Incorrect reserve adequacy assessments can lead to false or incomplete findings, uninformed management decisions and unfavorable outcomes, not to mention a possible wrongful termination suit by the claims manager.

Why do so many organizations struggle with reserve adequacy assessments? Frequently, those carrying out the review are not assessing the appropriate criteria to fully evaluate reserve adequacy or the root causes of deficiencies. Recommendations often do not align with findings, organizational objectives, goals or means.

Reserve assessments without an appropriate foundation and documentation have little credibility and are of questionable value. It's always better to have a well-reasoned discussion of the facts, issues and coverages afforded, addressing who is responsible for paying the loss and how much should be paid to resolve the claim.

Here are five leading industry practices that facilitate an effective approach to the evaluation process, typically generate outcomes that are actionable and bring results in line with objectives.

1. Define the scope

Various triggers require different approaches to scope and must be considered in the planning process. The specific criteria (such as random sampling versus targeted, line of business or accident year), volume (sample size) and type of information gathered, the process for assimilating the data, and the format in which the evaluation is documented, will differ depending on nature of the review.

The assessment plan should demonstrate a full understanding of the trigger for the review and identify the appropriate criteria to meet objectives. The review team and those requesting the review should agree on the information they want to document before starting the assessment process.

The documentation's extent can vary. For example:

If the scope includes providing a reserve recommendation, will the company require the auditor to verify the math, logic and claim file documentation that supports its view?
Will it be necessary to compare the timing of the receipt of information to reserve adjustments?
If benchmarking is requested, what data should be captured to address similar industry benchmarks?

When defining scope, it is also critical to incorporate organizational objectives and goals. Recommendations for corrective action or operational enhancements will become reality only if they are consistent with the organization's overall direction.

2. Develop tools that measure criteria

The amount of information necessary to opine on reserve adequacy can be voluminous. Depending on the scope, it can include historical operational and claims-specific documentation and data, which often resides in multiple legacy systems.

By clearly defining what is being measured and the sources of information that can validate an assessment, it will be possible to develop a specific plan with tools that capture all defined criteria that impact the reserving process, as well as other in-scope criteria. These tools typically use data that the claims organization provides.

Considering the extent and format of relevant information during development will enable an accurate data transfer (including policy and claims numbers, insured names, etc.). The tools should allow electronic scoring and calculation of results for each criterion, and allow for comments to address perceived strengths or weaknesses as they relate to relevant criteria and the reserving process.

3. Evaluate reviewed categories with quantifiable and measurable results

Comments accompanying the data should be factual, instructive and supportable, and facilitate consistent reviewer assessments. This is a challenge for many review teams, but can be easily resolved through adequate quality control initiatives, including a calibration exercise at the onset of a review. Document:

Information that serves as the basis of opinions
Reserve calculations based on exposure and application of the coverage, as well as those that specifically identify gaps in sound claims handling activity.

Whenever an assessment takes place, identify opportunities for operational enhancements. A routine assessment process can establish baselines and facilitate the benchmarking of performance to goals. This should result in more meaningful workflow and financial metrics, reflect organizational and process improvements, and enhance management's decision-making abilities.

4. Incorporate resources and expertise

Experienced quality assurance staff (or reviewers from elsewhere) who maintain awareness of current claims trends and practices typically are able to assess the specifics of an individual claims file and often can provide useful suggestions on improving performance and the customer experience, as well as help accelerate cycle time.

To make accurate assessments, reviewers must know the line of business and have claims handling experience. In order to properly assess and test a reserving philosophy, they will need to understand claims management's multiple facets.

5. Implement a plan that includes all key stakeholders

Other stakeholders often are interested in reserve adequacy assessment outcomes, and in some cases can add insight into potential issues and solutions. For example, a reserve adequacy review of a third-party administrator by the direct claims department may be of significant interest to the actuary responsible for assessing loss picks for pricing purposes.

Internal audits also can be helpful during an assessment because there are often controls and procedures that overlap in different parts of the organization. It is important that any involved groups understand their respective roles, determine who is responsible for capturing what and clarify the process for delivering key findings.

Positive assessments clearly benefit from an appropriate level of planning and effective implementation. The most effective processes include case reserve assessments at routine intervals, through which companies can identify and then pursue opportunities for improvement. Last but not least, the incorporation of the correct resources and tools is critical to sustaining a successful program.

Special Reports /

Reviewing case reserves: 5 best practices for favorable outcomes

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