1. ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Speaker - Barbara Benson Grinnell Vice President, Willis Benson_Ba@willis.com (985)727-4039

2. 2 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Agenda Introduction Basic loss development Loss Forecasting Accrual Analysis Risk Financing Conclusion

3. 3 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 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

4. 4 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sources of Loss Development Factors Industry-provided –Insurance carriers –Rating bureaus –Independent consultants –Actuaries Organization-specific

5. 5 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Casualty Coverage’s Workers’ compensation Automobile liability General liability Products liability

6. 6 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Loss Development Triangles Types of triangles –Incurred loss development –Paid loss development –Frequency loss development Per occurrence retention –Limited –Unlimited Per Occurrence Retention $250,000 $3,000,000 Aggregate Self- Funded Excess Insurance

7. 7 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 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

8. 8 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Company – Loss Run Summary

9. 9 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Co. – Incurred Loss Triangulation - WC

10. 10 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Co. – Incurred Loss Triangulation - WC 24 month incurred losses 12 month incurred losses 578,368 402,087 = =

11. 11 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Co. – Incurred Loss Triangulation - WC Average all policy years

12. 12 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Co. – Incurred Loss Triangulation - WC Remove any “irregular” averages

13. 13 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Co. – Incurred Loss Triangulation - WC 36 month cumulative average X 48 month incremental average 1.823 X 1.126 = 2.052 Multiply each consecutive incremental average by the previous cumulative average

14. 14 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Co. – Incurred Loss Triangulation - WC 84 month cumulative avg. 24 month cumulative avg. 2.184 1.408 = 1.551 ==

15. 15 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Co. – Incurred Loss Triangulation - WC 1 / development factor = 1 / 2.184 = 45.8%

16. 16 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Co. – Paid Loss Triangulation - WC

17. 17 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Co. – Frequency Triangulation - WC

18. 18 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 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

19. 19 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 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

20. 20 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Co. – WC Remaining Liability Projections

21. 21 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Co. – WC Loss Forecast

22. 22 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Co. – WC Loss Forecast Excluded

23. 23 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Risk Financing Determining the most cost-effective way to pay or fund for losses Risk financing continuum Risk Transfer Risk Retention Guaranteed Cost Large Deductible Qualified Self- Insurance Captive

24. 24 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 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

25. 25 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Cash flow Comparisons Definition: Using the net present value of alternative market quotes to determine the most cost-effective program

26. 26 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 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 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

27. 27 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Co. – 1/1-12/31/11 WC Guaranteed Cost Cash Flow

28. 28 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Co. – 1/1-12/31/09 WC Self Insurance Cash Flow

29. 29 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sensitivity Analysis How do optimistic and pessimistic loss projections alter the net present value decision of the various program alternatives?

30. 30 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 Sample Company – Net Present Value Cash Flow Comparison

31. 31 ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM Thursday, September 22, 2011 In Conclusion… Key Points –Loss development –Loss analysis –Cash flow comparisons Questions