Ultimate Losses and ALAE for Future Period

The nominal losses and ALAE expected to be incurred during policy period 7/1/23— 6/30/24 by the City, with a
self-insured retention of $3.0 million for police and fire employees and $1.5 million for all other employees, are
as shown in Table 2 below.

Table 2: Projected Ultimate Losses & ALAE

Actuarial
Probability Level
Self-Insured Central opapuiy revels
Retention Estimate 70th 80th 90th
1.5M / 3M 2,885,000 | 3,303,325 3,842,820 4,745,825

This forecast is based on Oliver Wyman’s estimated loss costs (losses per unit of exposure) and the City’s
forecasted exposures of approximately $163 million, It should be noted that since the projected losses and ALAE

Actuarial Analysis Executive Summary

are directly related to the forecasted exposures, if actual exposures differ from the forecast, the projected losses
and ALAE should be adjusted accordingly.

Relevant Comments

Estimated unpaid losses and ALAE are composed of case reserves and an incurred but not reported (IBNR)
provision. The case reserves are established by individual claim adjusters on open claims. Case reserves are
based on the facts of a claim as they are known as of the valuation date; however, the ultimate value of each
claim will likely differ from the current incurred estimate.

IBNR is estimated by Oliver Wyman and includes a provision for a) events that have occurred for which claims
have not been reported; b) future development on known open claims; c) claims that have been reported but
not yet recorded; and d) claims that have closed but will reopen.

The fact that the IBNR estimate includes a provision for development on known claims does not necessarily
imply that there is a problem with the case reserves. Please note that Oliver Wyman’s IBNR estimate is
appropriate for all historical periods in aggregate but not necessarily for any one particular period.

Loss and ALAE estimates may be dependent on exposure projections; if actual exposures differ from projected
amounts, loss and ALAE should be adjusted accordingly.

Actuarial Analysis Background

2. Background

Founded on May 17, 1912, the City of Chandler is located in the Greater Phoenix Valley of Arizona, located 20
miles from the Phoenix Sky Harbor Airport.

The City began self-insuring its Workers’ Compensation exposures on July 1, 2002 and has maintained a self-
insured retention since inception. Prior to that date, the City’s Workers’ Compensation liabilities were covered
through a guaranteed cost program.

The City’s self-insured retentions since July 1, 2002 are as displayed below. All self-insured retentions are
assumed to be on a per occurrence basis and eroded by loss and ALAE.

. Self-Insured Retention
Policy Years
Police / Fire All Other
7/1/02-03 to 7/1/11-12 500,000
7/1/12-13 to 7/1/14-15 600,000
7/1/15-16 to 7/1/17-18 1,000,000 600,000
7/1/18-19 to 7/1/19-20 1,250,000 600,000
7/1/20-21 2,250,000 750,000
7/1/21-22 3,000,000 1,000,000
7/1/22-23 to 7/1/23-24 3,000,000 1,500,000

Actuarial Analysis Data

3. Data

For this study, Oliver Wyman relied upon the following information, provided by the City:

* Historical ground-up and unlimited detailed claims listing for both open and closed claims as of June 30,
2023

* Historical estimated and audited (where applicable} payrolls by period

* Historical retention limits by period

Additionally, Oliver Wyman relied on the following information:

* Oliver Wyman’s prior study titled “Actuarial Analysis of Workers’ Compensation Unpaid Losses and ALAE as
of June 30, 2022” and dated September 30, 2022.

* Industry loss development factors, increased limit factors and benefit level changes from the Annual
Statistical Bulletin published by the National Council on Compensation Insurance (NCCI)

Actuarial Analysis Methodology

4. Methodology

The estimates in this report are developed in accordance with generally accepted actuarial methodology and
applicable standards of practice promulgated by the Actuarial Standards Board, Below is a discussion of the
actuarial methodologies and assumptions underlying the analysis. Projections for the City assume that the
patterns observed in historical periods will be applicable to future periods.

Oliver Wyman first selected ultimate losses limited to $75,000, which provides a more stable base for projections
than the City’s historical SIRs [or losses at statutory limits]. Oliver Wyman then used the City’s data
supplemented with insurance industry data to adjust the estimates limited to $75,000 to the actual SIR by policy
period.

To develop the estimates of limited ultimate losses, Oliver Wyman applied the following generally accepted
actuarial techniques:

* Paid and incurred loss development methods

* Case reserve development method

«Paid and incurred Bornhuetter-Ferguson methods

* Frequency / severity method

* Loss cost method

The following describes each of these methods in more detail.

Loss Development Methods

Loss development methods involve estimating how a cohort of claims will change in value over time. This cohort
of claims is typically defined as claims which have occurred over a span of time which is usually a full year which
is referred to as a particular accident year. Oliver Wyman derived loss development patterns based on accident
year development triangles created from available historical experience for the City, supplemented with
insurance industry data where appropriate. For example, if an entity's exposure is small, if there are not enough
historical periods of data to determine its own patterns, or if the entity’s own patterns are volatile, then
insurance industry data may be applied.

Under the paid loss development method, a loss payment pattern is applied directly to the latest evaluation of
cumulative paid losses by accident year to project ultimate losses.

Under the incurred loss development method, a loss reporting pattern is applied directly to the latest incurred
losses (case reserves plus cumulative paid losses) by accident year to project ultimate losses.

An advantage of the paid loss development method is that its predictive accuracy is independent of case
reserving practices and philosophies.

An advantage of the incurred loss development method is that incurred losses provide a larger statistical
database than paid losses (since case reserves are used in addition to payments) and that incurred losses provide
more current information (since the establishment of case reserves occurs before payments are made),

Actuarial Analysis Methodology

Bornhuetter-Ferguson Methods

The Bornhuetter-Ferguson (B-F) method is a blending of the results of the loss development method with an
a priori expectation of ultimate losses. The a priori expectation of ultimate losses, or preliminary ultimate losses,
are based on the results of the loss development methods described above and the results of the loss cost
method (described below) for more recent periods,

Under the incurred B-F method, the City’s (or industry's) historical reporting pattern is used to estimate the
percentage of ultimate losses which are unreported as of the valuation date. This percentage is then multiplied
by preliminary ultimate losses to produce expected unreported losses. Expected unreported losses are also
known as IBNR.

The paid B-F method relies on a mathematical procedure similar to the incurred B-F method, Payment patterns
are used in place of reporting patterns and unpaid losses are estimated in place of unreported losses. Unpaid
losses equal case reserves plus IBNR.

An advantage of the B-F method is that estimates of ultimate losses tend to be more stable than estimates
produced by the loss development method. This is because estimates based on the B-F method are generally a
weighted average between the estimate based on the loss development method and the preliminary ultimate

loss,

Loss Cost Method

Under the /oss cost method, an ultimate loss cost, or loss amount per exposure unit, is judgmentally selected to
obtain the ultimate loss estimate. The ultimate loss cost selection is based on the City’s historical loss costs,
adjusted for inflation and benefit levels. The preliminary estimate of ultimate losses is based on the results of
the loss development methods described above.

This method can be useful for estimating ultimate losses for more recent and future periods. The advantages of
using a foss cost method for the most recent periods are that it accounts for changes in exposure and is less
affected by changes in claims closing and case reserving practices than the loss development methods.

Frequency / Severity Method

Under the frequency / severity method, the ultimate losses for each period are the product of the selected
ultimate severity (i.e., average cost per claim) multiplied by the estimated ultimate number of claims. The

preliminary estimate of ultimate losses Is based on the results of the loss development methods described above.

The ultimate severity for the most recent period is judgmentally selected based on the historical limited
severities, trended to the current period’s cost and benefit level. The ultimate severity for prior periods equals
the selected current severity, detrended to the appropriate cost and benefit level to derive estimates of ultimate
losses,

Estimated Ultimate Number of Claims

Similar to the paid and incurred loss development factors, reported claim count development factors are
calculated based on historical claims triangles created from the City’s own experience. The selected count
development factors are applied to the latest reported counts to determine an estimate of the ultimate number

of claims.

Actuarial Analysis Methodology

A second estimate of the ultimate number of claims is developed based on a combination of the frequency and
Bornhuetter-Ferguson methods. The frequency method is used to develop the preliminary estimate. The
Bornhuetter-Ferguson method uses the preliminary estimate and the reported claim count development pattern
to determine a second estimate of ultimate claim counts. Oliver Wyman then judgmentally selects the ultimate
number of claims based on the two estimates.

Estimated Ultimate Losses and ALAE at Retained Limits

To develop the estimates of retained ultimate losses, Oliver Wyman applied three generally accepted actuarial
techniques: the Increased Limit Factor (ILF) Method, the LDF method, and the Excess Method.

In the ILF Method, Oliver Wyman used the City’s data supplemented with insurance industry data to create ILFs,
which are ratios of expected losses at different limits to expected losses at the selected limit of $75,000. These
selected ILFs were multiplied by the $75,000 limited ultimate loss estimates to bring these estimates to the
actual retention by policy period. This method can be useful for estimating ultimate losses for policy periods that
are less mature. Typically, this is most useful for more recent or future policy periods and for policy periods with
a significantly high retention, where actual losses have not yet had time to develop into that layer.

in the LOF Method, Oliver Wyman used internal data to adjust the selected limited loss development factors to
reflect the incurred loss development pattern appropriate for the actual retention limit by policy period. These
LDFs were then applied to the retained incurred losses. This method is useful when it is appropriate to assume
that historical development patterns are representative of future development patterns, regardless of what has
been reported so far in a given policy period,

In the Excess Method, Oliver Wyman used the aforementioned ILFs, LDFs at the $75,000 limit, and LDFs at the
actual retention limit to calculate an estimate of IBNR excess of the $75,000 limit. This amount was then added
to the limited ultimate losses and the excess incurred losses to estimate ultimate losses at the actual retention
limit. This method is a blend of the ILF and LDF methods.

Unpaid Losses and ALAE

Unpaid losses and ALAE at retained limits as of June 30, 2023 were calculated by subtracting actual payments as
of the same date from selected ultimate losses at retained limits.

Forecasted Ultimate Losses and ALAE for Future Period

Ultimate losses for the forecasted future period limited to $75,000 per occurrence were selected based on the
results of two methods, the Loss Cost method and the Frequency / Severity method. The selected ultimate losses
are then adjusted to additional retentions by the application of selected ILFs. The ILFs were derived as described
in the “Ultimate Losses and ALAE at Retained Limits” section of this report. The two methods are described

below.

Loss Cost Method

Under the Loss Cost method, ultimate losses for the forecasted future period were estimated by multiplying
forecasted payroll by a projected loss cost limited to $75,000 per occurrence. The ultimate loss cost selection
was based on the City’s historical loss costs, adjusted for inflation and benefit levels, as applicable.

Actuarial Analysis Methodology

Frequency / Severity Method
Under the frequency / severity method, ultimate losses for the forecasted future period are the product of the
selected ultimate severity (i.e., average cost per claim) multiplied by the estimated ultimate number of claims.

The ultimate frequency for the forecasted future period was judgmentally selected based on the historical
frequencies, trended to the forecast period. The selected ultimate frequency was then multiplied by projected
exposure to arrive at an estimate of estimated number of claims.

The ultimate severity for the forecasted future period was judgmentally selected based on the historical limited
severities, trended to the forecast period's cost and benefit level.

Estimates at Various Probability Levels

Oliver Wyman’s approach to estimating probability levels measures the variability or statistical fluctuation
associated with the self-insurance process itself, ie., “process risk.” Oliver Wyman has also judgmentally
introduced a variable for “parameter risk,” which is defined as the additional fluctuation which would result if
the actual parameter is different from the estimated parameter for the expected number of claims or the
average claim cost. The methodology does not, however, consider “model risk,” or the risk that the techniques
used by Oliver Wyman may not be appropriate to the City’s experience.

The parameters for the model were determined based on Oliver Wyman’s analysis of the claim detail. Specifically,
Oliver Wyman has assumed loss severity follow a lognormal distribution. The frequency for the distribution was
estimated based on the number of open and IBNR claims, while the severity was based on the City’s own loss
experience.

Actuarial Analysis Distribution and Use

5. Distribution and Use

Usage and Responsibility of Client — Oliver Wyman prepared this report for the sole use of the client named
herein for the stated purpose. This report includes important considerations, assumptions, and limitations and,
as a result, is intended to be read and used only as a whole. This report may not be separated into, or distributed,
in parts other than by the client to whom this report was issued, as needed, in the case of distribution to such
client’s directors, officers, or employees. All decisions in connection with the implementation or use of advice
or recommendations contained in this report are the sole responsibility of the client named herein.

Third Party Reliance and Due Diligence — Oliver Wyman’s consent to any distribution of this report (whether
herein or in the written agreement pursuant to which we issued this report) to parties other than of the client
named herein does not constitute advice by Oliver Wyman to any such third parties. Any distribution to third
parties shall be solely for informational purposes and not for purposes of reliance by any such parties. Oliver
Wyman assumes no liability related to third party use of this report or any actions taken or decisions made as a
consequence of the results, advice or recommendations set forth herein. This report should not replace the due
diligence on behalf of any such third party.

Actuarial Analysis Considerations and Limitations

6. Considerations and Limitations

Oliver Wyman has prepared this analysis in conformity with its intended utilization by persons technically
competent in the areas addressed and for the stated purposes only. Judgments as to the conclusions, indications,
methods, and data contained in this analysis should be made only after studying the analysis in its entirety.
Furthermore, Oliver Wyman staff is available to explain any matter presented herein. It is assumed that the user
of the analysis will seek such explanation as to any matter in question.

Data Verification —- For our analysis, we relied on data and information provided by the client named herein
without independent audit. Though we have reviewed the data for reasonableness and consistency, we have
not audited or otherwise verified this data. Our review of data may not always reveal imperfections. We have
assumed that the data provided is both accurate and complete. The results of our analysis are dependent on
this assumption. If this data or information ts inaccurate or incomplete, our findings and conclusions might
therefore be unreliable.

Prospective Policy / Accident Pertod Estimates ~ We estimated the prospective policy/accident period
estimates developed in this analysis using estimated loss costs and the projected exposures. Prospective period
loss and ALAE estimates are directly related to the projected exposures. Therefore, if actual exposures differ
from the projection, we would need to adjust the prospective policy/accident period estimates accordingly.

Supplemental Data — Where historical data of the client named herein was either {i) not available, (ii) not
appropriate or (ili) not sufficiently credible to develop our actuarial assumptions, we supplemented it with
external information, as we deemed appropriate. Although we believe these external sources may be more
predictive of future experience of the client named herein than any other data of which we are aware, the use
of external data adds to the uncertainty associated with our projections.

Exclusion of Other Program Costs — The scope of the project does not include the estimation of any costs other
than those described herein. Such ancillary costs may include unallocated loss adjustment expenses (ULAE);
excess insurance premiums; the costs of trustee, legal, administrative, risk management and actuarial services;
fees and assessments; and costs for surety bonds or letters of credit pertaining to claim liabilities.

Assumption of Valid Insurance / Reinsurance — We assumed that all insurance/reinsurance is valid and fully
collectible. We made no assessment, and do not express any opinion, concerning the viability or collectability of
any insurance or reinsurance. We have not evaluated the financial strength, claims-paying ability or any other
factors with regard to the past, current, and prospective insurers/reinsurers of the client named herein.

Funding of Claim Payments — We have not examined any assets that may be supporting the liabilities, and have
made no assumptions regarding the maturities and liquidity of these assets, should they exist. This examination
is beyond the scope of our review.

Rounding and Accuracy — Our models may retain more digits than those displayed. Also, the results of certain
calculations may be presented in the exhibits with more or fewer digits than would be considered significant. As
a result, there may be rounding differences between the results of calculations presented In the exhibits and
replications of those calculations based on displayed underlying amounts. Also, calculation results may not have
been adjusted to reflect the precision of the calculation.

Unanticipated Changes — We developed our conclusions based on an analysis of the data of the client named
herein and on the estimation of the outcome of many contingent events. We developed our estimates from the
historical claim experience and covered exposure, with adjustments for anticipated changes. Our estimates
make no provision for extraordinary future emergence of new types of losses not sufficiently represented in

Actuarial Analysis Considerations and Limitations

historical databases or which are not yet quantifiable. Also, we assumed that the client named herein will remain
a going concern, and we have not anticipated any impacts of potential insolvency, bankruptcy, or any similar
event.

Internal / External Changes — The sources of uncertainty affecting our estimates are numerous and include
factors internal and external to the client named herein. Internal factors include items such as changes in claim
reserving or settlement practices. The most significant external influences include, but are not limited to,
changes in the legal, social, or regulatory environment surrounding the claims process. Uncontrollable factors
such as general economic conditions also contribute to the variability.

Uncertainty Inherent in Projections — While this analysis complies with applicable Actuarial Standards of
Practice, users of this analysis should recognize that our projections involve estimates of future events and are
subject to economic and statistical variations from expected values. We have not anticipated any extraordinary
changes to the legal, social, or economic environment that might affect the frequency or severity of claims. For
these reasons, we do not guarantee that the emergence of actual losses will correspond to the projections in
this analysis.

Probability Levels — We have calculated estimates of the statistical uncertainty associated with the process risk
inherent in our estimates. However, unless otherwise indicated, our probability level estimates do not address
parameter or model risk. To the extent that the probability estimates do not address parameter risk or model
risk, the true variability of results is greater than the range of outcomes presented. The client named herein may
wish to consider this additional uncertainty In evaluating the estimates presented in this report.

COVID-19 Pandemic — We have included no explicit adjustments in this report for the effect of the COVID-19
pandemic on loss experience except as specifically noted in this report.

Actuarial Analysis Acknowledgement of Qualifications

7. Acknowledgement of Qualifications

1, Adam Hirsch, am a Senior Principal with Oliver Wyman Actuarial Consulting, Inc. lam a Fellow of the Casualty
Actuarial Society (FCAS), a member of the American Academy of Actuaries (MAAA) and | meet the Qualification
Standards for Actuaries Issuing Statements of Actuarial Opinion in the United States of the American Academy
of Actuaries to render the actuarial opinion contained herein.

Oliver Wyman Actuarial Consulting, Inc.:

Adam Hirsch, FCAS, MAAA

633 West Fifth Street, Suite 1200
Los Angeles, CA 90071

(213) 346-5352

adam, hirsch@oliverwyman.com

Actuarial Analysis Appendix A

Appendix A. Glossary

Accident Period
The period in which the event giving rise to a claim occurred, regardless of when the claim is actually reported.

Accounting Date
The point in time at which the estimate of unpaid claims and ALAE is evaluated.

Actuarial Central Estimate
An estimate that represents an expected value over the range of reasonably possible outcomes. Such range of
reasonably possible outcomes may not include all conceivable outcomes.

Allocated Loss Adjustment Expense (ALAE)

Expense costs associated with the handling and settling of an individual claim that can be directly attributed to
the particular claim, Fees paid to outside defense attorneys and investigation firms are examples of this expense
cost.

Case Reserves
The unpaid claim estimates established by adjusters on an individual claim basis.

Claim
A demand for payment under the coverage provided by a plan or contract. As used throughout this Glossary, it
also includes suits, potentially compensable events, notifications, and unasserted claims.

Claim Adjustment Expenses
The costs of administering, determining coverage for, settling, or defending claims. Claim adjustment expenses
include allocated claim adjustment expenses and unallocated claim adjustment expenses.

Claim Frequency
The number of claims that occur over a period of time per unit of exposure.

Claim Reporting Pattern
The rate at which claims are assumed to be reported over time.

Claim Severity
The average cost per claim.

Coefficient of Variation
A statistical measure of dispersion. The coefficient of variation is calculated as the standard deviation of the
random process divided by the expected vaiue (mean).

Confidence Level

The probability that the outcome of a random process will not exceed an associated estimate. For example, a
75% confidence level for an unpaid claim estimate of $10 million would indicate that there is a 75% probability
that the actual claim payments will be less than or equal to $10 million. The estimate is defined in the context
of the risks modeled in our analysis and may not consider all factors contributing to variability of outcomes,

Credibility
A measure of the predictive value of a body of data.

Actuarial Analysis Appendix A

Development
The change between valuation dates in the observed values of certain fundamental quantities that may be used
in the unpaid claim estimation process.

For example, the number of reported claims associated with events occurring within a particular period will
change from one valuation date to the next until all claims have been reported. In a similar fashion, the paid
claim amounts for events occurring within a particular period will change from one valuation date to the next
until all claims have been reported and closed. The change In the number of reported claims or the change in
the paid claim amounts Is referred to as development. The concept of development also applies to reported
incurred losses.

Estimated Ultimate Incurred Losses
The estimated cost of claims during a period. Ultimate incurred losses represent the total of paid claim amounts,
case reserves, and IBNR.

Event
The incident or activity that triggers potential for claim or allocated claim adjustment expense payment.

Exposure
A measure of the underlying potential for claim costs.

IBNR

The unpaid claim estimate for: (a) events that have occurred for which claims have not been reported as of the
accounting date, (b) future development of the case reserves, (c) claims that have been reported but not yet
recorded in the loss listing, and (d) claims that have been closed but that will be reopened,

Loss
The cost associated with a claim. The cost may or may not include loss adjustment expenses,

’

Loss Adjustment Expenses
The costs of administering, determining coverage for, settling, or defending claims. Loss adjustment expenses
include allocated loss adjustment expenses and unallocated loss adjustment expenses.

Loss Cost
The loss amount per exposure unit.

Method
The systematic procedure for developing an actuarial estimate.

Model
A mathematical or empirical representation of a specified phenomenon.

Model Risk
The risk that the methods are not appropriate to the circumstances or the models are not representative of the
specified phenomenon.

Paid Losses
The total aggregate dollar amount paid on all reported claims as of a certain date.

Actuarial Analysis Appendix A

Parameter Risk
The risk that the assumptions or parameters used in the methods or models are not representative of future
outcomes.

Payment Pattern
The rate at which claims are paid over time.

Process Risk
The uncertainty associated with the projection of future contingencies that are inherently variable, even when
the parameters are known with certainty.

Reported Incurred Loss Amount
The total of paid claim amounts and case reserves.

Review Date
The date through which information is considered in the unpaid claim estimate analysis.

Risk Margin .
An amount that may be added to the unpaid claim estimate to recognize the uncertainty in the estimate.

Salvage
Recoveries due to the sale of damaged or recovered property.

Subrogation
Recoveries from a third party responsible for the event for which a claim has already been paid.

Tail or Unreported Loss Estimate
The unpaid loss estimate for events that have occurred for which claims have not been reported as of the
accounting date.

Unallocated Loss Adjustment Expense (ULAE)
Loss adjustment expenses that cannot be attributed to an individual claim. Typically includes salaries, utilities,
and rent apportioned to the claim adjustment expense function but not readily assignable to specific claims.

Unpaid Loss Estimate
The estimate of the obligation for future payments resulting from losses due to past events.

Valuation Date
The date through which transactions are included in the data used in the unpaid clair estimate analysis.

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