The Ins & Outs Of Self-Insurance Southwest Actuarial Forum December 4, 2007 Ed Costner, ACAS, MAAA Casualty Actuarial Consultants, Inc. The Ins & Outs of Self-Insurance Definition of Self-Insurance– retain some portion of the risk of loss Lines of Coverage to Discuss Workers Compensation Liability Insurances General Liability Professional Liability Auto Liability The Ins & Outs of Self-Insurance Workers Compensation Three Choices for Coverage Qualify to be Self-insured Must qualify on a state by state basis Terms between the S-I and each state where they qualify Provide evidence of financial responsibility Provide evidence of acceptable excess insurance Must collateralize retained losses to each state Must report to each state annually Buy a policy from a licensed, admitted insurance company Group Self-Insurance The Ins & Outs of Self-Insurance Workers Compensation Other Features of Individual Self-Insured WC - Acquire excess insurance - Report on retained losses to each state (actuarial reports?) - Select TPA - More control over loss adjustment - Loss control and safety - Financial issues - Federal income tax issues - Guaranty fund(s)? - Long term financial commitment Extra Credit Problem! The Ins & Outs of Self-Insurance Workers Compensation Buy A Policy – Agreement between the insured & insurer - Retrospectively Rated Specific & aggregate retentions Basic charge [(L x LCF) + B] x TM Provide collateralization for the retained losses to the insurance company Incurred loss and paid loss retros Financial Issues ‘Bundled’ vs. ‘Unbundled’ - Deductible Policies - Reinsure your insurance company into your captive The Ins & Outs of Self-Insurance Workers Compensation Deductible Policies Same issues as retros Primarily designed to avoid premium tax Captive Reinsurance Must establish a captive insurance company Front company insures the risk Captive reinsures the front company only for the losses within its retention Retention agreement between captive and front Captive (unauthorized reinsurer) must collateralize assumed losses to the front (Schedule F) Captive is subject to regulation by state or country of domicile Extra credit problem! The Ins & Outs of Self-Insurance Workers Compensation Group Self-Insurance Funds Organizations agree to pool the risk of loss Enabling legislation - ‘Sponsored by an association in business for purposes other than insurance in (state) for more than five years’ Members have joint and severable liability Excess insurance required Rules of operation set by each state Members are charged a premium and participate in profits and losses (assessments) Fund purchases services from vendors Similar to an insurance company except that the surplus of the organization includes the members’ net worth Zero sum game The Ins & Outs of Self-Insurance Workers Compensation Services Required by Group Self-Insurance Funds General Administration including premium billing, collection, and financial records Claims Administration including medical fee review Safety and Loss Control Investment Services Actuaries Outside CPAs Figure 1 SAMPLE SELF-INSURER A WORKERS COMPENSATION HISTORICAL PROFITABILITY ANALYSIS (Losses Limited to Prior Specif ic and Aggregate Retentions Including ALAE) Premium Rate Pure Loss Rate Expenses Rate Amount Per $100 Pay roll $3.00 $2.50 $2.36 $2.28 $2.09 $2.02 $2.20 $2.15 $2.00 $1.85 $1.77 $1.73 $1.50 $1.48 $1.51 $1.45 $1.34 $1.44 $1.36 $1.32 $1.33 $1.31 $1.28 $1.27 $1.07 $1.18 $1.16 $1.14 $1.16 $1.15 $1.12 $1.00 $0.90 $0.85 $0.85 $0.50 $0.00 6 -0 5 -0 05 1/ 1/ 4 -0 04 1/ 1/ 3 -0 03 1/ 1/ 2 -0 02 1/ 1/ 1 -0 01 1/ 1/ 0 -0 00 1/ 1/ 9 -9 99 1/ 1/ 8 -9 98 1/ 1/ 7 -9 97 1/ 1/ 6 -9 96 1/ 1/ 5 -9 95 1/ 1/ 4 -9 94 1/ 1/ 3 -9 93 1/ 1/ 2 -9 92 1/ 1/ 91 1/ 1/ Policy Period HISTORICAL PROFITABILITY ANALYSIS-PER $100 PAYROLL (Losses Limited to Prior Retentions) (Excludes Investment Income, Income Taxes, and Dividends) Earned Premium Operating Expenses Estimated Ultimate Losses $3.00 Per $100 of Payroll $2.52 $2.50 $2.31 $2.04 $1.98 $2.00 $1.85 $1.81 $1.71 $1.55 $1.69 $1.63 $1.67 $1.51 $1.50 $1.45 $1.34 $1.17 $1.26 $1.11 $1.10 $1.00 $0.50 $0.00 1/1/95-96 1/1/97-98 1/1/96-97 1/1/99-00 1/1/98-99 1/1/01-02 1/1/00-01 Policy Period 1/1/03-04 1/1/02-03 The Ins & Outs of Self-Insurance Liability Insurances Ways to Self-Insure Deductibles Self-insured retentions Retros Captive Reinsurance Self-Insurance Groups Risk Retention Groups Limited only by certificate of insurance needs Extra Credit Problem! The Ins & Outs of Self-Insurance Liability Insurances Risk Retention Groups Federal enabling legislation Licensed and regulated by state of domicile Authorized to write liability insurance in all states Some insurance departments HATE RRGs No guaranty mechanism No WC, no property (currently) Since surplus is required – stock or mutual Profits belong to the owners Extra Credit Problem!