the actuary’s perspective · actuary’s analysis and the financial forecasts for the captive...
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Captive Academy of the 14th Annual Executive Educational Conference
The Actuary’s Perspective
Legaré Gresham, FCAS, MAAA
Bartlett Actuarial Group, Ltd.
145 King Street, Suite 203 Charleston, SC 29401
(843) 377-0993
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Captive Academy of the 14th Annual Executive Educational Conference
First, What Is an Actuary? Definition (websters.com) – “a person who computes premium rates, dividends, risks, etc., according to probabilities based on statistical records.” Experts in measuring and managing risk In order to become credentialed, there is a rigorous series of professional examinations. Accountants Look Back, We Look to the Future
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Captive Academy of the 14th Annual Executive Educational Conference
How Can an Actuary Help?
• Feasibility Studies
• Reserve Reviews
• Support for Ongoing Operations
• Support for Business Plan Changes
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Captive Academy of the 14th Annual Executive Educational Conference
What is a Feasibility Study?
Purpose - to assess the viability of forming a captive insurance company or risk retention group.
• Project loss costs
• Estimate other costs and premiums
• NPV comparison of alternatives
• Develop program structure
• Estimate required capitalization
• Pro forma financials
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Captive Academy of the 14th Annual Executive Educational Conference
Pre-Feasibility
• Conceptual review
• Funding appetite
• Commitment to an alternative market solution
• Specifics of program (lines of coverage, limits, etc.)
• Determine ownership structure
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Captive Academy of the 14th Annual Executive Educational Conference
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• Retention Levels
• Reinsurance Alternatives
• Loss & Expense Forecasts
• Premium Estimates
• Capital Requirements
Core Financial Considerations
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Retention
Reinsurance
Net L&LAE Forecast Net Premium
Capital Requirement
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Captive Academy of the 14th Annual Executive Educational Conference
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Retention Considerations
• Cost of Reinsurance
• Current Commercial Policies
• Lines of Business
• Actual Exposure
• Risk Appetite
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Captive Academy of the 14th Annual Executive Educational Conference
Retention
Reinsurance
Net L&LAE Forecast Net Premium
Capital Requirement
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Captive Academy of the 14th Annual Executive Educational Conference
• What exposures are being written in the captive?
─ Are they frequency or severity driven
• Risk appetite of the captive’s owners
• How much capital is available
• Size of program
Reinsurance Considerations
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Captive Academy of the 14th Annual Executive Educational Conference
• Pro rata (%)
• Excess of loss ($)
• Treaty
• Facultative
Reinsurance Alternatives
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Captive Academy of the 14th Annual Executive Educational Conference
Retention
Reinsurance
Net L&LAE Forecast Net Premium
Capital Requirement
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Captive Academy of the 14th Annual Executive Educational Conference
Loss and Expense Forecasts
• Gross (Direct and Assumed) versus Net losses and loss
adjustment expenses (L&LAE)
• Effect of Retention/Reinsurance
• Correlation between lines of business?
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Captive Academy of the 14th Annual Executive Educational Conference
Developing Expected Losses
• Company Experience
─ Most applicable but not always credible
─ Is history predictive of future?
• Industry Information
─ Credible but perhaps not an exact match
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Captive Academy of the 14th Annual Executive Educational Conference
Exposures
• Basic Rating Unit ─ Reasonable
─ Closely Correlated to Loss Potential
─ Easily Verifiable
─ Not Subject to Manipulation
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Captive Academy of the 14th Annual Executive Educational Conference
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Company Data
• Paid and Reported Losses for last 5-10 Years • Claim Count for last 5-10 Years • Historical Exposure (# autos, revenue, etc) • Historical Premium • Historical Retentions • Large Loss Listing • Triangles (Historical Development)
***Projected Exposure***
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Captive Academy of the 14th Annual Executive Educational Conference
• Insurance Industry
– Commercial Rates
– Development Patterns
– Loss Ratios
– Benefit Level Change Factors
• Other
– Inflation Trends
– Specialized Expertise; eg NOAA, Ponemon Institute
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Industry Information
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• Deterministic – Single Point Estimate —Loss Cost/Pure Premium —Frequency and Severity —Expected Loss Ratio
•Current Premium •Other Commercial Rates
• Stochastic Models - Estimate a Loss Distribution —Confidence Levels
Possible Methods
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Retention
Reinsurance
Net L&LAE Forecast Net Premium
Capital Requirement
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Captive Academy of the 14th Annual Executive Educational Conference
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• Sufficient to cover all expenses, including the cost of reinsurance and/or fronting
• Reinsurance decreases the net expected L&LAE, which decreases the net premium
• Expected Payout Period/Time Value of Money
• Adjusted to Projection Period – Trend, Benefit Level, Exposure, etc.
• Safety/Risk Margin?
Premium Considerations
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Captive Academy of the 14th Annual Executive Educational Conference
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Rate = Loss Rate + Safety Margin + Expenses ………………………………………………………………………………
Premium
= Rate x Exposures
Or
= (Expected Losses + Fixed Exp) /
( 1 –Variable Exp- Safety Margin)
Premium Calculation
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Captive Academy of the 14th Annual Executive Educational Conference
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Premium
Loss & LAE
Other Operating Expenses
Risk Margin
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Retention
Reinsurance
Net L&LAE Forecast Net Premium
Capital Requirement
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Capital Considerations
• Premium
• Anticipated Reserves
• Per Occurrence/Aggregate Retentions
• Adverse Case
• Statutory Requirements
• Lines of business
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Captive Academy of the 14th Annual Executive Educational Conference
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Retention
Reinsurance
Net L&LAE Forecast Net Premium
Capital Requirement
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Captive Academy of the 14th Annual Executive Educational Conference
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Pro Forma Financials
• Assess the viability of the program
• Projected balance sheets, cash flow, and income statements
• Five to ten year time horizon
• Expected and Adverse Case Scenarios
–Adverse = “Worse” not “Worst”
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Captive Academy of the 14th Annual Executive Educational Conference
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An actuarial report is filed with the captive application and provides a written explanation of the actuary’s analysis and the financial forecasts for the captive (pro formas). • The report should provide a clear explanation of the
assumptions and projected results should be included in the actuarial feasibility study report.
• Ask questions. You know the unique nature of your operations better than anyone else.
• It’s your capital at risk. Be sure you’re comfortable with the answers.
Actuarial Report
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Captive Academy of the 14th Annual Executive Educational Conference
Annual Work
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• Fiscal Year End Reserve Review Actuarial Report Statement of Actuarial Opinion
• Additional Reserve Reviews
• Pricing Analysis
• Benchmarking
• Emergence Tests
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Captive Academy of the 14th Annual Executive Educational Conference
Annual Reserve Review • Loss Reserving
– Process of determining the required amount of money to be set aside to cover liability the insurance company currently has for claims by and against its policyholders
• Statement of Actuarial Opinion
– Required to be filed annually and to be presented to Board of Directors
– Based on NAIC requirements – Reasonable, Excessive, Deficient, Qualified or No Opinion
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Captive Academy of the 14th Annual Executive Educational Conference
Additional Work
• Retention Analysis
• New Coverage Pricing
• Review of Gaps in Coverage
• Pro Formas for Business Plan Changes
• Benchmarking
• Risk Transfer Analysis
• Regulation Changes – Solvency II, Legislative, Judicial Interpretation, etc.
• Enterprise Risk Management Review
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Captive Academy of the 14th Annual Executive Educational Conference
• Captive Application Review – outsourced by DOI and/or
internal review by DOI staff actuaries
• Financial Condition Examination – DOI will review risk, reserves, underwriting, etc. to confirm solvency of company
• Because they are awesome!!!!
Why Else Might I Talk to an Actuary?
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