Utilizing Non-Traditional Roles Of Your Actuary To Your Benefit - PowerPoint PPT Presentation

Utilizing Non-Traditional Roles Of Your Actuary To Your Benefit “Working With Your Actuary” January 15, 2013 Richard C. Frese, FCAS, MAAA

Agenda � Introduction to an actuary � The actuarial process and communication for optimal results � Hard market preparation with tune-up of self-insurance program � Financial reporting compliance � Best practices in working with an actuary 2

What Is An Actuary? � An actuary is a person who passes as an expert on the basis of a prolific ability to produce an infinite variety of incomprehensive figures calculated with micrometric precision from the vaguest of assumptions based on debatable evidence from inconclusive data derived by persons of questionable reliability for the sole purpose of confusing an already hopelessly befuddled group of persons who never read the statistics anyway! 3

When Should I Use An Actuary? (1) � Financial Reporting – Loss Reserve Estimation for Accrual – Projection of Contributions / Budgeting – Captive Feasibility and Valuation – Statements of Actuarial Opinion � Insurance Decisions – Selecting Retentions – Selecting Limits – Negotiating Excess Insurance Rates – Negotiating Collateral 4

When Should I Use An Actuary? (2) � Business Decisions – Mergers and Acquisitions – Pricing of Products – Determination of Class Plans � Risk Management – Allocation of Premium or Liabilities to Divisions / Entities – Enterprise Risk Management – Examining Loss Drivers and Safety Studies – Benchmarking 5

What Firm And What Actuary? � A firm with the reputation, experience and internal resources necessary to provide the needed study � An actuary with credentials and training in the specific area of your needs (Fellow of CAS for P/C needs) � An actuary who sees beyond the numbers � An actuary and firm that have the respect and approval of the end user 6

The Actuarial Process And Communication For Optimal Results 7

What Are The Basic Loss Components? INDEMNITY LOSSES PAID CASE RESERVES REPORTED (INCURRED) INCURRED BUT NOT REPORTED (IBNR) LOSS ADJUSTMENT ULTIMATE EXPENSES (LEGAL) 8

How Do Current Losses Become Ultimate Losses? (Ultimate) Occurrence Paid Case Incurred IBNR End of Year Counts Losses Reserves Losses Losses Time 2007 75 2,340,000 0 2,340,000 ???? ???? 2008 80 2,500,000 70,000 2,570,000 ???? ???? 2009 70 2,700,000 180,000 2,880,000 ???? ???? 2010 60 2,300,000 300,000 2,600,000 ???? ???? 2011 40 2,200,000 760,000 2,960,000 ???? ???? 2012 25 280,000 1,000,000 1,280,000 ???? ???? Total 350 12,320,000 2,310,000 14,630,000 ???? ???? � Ultimate Losses = Paid Losses + Case Reserves + IBNR Losses � Liability = Case Reserves + IBNR Losses Data is for demonstration purposes only 9

What Are Incurred But Not Reported (IBNR) Losses? � Unknown loss events that are expected to become claims � Known loss events that are expected to later be presented as claims � Expected future case development on claims already reported 10

How Is IBNR Calculated? � Multiple methods based on paid losses, case reserves and claim counts � Actual loss emergence from previous (mature) years � Future is based on history 11

What Is The Life Of An Individual Claim? $ ? NEGOTIATE INVESTIGATE EVALUATE ACCIDENT CLAIM CLAIM OCCURS REPORTED SETTLED TIME 12

What Is Loss Development? Months of Development Year 12 24 36 48 60 72 2007 1,010,000 2,090,000 2,220,000 2,310,000 2,330,000 2,340,000 2008 1,100,000 2,310,000 2,450,000 2,550,000 2,570,000 2009 1,190,000 2,550,000 2,760,000 2,880,000 2,310,000 2010 1,300,000 2,460,000 2,600,000 1,100,000 = 2.04 2011 1,470,000 2,960,000 2012 1,280,000 1,280,000 X 2.04 X 1.07 X 1.04 X 1.008X 1.004 = 2,940,000 What if the 1,100,000 was 2,200,000 instead? What is your program’s loss development? 13

Where Does IBNR Get Reported? (Ultimate) Occurrence Paid Case Incurred IBNR End of Year Counts Losses Reserves Losses Losses Time 2007 75 2,340,000 0 2,340,000 0 2,340,000 2008 80 2,500,000 70,000 2,570,000 10,000 2,580,000 2009 70 2,700,000 180,000 2,880,000 40,000 2,920,000 2010 60 2,300,000 300,000 2,600,000 140,000 2,740,000 2011 40 2,200,000 760,000 2,960,000 370,000 3,330,000 2012 25 280,000 1,000,000 1,280,000 1,660,000 2,940,000 Total 350 12,320,000 2,310,000 14,630,000 2,220,000 16,850,000 14

Loss Development-WC What Is Your Program’s Tail? 100% s s o 80% L e t a im 60% lt U 40% f o IBNR % Case Reserv es 20% Paid Loss 0% 0 12 24 36 48 60 72 84 96 108 120 Months Sample development pattern 15

Loss Development-GL What Is Your Program’s Tail? 100% s s o 80% L e t a im 60% lt U 40% f o IBNR % Case Reserv es 20% Paid Loss 0% 0 12 24 36 48 60 72 84 96 108 120 Months Sample development pattern 16

Loss Development-PROP What Is Your Program’s Tail? 100% s s o 80% L e t a im 60% lt U 40% f o IBNR % Case Reserv es 20% Paid Loss 0% 0 12 24 36 48 60 72 84 96 108 120 Months Sample development pattern 17

How Do I Achieve Results? � Cost Control – Risk management – Proactive claims handling – “Skin in the game” � Communication! – Discussions with actuary 18

What Should I Discuss With My Actuary? (1) � Claim Handling Process – What are the specific objectives and guidelines of the program in setting an unpaid case reserve? • Stair step • Reserve to ultimate • Inflation provision? 19

Does My Reserving Make A Difference? � 10 claims initially reserved at $100K apiece for a total of $1 million � 9 claims closed at $100k; 1 claim closed at $1.1 million for a total of $2 million � Should each claim have been reserved at $200k? � 90% right or 100% wrong � IBNR or case reserve Consistency is the key! 20

What Should I Discuss With My Actuary? (2) � Claim Trends – Are there any specific trends? • Frequency/Severity increasing • Shifts in claim settling rate, reporting rate, payments of legal expenses (ALAE) • Any future large settlement Double whammy! (bigger losses x bigger LDFs) 21

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How Does Risk Management Make A Difference? Trend or less is good! Flat is great! 25

What Should I Discuss With My Actuary? (3) � Program Changes – Exposures – Retention – Excess/reinsurance premium Anything different from the past? Remember: Actuarial science is based on history! 26

Hard Market Preparation With Tune-up Of Self-insurance Program 27

What Is Happening In The Market? Market Cycle 160 140 120 100 Gross Loss Ratios 80 Med Mal ‐‐ CM WC 60 CAL 40 20 0 Accident Year Aggregated NAIC Schedule P Information 28

Tactic 1 – Proper Retention � Appetite for risk � Predictability of losses � Cost considerations 29

What Is Your Working Layer? Occurrence Report Indemnity Expense Total 2013 Trended Closing Date Date Paid Paid Paid Paid Cause Date 2003 2005 750,000 25,000 775,000 1,300,000 WC - Lifting 2008 2008 2008 500,000 20,000 520,000 700,000 Auto - Large Truck 2010 2009 2009 500,000 25,000 525,000 600,000 Auto - Large Truck 2010 2011 2011 350,000 10,000 360,000 400,000 WC - Lifting 2011 2011 2001 200,000 35,000 235,000 300,000 WC - Ankle 2011 2012 2012 175,000 15,000 190,000 200,000 Auto - Small Truck 2005 Uses severity trend of 5.0% per year for all lines for demonstration purposes 30

Tactic 2 – Feasibility � Insurable exposures � Availability in marketplace � Structure 31

Tactic 3 – Allocations � Goals � Exposure vs. losses – Stability vs. responsiveness – Length of experience – Caps on losses � Advanced systems 32

Tactic 4 – Safety Study � Identify loss drivers � Analyze data interactions � Prioritize actions 33

Tactic 5 – Ensuring Credit � Use of industry data � Benchmarks � Other factors � Conversations with providers Remember: Differentiation! 34

Financial Reporting Compliance 35

What Are Auditor’s “Hot” Topics? � Sarbanes-Oxley Compliance � Booking within a range � Percentile � Discounting – Segregated assets return – Corporate bonds – Risk free rate � Gross-Net Presentation 36

Best Practices For Risk Management In Working With An Actuary 37

What Are Tips For A Smooth Actuarial Process From Start To Finish? � Confirm scope of analysis � Have frequent conversations – Before, during, after & interim – Meet in person � Request list of drivers and changes in results � Understand analysis and assumptions � Challenge the actuary and ask questions � Utilize the actuary as a partner 38

Questions? 39

Contact Information Richard C. Frese, FCAS, MAAA • Firm: Milliman, Inc. • Address: 71 S. Wacker Drive, 31 st Floor Chicago, IL 60606 • Phone: 312-499-5648 • Fax: 312-499-5690 • Email: richard.frese@milliman.com 40