Evaluation, Assessment, Impact Reporting and Reserving

Rachel Ehrlich Peter Uzzi

© CLM Litigation Management Institute 2013. All rights reserved. The course material presented herein does not represent the views or opinions of any of the individual faculty members or instructors or of any of the companies or entities with which they may be employed or affiliated. Nothing in the course materials presented should be construed as legal or professional advice or the rendering of a legal or professional opinion on any specific factual situation. Always seek appropriate legal and professional business advice in the context of specific cases.

Cast of Characters Claimant Plaintiff’s Counsel Adjuster Supervisor Defense Counsel Coverage Counsel Mediator Jury

Evaluation Timeline FNOL Claim Registration Claim Assignment Investigation Discovery Evaluation Negotiation Settlement

Foundations of Case Assessment Coverage Liability probability and damage probability Sliding scale from total victory to total defeatTotal Defeat (Expressed As Percentage) Total Victory

100% 50%100%

Drivers of the assessment processMajor versus Minor Drivers per case typeTools available to assist in the assessment

Damage-Liability Proportion

Category 1 Category 2 Category 3 Category 40

5

10

15

20

25

30

35

Damages

Probability of Liability Against the Defendant

Liability Drivers Common Drivers regardless of claim type Facts Parties Magnitude of damages Jurisdiction Venue Skills of counsel

Liability Drivers

Magnitude of the Damages PI Case – Injuries Property or Commercial Case – Damages

The magnitude of the damages has a direct proportional relationship to the probability of liability, i.e., the more severe the damages, the more likely a finding of liability. Expressed graphically as:

Liability Drivers

Facts The “Outrage Continuum” — The more outrageous the behavior of the party the more inverse the impact on the party’s chance of success

Behavior“Bad” “Good”

Probability of Success Your Behavior

Your Opponent’s Behavior

Tools to Assist

Counsel Westlaw/Lexis Nexis Jury Research Jury Consultants Experts – Medical, Property, Financial Collective experience of the team (you, counsel,

experts, your client)

Liability Drivers

Venue A case venued in Dallas may have a different value than a

case venued in Brooklyn. Are any of the parties important to the community where

case is venued? E.g., Is Defendant the largest employer in the venue? Is the Plaintiff the largest employer? Is Defendant a foreign corporation?

Liability Drivers

Skills of Counsel Probability of success is directly related to the skills and reputation of your opponent. Reputation must be real and not a figment of marketing skill How many analogous cases have they tried? In the applicable venue? E.g., Southern lawyer – very

effective in Florida and Georgia not effective in Philadelphia Are they well capitalized? Size of firm – ability of you to “paper” and deposition your

opponent to death.

Caveat: This costs money!

Deploying Tools Must categorize data into appropriate category Objective (Hard) data — Undisputed medical bills,

property damage. Undisputed injuries. Undisputed conduct.

Subjective (Soft) Data — “Appealability” of parties, i.e., plaintiff is attractive mother of three versus Big Company with history of bad conduct.

Variables — Counsel, experts, venue, facts, law, judge, jury.

Bake the Cake

Only after you perform a thoughtful and complete analysis of the data can you

take the next step — creating the Resolution Strategy.

Analysis

Once liability and damages are valued, we are ready to create strategy, right? Wrong, we need a goal first. What is our goal based upon the data we know

today? You must support the goal with the data.

Analysis

What other factors must we consider in formulating our goal? Cost — What is our appetite for expense? Company culture — Litigate? Settle? Trial? Regional culture

Getting It Down in Writing —Communication Matters

“The most valuable of all talents is that of never using two words when one will do.” — Thomas Jefferson

“Any intelligent fool can make things bigger and more complex ... It takes a touch of genius — and a lot of courage to move in the opposite direction.” — Albert Einstein

Getting It Down in Writing —Communication Matters

Clear, concise, directive communication.

Example: Statement of facts followed by liability probability of 50% and range of damages $25 to $75M. Does this help the decision maker?

Why? All of your analysis is useless if it cannot be communicated clearly.

Getting It Down in Writing —Communication Matters

Set out decision points (milestones). When milestones are reached, make a decision. Hold the professionals to a high level of quality

communication — insist on meaningful reports. Company culture is very important in good

communication.

Reserving —Demystifying Insurance Reserving

Why Reserves Matter Insurance companies do not have a “cost of goods

sold” when they take in policy premium. The ultimate payout on the claims made under a

policy may not be known for many years. Publicly held companies have an obligation to

accurately report income to shareholders and investors.

Reserves are a method to help reflect the company’s best estimate of current earnings and future ability to pay claims.

Reserves Come in Many Shapes and Sizes!

Statutory reserving — regulated by state and requirements may differ by line of business and individual insurers. Also known as capital requirement needed to write new business.

Generally, about 10 to 12 percent of premium must be held in reserve to pay potential claims.

Insurers invest this money, and this investment income generally represents the majority of profits!

Claim Reserving Claim reserving is done either by data averaging or adjuster

input. Signal Reserves Actuaries look at claim movements quarterly to determine the

“ultimate” payouts in related groups of business. Long-tail claims are susceptible to large swings when reserve

changes are extrapolated out over many years. Reserve releases happen when claims settle for less than the

reserve. Insurers dislike large reserve increases as it is seen as a

management failure and is unsettling to shareholders and investors.

Incurred But Not Yet Reported IBNR is an actuarial term to cover known losses that

are not developed enough to have a claim reserve. All IBNR should (theoretically) eventually become a claim reserve.

IBNR = Ultimate Value - Incurred All reserves are money that insurers must keep in

abeyance to pay claims. Over-reserving loses the opportunity cost of money. Under-reserving misstates earnings and can cause regulatory and stock price issues

Typical Reserve Process P&C Insurer

Reserve Committee meets quarterly to review reserve analyses

Annual external reserve review Quarterly roll forwards Monitoring of large open claims greater

than $10 million CAT Committee meets regularly to review

CAT reserves

Evaluation, Assessment, Impact Reporting and Reserving

Rachel EhrlichPeter Uzzi