LOCAL GOVERNMENT SELF-INSURANCE PROGRAM (LGSI)

Guideline for Self-Insured Property and Liability Pool Claims Reserving

Adopted February 11, 1999 by the State of Washington Joint Property and Liability Advisory Board

Purpose

Proper claim reserving practices are a critical component of the financial operation of joint local government self-insured property/liability pools. There is significant variance in the philosophies and reserving practices of pools. While it is appropriate for each pool to establish its own philosophy and practice, the main components of (1) consistency, (2) reasonableness in reserving, and (3) proper documentation are mandatory.

The reserving Philosophy and Suggested Reserving Practices below are offered as maximum guidelines to assist pools in establishing a reasonable reserving philosophy and applying consistent claim reserving practices. Pools shall use these guidelines to review their current practices or develop similar ones of their own that contain the main three components outlined above.

DEFINITION OF RESERVING

The practice of establishing funding on an individual case basis.

DEFINITION OF THE JURY VERDICT VALUE PROCESS

The process of establishing claim value by analyzing the jury verdict results within a jurisdiction, and other factors including severity of injury or damage, length of recovery, credibility of parties and witnesses, ability of attorneys, sympathy factors, degree of negligence of the parties, contribution or recovery from other sources, etc.

RESERVING PHILOSOPHY

These guidelines recommend the use of the Jury Verdict Value process because it is an accepted practice in the industry. The Jury Verdict Value process of reserving claims requires that all claims be reserved at exposure. Specifically, this process evaluates each claim based upon 100% of liability, discounted by either 1) the percentage of the claimant's comparative negligence, or 2) the percentage chance of winning the case (as estimated by defense counsel), less reasonably anticipated contribution from other parties. The resulting amount is the expected exposure on the case.

Below are two examples demonstrating the application of the Jury Verdict Value process:

  1. Assume the value of the plaintiff's claim without regard to liability is $100,000, and the investigation indicates plaintiff's comparative negligence is at 20%, and the contributing negligence of a third party co-defendant is 10%, a reduction of 30% or $30,000 is made, thus establishing a reserve of $70,000.
    2. Jury Verdict Value at 100% 
    $100,000
    Minus % of claimant's comparative negligence 
    -20,000
    Minus % of contribution from other parties
    -10,000
    Equals exposure. Reserve at this amount. 
    = 70,000

  2. Another example uses the same value of $100,000 with defense counsel estimating the chances of winning at 75%, thus establishing a reserve of $25,000.

    3. Jury Verdict Value at 100% 
    $100,000
    Minus % chance of winning at 75%
    -75,000
    Equals exposure. Reserve at this amount.
    = 25,000

    When applicable, consideration for defense attorney's fees and costs and plaintiff attorney's fees and costs should be factored into the reserve.

    The same philosophy in reserving the loss should be followed regardless of what percentage your investigation indicates the member's exposure to be in a given case. This is particularly important in cases with very serious injuries or damages. In the event of a joint and several liability case, even a 1% exposure can be extended to a 100% exposure and the formula needs to be modified in that event.

    Below are two examples demonstrating the application of the Jury Verdict Value process under these circumstances:

Assume the value of the plaintiff's claim is $5,000,000 and the investigation indicates there is no comparative fault of the plaintiff. The contributing negligence of the co-defendant is 90% but the co-defendant has a policy limit of $500,000.

Jury Verdict Value
$500,000,00
Minus % of claimant's comparative negligence
- 000,000
Minus % of contribution from the other parties (policy limit)
- 500,000
Equals exposure. Reserve
= 4,500,000

Another example uses the same value of $5,000,000 and the investigation indicates no negligence on the part of the member. However, the injuries are severe and there is a danger that the jury may have sympathy for the plaintiff.

Jury Verdict Value
$500,000,00
Danger factor 10% equals exposure. Reserve
= 500,000

Once again, consideration for defense attorney's fees and costs and plaintiff attorney's fees and costs should be factored into the reserve.

When a file goes into litigation, the same reserving philosophy should apply. Defense counsel should be asked to include evaluations of jury verdict value and liability in their interim reports. They should also be asked to provide a budget estimating their anticipated costs through trial.

SUGGESTED RESERVING PRACTICES:

  1. Not all incidents need to be set-up as a claim. It is acceptable to establish "incident reports" which require no action beyond filing. Criteria should be established to identify which types of reports should be set-up as claims and which should remain as incidents. All claims-related material should be date stamped.
  2. For those incidents to be set-up as a claim, the claim should be assigned to an adjuster
  3. or independent claims examiner no later than three (3) working days from receipt in the office.
  4. For those incidents that are set-up as a claim, the claim is to appear on the claims report on or before 20 working days from the date of assignment to an adjuster or independent. For analysis purposes, claims coding should always separate property from casualty.
  5. For those incidents that are set-up as a claim, realistic or fact-based reserves that are supported by the file should be established within 30 days from the date of assignment.
  6. The claims report shall reflect all claims that have been reserved. The claims report shall consist of the minimum elements of: claim number, date of loss, member name, claimant name, amount of reserve, type of reserve, and brief description of loss. If you do a summary report by year, it should be done by date of loss.
  7. Reserves should never be set at zero (0) unless the file is closed. For files of nominal exposure, a minimum or statistical reserve can be established until the file is closed.
  8. Reserves should be reviewed regularly throughout the life of the file, usually every 90 days. Reserve changes should be made, up or down, upon notice of a significant, material development in the file and documented. Changes should be made within 60 days, although reasonable exceptions may be noted. A consistent pattern of "stair-stepping" reserves should not be practiced.
  9. Separate reserves should be established for expenses such as adjusting costs, legal bills, expert fees, etc. If separate reserves are not established, evidence of consideration for these expenses should be reflected in the reserve and outlined in the file.
  10. The reserves should take into consideration deductibles, excess and reinsurance in a consistent manner. Notification to an excess or reinsurance carrier should be made in accordance with the reporting requirements of the carrier and documented in the file.
  11. The reserve should always be sufficient to cover the amount of payment.
  12. Changes in the date of loss should not be made without reasonable explanation to the file.
  13. There should be a regular, separate analysis of the stop-loss limit by year in determining the liabilities that are presented on the financial statement.

JOINT POOL FINANCIAL SAFETY AND SOUNDNESS GUIDELINES

Financial Analysis Ratios
Equity to Self-Insured Retention:

  • This ratio is a measure of the maximum percentage that equity could decline due to a single loss
  • Recommendation – Equity 5 to 10 times the self-insured retention. A larger SIR would merit a ratio of 3.0 to 1.0.

Annual Provision for Expected Losses to Equity:

  • This ratio is measure of how equity is leveraged against possible rating inaccuracies.
  • Recommendation – A low ratio is desirable – i.e. less than 1.00 to 1.00
  • Second Opinion – a ratio of 5.0 to 1.0 for a new pool and .5 to 1.0 for a mature pool.

Net Reserves to Equity:

  • This ratio is a measure of how equity is leveraged against possible loss reserve inaccuracies
  • Recommendation – A low ratio is desirable – not greater than 1.5 to 1.00

Change in Member Equity:

  • This ratio is to determine whether an equity change merits a study of rate or funding levels.
  • Recommendation – More than a 10% reduction in equity merits a study of funding levels.

Change in Prior Years’ Loss Reserves:

  • This ratio is a measure of the development in prior years’ ultimate loss reserves during the financial year.
  • Recommendation – Not more than a 25% increase in prior year’s loss reserves.