1. Page 1 Recording of this session via any media type is strictly prohibited. FN 101 – THE LEXICON OF RISK FINANCING BASICS EXPLAINED Wednesday, April 30 9:00 am – 11:00 am

2. Page 2 Recording of this session via any media type is strictly prohibited. Moderator – Shaun Jackson Director of Risk Management, El Pollo Loco, Inc. sjackson@elpolloloco.comsjackson@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.comBenson_Ba@willis.com (985)727-4039

3. Page 3 Recording of this session via any media type is strictly prohibited. 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

4. Page 4 Recording of this session via any media type is strictly prohibited. Agenda Introduction Basic loss development Loss analysis Cash flow comparisons of market quotes Conclusion

5. Page 5 Recording of this session via any media type is strictly prohibited. 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

6. Page 6 Recording of this session via any media type is strictly prohibited. Sources of Loss Development Factors Industry-provided – Insurance carriers – Rating bureaus – Independent consultants – Actuaries Organization-specific

7. Page 7 Recording of this session via any media type is strictly prohibited. Casualty Coverage’s Workers’ compensation Automobile liability General liability Products liability

8. Page 8 Recording of this session via any media type is strictly prohibited. Loss Development Triangles Types of triangles – Incurred loss development – Paid loss development – Frequency loss development Per occurrence retention – Limited – Unlimited

9. Page 9 Recording of this session via any media type is strictly prohibited. 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

10. Page 10 Recording of this session via any media type is strictly prohibited. Sample Company – Loss Run Summary

11. Page 11 Recording of this session via any media type is strictly prohibited. Sample Co. – Incurred Loss Triangulation - WC

12. Page 12 Recording of this session via any media type is strictly prohibited. Sample Co. – Incurred Loss Triangulation - WC 24 month incurred losses 12 month incurred losses 578,368 402,087 = = = 1.438

13. Page 13 Recording of this session via any media type is strictly prohibited. Sample Co. – Incurred Loss Triangulation - WC Average all policy years

14. Page 14 Recording of this session via any media type is strictly prohibited. Sample Co. – Incurred Loss Triangulation - WC Remove any “irregular” averages

15. Page 15 Recording of this session via any media type is strictly prohibited. Sample Co. – Incurred Loss Triangulation - WC 36 month cumulative average X 48 month incremental average 1.823 X 1.126 = 2.052

16. Page 16 Recording of this session via any media type is strictly prohibited. Sample Co. – Incurred Loss Triangulation - WC = 84 month cumulative avg. 24 month cumulative avg. 2.184 1.408 =

17. Page 17 Recording of this session via any media type is strictly prohibited. Sample Co. – Incurred Loss Triangulation - WC 1 / development factor = 1 / 2.184 = 45.8%

18. Page 18 Recording of this session via any media type is strictly prohibited. Sample Co. – Paid Loss Triangulation - WC

19. Page 19 Recording of this session via any media type is strictly prohibited. Sample Co. – Frequency Triangulation - WC

20. Page 20 Recording of this session via any media type is strictly prohibited. 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

21. Page 21 Recording of this session via any media type is strictly prohibited. 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

22. Page 22 Recording of this session via any media type is strictly prohibited. Sample Co. – WC Remaining Liability Projections (a)(b)(c)(d)(e) (a x b) (c - d) Policy Year Incurred Losses @ 12/31/13 Loss Development FactorUltimate Losses Paid Losses @ 12/31/13 Remaining Liabilities 1/1-12/31/07 718,434 1.000 718,434 - 1/1-12/31/08 570,145 1.000 570,145 545,879 24,266 1/1-12/31/09 1,588,127 1.007 1,598,815 1,485,214 113,601 1/1-12/31/10 1,549,531 1.064 1,648,625 1,301,258 347,367 1/1-12/31/11 1,087,525 1.198 1,302,747 1,001,234 301,513 1/1-12/31/12 578,368 1.551 897,261 418,547 478,714 1/1-12/31/13 402,966 2.184 879,900 150,145 729,755 Total 6,495,096 7,615,927 5,620,711 1,995,216

23. Page 23 Recording of this session via any media type is strictly prohibited. Sample Co. – WC Loss Forecast

24. Page 24 Recording of this session via any media type is strictly prohibited. Excluded Sample Co. – WC Loss Forecast

25. Page 25 Recording of this session via any media type is strictly prohibited. Risk Financing Determining the most cost-effective way to pay or fund for losses

26. Page 26 Recording of this session via any media type is strictly prohibited. Risk Financing Continuum Risk Transfer Risk Retention Guaranteed Cost Large Deductible Qualified Self- Insurance Captive

27. Page 27 Recording of this session via any media type is strictly prohibited. Risk Financing Continuum Risk Transfer Risk Retention Guaranteed Cost Large Deductible Qualified Self- Insurance Captive

28. Page 28 Recording of this session via any media type is strictly prohibited. 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

29. Page 29 Recording of this session via any media type is strictly prohibited. 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

30. Page 30 Recording of this session via any media type is strictly prohibited. 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

31. Page 31 Recording of this session via any media type is strictly prohibited. Cash flow Comparisons Definition: Using the net present value of alternative market quotes to determine the most cost-effective program

32. Page 32 Recording of this session via any media type is strictly prohibited. Present Value Analysis $ today is worth more than $ tomorrow because of investment income implications.

33. Page 33 Recording of this session via any media type is strictly prohibited. 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

34. Page 34 Recording of this session via any media type is strictly prohibited. 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

35. Page 35 Recording of this session via any media type is strictly prohibited. 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

36. Page 36 Recording of this session via any media type is strictly prohibited. Case Study Compare the net present value of the following programs – Guaranteed cost – Self-insurance

37. Page 37 Recording of this session via any media type is strictly prohibited. Sample Co. – 1/1-12/31/14 WC Guaranteed Cost Cash Flow

38. Page 38 Recording of this session via any media type is strictly prohibited. Sample Co. – 1/1-12/31/14 WC Self Insurance Cash Flow

39. Page 39 Recording of this session via any media type is strictly prohibited. Sensitivity Analysis How do optimistic and pessimistic loss projections alter the net present value decision of the various program alternatives?

40. Page 40 Recording of this session via any media type is strictly prohibited. Sample Company – Net Present Value Cash Flow Comparison

41. Page 41 Recording of this session via any media type is strictly prohibited. In Conclusion… Key Points – Loss development – Loss analysis – Cash flow comparisons Questions Please complete the session survey on the RIMS14 mobile application.