Reserving for Self-Insureds

Kevin M. Bingham – Deloitte.kbingham@deloitte.com

Casualty Actuarial SocietySeptember 12, 20051:30 PM – 3:00 PMBoston, Massachusetts

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INTRODUCTION

• Setting Reserves for Self-Insured Corporations• “Speak the Language”• Business Unit Focus• Quarterly Monitoring• Year-end Results

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Setting Reserves For Self-InsuredCorporations

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Setting Reserves For Self-InsuredCorporations

Actuarial Consultant

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“Speak the Same Language”

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“Speak the Same Language”

• Provide clear and concise reports° Executive summary° Technical appendix° Meet with each business unit

• First understand business unit trends• Second incorporate BU feedback then discuss results

• Training class titled “Guidebook to “The Books” and Quarterly Monitoring”

• Bridge the gap between Environmental Health and Safety (EH&S) terminology and actuarial terminology

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OSHA versus Actuarial Terminology

• Frequency° OSHA

• Number of Cases Divided by Hours Worked

EH&S data tracked separately for lost work day cases, restricted duty cases and medical only cases

Some business units rely on the frequency for OSHA Lost Work Day cases only

° Insurance• Number of Claims Divided by Payroll

All types of claims combined

Conceptually Similar

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OSHA versus Actuarial Terminology

• Severity° OSHA

• Number of Lost Work Days Divided by Hours Worked Definition is actually more like a loss rate (i.e., frequency

times severity) Definition is based on number of lost work days rather than

claim dollars and therefore does not incorporate inflationary trends in indemnity claim dollars per lost work day, nor the trends in medical costs or litigation costs.

° Insurance• Claim Dollars Divided by Number of Claims

Insurance Severity definition measures average value per claim and does not incorporate frequency

Conceptually

Not Even Close

EXAMPLE:

EMPLOYEE 1 – 60 LOST DAYS• SEVERE HEAD TRAUMA• INTENSE CARE UNIT• MULTIPLE BRAIN SURGERIES

EMPLOYEE 2 – 60 LOST DAYS• INITIAL BED REST• PAIN RELIEVERS• FAMILY ASSISTS RECOVERY

DRAMATICALLYDIFFERENT COSTS

SAME OSHA SEVERITY!

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Business Unit Focus

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Business Unit Focus

• Understand each business unit° Workforce

• Age• Location• BU trends (acquisitions, growth, etc.)

° Work location• On-site• Travel to customer site

° Proactive risk management• On-site medical staff• Focused claims handling• EH&S initiatives

Implications on reserving

assumptions

•Lift programs•Executive Ownership•Design for Environment and Safety (guidebook)•Ergonomics•Machine guarding, etc.

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Quarterly Monitoring

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Quarterly Monitoring

• Monitor results° Early warning when actual exceeds expected

° Avoid surprises at BUs → book quarterly adjustment?

• Understand drivers° Large losses (e.g., back fusion, severe auto accident)

° Spike in frequency

• Proactive risk management° Identify data issues

° Investigate unusual variances

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Quarterly Monitoring

• Clear communication is important° What quarterly monitoring is:

• Actual versus expected (i.e., uses year-end assumptions to project emergence of incurred/paid losses)

• Early warning

° What quarterly monitoring is not:• Complete actuarial analysis (i.e., re-pick loss development

factors, expected loss rates, etc.)

“Adverse/(favorable) quarterly monitoring results may end up worse/(better) at year-end when actuaries re-visit their assumptions…”

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Year-end Results

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Year-end Results

• Data gathering• Preliminary actuarial analysis• BU trend discussion & research• Finalize analysis and communicate results

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Year-end Results – Data Gathering

• BU loss & ALAE information

• BU claim count information

• BU exposure information

• Fixed expenses (e.g., broker fees, system costs, LOCs, claims handling fees, etc.)

• Variable expenses (e.g., 2nd injury assessment rate, self-insured assessment rate, etc.)

• Policy period information (e.g., self-insured retention, policy type, reinsurance, etc.)

• Discount rate

By BU division?

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Year-end Results – Preliminary Actuarial Analysis• Traditional actuarial methodologies• Prior year runoff of analysis• Review drivers of change in ultimates• Diagnostics

° Frequency

° Severity

° Paid to incurred ratios

° Settlement rates

° Aggregate case reserves

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Year-end Results – BU trend discussion & research• Discuss preliminary actuarial diagnostics and

drivers• Discuss BU trends• Discuss individual large losses

° Medical director and claim staff feedback

° Settlement efforts (active vs. inactive employees)

° Shift in distribution of claims

• EH&S update

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Year-end Results - Finalize analysis and communicate results• BU presentation

° Recap major findings, research efforts and how issues were addressed in the actuarial analysis

° Present findings by coverage (e.g., WC, AL, GL, etc.)• Change in prior year ultimates• Change in forecasts• Accrual adjustments

° Display graphs• Loss rates• Frequency/Severity

• Consolidated presentation (Corporate)

∆’s in:• Exposures• Fixed expenses• Variable expenses• Ultimate losses• Actuarial assumptions• Discount rate• Etc.