Working With Your Actuary
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)
LOSS ADJUSTMENT EXPENSES (LEGAL)
8
INCURRED BUT NOT REPORTED (IBNR) ULTIMATE
How Do Current Losses Become Ultimate Losses? Occurrence Year Counts
Paid Losses
Case Reserves
Incurred Losses
IBNR Losses
(Ultimate) End of Time
2007 2008 2009 2010 2011 2012
75 80 70 60 40 25
2,340,000 2,500,000 2,700,000 2,300,000 2,200,000 280,000
0 70,000 180,000 300,000 760,000 1,000,000
2,340,000 2,570,000 2,880,000 2,600,000 2,960,000 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 OCCURS
CLAIM REPORTED
CLAIM SETTLED TIME
12
What Is Loss Development?
Year
12
2007 2008 2009 2010 2011 2012
1,010,000 1,100,000 1,190,000 1,300,000 1,470,000 1,280,000
Months of Development 24 36 48 2,090,000 2,310,000 2,550,000 2,460,000 2,960,000
72
2,220,000 2,310,000 2,330,000 2,340,000 2,450,000 2,550,000 2,570,000 2,760,000 2,880,000 2,310,000 = 2.04 2,600,000 1,100,000
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
60
Where Does IBNR Get Reported?
Occurrence Year
14
Counts
Paid Losses
Case Reserves
Incurred Losses
IBNR Losses
(Ultimate) End of Time
2007 2008 2009 2010 2011 2012
75 80 70 60 40 25
2,340,000 2,500,000 2,700,000 2,300,000 2,200,000 280,000
0 70,000 180,000 300,000 760,000 1,000,000
2,340,000 2,570,000 2,880,000 2,600,000 2,960,000 1,280,000
0 10,000 40,000 140,000 370,000 1,660,000
2,340,000 2,580,000 2,920,000 2,740,000 3,330,000 2,940,000
Total
350
12,320,000
2,310,000
14,630,000
2,220,000
16,850,000
Loss Development-WC What Is Your Program’s Tail?
%of Ultim ateLoss
100% 80% 60% 40%
IBNR Case Reserves
20% 0%
Paid Loss
0
12
24
36
48
60
Months
Sample development pattern 15
72
84
96
108
120
Loss Development-GL What Is Your Program’s Tail?
%of Ultim ateLoss
100% 80% 60% 40%
IBNR Case Reserves
20% 0%
Paid Loss
0
12
24
36
48
60
Months
Sample development pattern 16
72
84
96
108
120
Loss Development-PROP What Is Your Program’s Tail?
%of Ultim ateLoss
100% 80% 60% 40%
IBNR Case Reserves
20% 0%
Paid Loss
0
12
24
36
48
60
Months
Sample development pattern 17
72
84
96
108
120
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
22
23
24
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
Gross Loss Ratios
120
100
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 Date 2003 2008 2009 2011 2011 2012
Report Date 2005 2008 2009 2011 2001 2012
Indemnity Expense Paid Paid 750,000 25,000 500,000 20,000 500,000 25,000 350,000 10,000 200,000 35,000 175,000 15,000
Total 2013 Trended Paid Paid Cause 775,000 1,300,000 WC - Lifting 520,000 700,000 Auto - Large Truck 525,000 600,000 Auto - Large Truck 360,000 400,000 WC - Lifting 235,000 300,000 WC - Ankle 190,000 200,000 Auto - Small Truck
Uses severity trend of 5.0% per year for all lines for demonstration purposes
30
Closing Date 2008 2010 2010 2011 2011 2005
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, 31st Floor Chicago, IL 60606 • Phone:
312-499-5648
• Fax:
312-499-5690
• Email:
40
[email protected]
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)
LOSS ADJUSTMENT EXPENSES (LEGAL)
8
INCURRED BUT NOT REPORTED (IBNR) ULTIMATE
How Do Current Losses Become Ultimate Losses? Occurrence Year Counts
Paid Losses
Case Reserves
Incurred Losses
IBNR Losses
(Ultimate) End of Time
2007 2008 2009 2010 2011 2012
75 80 70 60 40 25
2,340,000 2,500,000 2,700,000 2,300,000 2,200,000 280,000
0 70,000 180,000 300,000 760,000 1,000,000
2,340,000 2,570,000 2,880,000 2,600,000 2,960,000 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 OCCURS
CLAIM REPORTED
CLAIM SETTLED TIME
12
What Is Loss Development?
Year
12
2007 2008 2009 2010 2011 2012
1,010,000 1,100,000 1,190,000 1,300,000 1,470,000 1,280,000
Months of Development 24 36 48 2,090,000 2,310,000 2,550,000 2,460,000 2,960,000
72
2,220,000 2,310,000 2,330,000 2,340,000 2,450,000 2,550,000 2,570,000 2,760,000 2,880,000 2,310,000 = 2.04 2,600,000 1,100,000
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
60
Where Does IBNR Get Reported?
Occurrence Year
14
Counts
Paid Losses
Case Reserves
Incurred Losses
IBNR Losses
(Ultimate) End of Time
2007 2008 2009 2010 2011 2012
75 80 70 60 40 25
2,340,000 2,500,000 2,700,000 2,300,000 2,200,000 280,000
0 70,000 180,000 300,000 760,000 1,000,000
2,340,000 2,570,000 2,880,000 2,600,000 2,960,000 1,280,000
0 10,000 40,000 140,000 370,000 1,660,000
2,340,000 2,580,000 2,920,000 2,740,000 3,330,000 2,940,000
Total
350
12,320,000
2,310,000
14,630,000
2,220,000
16,850,000
Loss Development-WC What Is Your Program’s Tail?
%of Ultim ateLoss
100% 80% 60% 40%
IBNR Case Reserves
20% 0%
Paid Loss
0
12
24
36
48
60
Months
Sample development pattern 15
72
84
96
108
120
Loss Development-GL What Is Your Program’s Tail?
%of Ultim ateLoss
100% 80% 60% 40%
IBNR Case Reserves
20% 0%
Paid Loss
0
12
24
36
48
60
Months
Sample development pattern 16
72
84
96
108
120
Loss Development-PROP What Is Your Program’s Tail?
%of Ultim ateLoss
100% 80% 60% 40%
IBNR Case Reserves
20% 0%
Paid Loss
0
12
24
36
48
60
Months
Sample development pattern 17
72
84
96
108
120
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
22
23
24
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
Gross Loss Ratios
120
100
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 Date 2003 2008 2009 2011 2011 2012
Report Date 2005 2008 2009 2011 2001 2012
Indemnity Expense Paid Paid 750,000 25,000 500,000 20,000 500,000 25,000 350,000 10,000 200,000 35,000 175,000 15,000
Total 2013 Trended Paid Paid Cause 775,000 1,300,000 WC - Lifting 520,000 700,000 Auto - Large Truck 525,000 600,000 Auto - Large Truck 360,000 400,000 WC - Lifting 235,000 300,000 WC - Ankle 190,000 200,000 Auto - Small Truck
Uses severity trend of 5.0% per year for all lines for demonstration purposes
30
Closing Date 2008 2010 2010 2011 2011 2005
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, 31st Floor Chicago, IL 60606 • Phone:
312-499-5648
• Fax:
312-499-5690
• Email:
40
[email protected]
