FN 101 – THE LEXICON OF RISK FINANCING
BASICS EXPLAINED
Wednesday, April 30
9:00 am – 11:00 am
Recording of this session via any media type is strictly prohibited.
Page 1
Moderator – Shaun Jackson
Director of Risk Management, El Pollo Loco, Inc.
sjackson@elpolloloco.com (714)599-5180
Speaker – Scott Silitsky
VP Contracts & Risk Manager, ThyssenKrupp Elevator Company
Scott.silitsky@thyssenkrupp.com (954)597-3016
Coordinator/Speaker - Barbara Benson Grinnell
Vice President, Willis
Benson_Ba@willis.com (985)727-4039
Recording of this session via any media type is strictly prohibited.
Page 2
What to Expect
After attending this session, you should be able to:
• Incorporate risk finance terms and tools into
your skill set
• Understand how to use risk financing
assessment tools
• Practice effective communication or risk finance
concepts
Recording of this session via any media type is strictly prohibited.
Page 3
Agenda
•
•
•
•
•
Introduction
Basic loss development
Loss analysis
Cash flow comparisons of market quotes
Conclusion
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Page 4
Basic Loss Development
• Purpose: To use the growth patterns of
historical losses to predict ultimate losses on
policy years that are still open and developing
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Page 5
Sources of Loss Development Factors
• Industry-provided
– Insurance carriers
– Rating bureaus
– Independent consultants
– Actuaries
• Organization-specific
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Page 6
Casualty Coverage’s
•
•
•
•
Workers’ compensation
Automobile liability
General liability
Products liability
Recording of this session via any media type is strictly prohibited.
Page 7
Loss Development Triangles
• Types of triangles
– Incurred loss development
– Paid loss development
– Frequency loss development
• Per occurrence retention
– Limited
– Unlimited
Recording of this session via any media type is strictly prohibited.
Page 8
Incurred But Not Reported Claims
• Incurred But Not Reported (IBNR) claims caused by
– Delay between occurrence and reporting of the claim
– Actual amount for which a claim will settle is unknown
– Indeterminate amount of time between a claims first
report and when all activity on that claim ceases
Recording of this session via any media type is strictly prohibited.
Page 9
Sample Company – Loss Run Summary
Valuation Date:
Policy Period
1/1-12/31/07
12/31/2007
Incurred
352,429
Paid
150,254
# Claims
120
Valuation Date:
Policy Period
1/1-12/31/07
1/1-12/31/08
12/31/2008
Incurred
459,510
276,952
Paid
274,587
145,210
# Claims
150
101
Valuation Date:
Policy Period
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
12/31/2009
Incurred
591,215
393,833
592,449
Paid
525,112
312,541
256,874
# Claims
152
140
130
Valuation Date:
Policy Period
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
12/31/2010
Incurred
659,874
500,123
1,053,915
644,873
Paid
565,899
478,001
501,245
295,741
# Claims
152
148
155
140
Valuation Date:
Policy Period
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
12/31/2011
Incurred
715,846
554,123
1,344,098
980,544
816,337
Paid
625,000
498,741
1,300,000
758,474
321,587
# Claims
152
149
160
165
135
Valuation Date:
Policy Period
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
12/31/2012
Incurred
718,434
564,587
1,488,670
1,322,208
1,104,286
402,087
Paid
701,058
525,000
1,356,987
1,254,123
645,874
195,120
# Claims
152
149
161
167
160
105
Valuation Date:
Policy Period
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12/31/2013
Incurred
718,434
570,145
1,588,127
1,549,531
1,087,525
578,368
402,966
Paid
718,434
545,879
1,485,214
1,301,258
1,001,234
418,547
150,145
# Claims
152
149
161
170
175
145
99
Recording of this session via any media type is strictly prohibited.
Page 10
Sample Co. – Incurred Loss
Triangulation - WC
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
352,429
276,952
592,449
644,873
816,337
402,087
402,966
Incurred Loss Triangle
Elapsed Months from Inception
24
36
48
60
459,510
591,215
659,874
715,846
393,833
500,123
554,123
564,587
1,053,915 1,344,098 1,488,670 1,588,127
980,544 1,322,208 1,549,531
1,104,286 1,087,525
578,368
72
718,434
570,145
84
718,434
Recording of this session via any media type is strictly prohibited.
Page 11
Sample Co. – Incurred Loss
Triangulation - WC
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
352,429
276,952
592,449
644,873
816,337
402,087
402,966
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
Incurred Loss Triangle
Elapsed Months from Inception
24
36
48
60
459,510
591,215
659,874
715,846
393,833
500,123
554,123
564,587
1,053,915 1,344,098 1,488,670 1,588,127
980,544 1,322,208 1,549,531
1,104,286 1,087,525
578,368
12
1.000
1.000
1.000
1.000
1.000
1.000
1.000
=
24 month incurred losses
12 month incurred losses
=
578,368
402,087
Incremental Growth Triangle
Elapsed Months from Inception
24
36
48
1.304
1.287
1.116
1.422
1.270
1.108
1.779
1.275
1.108
1.521
1.348
1.172
1.353
0.985
1.438
72
718,434
570,145
84
718,434
72
1.004
1.010
84
1.000
60
1.085
1.019
1.067
= 1.438
Recording of this session via any media type is strictly prohibited.
Page 12
Sample Co. – Incurred Loss
Triangulation - WC
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
352,429
276,952
592,449
644,873
816,337
402,087
402,966
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
1.000
1.000
1.000
1.000
1.000
1.000
1.000
EMFI
Incremental Avg.
12
1.000
Incurred Loss Triangle
Elapsed Months from Inception
24
36
48
60
459,510
591,215
659,874
715,846
393,833
500,123
554,123
564,587
1,053,915 1,344,098 1,488,670 1,588,127
980,544 1,322,208 1,549,531
1,104,286 1,087,525
578,368
Incremental Growth Triangle
Elapsed Months from Inception
24
36
48
1.304
1.287
1.116
1.422
1.270
1.108
1.779
1.275
1.108
1.521
1.348
1.172
1.353
0.985
1.438
24
1.469
36
1.233
48
1.126
72
718,434
570,145
84
718,434
60
1.085
1.019
1.067
72
1.004
1.010
84
1.000
60
1.057
72
1.007
84
1.000
Average all policy years
Recording of this session via any media type is strictly prohibited.
Page 13
Sample Co. – Incurred Loss
Triangulation - WC
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
352,429
276,952
592,449
644,873
816,337
402,087
402,966
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
1.000
1.000
1.000
1.000
1.000
1.000
1.000
EMFI
Incremental Avg.
Adjusted Inc. Avg.
12
1.000
1.000
Incurred Loss Triangle
Elapsed Months from Inception
24
36
48
60
459,510
591,215
659,874
715,846
393,833
500,123
554,123
564,587
1,053,915 1,344,098 1,488,670 1,588,127
980,544 1,322,208 1,549,531
1,104,286 1,087,525
578,368
Incremental Growth Triangle
Elapsed Months from Inception
24
36
48
1.304
1.287
1.116
1.422
1.270
1.108
1.779
1.275
1.108
1.521
1.348
1.172
1.353
0.985
1.438
24
1.469
1.408
36
1.233
1.295
48
1.126
1.126
72
718,434
570,145
84
718,434
60
1.085
1.019
1.067
72
1.004
1.010
84
1.000
60
1.057
1.057
72
1.007
1.007
84
1.000
1.000
Remove any “irregular” averages
Recording of this session via any media type is strictly prohibited.
Page 14
Sample Co. – Incurred Loss
Triangulation - WC
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
352,429
276,952
592,449
644,873
816,337
402,087
402,966
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
1.000
1.000
1.000
1.000
1.000
1.000
1.000
EMFI
Incremental Avg.
Adjusted Inc. Avg.
Cumulative Average
12
1.000
1.000
1.000
Incurred Loss Triangle
Elapsed Months from Inception
24
36
48
60
459,510
591,215
659,874
715,846
393,833
500,123
554,123
564,587
1,053,915 1,344,098 1,488,670 1,588,127
980,544 1,322,208 1,549,531
1,104,286 1,087,525
578,368
Incremental Growth Triangle
Elapsed Months from Inception
24
36
48
1.304
1.287
1.116
1.422
1.270
1.108
1.779
1.275
1.108
1.521
1.348
1.172
1.353
0.985
1.438
24
1.469
1.408
1.408
36
1.233
1.295
1.823
48
1.126
1.126
2.052
72
718,434
570,145
84
718,434
60
1.085
1.019
1.067
72
1.004
1.010
84
1.000
60
1.057
1.057
2.169
72
1.007
1.007
2.184
84
1.000
1.000
2.184
36 month cumulative average X 48 month incremental average
1.823 X 1.126 = 2.052
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Page 15
Sample Co. – Incurred Loss
Triangulation - WC
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
352,429
276,952
592,449
644,873
816,337
402,087
402,966
Incurred Loss Triangle
Elapsed Months from Inception
60
48
36
24
715,846
659,874
591,215
459,510
564,587
554,123
500,123
393,833
1,053,915 1,344,098 1,488,670 1,588,127
980,544 1,322,208 1,549,531
1,104,286 1,087,525
578,368
Incremental Growth Triangle
Elapsed Months from Inception
48
36
24
1.116
1.287
1.304
1.108
1.270
1.422
1.108
1.275
1.779
1.172
1.348
1.521
0.985
1.353
1.438
72
718,434
570,145
84
718,434
72
1.004
1.010
84
1.000
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
1.000
1.000
1.000
1.000
1.000
1.000
1.000
EMFI
Incremental Avg.
Adjusted Inc. Avg.
Cumulative Average
12
1.000
1.000
1.000
24
1.469
1.408
1.408
36
1.233
1.295
1.823
48
1.126
1.126
2.052
60
1.057
1.057
2.169
72
1.007
1.007
2.184
84
1.000
1.000
2.184
EMFI
Development Factor
12
2.184
24
1.551
36
1.198
48
1.064
60
1.007
72
1.000
84
1.000
60
1.085
1.019
1.067
84 month cumulative avg.
=
24 month cumulative avg.
=
2.184
1.408
Recording of this session via any media type is strictly prohibited.
Page 16
Sample Co. – Incurred Loss
Triangulation - WC
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
352,429
276,952
592,449
644,873
816,337
402,087
402,966
Incurred Loss Triangle
Elapsed Months from Inception
24
36
48
60
459,510
591,215
659,874
715,846
393,833
500,123
554,123
564,587
1,053,915 1,344,098 1,488,670 1,588,127
980,544 1,322,208 1,549,531
1,104,286 1,087,525
578,368
Incremental Growth Triangle
Elapsed Months from Inception
24
36
48
1.304
1.287
1.116
1.422
1.270
1.108
1.779
1.275
1.108
1.521
1.348
1.172
1.353
0.985
1.438
72
718,434
570,145
84
718,434
60
1.085
1.019
1.067
72
1.004
1.010
84
1.000
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
1.000
1.000
1.000
1.000
1.000
1.000
1.000
EMFI
Incremental Avg.
Adjusted Inc. Avg.
Cumulative Average
12
1.000
1.000
1.000
24
1.469
1.408
1.408
36
1.233
1.295
1.823
48
1.126
1.126
2.052
60
1.057
1.057
2.169
72
1.007
1.007
2.184
84
1.000
1.000
2.184
EMFI
Development Factor
12
2.184
24
1.551
36
1.198
48
1.064
60
1.007
72
1.000
84
1.000
Discovery Schedule
Cumulative
Incremental
45.8%
45.8%
64.5%
18.7%
83.5%
19.0%
94.0%
10.5%
99.3%
5.3%
100.0%
0.7%
100.0%
0.0%
1 / development factor
= 1 / 2.184 = 45.8%
Recording of this session via any media type is strictly prohibited.
Page 17
Sample Co. – Paid Loss Triangulation - WC
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
150,254
145,210
256,874
295,741
321,587
195,120
150,145
Paid Loss Triangle
Elapsed Months from Inception
24
36
48
60
274,587
525,112
565,899
625,000
312,541
478,001
498,741
525,000
501,245 1,300,000 1,356,987 1,485,214
758,474 1,254,123 1,301,258
645,874 1,001,234
418,547
Incremental Growth Triangle
Elapsed Months from Inception
24
36
48
1.827
1.912
1.078
2.152
1.529
1.043
1.951
2.594
1.044
2.565
1.653
1.038
2.008
1.550
2.145
72
701,058
545,879
84
718,434
60
1.104
1.053
1.094
72
1.122
1.040
84
1.025
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
1.000
1.000
1.000
1.000
1.000
1.000
1.000
EMFI
Incremental Avg.
Adjusted Inc. Avg.
Cumulative Average
12
1.000
1.000
1.000
24
2.108
2.108
2.108
36
1.848
1.661
3.503
48
1.051
1.051
3.680
60
1.084
1.084
3.988
72
1.081
1.081
4.310
84
1.025
1.025
4.417
EMFI
Development Factor
12
4.417
24
2.095
36
1.261
48
1.200
60
1.108
72
1.025
84
1.000
Payout Schedule
Cumulative
Incremental
22.6%
22.6%
47.7%
25.1%
79.3%
31.6%
83.3%
4.0%
90.3%
7.0%
97.6%
7.3%
100.0%
2.4%
Recording of this session via any media type is strictly prohibited.
Page 18
Sample Co. – Frequency Triangulation - WC
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
120
101
130
140
135
105
99
Number of Claims Triangle
Elapsed Months from Inception
24
36
48
150
152
152
140
148
149
155
160
161
165
167
170
160
175
145
Incremental Growth Triangle
Elapsed Months from Inception
24
36
48
1.250
1.013
1.000
1.386
1.057
1.007
1.192
1.032
1.006
1.179
1.012
1.018
1.185
1.094
1.381
60
152
149
161
72
152
149
84
152
60
1.000
1.000
1.000
72
1.000
1.000
84
1.000
Policy
Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
12
1.000
1.000
1.000
1.000
1.000
1.000
1.000
EMFI
Incremental Avg.
Adjusted Inc. Avg.
Cumulative Average
12
1.000
1.000
1.000
24
1.262
1.262
1.262
36
1.042
1.042
1.315
48
1.008
1.008
1.325
60
1.000
1.000
1.325
72
1.000
1.000
1.325
84
1.000
1.000
1.325
EMFI
Development Factor
12
1.325
24
1.050
36
1.008
48
1.000
60
1.000
72
1.000
84
1.000
Discovery Schedule
Cumulative
Incremental
75.5%
75.5%
95.3%
19.8%
99.2%
4.0%
100.0%
0.8%
100.0%
0.0%
100.0%
0.0%
100.0%
0.0%
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Page 19
Discovery and Payout Patterns
• General/products liability
– Slowest patterns
– Longest tail because of investigation, litigation, and time lag between
report and occurrence date
• Workers’ compensation
– Payout increases steadily over time
– Benefits are statutorily defined
– Duration of injury and amount of medical treatment unknown
• Automobile liability
– Relatively quick patterns
– Relatively no lengthy litigation
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Page 20
Loss Analysis – Forecasting and
Ultimate Liability Analysis
• Ultimate liability projections
– Adhere to FASB and GASB requirements regarding
contingent liabilities
• Loss forecasting
– Part of the budgeting and marketing process
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Page 21
Sample Co. – WC Remaining Liability
Projections
(a)
(b)
(c)
(a x b)
Policy Year
Incurred Losses
@ 12/31/13
Loss
Development
Factor
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
718,434
570,145
1,588,127
1,549,531
1,087,525
578,368
402,966
Total
6,495,096
1.000
1.000
1.007
1.064
1.198
1.551
2.184
(d)
(e)
(c - d)
Ultimate Losses
Paid Losses @
12/31/13
Remaining
Liabilities
718,434
570,145
1,598,815
1,648,625
1,302,747
897,261
879,900
718,434
545,879
1,485,214
1,301,258
1,001,234
418,547
150,145
24,266
113,601
347,367
301,513
478,714
729,755
5,620,711
1,995,216
7,615,927
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Page 22
Sample Co. – WC Loss Forecast
Policy Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
1/1-12/31/11
(a)
(b)
Incurred
Losses @
12/31/13
LDF
718,434
570,145
1,588,127
1,549,531
1,087,525
578,368
402,966
1.000
1.000
1.007
1.064
1.198
1.551
2.184
(c)
(a x b)
(d)
Ultimate
Losses
Inflation
Factor @ 7%
(e)
(c x d)
Inflated
Ultimate
Losses
Number of
Employees
(g)
(e / f)
Inflated Ult.
Loss Per
Employee
(f)
718,434
570,145
1,598,815
1,648,625
1,302,747
897,261
879,900
1.606
1.501
1.403
1.311
1.225
1.1449
1.070
1,153,648
855,634
2,242,421
2,161,011
1,595,921
1,027,274
941,493
700
800
900
950
975
1,000
900
1,648
1,070
2,492
2,275
1,637
1,027
1,046
1,443,000
1.000
1,443,000
900
1,603
Assumptions:
1. Client specific loss development factors
2. No losses in excess of the per occurrence limit
3, Workers' compensation inflation rate = 7% per year
4. Forecast includes all policy years
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Page 23
Sample Co. – WC Loss Forecast
Policy Year
1/1-12/31/07
1/1-12/31/08
1/1-12/31/09
1/1-12/31/10
1/1-12/31/11
1/1-12/31/12
1/1-12/31/13
1/1-12/31/11
(a)
(b)
Incurred
Losses @
12/31/13
LDF
718,434
570,145
1,588,127
1,549,531
1,087,525
578,368
402,966
1.000
1.000
1.007
1.064
1.198
1.551
2.184
(c)
(a x b)
(d)
Ultimate
Losses
Inflation
Factor @ 7%
(e)
(c x d)
Inflated
Ultimate
Losses
Number of
Employees
(g)
(e / f)
Inflated Ult.
Loss Per
Employee
(f)
718,434
570,145
1,598,815
1,648,625
1,302,747
897,261
879,900
1.606
1.501
1.403
1.311
1.225
1.1449
1.070
1,153,648
855,634
2,242,421
2,161,011
1,595,921
1,027,274
941,493
700
800
900
950
975
1,000
900
1,648
1,070
2,492
2,275
1,637
1,027
1,046
1,116,000
1.000
1,116,000
900
1,240
Excluded
Assumptions:
1. Client specific loss development factors
2. No losses in excess of the per occurrence limit
3, Workers' compensation inflation rate = 7% per year
4. Forecast excludes policy years 1/1-12/31/07 through 1/1-12/31/10
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Page 24
Risk Financing
• Determining the most cost-effective way to
pay or fund for losses
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Page 25
Risk Financing Continuum
Guaranteed
Cost
Risk Transfer
Large
Deductible
Qualified SelfInsurance
Captive
Risk Retention
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Page 26
Risk Financing Continuum
Guaranteed
Cost
Risk Transfer
Large
Deductible
Qualified SelfInsurance
Captive
Risk Retention
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Page 27
Large Deductible
•
•
•
•
•
•
•
Loss retention plan
Excess insurance covers losses above deductible
Positive cash flow
Ability to influence program costs
Access to insurer services
Collateral requirements
Tax deduction disadvantage
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Page 28
Qualified Self Insurance
•
•
•
•
•
•
•
Formalized retention program
Excess insurance purchased for losses exceeding limit
Qualification requirements vary by state
Positive cash flow
Ability to influence program costs
Unbundled services
Administrative requirements
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Page 29
Factors Influencing Design of Risk
Financing Programs
• Expected losses
• Market conditions
• Corporate
philosophy
• Risk control
commitment
• Financial position
• Geographical
locations
• Loss payout patterns
• Effective tax rate
• Corporate ownership
• Cash flow
comparisons
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Page 30
Cash flow Comparisons
• Definition: Using the net present value of
alternative market quotes to determine the
most cost-effective program
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Page 31
Present Value Analysis
$ today is worth more than $
tomorrow because of investment
income implications.
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Page 32
Investment Income
• Fund losses at a discount, additional money
will be added as interest is earned
• Varied by program and payout
• One decision tool to select the ideal program
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Page 33
Tax Implications
• Need to consider when the losses and
premium can be deducted from taxable
income
• Different programs are treated differently
• Should involve corporate tax department
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Page 34
Costs Included
• Expected losses
• Primary and excess
premiums
• Claims handling
• Taxes
• Assessments
• Loss Control
•
•
•
•
Broker fees
Collateral
Fronting costs
Residual market
loads
• Boards and bureaus
• State funds
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Page 35
Case Study
• Compare the net present value of the
following programs
– Guaranteed cost
– Self-insurance
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Page 36
Sample Co. – 1/1-12/31/14 WC
Guaranteed Cost Cash Flow
(a)
(b
Month
1
2
3
4
5
6
7
8
9
10
11
12
Total
Premium
Cash Flow
125,000
125,000
125,000
125,000
125,000
125,000
125,000
125,000
125,000
125,000
125,000
125,000
1,500,000
(c)
(b x 34%)
(d)
(b - c)
Tax Effect
42,500
42,500
42,500
42,500
42,500
42,500
42,500
42,500
42,500
42,500
42,500
42,500
510,000
After-Tax
Cash Flow
82,500
82,500
82,500
82,500
82,500
82,500
82,500
82,500
82,500
82,500
82,500
82,500
990,000
(e)
Discount
Factor
1.0000
0.9967
0.9935
0.9902
0.9870
0.9838
0.9806
0.9774
0.9742
0.9710
0.9678
0.9647
(f)
(d x f)
Discounted
After Tax
Cash Flow
82,500
82,231
81,962
81,695
81,428
81,163
80,898
80,634
80,371
80,109
79,847
79,587
972,424
Assumptions:
1. Premium is paid in 12 monthly installments at the first of the month
2. Losses are discounted at a 4% discount rate
3. The effective tax rate is 34%
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Page 37
Sample Co. – 1/1-12/31/14 WC
Self Insurance Cash Flow
Month
1
2
3
4
5
6
7
8
9
10
11
12
Cumulative
Payout
Schedule
0.09%
1.18%
2.35%
3.71%
5.34%
7.15%
9.15%
11.32%
13.85%
16.57%
19.47%
22.64%
Subtotal
24
36
48
60
72
84
Total
47.73%
79.29%
83.31%
90.29%
97.58%
100.00%
Incremental
Payout
Schedule
Letter of
Paid Losss Credit Fee
Excess
Premium
Claims
Handling
Admin.
Expenses
Fees &
Assess.
Total Cash After-Tax
Flow
Cash Flow
0.09%
1.09%
1.17%
1.36%
1.63%
1.81%
2.00%
2.17%
2.53%
2.72%
2.90%
3.17%
1,004
12,164
13,057
15,178
18,191
20,200
22,320
24,217
28,235
30,355
32,364
35,377
5,000
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
50
608
653
759
910
1,010
1,116
1,211
1,412
1,518
1,618
1,769
5,000
2,500
21,888
21,106
22,043
24,270
27,434
29,543
31,769
33,761
37,980
40,206
42,316
45,479
14,446
13,930
14,549
16,018
18,106
19,498
20,968
22,283
25,067
26,536
27,928
30,016
22.64%
252,662
5,000
100,000
12,633
5,000
2,500
377,796
249,345
25.09%
31.56%
4.02%
6.98%
7.29%
2.42%
280,004
352,210
44,863
77,897
81,356
27,007
3,868
2,614
1,036
835
486
121
297,873
372,434
48,142
82,626
85,910
28,479
196,596
245,806
31,774
54,533
56,700
18,796
100.00%
1,116,000
13,958
1,293,258
853,550
14,000
17,610
2,243
3,895
4,068
1,350
100,000
55,800
5,000
2,500
Discount
Factor
1.0000
0.9967
0.9935
0.9902
0.9870
0.9838
0.9806
0.9774
0.9742
0.9710
0.9678
0.9647
Discounted
After-Tax
Cash Flow
14,446
13,884
14,454
15,862
17,871
19,182
20,561
21,779
24,420
25,767
27,030
28,956
244,212
0.9460
0.9096
0.8746
0.8409
0.8086
0.7775
185,970
223,578
27,789
45,860
45,848
14,614
787,871
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Page 38
Sensitivity Analysis
• How do optimistic and pessimistic loss
projections alter the net present value
decision of the various program alternatives?
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Page 39
Sample Company – Net Present Value
Cash Flow Comparison
Net Cash Flow
$1,600,000
$1,400,000
$1,200,000
$1,505,963
972,424
972,424
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
972,424
$787,871
Self Insurance
Guaranteed Cost
$428,825
Optimistic
Expected
Pessimistic
Loss Scenario
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Page 40
In Conclusion…
•Key Points
–Loss development
–Loss analysis
–Cash flow comparisons
•Questions
•Please complete the session survey on the
RIMS14 mobile application.
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Page 41