Data Integrity: Garbage
Out can be Costly
Data Validation in Reserve Analysis and Loss Forecasting
September 11, 2013
Sound Familiar?
From your underwriter………
“Due to market conditions and your recent claims experience, we are
increasing your rates by 7%”
From your actuary…….
“Total unpaid losses increased by approximately $300,000 due to adverse
loss development”
From your broker…….
“The carrier has increased your collateral requirement by $2 million and the
LOC needs to be in place in 30 days”
From your owner…….
“Section 16 of the Construction management agreement clearly states that
the construction manager shall bear the cost of all deductibles”
From your DCAA auditor…..
“Your charge for self insurance is disallowed as it is not based on Projected
Average Loss as defined under CAS 416”
Session Overview
Background & basics
Section 1: Loss Forecasting
Section 2: Reserve analysis
Section 3: Collateral
Commercial Insurance has Evolved
1960s
Guaranteed
Cost
1980s
Retrospectively
Rated
Programs
2000+
Large
Deductible
/ SIR
Data Implications
•
•
•
•
Insurance company data only
Manual process / paper loss runs
GC focus on premium minimization
100% fixed cost allocation
•
•
•
•
Carrier loss data required to
support retro adjustments
Initial use of RMIS
Profit sharing imbedded in
allocations
Increasing pressure to assume
risk/ reduce premiums
3
•
•
•
•
•
Carrier loss data standardized
Widespread use of RMIS
Insurance market pushing larger
loss retentions
Insurers will provide loss data in
multiple formats (when asked)
Some carriers allow access to
their online systems
Variable costs represent an
increasing % of TCOR
INSURANCE PREMIUMS
28%
LOSSES & LOSS
ADJUSTMENT
EXPENSE
65%
RISK MANAGEMENT
& SAFETY
2%
INSURANCE BROKERAGE FEES
5%



Contractors are under increasing pressure to validate cost of insurance to owners.
Insurance Cost allocation for government work highly regulated (FAR, CAS)
Increased importance on accurate measurement and forecasting of variable loss costs
4
Willis Construction
Sample of 49 clients
Workers Comp Deductible Levels
14
General Liability Deductible Levels
14
13
12
10
10
8
8
4
0
6
7
6
6
6
2
11
12
12
1
2
4
3
1
1
1
1
2
0
2
4
3
1
1
1
1
1
2
3
Data Sources & Applications
Internal
Insurance Program Data (retentions,
limits, rates)
Premiums
Loss Data
Exposure Data (Payroll, CV, Vehicle
counts)
RM Overhead
Safety & Loss Control
External
Insurance Carrier loss rates,
aggregate rates
Industry LDFs (AM Best, NCCI)
Experience Mods
• Renewal Negotiation
• Collateral Analysis
• Accounting / Liability
Accruals
• Project Costing
• Acquisition Pricing
• Benchmarking
6
Projected Ultimate Loss
 An estimate of total claims cost
 Within the deductible layer
 For a single policy period
 Once all claims are settled, paid and closed.
 For first party coverage (Property or Builders Risk), losses are
directly measured based on property valuation whether actual cash
value or replacement cost. (Short tail)
 For casualty lines (AL, GL and WC), due to the lengthy period of
time between the occurrence of a claim and final settlement,
estimation of ultimate loss is required.
7
Components of Loss
Incurred but not
reported (IBNR)
Incurred but not
reported (IBNR)
Outstanding Case
Reserves
Outstanding Case
Reserves
Paid
Paid
Paid
3 months
6 months
Loss Development
Claim Closed
Measuring IBNR
 Request your loss data as of a set date each
year (expiration or year end)
XYZ Construction
( Valued as of 3/27/2012 )
Workers Compensation Incurred Losses Development Triangle (Limited to $250,000 PO)
Experience Period
1 6/1/2000
2 6/1/2001
3 6/1/2002
4 6/1/2003
5 6/1/2004
6 6/1/2005
7 6/1/2006
8 6/1/2007
9 6/1/2008
10 6/1/2009
11 6/1/2010
To
To
To
To
To
To
To
To
To
To
To
5/31/2001
5/31/2002
5/31/2003
5/31/2004
5/31/2005
5/31/2006
5/31/2007
5/31/2008
5/31/2009
5/31/2010
5/31/2011
1
12 months
688,113
1,272,629
4,048,964
778,680
1,692,891
1,861,210
1,197,109
1,477,914
1,341,166
844,060
730,908
2
24 months
1,313,416
2,118,666
4,581,738
1,440,285
2,231,172
2,892,533
1,744,078
1,926,047
1,947,308
1,396,356
3
36 months
1,380,707
2,410,284
4,996,855
1,760,011
2,246,244
3,532,579
1,821,767
2,200,930
2,230,905
4
48 months
1,341,767
2,559,856
5,247,677
1,839,979
2,364,051
3,636,037
1,964,366
2,204,225
Workers' Compensation Incurred Losses Report-to-report Development Factors (Limited to $250,000 PO)
48 Mos To
36 Mos To
24 Mos To
12 Mos To
60 Mos
48 Mos
36 Mos
24 Mos
Experience Period
1.007
0.972
1.051
1.909
5/31/2001
To
1 6/1/2000
1.095
1.062
1.138
1.665
5/31/2002
To
2 6/1/2001
0.970
1.050
1.091
1.132
5/31/2003
To
3 6/1/2002
1.079
1.045
1.222
1.850
5/31/2004
To
4 6/1/2003
1.076
1.052
1.007
1.318
5/31/2005
To
5 6/1/2004
1.005
1.029
1.221
1.554
5/31/2006
To
6 6/1/2005
0.966
1.078
1.045
1.457
5/31/2007
To
7 6/1/2006
1.001
1.143
1.303
5/31/2008
To
8 6/1/2007
1.146
1.452
5/31/2009
To
9 6/1/2008
1.654
5/31/2010
To
10 6/1/2009
5/31/2011
To
11 6/1/2010
Average Report to Report Factors
Report to Ultimate Factors
1.529
2.527
1.118
1.652
1.036
1.478
1.028
1.426
5
60 months
1,350,924
2,802,430
5,090,751
1,986,062
2,543,919
3,654,268
1,898,302
6
72 months
1,348,103
2,884,460
5,091,001
1,987,490
2,541,738
3,560,541
7
84 months
1,353,342
2,888,163
5,089,254
1,987,490
2,532,844
8
96 months
1,353,508
3,017,388
5,085,664
1,987,399
9
108 months
1,357,685
3,023,259
5,085,659
10
120 months
1,371,248
3,022,408
60 Mos To
72 Mos
72 Mos To
84 Mos
84 Mos To
96 Mos
96 Mos To
108 Mos
108 Mos To
120 Mos
120 Mos To
132 Mos
0.998
1.029
1.000
1.001
0.999
0.974
1.004
1.001
1.000
1.000
0.997
1.000
1.045
0.999
1.000
1.003
1.002
1.000
1.010
1.000
1.000
1.387
1.000
1.386
1.011
1.386
1.002
1.371
1.005
1.368
1.362
1.362
Section 1
Loss Forecasting
Loss Forecast
 A Projection of ultimate losses:
•
Within the deductible layer
•
For the upcoming or renewal policy period
•
Based on historical loss and exposure history
•
Adjusted for inflation
Total Loss
Loss
=
Exposures
Rate
•
Forecast = loss rate x projected exposures
 Applications:
•
•
•
Risk Transfer Premium Negotiation
Renewal Year Collateral
Project Cost Allocation
Case Study #1 :Loss Forecasting
 General Contractor just signed contract for $30,000,000 project
 General Liability program has a $250,000 per occurrence
deductible
 The liability rate charged to the job needs to cover both fixed cost
premiums and expected losses within the deductible
Goal: Forecast an expected loss rate for the deductible
Summarize and limit loss data
Individual large
losses should be
identified and
limited
Historical losses should be limited at the
forecast deductible level
Apply Loss Development & Select
Ultimate Loss
Some actuaries reduce LDF to
1.0 when all claims are paid
 Carriers generally select
ultimate loss based on
incurred; for older years
paid factors may be more
appropriate
Losses and exposures are
adjusted for inflation
 Verify trend factors are
applicable.
 Consider separate analysis of
workers compensation for
states with significant benefit
level adjustments.
Select loss rate and apply to
forecast exposures
 Verify projected exposures
 Carrier expected loss
rates can be derived from
collateral requirements
 Deductible aggregate
rates identify maximum
exposure
Project Allocation
 The deductible rates (expected and
aggregate) may help provide an applicable
range for project cost allocation
XYZ Construction, Inc.
Project Cost Allocation
Exposure Information
Commercial Construction Value (CV)
$
500,000,000
Fixed Costs
Insurance Premiums
Automobile Liability
Professional & Pollution Liability
Professional & Pollution Excess Liability
Property
Contractor's Equipment
D&O / EPL / Fiduciary
Crime
General Liability
Umbrella
2nd Layer Excess
3rd Layer Excess
4th Layer Excess
5th Layer Excess
Carrier
Chartis
Catlin
Great American
Chartis
Chartis
Zurich
Zurich
Chartis
Chartis
Allied World
Chartis
Great American
XL
Deductible/SIR
$100,000 BI / $1,000 PD
$100,000
various
various
various
various
$50,000
$250,000
-
Administration
Safety / Brok er Admin Fee / RM Overhead & Admin
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Premium
140,000
163,000
100,000
113,000
50,000
44,000
25,000
197,000
145,000
40,000
50,000
30,000
25,000
1,122,000
% of CV
0.03%
0.03%
0.02%
0.02%
0.01%
0.01%
0.01%
0.04%
0.03%
0.01%
0.01%
0.01%
0.01%
0.22%
Cost
$
% of CV
300,000
0.06%
Variable Costs
Estimated Loss Costs
Automobile Liability
Professional & Pollution Liability
D&O / EPL / Fiduciary
Crime
General Liability
Total
Deductible/SIR
$100,000 BI / $1,000 PD
100,000
50,000
50,000
250,000
Expected Loss
Maximum Loss
150,000 $
450,000
$
300,000
$
150,000
$
150,000
$
835,000 $
2,505,000
$
985,000 $
3,555,000
$
$
$
$
2,407,000
$
4,977,000
Expected % CV
0.03%
0.00%
0.00%
0.00%
0.17%
0.20%
0.48%
Max % CV
0.09%
0.06%
0.03%
0.03%
0.50%
0.71%
1.00%
Common Data Issues
 Overstating Loss Data
•
Incorrectly Limiting Loss Data - Not grouping multiple claims of a single
occurrence
•
Outstanding case reserves on claims that have settled and should be closed
•
Including self insured states losses in an insured states forecast
•
Not adjusting incurred and paid losses for recovery
•
Developing losses in policy years where all claims are closed. (Debatable)
 If loss data is high, loss rate will be artificially high
Case Study Impact of Overstating
Losses
 Case study loss rate was $1.67
 If the two large losses in policy years 2008 and 2011 were the result of common
occurrences, the losses in those policy years should decrease by $250,000.
Period
Period
Adjusted Losses
Inception Expiration
10/1/2008
10/1/2009
10/1/2010
10/1/2011
10/1/2012
9/30/2009
9/30/2010
9/30/2011
9/30/2012
9/30/2013
$
$
$
$
$
345,987
602,675
420,854
833,701
858,758
Adjusted
$
$
$
$
$
398,908,800
409,077,500
408,432,000
501,473,000
558,885,000
Average
Pure Loss
Rate per
$1,000 CV
0.87
1.47
1.03
1.66
1.54
1.31
 After correcting the losses, the rate decreases to $1.31
 This results in a decrease in the forecast from $835,000 to $655,000
Common Data Issues
 Overstating Exposure Data
•
Including CV/payroll that is enrolled in a CCIP or OCIP
•
Including self insured states payroll in the insured’s state analysis
•
Including exposures related to sold or discontinued operations
 If exposure data is high, loss rate will be artificially low
Case Study Impact of Overstating
Exposure
 Case study loss rate was $1.67
 If 25% of construction value was enrolled in CCIP/OCIP ,exposures should be decreased
by 25%
Period
Period
Adjusted Losses
Inception Expiration
10/1/2008
10/1/2009
10/1/2010
10/1/2011
10/1/2012
9/30/2009
9/30/2010
9/30/2011
9/30/2012
9/30/2013
$
$
$
$
$
595,987
602,675
420,854
1,421,253
858,758
Adjusted
$
$
$
$
$
299,181,600
306,808,125
306,324,000
376,104,750
419,163,750
Average
Pure Loss
Rate per
$1,000 CV
1.99
1.96
1.37
3.78
2.05
2.23
 After correcting the exposures, the rate increases to $2.23
 This results in a increase in the forecast from $835,000 to $1,115,000
Loss Forecasting Tips
 The loss forecast is only as good as the source data.
 Request loss data from your carrier in an excel format
 Know your large losses; make sure claims data is accurate.
 Utilize claim reviews; claim closure projects
 Make sure discontinued operations are excluded from historical loss and exposure
data for forecasting purposes
 Verify that allocated loss adjustment expense is treated consistent with renewal
terms.
 Ask your carrier for loss triangles limited at your deductible level
 Utilize company specific loss development factors if there is sufficient underlying
data to be statistically valid.
 Consider an LDF of 1.0 on policy years where all claims are closed.
22
Section 2
Reserve Analysis
Reserve Analysis
 Estimating the total remaining liability:
 For past & current policy years
 As of a specific date
 Process:
 Estimate ultimate loss
‒ Generally, the actuary will use several methods and select one
 Subtract total paid to date
 Applications:
 Financial Reporting
 Collateral determination of expired policy years
 Valuing Acquisitions
24
Case Study #2 :Reserve Analysis
 General Contractor has an expiring Contractor Controlled
Insurance Program with no new enrollment
 Program included a $250,000 deductible for workers compensation
 The GC needs to book an outstanding liability for residual risk on
its balance sheet
 The GC wants to negotiate with the carrier for a release of
collateral
Goal: Interpret actuarial analysis and provide accounting
with the appropriate reserve estimate
Interpreting an actuarial analysis
 Validate loss data before providing to
actuary
 Know your large losses and clash
claims
 In a primary casualty program, make
sure historical loss limits are correct
 Errors in loss data will be magnified
when loss development is applied
 Your actuary will use multiple methods
to estimate ultimate loss
 Read the footnotes
 Understand the
selection of projected
ultimate
 Communicate with
your actuary
 Request a confidence level analysis or range to increase flexibility
 Inquire about discounting losses to reflect anticipated payment patterns
Reserve Analysis Tips
 Review the data before submitting to the actuary
 Know your large claims
‒ Challenge individual claim reserves if they are high based on your knowledge of the loss. (i.e.
potential subrogation)
‒ Challenge losses you know have been paid that have outstanding reserves that should be
closed.
 Watch for duplicate claims or claims that should be excluded
‒ Subguard claims should not be included on a GL loss run
 Notify the actuary of any multiple claim occurrences and/or clash claims
 Look for recovery dollars. Total incurred should be appropriately adjusted.
 Communicate historical deductible levels / loss limits
 Request a confidence level analysis or a range.
 Consider discounting
 Ask if your loss history is sufficient to produce loss Triangles / development factors
based on your claims experience versus industry.
30
Section 3
Collateral
Insurance Collateral
 Assets of the insured pledged to the insurance carrier to cover deductible losses
 In large deductible policies, the insurer “pays on behalf” of the insured and seeks
reimbursement for deductible losses creating credit risk
 With insufficient collateral, insurers are subject to accounting penalties (Schedule
F) which result in a reduction in admitted assets
 For the insured, insurance collateral may restricts assets, draw on credit capacity
and can create liquidity issues
 The payment agreement outlines the collateral terms
 Carriers may accept alternative forms of collateral
32
Request Carrier Calculation
XYZ Company
Security Required
Effective Date: 10/01/13
Evaluated as of: 05/31/13
Reserve
Analysis
Loss
Limit
Incurred
Limited
Loss
Paid
Limited
Loss
Ultimate
Limited
Loss
Security
Required
Year
LOB
2008
2008
2008
2008
WC
GL
Auto
Total
500,000
750,000
25,000
3,294,938
102,658
128,606
3,526,139
2,368,758
88,767
128,606
2,565,039
3,491,663
132,778
129,550
3,753,991
1,122,905
44,011
944
1,167,860
2009
2009
2009
2009
WC
GL
Auto
Total
500,000
750,000
25,000
696,333
791,894
112,520
1,600,744
379,343
787,921
82,076
1,237,457
759,011
1,361,938
113,550
2,234,499
379,668
574,017
31,474
985,159
2010
2010
2010
2010
WC
GL
Auto
Total
500,000
750,000
25,000
1,042,299
12,423
72,724
1,132,229
671,150
12,423
72,724
747,995
1,278,572
20,695
75,792
1,375,059
607,422
8,272
3,068
618,762
2011
2011
2011
2011
WC
GL
Auto
Total
500,000
750,000
25,000
735,221
10,955
68,443
693,731
443,672
905
55,656
429,756
1,359,222
326,881
83,076
1,769,179
915,550
325,976
27,420
1,268,946
2012
2012
2012
2012
WC
GL
Auto
Total
500,000
750,000
25,000
382,390
0
40,487
372,302
185,444
0
28,044
165,838
2,381,461
982,235
100,596
3,464,293
2,196,017
982,235
72,552
3,250,805
2013
2013
2013
2013
WC
GL
Auto
Total
500,000
750,000
25,000
2,609,117
511,738
105,470
3,226,325
2,609,117
511,738
105,470
3,226,325
5,146,085 12,597,021
3,226,325
5,146,085 15,823,346
7,291,532
3,226,325
10,517,857
Total excluding Renewal
Renewal Year
Total All Years
7,325,145
7,325,145
Security Adjustment
Total Security & Escrow Required
33
(675,000)
9,842,857
Loss
Forecast
Validate the data
 Request carrier data at same evaluation date
Carrier
Report
Claim Number Status Loss Date Date
WC555916398
WC555921752
WC949009267
WC555A07413
WC608628100
WC608640069
WC608A09883
WC608656989
WC80D016360
WC608A28968
WC390583506
WC608A48480
WC608626660
WC949004168
WC555A65647
WC555A58429
Row Labels
10/1/2008
10/1/2009
10/1/2010
10/1/2011
10/1/2012
Open
5/19/2009 5/19/2009
Closed
7/6/2009
7/6/2009
Open
6/24/2009 6/24/2009
Open
2/25/2011 2/28/2011
Open
3/11/2009 3/11/2009
Open
9/11/2009 9/15/2009
Open
6/3/2010 8/22/2011
Open
6/22/2010 6/22/2010
Closed 12/9/2008 12/10/2008
Open
3/1/2012 5/31/2012
Closed 10/6/2010 11/10/2010
Open 10/25/2010 12/3/2012
Closed 1/30/2009 2/16/2009
Closed
5/5/2009
5/7/2009
Open
5/22/2012 7/18/2012
Open
4/28/2012 5/11/2012
Line of Jur/Cov/ Accident Description
Business Gar State Code
WC
WC
WC
WC
WC
WC
WC
WC
WC
WC
WC
WC
WC
WC
WC
WC
NC
NC
TX
GA
CA
CA
CA
CA
MD
CA
PA
CA
CA
TX
SC
GA
100 - AMPUTATION
210 - FRACTURE
500 - FATALITY-NOC
160 - BRUISE/CONTU
309 - STR/SPR/BACK
313 - STR/SPR LEG
700 - CUMTV TRAUMA
210 - FRACTURE
400 - MULTIPLE
310 - SPR/STRAIN
310 - SPR/STRAIN
700 - CUMTV TRAUMA
310 - SPR/STRAIN
309 - STR/SPR/BACK
310 - SPR/STRAIN
400 - MULTIPLE
Contract
Effective
Accident Date
Limited
State
Year
Total Incurred Incurred
NC
NC
TX
GA
CA
CA
CA
CA
MD
CA
PA
CA
CA
TX
SC
GA
2008
2008
2008
2010
2008
2008
2009
2009
2008
2011
2010
2010
2008
2008
2011
2011
Sum of Total Incurred Sum of Limited Incurred Sum of Total Paid Sum of Limited Paid
5,349,228
3,294,938
3,187,626
2,368,758
696,333
696,333
379,343
379,343
1,229,011
1,042,299
671,150
671,150
735,221
735,221
443,672
443,672
382,390
382,390
185,444
185,444
1,366,221
1,318,868
869,200
686,712
488,445
312,742
290,688
212,535
209,314
180,842
147,457
146,622
134,041
129,419
90,869
87,025
500,000
500,000
500,000
500,000
488,445
312,742
290,688
212,535
209,314
180,842
147,457
146,622
134,041
129,419
90,869
87,025
Limited Paid
318,134
500,000
166,926
194,322
222,200
260,620
28,687
157,547
209,314
123,959
147,457
116,048
134,041
129,419
13,391
32,457
Tips to Negotiating Collateral
 Prepare an independent analysis
 Save prior year carrier calculations, question more conservative
calculations on old policy years
 Review your payment agreements
 Separate executed payment agreements for each policy period
 Look for pre-defined LDFs or collateral adjustment terms
 Make the carrier comfortable with your credit profile
 Submit financial statements
 Disclose recent developments
 Develop a relationship with the credit officer / invite your CEO & CFO
 Ask about paid loss credits
 Consider collateral implications prior to marketing your program
 Understand the various forms of security that your carrier will accept
(LOC’s, trusts, cash/asset backed accounts)
Your response…..
To your underwriter………
“According to the data , our loss rate has actually decreased as a result of our
new safety initiatives”
To your actuary…….
“The apparent adverse loss development is actually a result of a change in TPA
that is more conservative therefore IBNR should be adjusted downward”
To your broker…….
“It appears that the LDFs applied by the carrier are inconsistent with the
payment agreement and the LOC should be decreased by….”
To your owner…….
“We have elected to purchase guaranteed cost coverage which unfortunately will
increase the insurance allocation on your projects”
To your DCAA auditor…..
“Please review the attached actuarial analysis which includes the estimate of
projected average loss”
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