2015 FALL CONFERENCE & TRAINING SEMINAR BENCHMARKS Keys to Identifying the Health of Your JPA Mark Nestor – LIC, ARM, AAI, CWCP President, Independent Consulting and Risk Management Services, LLC.

Why Benchmark? UCLA Management and Leadership Conference “I need Benchmarks, something that I can measure my Group against to understand where we have to go from here”.

To Benchmark or Not to Benchmark What are the issues? What are the benefits? Why should we worry? JPA vs. Insurance Carriers Regulations

IRIS Insurance Regulatory Information System IRIS uses the financial statements of the insurer to calculate a series of financial ratios, which are then taken as a measure of the insurer's overall financial condition. If the ratios do not fit into a predetermined range, then IRIS may identify the company for regulation by appropriate authorities. The system acts as an early-warning protection, which aids state insurance departments to pick out those companies that show financial problems. The ratios are merely guidelines, though: often a financial disaster comes without warning, or defies prediction. “We are a JPA - we do not have to report our financial ratios to the State DOI Office like an insurance carrier”

Sample Primary Operating Ratios Contributions Written to Surplus – The JPA’s annual Member contribution in relation to its surplus: AM Best recommends having $1.00 of surplus for every $2.00 of written Member contribution. Pools have ratios which range from 1:1 to over 4:1 countrywide (contributions to surplus). Surplus to SIR (Self Insured Retentions) – The JPA’s surplus (capacity) in retaining risk (retentions in either liability or property coverages). Normally, JPA’s have $10.00 in surplus for each $1.00 retained. Some JPA’s may allow up to a 5:1 ratio in California as a guideline. Pure Loss Ratio-The JPA’s claims fund and claims expense to annual contributions (without administrative or reinsurance/excess insurance costs). It is recommended that this ratio not exceed 60% on a gross basis- but may be higher subject to reinsurance transfer arrangements and drop down corridor coverages within the program retentions. Combined Operating Loss Ratio – The JPA’s annual profitability (or loss) on the book of business (total revenues less total expenses including investment income). This ratio should be 100% or lower.

Sample Primary Operating Ratios – cont. Administrative Ratio – Administrative expenses (internal operating costs, audits, legal, professional, workshops etc.) divided by the annual Member contributions. ICRMS recommends that this ratio be below 20% if possible, but no greater than 25%. Claims Administrative Ratio – JPA’s annual cost of claims handling services divided by gross Member contribution of the line of coverages serviced. The normal range of this ratio may vary between 5% and 8% of annual contributions subject to the nature of the contractual services and how future claims run off is handled. JPA Surplus Net Assets Level to Loss Reserves– Amount of annual surplus to be determined as appropriate by the JPA and actuary for the protection of all assets, unexpected claims retention levels, market changes and other unanticipated events which may impact the financial integrity of the JPA. This is recommended at a level not to exceed 100%.

Sample Primary Operating Ratios – cont. Excess / Reinsurance Expense Ratio – Cost of the JPA’s excess/reinsurance (above the retention) divided by the annual Member contributions. This is not normally computed within a benchmark report but may be tracked by the JPA for the liability, WC and property programs on a five year rolling basis. Marketplace fluctuations, retention levels, coverages afforded by the reinsurer/carrier and prior loss experience of the JPA may dramatically impact reinsurance pricing of the three major programs on a year to year basis.

Contributions Written to Surplus What is your ratio for the Past Year; Past 3 years; Past 5 Years Average? Why do we need all of this surplus? Ability to assume more risk / retention Ability to add more insurance coverage options (within retention levels) Ability to smooth out unexpected losses Ability to add more new members Ability to provide dividends or assist in retro assessment process Ability to handle unforeseen reinsurance issues / disputes Ability to better control our own destiny

Surplus to SIR (Self Insured Retentions) Are we at 10:1; 7:1; 5:1 or lower? Can we afford to roll the dice or predict our future losses? Pure Loss Ratio What is the incurred and fully developed loss fund of your JPA? By LOC or Program Wide? How Does This Ratio Stack Up to Your Projected Administrative and Reinsurance Budget’s Ratios? On Target?......

Combined Operating Loss Ratio Are you operating above or below 100% without investment income? Is your investment income supporting ongoing operations? What are the primary drivers if your ratio is above 100%? Are you drawing down on surplus to support the program? How Long Can This Last?

Administrative Ratio How does your Admin Ratio measure up to your competition? How does your Admin Ratio Measure Up to the Competing Insurance Carriers? What Is Your Admin Ratio tolerance range - “Low to High”? How is the quality of services provided to your Members impacted by this Ratio?

Claims Administrative Ratio Can you drill down to determine this Ratio? If your claims Operating Ratio goes up, is the quality of service going up? What is the cost to handle a claim? Do you need to know? Can you determine other key departmental Operating Ratios? What is the maximum Admin Ratio your Program can handle?

JPA Surplus Net Assets Level to Loss Reserves How have our reserves each year stacked up to our IBNR Reports? How much have our older Tail Claims increased each year? How many years out are Tail Claims by LOC? How have our reserves compared to the previous year’s reserves? Are shock losses or development on frequency hurting us? Both? Are we seeing 20% - 25% - 30% reserve increases to Surplus? Are we facing Retro Assessments in the near future?

Excess / Reinsurance Expense Ratio Complicated to measure beyond straight numbers. Have our retentions changed? Have our losses increased dramatically? Have our Reinsurance relationships changed? How is our reputation in the market place? Is the market place changing? Carriers in or out? More Ratios Are Available - but….. Let’s Stick With These -You Can Always Add To The List…..

Now What Should We Do With This Data? Does your BOD understand the importance of these Ratios? Does Your Management Team understand the importance of these Ratios? Does your Management Team buy into this data evaluation? When one Ratio changes - what is the impact to the other Ratios? Are we looking ahead through our rear view mirror? What is our Actuary’s thoughts? Financial and Claims Auditor thoughts? What can happen next? Scenario playing with our Ratios - ProForma game changers. What is the credibility of the variables we have put in the ProForma game changers? Need a rolling 5 year ProForma Can your Management Team play Chess on a seven level board?

Who Is Right And Who Is Wrong? How do we pick the right Ratios for measurements? Who do we Benchmark against? What if we see trends going South? What is our Plan of Action? Are Retro Assessments built into our Plan? How do other non CA State Pools deal with Assessments? Ongoing or special - one time? How far should we go with the Benchmarking Process? How to incorporate Ratios into your Business Planning Process How To incorporate Ratios into your Strategic Planning Process No set concrete rules on the Benchmarking phases.

UCLA Definition Of Benchmarking “This Is An Ongoing Systematic Methodology For Identifying, Measuring and Comparing the Work Processes Or Functions Of Your Own Organization From Period To Period And Making Comparisons With One or More Other Organizations In Order To Bring About Internal Improvements”.