brian beckman, kpmg llp kevin bingham, deloitte touche llp george levine, kpmg llp leon palmer,...

Brian Beckman, KPMG LLPKevin Bingham, Deloitte Touche LLPGeorge Levine, KPMG LLPLeon Palmer, Director, UTC

Self-Insured ReservingSelf-Insured Reserving

September, 2005

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In-House Actuarial PerspectiveIn-House Actuarial Perspective

In-House Actuary’s Involvement

In-House vs. Consulting Actuary

Self-Insurance Risk Areas

Range of Reasonable Reserves

Discounting

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1. In-House Actuary’s Involvement1. In-House Actuary’s Involvement

Setting Reserves/Accruals

Maintenance of Actuarial Data Base

Interface with Other Departments: Finance,

Accounting, Controllers Dept., Legal, Tax

Captive Certification

Communicate--Operating Units, Auditors (Internal +

External), Brokers

Budget (Forecast) and Allocation to Operating Units

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2. In-House vs. Consulting Actuary2. In-House vs. Consulting Actuary

IN-HS. CONS.

Setting Reserves/Accruals

Maintenance of Actuarial Data Base

Interface with Other Departments

Captive Certification (Independence)

Communication

Budget and Allocation

Formal Actuarial Report

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3. Self-Insurance Risk Areas3. Self-Insurance Risk Areas

Underwriting Risk

Interest Rate Risk (If Discounting)

Timing Risk

Collectibility of Insurance/Reinsurance Risk

Accounting Risk (Payments to TPAs) Monitoring Loss Payments/Expense Payments

Producer solicits/binds coverage, or policy renews

Underwriting Process

Policy expires and may be renewed or audited

Underwriter verifies risk acceptability and price

Policy is submitted to Underwriter

Underwriting Guides

Product Rate Plan and Coverage

Premiums Written and Earned

Resulting Financial FlowsLosses received, recorded, estimated

Business DesignMarkets Targeted

Underwriting Expenses result

Transactional Data Systems

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The P/C Company Risk Assumption Process

Claims are received or estimated

Claims Data Sorted by Insured

Reports produced generating loss triangles, etc. to estimate accruals

Claims Limited to Self-Insured Retention

Claims recorded into General Ledger

Bills received from TPA

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The Self-Insured Company Claim Payment Process

Claims are received or estimated

Claims Billed to Self-Insurer

Injured Party Receives Payment

Insurance Company/TPA Indemnified Party

Transactional Data Systems

Self-Insurer Systems

Claims data placed into Actuarial Data Base

Claims data delivered to actuary

Claims paid to TPA

RECONCILIATION

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4. Where does one carry Accruals? 4. Where does one carry Accruals? Range of Reasonable Reserve EstimatesRange of Reasonable Reserve Estimates

• Range Defined in Actuarial Standard of Practice # 36—Section 3.6.4

Range of Estimates that could be produced by appropriate actuarial methods or alternative sets of assumptions that the actuary judges to be reasonable

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4. Range of Reasonable Reserves (cont.)4. Range of Reasonable Reserves (cont.)

• Accounting Literature: Financial Accounting Standards No. 5: “Accounting for Contingencies”—Accrue Loss When

1) Probable Asset Impaired or Liability Incurred

2) Amount of Loss Can be Reasonably Estimated

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4. Range of Reasonable Reserves (cont.)4. Range of Reasonable Reserves (cont.)

• “FASB Interpretation # 14: Reasonable Estimation of the Amount of a Loss—An Interpretation of FASB 5”

1) When an Amount In Range Appears Better than Another, Accrue that Amount

2) When No Amount is Better than any Other Amount, Accrue the Minimum Amount in the Range

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4. Range of Reasonable Reserves (cont.)4. Range of Reasonable Reserves (cont.)

• Company must accrue within range, or audit difference posted—MATERIALITY and implications up to Accountant

• Illustrates Difference Between Actuary’s and Accountant’s View of Best Estimate and Range

1) Actuary: Point Estimate is More Probable than other points//Accountant: Book It (Under FASB5)

2) Accountant: All Points in A Reasonable Range are equally Likely, so Book the Minimum {In Spite of the Existence of A Point Estimate}

• SSAP #55: Statutory Accounting Management’s Best Estimate

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5. Discounting5. Discounting

• For GAAP purposes, discounting is optional

• Staff Accounting Bulletin 62:

1) Risk-free rate or settlement rate (arms-length transaction, < risk-free rate) locked in by accident year

2) Floating risk-free or settlement rate: entire liability redetermined at end of each period

• Amount and timing of payments fixed or reliably determinable