Post on 01-Jan-2016
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