Odomirok.15-P

Reading: Financial Reporting Through the Lens of a Property/Casualty Actuary - Chapter 15 - Schedule P

Author: Kathleen C. Odomirok, FCAS, MAAA, Liam M. McFarlane, FCIA, FCAS, Gareth L. Kennedy, ACAS, MAAA, Justin J. Brenden, FCAS, MAAA, EY

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BA Quick-Summary: Schedule P - Loss & LAE Reserves Chapter 15 of the document focuses on Schedule P, a crucial component of the Annual Statement for property/casualty actuaries. Schedule P details the loss and loss adjustment expense (LAE) reserves, providing a decade of historical data to assess reserve adequacy and trends. It comprises seven parts, covering aspects like net ultimate loss, net paid loss, IBNR, and premium earnings, among others. The chapter explains the structure and purpose of each part, highlighting their roles in supporting actuarial opinions and regulatory requirements. Additionally, it emphasizes the importance of careful analysis and the potential pitfalls of relying solely on Schedule P for evaluating reserve adequacy.

Pop Quiz

Note: For the multiple choice Pop Quiz, please refer only to the first Battle Card in the quiz below. It is for general review once you've studied the Schedule P reading.

Multiple Choice (mini BattleQuiz 1) ← for general review of topic

Study Tips

The Schedule P material is mostly calculation. Do the practice templates in the quizzes until you consistently get the right answer. You also have to be able to interpret the results. Since this is a Top 6 reading, make sure you can do the old exam problems going back to 2012.

Here is a memory trick written as cute poem to remember the different sections of the annual statement.

Estimated Study Time: several days (not including subsequent review time)

Source Readings: BattleActs includes all material from past exams in at least 1 of the elements of the system: wiki articles, BattleCards, BattleTables. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend a portion of your time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be much more efficient. For a little more on this click on Using the Source Material.

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• calculations related to Schedule P - Parts 2,3,4 (ultimates, paids, IBNR)
• calculations related to Schedule P - Part 5 (claim counts)
• calculations related to Schedule P - Part 6 (earned premium)
• inter-company pooling
• miscellaneous facts & interpretations

Questions held out from Fall 2019 exam: #14. (Skip these now to have a fresh exam to practice on later. For links to these questions, see Exam Summaries.)

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #11)	financial health: - using Sched P, Pt 2	financial health: - using Sched P	reserve adequacy: - considerations (Sched P)
E (2018.Fall #13)	reserve adequacy: - assess with Sched P	reserve adequacy: - considerations (Sched P)
E (2018.Fall #12)	organization: - LOB reporting	Part 1: - reinsurance effectiveness
E (2018.Spring #11)	Parts 2,3,4 & 6:    - calc loss ratio
E (2017.Fall #11)	Parts 2,3,4:    - calc CY case loss	Parts 2,3,4:    - calc CY paid loss	Parts 2,3,4:    - reserve adequacy
E (2017.Spring #13)	intercompany pooling:    - Sched P	intercompany pooling:    - other than Sched P	intercompany pooling:    - disclosures 1
E (2016.Fall #11)	Part 5:    - claim closure rate	Part 5:    - claim count trends	Part 5:    - effect on reserves
E (2016.Fall #12)	Parts 2,3:    - calc Part 2 prior year
E (2016.Spring #12)	Parts 2,3,4:    - calc Part 2,3
E (2016.Spring #13)	Parts 2,3,4,5:    - calc open clm severity	IBNR methodology - disadvantages
E (2015.Fall #14)	Part 5:    - freq/sev trends	Part 5:    - claims closure rates	Part 5:    - evaluate clms process	uses of Sched P    [Hint: DT – RAPID]
E (2015.Spring #14)	Parts 2,5,6:    - calc trends	Parts 2,5,6:    - limitations re trends
E (2014.Fall #13)	Parts 2,3:    - calc Part 2
E (2014.Spring #16)	claim scenario: - calc Part 2,3 for clm	claim scenario: - calc Sched F entries 2b	claim scenario: - retro reins on B/S 2c	claim scenario: - effects on fin. stmts.
E (2014.Spring #17)	Parts 2,3,4,5:    - calc severity	Parts 2,3,4,5:    - prior yr devlpt	Parts 2,3,4,5:    - interpret severity
E (2013.Fall #20)	Parts 2,3:    - calc Part 2,3 prior yr 3	Parts 2,3:    - outstanding severity	uses of Sched P    [Hint: DT – RAPID]

¹ For part (c) is from section (3.3) of COPLFR.SAO.

^2b For part (b), see Odomirok.14-F.

^2c For part (c), see Odomirok.14-F and also Odomirok.22-23-GAAP – Problem 2017.Fall #12.

³ Note the non-standard labeling of the Part 2E & 3E triangles in this problem. Normally the Prior row would represent 2003 & Prior, but here the 2003 row was displayed separately. (In other words, there is an extra row in the table.)

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In Plain English!

Introduction

Before we get too deeply into the content, here's an outline for the Schedule P chapter of Odomirok, Chapter 15.

Schedule P PART	Page Range	# of Pages	Relative Importance
1	142-174	17 pages	low
2,3,4	159-174	16 pages	high
5	174-182	8 pages	high
6	182-184	22 pages	medium
7	184-185	1 page	low
Interrogatories	185-186	1 page	low
Inter-Company Pooling	186-187	2 pages	medium

Overview & Organization of Schedule P

Overview: Schedule P is the most important schedule in an insurer's Annual Statement. Whereas the balance sheet has the total company reserves, Schedule P separates that total into lines of business and accident years going back 10 years. Outside parties can use Schedule P to evaluate the adequacy of a company's reserves. There are 7 parts to Schedule P, 😒, plus something called "interrogatories".

Schedule P is terrifying! There are 7 main parts, plus eleventy-billion more subsections for all the different lines of business you could possibly imagine. It's hard to even know where to start. Alice the Actuary's main piece of advice is to relax. We're going to work through it at an easy pace and build our understanding gradually over several sessions. I do not recommend reading the Schedule P chapter from Odomirok from start to finish, at least not at first. It's actually quite well written, but they throw too much information at you too quickly. A better strategy is to learn a little bit of the theory, then do an old exam problem. Then repeat. In other words, build your knowledge through an interplay between the theoretical and the practical. As you learn the theory and work through problems, you can then peruse the relevant portions of Odomirok as appropriate. And trust yourself. You've made it this far in the actuarial exam process (Congrats!!) so this is well within your ability to learn. Just take it one step at a time. Ok, let's get started!

The very first page of the chapter has a list of uses (or functions) of Schedule P. When I saw that list, I thought, "Yup, that's a favorite type of CAS exam question." Then I started looking through old exams and found (2015.Fall #14d). We might as well get this out of the way before going any further. The exam question only asked for 3 uses, but for completeness we'll cover all 7 that were listed in the text.

Question: describe the functions of Schedule P & identify which Parts provide that information [Hint: DT – RAPID, go downtown on rapid transit...]

• Side note on DT – RAPID hint: To stay on "Schedule", take the "P" train!

Note that the RBC calculation (Risk-Based Capital) is discussed in a later chapter in Odomirok. Also, the references to the applicable parts of Schedule P won't make sense until we discuss the organization of Schedule P. Nonetheless, let's proceed; you can refer back to this table later.

hint	use	Part
D	Development of reserves over time attributable to specific years & lines	Part 2,3,4
T	Trends in frequency & severity	Part 1,2,5
–	–	–
R	calculate RBC loss-sensitive discount	Part 7
A	evaluate Adequacy of recorded reserves	Part 2,3,4,5
P	determine Payment patterns for discounting	Part 3
I	observe split between actuarial reserves (IBNR) and case reserves	Part 4,5 2,3,4
D	Disclosures for the SAO (Statement of Actuarial Opinion)	Part 1

The next topic in this introductory section concerns the organization of Schedule P. This ties into the "Part" column in the above table.

Question: how is Schedule P organized

Odomirok provides a verbal description of Schedule P, but it's very wordy. After I read through it, I was like, "Huh?" So I did my own little exploration. On the simplest possible level, here is what the different parts of Schedule P show:

Part	contents
1	tables of everything by accident year (losses, expenses, premiums, claim counts)
2,3,4	triangles of losses (ultimates in Part 2, paids in Part 3, IBNR in Part 4)
5	triangles of claim counts
6	triangles of earned premium
7	tables & triangles for loss-sensitive contracts

What you should keep firmly in mind is that Part 1 shows tables, Parts 2-6 show triangles, and Part 7 shows both tables & triangles. Take a moment to look back at the uses/functions of Schedule P from the beginning of this section. That should all make more sense now that you have a rough idea of the contents of Schedule P.

Your next step is to look at an actual example of Schedule P. Below are links to selected portions of Liberty Mutual's annual statement as provided in the syllabus. Spend a few minutes on each one just to familiarize yourself with the general layout. (We'll be looking at exam problems very soon.)

Schedule P – Part 1 – Summary Click the link to open the exhibit. (You might want to first duplicate the tab so you can have the wiki and the exhibit open at the same time.) Here a a few observations:

• The Part 1 summary shows a table of ultimates by accident year.
• Regarding net losses & expenses: column (28) = (11) + (24). In other words, (incurred) = (paid) + (unpaid).
• Note that this is just a summary exhibit for the line of business detail shown in Parts 1A → 1T. (Don't worry too much about this for now.)
• Side note: If salvage/subrogation is shown in Part 1 then the total paid and total unpaid amounts are net of salvage/subrogation. This fact is important for an old exam problem from chapter 22/33 on SAP and GAAP accounting.

Schedule P – Part 2,3,4 – Summary

• Parts 2,3,4 show triangles of losses & DCC (ultimate, paid, and IBNR in parts 2,3,4 respectively). The rows are all shifted to the right because they use accident years (instead of development months) for the column labels. Kind of annoying! But whatever.
• It shows 10 years of history + prior years (same as for Part 1)
• These exhibits are summaries only (just like for Part 1). Line of business detail is shown in subparts A → T.
• The data is gross of all discounting.

Schedule P – Part 5A – Section 1,2,3

• Part 5 has no summary across lines of business. (It is only available for individual lines of business)
• Each line of business has 3 sections that show a triangle of claim counts. (closed with payment, outstanding, reported)
• There's often a s**tload of claims closed without payment, and this is an important distinction.

Schedule P – Part 6C – Section 1,2

• Part 6 has no summary across lines of business. (It is only available for individual lines of business)
• Each line of business has 2 sections that show a triangle of premium earnings. (direct + assumed, ceded)

Schedule P – Part 7

• Part 7 has no summary.
• The link above shows all of Part 7 on loss-sensitive contracts (Part 7A has 5 sections, Part 7B has 7 sections.)

→ The Odomirok source text incorrectly states that Part 7B contains only 5 parts. The 2019 NAIC Annual Statement Blank still shows 7 parts.  

• Part 7 is optional - the primary use is to calculate the loss-sensitive discount in the RBC calculation.
• Part 7A concerns primary insurance.
• Part 7B concerns assumed reinsurance.

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Study Strategy

Before charging ahead with calculations, let's pause and think about a strategy for learning the Schedule P material. Observe the following:

• almost all of the old Schedule P exam questions are calculations
• the questions that are not calculations usually ask you to interpret the result of a calculation

Unlike a school textbook, Odomirok doesn't have any exercises to give you practice. The best way to learn the calculations then is to do the BattleActs practice templates and the old exam problems. The BattleActs practice templates are typically scaled-down versions of exam problems, but the inputs are populated with random numbers so you can practice a particular problem type as often as you want. So, here's what I recommend regarding study strategy:

Step 1: You must get a good grasp of the layout of the Schedule P exhibits, and develop a facility for typical calculations.

• We covered the layout of Schedule P in the previous section. To develop a facility with the calculations, we'll cover a representative selection of old exam problems. It's easy to see from the BattleTable at the top of this wiki article that Parts 2,3,4 are the most heavily tested, so that's where we'll start.
• At this point, you do not have to refer to Odomirok.

Step 2: Learn the big picture. By that I mean you have to know how to interpret the results of your calculations.

• Once you can do the calculations, much of the interpretation is common sense. But it will also be helpful to now refer to the text.
• A great example of useful information is on p164: Cautions When Using Schedule P to Assess Reserve Adequacy. Recall that one of the uses of Schedule P is for an outside party to assess the insurer's reserve adequacy. Bullet point #2 in this list of cautions states that intercompany pooling can distort an analysis and that this distortion may not be readily apparent from Schedule P itself. Note that inter-company pooling came up on (2017.Spring #13). You can also see from the COPLFR BattleTables from 2017 that it appears occasionally on questions related to the SAO.

Pop Quiz!    :-o

1. Do you remember the various functions or uses of Schedule P? [Hint: DT – RAPID, go downtown on rapid transit...]
2. Do you remember which parts of Schedule P are used to assess reserve adequacy?

Ok, enough jibber-jabber about study strategy! Let's get down to work!

Our First Calculation (Parts 2,3,4)

Let's begin by looking at a problem that's just like (2017.Fall #11ab), but with different numbers. (See green link below.) It deals with Schedule P, Part 2,3,4. I don't think it's too hard, but there are some formulas you need to know.

Recall:

• Part 2 shows incurred loss (which includes IBNR, so it really is ultimate loss)
• Part 3 shows cumulative paid loss
• Part 4 shows IBNR

Then the 1^st formula you need is:

case reserves = (part 2) – (part 3) – (part 4)

The 2^nd formula is simple:

paid in CY = (cumulative paid in CY) – (cumulative paid in CY-1)

The 3^rd formula ties everything together:

case incurred in CY = Σ(chg in case in CY) + Σ(paid in CY)

Click on the green link below and work your way through the problem. When you get to the actual exam problem in the mini BattleQuiz below, note that my solution is laid out differently from the solution in the examiner's report. You can decide which solution better fits your thinking style. I found it easier to solve part (b) first. Also, the actual exam problem has a part (c).

Schedule P Practice - Model 2017.Fall #11ab

Once you understand the practice problem, Alice gives you permission to continue your attack in the mini BattleQuiz!

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Our Second Calculation (Part 5)

Here, we'll look at a problem just like:

E (2016.Fall #11)

It's another pretty easy problem, provided you don't fall into the trap the examiners laid for you! Let's review the organization of Part 5. It has 3 sections:

• cumulative number of claims closed WITH payment
• outstanding number of claims
• cumulative number of reported claims

Note these triangles include Direct + Assumed business only. Anyway, take a look at the PDF below. Everything is explained there, but note the trap: They ask you to calculate the ratio of closed claims to reported claims. Some people used Part 5, Section 1 as the numerator in this ratio but that only includes claims closed WITH payment. We need to include claims closed WITHOUT payment also.

Schedule P Practice - Model 2016.Fall #11a (STEADY STATE)

Now that you've had a chance to look at this example, there are a few things I want to mention:

• There are 2 ways to present the solution triangle: Schedule P format and non-Schedule P format. The difference, obviously, is that in the latter, the rows are shifted to the left, which is the usual way of presenting triangles whey you're doing an analysis. And it's easier to see the trends in closure rates that way. You can just look down the columns instead of having to follow the diagonal.
• I also included the triangle of closed-WITH-payment to reported claims. This is the "error" that some people committed on the exam. It isn't really an error - that triangle also provides useful information - but it isn't what the actual exam question asked for.
• I constructed this example to be steady-state. In other words, there are no trends within development periods.

Here are 2 more examples for you to look at before moving on to the practice templates in the mini BattleQuiz. The first demonstrates a gradual increase closure rate (total claims closed to reported claims) within each development period. The second shows a spike in closure rate in the latest CY across all accident years. (To see this, look down the columns in the non-Schedule P format.) This is something you have to be able to recognize and interpret. One interpretation of an increase in closure rate is that staffing levels may have increased.

Schedule P Practice - Model 2016.Fall #11a (GRADUAL TREND)

Schedule P Practice - Model 2016.Fall #11a (SPIKE)             

The mini BattleQuiz provides more practice.

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Our Third Calculation (back to Parts 2,3)

The next problem we'll look at is modeled on (2016.Fall #12). It's pretty hard but if you spend the time to understand it thoroughly, it will deepen your understanding of Schedule P. Once you think you understand it, try solving it on your own with minimal reference to the answer. The PDF below explains the solution in detail.

Schedule P Practice - Model 2016.Spring #12

The next mini BattleQuiz has a practice template for this problem so you can practice it as much as you want with different numbers. After this, try your hand at the actual exam problem (which is also included in the mini BattleQuiz).

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Schedule P Concepts

In the DT-RAPID memory trick for the functions of Schedule P, do you remember what the A stands for? It stands for Adequacy – you can use Schedule P to assess the adequacy of reserves. Now, the only foolproof way to know whether reserves are redundant or deficient for a given accident year at a particular development period is to wait until the claims for that accident year are all closed. Except we don't want to wait that long! That means you have to use caution if you're trying to assess reserve adequacy from Schedule P before all claims are closed.

Question: identify cautions when using Schedule P to assess reserve adequacy

The text has a long bullet point list (7 items) for the answer to this question. Let's see if we can reorganize and shorten it to make it easier to remember.

talk to people!

• This point was listed last in the text, but I think it's the most important and it applies to any situation where you're trying to draw conclusions from data.
• Numbers don't tell the whole story. You have to talk to management (and others) to get a deeper understanding of what's really going on at the company.
• Example: Schedule P is net of reinsurance and does not reflect credit risk

10

• This is the score you want to achieve on your exam, but it is also the maximum # of years of data carried in Schedule P exhibits.
• This is a problem for long-tailed lines since any analysis requires external data to estimate tail factors.

pooling

• Bonus! There are actually 2 separate cautions related to pooling:

   [1] internal pooling can distort data

   [2] participation in voluntary/involuntary pools can distort data (because many pools report IBNR as case reserves)

commutations

• A commutation can cause a sudden increase in net reserves (commutations are covered in Klann.ReinsComm)

DCC

• Schedule P, Parts 2,3,4 include DCC
• That means you can't separate DCC trends from loss trends (which can distort your analysis)

preparation of Schedule P

• This was the first caution listed in the source text but I placed it last here because it seemed like the least specific caution.
• It just says that the person preparing Schedule P has a certain amount of choice regarding allocations & presentations. (I don't quite know what that means because I've never prepared Schedule P. The accounting department always did that. P.S. They hated doing it!!)

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Inter-Company Pooling

Here's a question asking you to do calculations related to inter-company pooling. I think it's a hard problem so you'll have to take some time to go over it. Note that it doesn't seem to be asked very often which is why I left it until the end. It's based on:

E (2017.Spring #13)

I put it in BattleQuiz #7 below. Here are 4 practice problems:

Schedule P Practice - Model 2017.Spring #13 (4 problems)

Remaining Exam Questions

mini BattleQuiz 6 Recent exam questions (2018 to current)

mini BattleQuiz 7 2017 & 2016 questions

mini BattleQuiz 8 2015 & 2014 questions

For older exam questions, go to BattleCard Filters and make sure to select BattleCards of Lower Probability in Optional Setting C.

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