2006 Casualty Loss Reserve Seminar September 12, 2006 Understanding Collateral Requirements in Relation to Self- Insurance.

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2006 Casualty Loss Reserve Seminar September 12, 2006 Understanding Collateral Requirements in Relation to Self- Insurance

Introduction Why collateral is required How collateral is determined Collateral stacking – what and why How insurance program structure affects operations and collateral Types of collateral Other Key considerations before selecting the insurance program structure and collateral Questions

Why Collateral? Credit Risk for Insurer Statutory Requirements Rating Agency Considerations

Who Best to Take Credit Risk? Casualty Insurer? Bank?

How Collateral Requirement Determined? For Financial Reporting Year (Balance Sheet) Estimate of Ultimate Loss – Paid to Date What Impacts This Calculation? Actual Loss Results to Date Loss Development Methodology Development Factors Used

How Collateral Requirement Determined? For Budget Year (Fiscal Plan) Loss Forecast What Impacts This Calculation? Historical Loss Experience Loss Forecast Methodology Development Factors Used

Collateral Stacking What is collateral “stacking”? - Collateral stacking is the accumulation of required collateral across multiple effective periods. Why is collateral “stacked”? - Paid loss emergence patterns - Accrued loss emergence and “IBNR” losses

Collateral Stacking (cont.) Example 1 – No growth and no inflation scenario Example 2 – No growth and 4% inflation scenario Example 3 – 3% growth and 4% inflation scenario

Collateral Stacking

Biggest Impact on Collateral? Actual Loss Results

Collateral Stacking

Insurance Program Structures Impact Common Insurance Program Structures - Guaranteed cost - Deductible - Self-insured retention - Retrospectively rated contracts - Captive insurance company

Insurance Program Structures Impact (cont.) Balance Sheet and Income Statement Impact Working Capital Impact Credit Capacity Impact Compliance considerations

Insurance Program Structures Impact (cont.) Guaranteed CostDeductible Self-Insured Retention Inc. Loss Retro.Captive Balance SheetLowHigh Income StatementHigh Working Capital (Cash) HighLow High Working Capital (Credit) LowHigh LowHigh ComplianceLow HighLowHigh

Types of Collateral Letter of Credit Cash Surety Bond Trust Account Promissory Note

Insurance Program Collateral Impact Letter of CreditCash Surety Bond Trust Account Promissory Note Working Capital (Cash) LowHighLow Working Capital (Credit) HighLow Deductible

Considerations Cash Position Effective Tax Rate Ability to Retain Risk Capacity and Cost of Collateral Financial Strength

Questions? Tom Fuller Liberty Mutual Sr. Risk Management Consultant x214 Marn Rivelle KPMG LLP Senior Manager, Actuarial Services

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