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Utilizing Non-Traditional Roles Of Your Actuary To Your Benefit “Working With Your Actuary”

January 15, 2013 Richard C. Frese, FCAS, MAAA

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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

Agenda

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What Is An Actuary?

An actuary is a person who passes as an expert

• n 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!

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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

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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

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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

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The Actuarial Process And Communication For Optimal Results

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What Are The Basic Loss Components?

PAID CASE RESERVES REPORTED (INCURRED) INCURRED BUT NOT REPORTED (IBNR) ULTIMATE INDEMNITY LOSSES LOSS ADJUSTMENT EXPENSES (LEGAL)

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Ultimate Losses = Paid Losses + Case Reserves + IBNR Losses Liability = Case Reserves + IBNR Losses

Data is for demonstration purposes only

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 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 ???? ????

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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

What Are Incurred But Not Reported (IBNR) Losses?

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Multiple methods based on paid losses, case reserves and claim counts Actual loss emergence from previous (mature) years

Future is based on history How Is IBNR Calculated?

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INVESTIGATE EVALUATE NEGOTIATE OCCURS ACCIDENT CLAIM REPORTED CLAIM SETTLED

$

?

TIME

What Is The Life Of An Individual Claim?

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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 2010 1,300,000 2,460,000 2,600,000 2011 1,470,000 2,960,000 2012 1,280,000 Months of Development

2,310,000 1,100,000 = 2.04 What if the 1,100,000 was 2,200,000 instead?

1,280,000 X 2.04 X 1.07 X 1.04 X 1.008X 1.004 = 2,940,000

What Is Loss Development?

What is your program’s loss development?

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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 2,340,000 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

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Loss Development-WC

What Is Your Program’s Tail?

0% 20% 40% 60% 80% 100%

12 24 36 48 60 72 84 96 108 120

Months

%

• f

U lt im a t e L

• s

s

IBNR Case Reserv es Paid Loss

Sample development pattern

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Loss Development-GL

What Is Your Program’s Tail?

0% 20% 40% 60% 80% 100%

12 24 36 48 60 72 84 96 108 120

Months

%

• f

U lt im a t e L

• s

s

IBNR Case Reserv es Paid Loss

Sample development pattern

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Loss Development-PROP

What Is Your Program’s Tail?

0% 20% 40% 60% 80% 100%

12 24 36 48 60 72 84 96 108 120

Months

%

• f

U lt im a t e L

• s

s

IBNR Case Reserv es Paid Loss

Sample development pattern

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Cost Control

– Risk management – Proactive claims handling – “Skin in the game”

Communication!

– Discussions with actuary

How Do I Achieve Results?

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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?

What Should I Discuss With My Actuary? (1)

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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!

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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)

What Should I Discuss With My Actuary? (2)

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How Does Risk Management Make A Difference?

Trend or less is good! Flat is great!

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Program Changes

– Exposures – Retention – Excess/reinsurance premium

Anything different from the past?

Remember: Actuarial science is based on history!

What Should I Discuss With My Actuary? (3)

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

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Aggregated NAIC Schedule P Information

What Is Happening In The Market?

20 40 60 80 100 120 140 160 Gross Loss Ratios Accident Year

Market Cycle

Med Mal‐‐CM WC CAL

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Appetite for risk Predictability of losses Cost considerations

Tactic 1 – Proper Retention

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Uses severity trend of 5.0% per year for all lines for demonstration purposes

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

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Insurable exposures Availability in marketplace Structure

Tactic 2 – Feasibility

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Goals Exposure vs. losses

– Stability vs. responsiveness – Length of experience – Caps on losses

Advanced systems

Tactic 3 – Allocations

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Identify loss drivers Analyze data interactions Prioritize actions

Tactic 4 – Safety Study

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Use of industry data Benchmarks Other factors Conversations with providers

Remember: Differentiation!

Tactic 5 – Ensuring Credit

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Financial Reporting Compliance

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Sarbanes-Oxley Compliance Booking within a range Percentile Discounting

– Segregated assets return – Corporate bonds – Risk free rate

Gross-Net Presentation

What Are Auditor’s “Hot” Topics?

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Best Practices For Risk Management In Working With An Actuary

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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

What Are Tips For A Smooth Actuarial Process From Start To Finish?

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Questions?

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Richard C. Frese, FCAS, MAAA

• Firm: Milliman, Inc.
• Address: 71 S. Wacker Drive, 31st Floor

Chicago, IL 60606

• Phone: 312-499-5648
• Fax: 312-499-5690
• Email: richard.frese@milliman.com

Contact Information