The Ins & Outs Of Self-Insurance Southwest Actuarial Forum December 4, 2007 Ed Costner, ACAS, MAAA Casualty Actuarial Consultants, Inc.

The Ins & Outs of Self-Insurance Definition of Self-Insurance– retain some portion of the risk of loss Definition of Self-Insurance– retain some portion of the risk of loss Lines of Coverage to Discuss Lines of Coverage to Discuss Workers Compensation Workers Compensation Liability Insurances Liability Insurances General Liability General Liability Professional Liability Professional Liability Auto Liability Auto Liability

The Ins & Outs of Self-Insurance Workers Compensation Three Choices for Coverage Qualify to be Self-insured Qualify to be Self-insured Must qualify on a state by state basis Must qualify on a state by state basis Terms between the S-I and each state where they qualify Terms between the S-I and each state where they qualify Provide evidence of financial responsibility Provide evidence of financial responsibility Provide evidence of acceptable excess insurance Provide evidence of acceptable excess insurance Must collateralize retained losses to each state Must collateralize retained losses to each state Must report to each state annually Must report to each state annually Buy a policy from a licensed, admitted insurance company Buy a policy from a licensed, admitted insurance company Group Self-Insurance Group Self-Insurance

The Ins & Outs of Self-Insurance Workers Compensation Other Features of Individual Self-Insured WC - Acquire excess insurance - Report on retained losses to each state (actuarial reports?) - Select TPA - More control over loss adjustment - Loss control and safety - Financial issues - Federal income tax issues - Guaranty fund(s)? - Long term financial commitment Extra Credit Problem!

The Ins & Outs of Self-Insurance Workers Compensation Buy A Policy – Agreement between the insured & insurer -Retrospectively Rated Specific & aggregate retentions Specific & aggregate retentions Basic charge Basic charge [(L x LCF) + B] x TM [(L x LCF) + B] x TM Provide collateralization for the retained losses to the insurance company Provide collateralization for the retained losses to the insurance company Incurred loss and paid loss retros Incurred loss and paid loss retros Financial Issues Financial Issues ‘Bundled’ vs. ‘Unbundled’ ‘Bundled’ vs. ‘Unbundled’ -Deductible Policies -Reinsure your insurance company into your captive

The Ins & Outs of Self-Insurance Workers Compensation Deductible Policies Same issues as retros Same issues as retros Primarily designed to avoid premium tax Primarily designed to avoid premium tax Captive Reinsurance Must establish a captive insurance company Must establish a captive insurance company Front company insures the risk Front company insures the risk Captive reinsures the front company only for the losses within its retention Captive reinsures the front company only for the losses within its retention Retention agreement between captive and front Retention agreement between captive and front Captive (unauthorized reinsurer) must collateralize assumed losses to the front (Schedule F) Captive (unauthorized reinsurer) must collateralize assumed losses to the front (Schedule F) Captive is subject to regulation by state or country of domicile Captive is subject to regulation by state or country of domicile Extra credit problem!

The Ins & Outs of Self-Insurance Workers Compensation Group Self-Insurance Funds Group Self-Insurance Funds Organizations agree to pool the risk of loss Organizations agree to pool the risk of loss Enabling legislation - ‘Sponsored by an association in business for purposes other than insurance in (state) for more than five years’ Enabling legislation - ‘Sponsored by an association in business for purposes other than insurance in (state) for more than five years’ Members have joint and severable liability Members have joint and severable liability Excess insurance required Excess insurance required Rules of operation set by each state Rules of operation set by each state Members are charged a premium and participate in profits and losses (assessments) Members are charged a premium and participate in profits and losses (assessments) Fund purchases services from vendors Fund purchases services from vendors Similar to an insurance company except that the surplus of the organization includes the members’ net worth Similar to an insurance company except that the surplus of the organization includes the members’ net worth Zero sum game Zero sum game

The Ins & Outs of Self-Insurance Workers Compensation Services Required by Group Self-Insurance Funds Services Required by Group Self-Insurance Funds General Administration including premium billing, collection, and financial records General Administration including premium billing, collection, and financial records Claims Administration including medical fee review Claims Administration including medical fee review Safety and Loss Control Safety and Loss Control Investment Services Investment Services Actuaries Actuaries Outside CPAs Outside CPAs

HISTORICAL PROFITABILITY ANALYSIS-PER $100 PAYROLL (Losses Limited to Prior Retentions) (Excludes Investment Income, Income Taxes, and Dividends)

The Ins & Outs of Self-Insurance Liability Insurances Ways to Self-Insure Ways to Self-Insure Deductibles Deductibles Self-insured retentions Self-insured retentions Retros Retros Captive Reinsurance Captive Reinsurance Self-Insurance Groups Self-Insurance Groups Risk Retention Groups Risk Retention Groups Limited only by certificate of insurance needs Extra Credit Problem!

The Ins & Outs of Self-Insurance Liability Insurances Risk Retention Groups Risk Retention Groups Federal enabling legislation Federal enabling legislation Licensed and regulated by state of domicile Licensed and regulated by state of domicile Authorized to write liability insurance in all states Authorized to write liability insurance in all states Some insurance departments HATE RRGs Some insurance departments HATE RRGs No guaranty mechanism No guaranty mechanism No WC, no property (currently) No WC, no property (currently) Since surplus is required – stock or mutual Since surplus is required – stock or mutual Profits belong to the owners Profits belong to the owners Extra Credit Problem!