1. Using your Actuary as a Strategic Business Partner Presented by Bill Montanez, Jim Shoop, and Jeff Doffing

2. Overview Ace Hardware Overview Risk Management Perspective –“Make sure the numbers are low.” vs. “What are the numbers telling you about our business?” Broker Perspective –“I just need your loss pick.” vs. “How can we best optimize our client’s total cost of risk?” What is the Actuary’s Perspective? –Move from “Make fun of your actuary” to “Have fun with your actuary!” Q&A

3. Ace Hardware Overview Ace Hardware Corporation (Ace) –Headquartered in Oak Brook, Illinois, Ace Hardware Corp. is the largest retailer-owned hardware cooperative in the industry. Ace Insurance Agency –4,600 Retailer owned & operated stores New Age Insurance Ltd. (NAIL) –Wholly owned captive insurance company of Ace (Class 3) –Direct insurer of Ace’s corporate property & casualty exposures –Reinsurer of retailer property & casualty exposures (3 rd party business)

4. Captive Reserve Analysis & Reserving Philosophy Partner -Yes Strategic - ? Strategic Business Partner Vendor – Yes Partner - ?

5. Risk Management Perspective Captive Paid Losses vs. TPA Paid Losses –Who is minding the store? Risk Management: staff capacity/skills Captive Manager: insufficient invoice detail Claims Administrator: claimant focus –Result? Over payments by captive –Excess of retention »Occurrence or aggregate –Solution? Actuarial Reconciliation/Monitoring

6. Risk Management Perspective Managing Expectations of Senior Management –Singular end of year actuarial analysis can lead to unexpected year end adjustments –Executives don’t like year end surprises!!! –Solution? Actuarial Early Warning Systems –Quarterly actual vs. projected analysis –Estimate year end income statement effect –Estimate future capital requirements –Result? Allows management time to react and plan

7. Risk Management Perspective Risk Management Support for Board Presentations –Demonstrate captive financial strength via: Premium to surplus ratios over time Reserve to surplus ratios over time Equity stress testing at various confidence levels of reserves Income statement stress testing by comparing current year premiums to reserve risk –Reserve risk = variability from expected

8. Risk Management Perspective ROI Support for Investment in Risk Control & Claims Management Initiatives –Cost savings projected and realized for specific frequency reduction initiatives –Cost savings projected and realized to limit average claim size Benchmarking –Frequency & severity trends by state –Analyze retail stores separate from distribution centers –compare to self over time and to similar risks in the same industry

9. Risk Management Perspective Geographic Strategy Assistance –Pricing the risk Florida coastal properties –Growing the business State specific profit pockets Audit Support –Not simply providing information to the audit actuary –Review the audit actuary conclusions –Represent the client’s specific issues that may be overlooked by the audit actuary

10. Risk Management Perspective Captive Financial Strategy Analysis –Asset/Liability Matching Estimating optimal investment mix of fixed income investments & equities given surplus, reserve durations, and reserve risk –Is my captive under/over capitalized? Effectively rating the captive –Based on underwriting & investment risk »Collateral reduction »Collateral support from captive –New product introductions & recommendations Analyze risk/reward tradeoffs

11. Broker Perspective Submission Assistance –Garbage In = Garbage Out –Identifying & quantifying trends –Effects of Changing TPAs Differences in claim definitions –In WC, medical only vs. indemnity Reserving for ALAE Differences in reserving philosophy

12. Collateral Analysis/Negotiation

13. Excess Pricing – Keep the Carrier Honest

14. Analyzing Risk/Reward Tradeoffs

15. Summary If you truly want a strategic business partner, find an actuary who: –Knows your industry –Brings a strategic business solution mindset instead of a technical solution mindset –Learns your company’s culture & develops solutions accordingly –Looks at their proposed solution from your perspective before they deliver it to you. –Anticipates questions and is prepared with responses –Builds rapport with your management –Develops trust by acting with integrity

16. Summary Q&A