Reserving for Self-Insureds Kevin M. Bingham – Deloitte. Casualty Actuarial Society September 12, :30 PM – 3:00 PM Boston, Massachusetts

Page 2 INTRODUCTION Setting Reserves for Self-Insured Corporations “Speak the Language” Business Unit Focus Quarterly Monitoring Year-end Results

Page 3 Setting Reserves For Self-Insured Corporations

Page 4 Setting Reserves For Self-Insured Corporations Actuarial Consultant

Page 5 “Speak the Same Language”

Page 6 “Speak the Same Language” Provide clear and concise reports °Executive summary °Technical appendix °Meet with each business unit First understand business unit trends Second incorporate BU feedback then discuss results Training class titled “Guidebook to “The Books” and Quarterly Monitoring” Bridge the gap between Environmental Health and Safety (EH&S) terminology and actuarial terminology

Page 7 OSHA versus Actuarial Terminology Frequency °OSHA Number of Cases Divided by Hours Worked ­EH&S data tracked separately for lost work day cases, restricted duty cases and medical only cases ­Some business units rely on the frequency for OSHA Lost Work Day cases only °Insurance Number of Claims Divided by Payroll ­All types of claims combined Conceptually Similar

Page 8 OSHA versus Actuarial Terminology Severity °OSHA Number of Lost Work Days Divided by Hours Worked ­Definition is actually more like a loss rate (i.e., frequency times severity) ­Definition is based on number of lost work days rather than claim dollars and therefore does not incorporate inflationary trends in indemnity claim dollars per lost work day, nor the trends in medical costs or litigation costs. °Insurance Claim Dollars Divided by Number of Claims ­Insurance Severity definition measures average value per claim and does not incorporate frequency Conceptually Not Even Close EXAMPLE: EMPLOYEE 1 – 60 LOST DAYS SEVERE HEAD TRAUMA INTENSE CARE UNIT MULTIPLE BRAIN SURGERIES EMPLOYEE 2 – 60 LOST DAYS INITIAL BED REST PAIN RELIEVERS FAMILY ASSISTS RECOVERY DRAMATICALLY DIFFERENT COSTS SAME OSHA SEVERITY!

Page 9 Business Unit Focus

Page 10 Business Unit Focus Understand each business unit °Workforce Age Location BU trends (acquisitions, growth, etc.) °Work location On-site Travel to customer site °Proactive risk management On-site medical staff Focused claims handling EH&S initiatives Implications on reserving assumptions Lift programs Executive Ownership Design for Environment and Safety (guidebook) Ergonomics Machine guarding, etc.

Page 11 Quarterly Monitoring

Page 12 Quarterly Monitoring Monitor results °Early warning when actual exceeds expected °Avoid surprises at BUs → book quarterly adjustment? Understand drivers °Large losses (e.g., back fusion, severe auto accident) °Spike in frequency Proactive risk management °Identify data issues °Investigate unusual variances

Page 13 Quarterly Monitoring Clear communication is important °What quarterly monitoring is: Actual versus expected (i.e., uses year-end assumptions to project emergence of incurred/paid losses) Early warning °What quarterly monitoring is not: Complete actuarial analysis (i.e., re-pick loss development factors, expected loss rates, etc.) “Adverse/(favorable) quarterly monitoring results may end up worse/(better) at year-end when actuaries re-visit their assumptions…”

Page 14 Year-end Results

Page 15 Year-end Results Data gathering Preliminary actuarial analysis BU trend discussion & research Finalize analysis and communicate results

Page 16 Year-end Results – Data Gathering BU loss & ALAE information BU claim count information BU exposure information Fixed expenses (e.g., broker fees, system costs, LOCs, claims handling fees, etc.) Variable expenses (e.g., 2 nd injury assessment rate, self- insured assessment rate, etc.) Policy period information (e.g., self-insured retention, policy type, reinsurance, etc.) Discount rate By BU division?

Page 17 Year-end Results – Preliminary Actuarial Analysis Traditional actuarial methodologies Prior year runoff of analysis Review drivers of change in ultimates Diagnostics °Frequency °Severity °Paid to incurred ratios °Settlement rates °Aggregate case reserves

Page 18 Year-end Results – BU trend discussion & research Discuss preliminary actuarial diagnostics and drivers Discuss BU trends Discuss individual large losses °Medical director and claim staff feedback °Settlement efforts (active vs. inactive employees) °Shift in distribution of claims EH&S update

Page 19 Year-end Results - Finalize analysis and communicate results BU presentation °Recap major findings, research efforts and how issues were addressed in the actuarial analysis °Present findings by coverage (e.g., WC, AL, GL, etc.) Change in prior year ultimates Change in forecasts Accrual adjustments °Display graphs Loss rates Frequency/Severity Consolidated presentation (Corporate) ∆’s in: Exposures Fixed expenses Variable expenses Ultimate losses Actuarial assumptions Discount rate Etc.