Pooling Basics Fall 2016 - Event Schedule & Agenda...
19
Pooling Basics Fall 2016 Recommended Sessions for Pooling Basics Track: Pooling Basics Session #1a Monday, October 3, 1:45-3:00pm Pooling Basics Session #1b Monday, October 3, 3:00-4:00pm Pooling Basics Session #1c Monday, October 3, 4:00-5:00pm Pooling Basics Session #2a Tuesday, October 4, 10:00-11:00am Pooling Basics Session #2b Tuesday, October 4, 11:00-12:15pm Presentation Description Over the course of two days, solidify your pooling basics knowledge with several sessions to recap the course work you have already been through. Basics sessions will coverage Underwriting, Actuarial Science, the Claims Function, Financial Reporting, Auditing, and Risk Management. We will even dabble in Pooling’s historical background make some guesses as to it’s future. There will be plenty of time for Questions & Answers for the Pooling experts lined up to dispense their knowledge and experience. Presentation Software http://prezi.com/dcjl7yrankbc/?utm_campaign=share&utm_medium=copy&rc=ex0share Table of Contents Recommended Sessions for Pooling Basics Track: 1 Presentation Description 1 Presentation Software 1 Presenters 2 History of Insurance in 60 seconds 3 Pooling Background Material 4 Pooling Basics Session #1a – Underwriting 9 Pooling Basics Session #1b – The Life of a Claim 11 Pooling Basics Session #1c – Actuarial Science 13 Pooling Basics Session #2a – Financial Reporting and Auditing 14 Pooling Basics Session #2b – Risk Management, The Future of Pooling, and Questions & Answers 18
Transcript of Pooling Basics Fall 2016 - Event Schedule & Agenda...
PoolingBasics Fall2016
RecommendedSessionsforPoolingBasicsTrack:PoolingBasicsSession#1a Monday,October3,1:45-3:00pmPoolingBasicsSession#1b Monday,October3,3:00-4:00pmPoolingBasicsSession#1c Monday,October3,4:00-5:00pmPoolingBasicsSession#2a Tuesday,October4,10:00-11:00amPoolingBasicsSession#2b Tuesday,October4,11:00-12:15pm
PresentationDescription
Overthecourseoftwodays,solidifyyourpoolingbasicsknowledgewithseveralsessionstorecapthecourseworkyouhavealreadybeenthrough.BasicssessionswillcoverageUnderwriting,ActuarialScience,theClaimsFunction,FinancialReporting,Auditing,andRiskManagement.WewillevendabbleinPooling’shistoricalbackgroundmakesomeguessesastoit’sfuture.TherewillbeplentyoftimeforQuestions&AnswersforthePoolingexpertslineduptodispensetheirknowledgeandexperience.
PresentationSoftwarehttp://prezi.com/dcjl7yrankbc/?utm_campaign=share&utm_medium=copy&rc=ex0share
TableofContentsRecommendedSessionsforPoolingBasicsTrack: 1
PresentationDescription 1
PresentationSoftware 1
Presenters 2
HistoryofInsurancein60seconds 3
PoolingBackgroundMaterial 4
PoolingBasicsSession#1a–Underwriting 9
PoolingBasicsSession#1b–TheLifeofaClaim 11
PoolingBasicsSession#1c–ActuarialScience 13
PoolingBasicsSession#2a–FinancialReportingandAuditing 14
PoolingBasicsSession#2b–RiskManagement,TheFutureofPooling,andQuestions&Answers 18
Presenters
JoelKress,AGRiPStaff [email protected];603.568.4880JoelKresscurrentlyservesasDirectorofSpecialProjectsforAGRiP.Amongsthisotherprojects,heisupdatingPoolingBasicstobeincludedinaholisticinitiativeknownas‘PoolingAcademy’.Althoughinitsinfancy,PoolingAcademywillwrapupalleducationalinitiativesinthepoolingsector,andstandardizetheeducationalrequirementsforthoseseekingpoolmanagement.
Previously,Mr.KressservedasUnderwritingManagerforGovernmentEntitiesMutual,Inc.PCC,providingreinsuranceunderwritingandactuarialanalyticalservices,aswellascomputerprogrammingfortheclaimsmanagementinformationsystem.PrevioustoGEM,Mr.Kressworkedforanactuarialconsultingfirmfor5years.HehasreceivedtwoBachelorofSciencedegrees(AppliedMathematicsandMathematicalEducation)fromNorthCarolinaStateUniversity,andaMastersdegree(BusinessAdministration)fromSouthernNewHampshireUniversity.HealsoearnedthedesignationAssociateinReinsurance(ARe).
MujtabaDatoo,AONGlobalRiskConsulting [email protected];949-608-6332MujtabaDatooistheActuarialPracticeLeaderforAONGlobalRiskConsulting,leadingthepublicentitypractice.Hehasover30yearsexperienceprovidingactuarialserviceswithintheinsuranceandriskmanagementfields.Hehasspentover10,000hoursjustinthelastdecadepreparingactuarialreports,andthusqualifiesasanexpertaccordingtothe10,000-hourrulepopularizedbyMalcolmGladwellinhisbestsellingbook‘Outliers’.Mr.Datoohasextensiveexperienceinratemaking,lossreserve,andfundingstudiesforself-insuredworkerscompensationandliabilityprograms,particularlyforpoolingprograms.Hisexperiencehasincludedtenuresinacommercialcarrier,ratingbureaus,andconsulting.
Hehaspresentedbeforevariousorganizations,includingPRIMA,CAJPA,CASBO,PARMA,AGRiP,APTA,STRIMA,NLC,andConferenceofConsultingActuaries.AfrequentspeakertoPoolBoardshehaspresentedextensivelyonunderstandingactuarialreportsanditsfindings,financialmeasuresandcostallocations.HeisthecornerstoneofthefinancialbootcampsoftheAonPoolingConference.Hehasauthoredseveralarticlesonactuarialtopics,andaprimeronunderstandingyouractuarialreport–soontobepublished.Mr.DatooattendedColumbiaUniversityandholdstheprofessionaldesignationAssociateoftheCasualtyActuarialSociety(ACAS)andisaMemberoftheAmericanAcademyofActuaries(MAAA)andaFellowoftheConferenceConsultingActuaries(FCA).
ShawnBubb,MontanaSchoolBoardsAssociation/MSGIA [email protected];406.457.4500ShawnBubbhasbeenintheinsuranceindustrysince1994andpriortothatheworkedinthefinancialservicesindustryfor3years.Hehasastrongaccountingbackgroundholdingkeypositionssuchasinternalauditor,corporatecontroller,andinsuranceoperationsteamleaderfortheMontanaStateWCFund.Mr.BubbisagraduateofCarrollCollegeinHelena,MontanaandholdsundergraduatedegreesinAccountingandBusinessAdministration.HeisaCertifiedPublicAccount(CPA),CertifiedInternalAuditor(CIA),CIC(CertifiedInsuranceCounselor),CertifiedSchoolRiskManager(CSRM),andiscurrentlypursuinghisCharteredPropertyCausalityUnderwriter(CPCU)certification.Mr.Bubbhasworkedinthepoolingsectorsince2002.HeisapastpresidentofboththeMontanaWCSelfInsuranceAssociationboardofdirectorsandAssociationofGovernmentalRiskInsurancePools(AGRIP).FrankRamsey,WillisTowersWatson [email protected];8607594913FrankRamsayhasmorethan30yearsofexperienceinallaspectsofclaimsmanagementandconsulting.Histechnicalbackgroundincludesexperienceinprofessional(MPL,E&O,D&O,Lawyers)liability,generalliability,autoliability,workerscompensation,commercialandpersonallinespropertyclaims.Hehasmanagedasbestosandenvironmentalclaimissuesforamajorinsurerincludingthecoordinationandnegotiationofdefensecost-sharingagreements,lost
policyarrangements,casereserving,complexcoverageevaluation,legalcostmanagement,aswellasensuringtheconsistentapplicationofclaimandcoveragestandardsthroughoutvariousjurisdictions.Healsohasexperienceincededandassumedtreaty,facultative,proportionalandexcessoflossreinsuranceclaims.
Inadditiontohisconsultingrole,Mr.RamseyleadstheWillisTowersWatsonClaimsManagementpractice,overseeingthedeliveryoftheclaimpractice’sproductsandservices,managingclientrelationships,andpeoplemanagement.Mr.RamseyearnedaB.A.fromEasternConnecticutStateUniversity.HeholdstheSeniorClaimLawAssociatedesignationandisamemberoftheLossExecutivesAssociation.
HistoryofInsurancein60seconds(settothemusicofapopularsong)
Lloyd’sofLondon,teatime,cargoships,maritime;BarnbuildingAmish,Franklin’sFireMutuals;Homesteaderstakearisk,farmers’cropstakeahit;Insurancesalesmengetawrap,sellingonebigmoneytrap.
Exclusions,exclusionseverywhere,regulatorsonatear;ActsofGoddon’tyousay,NFIPsavestheday;Asbestos,blacklungdisease,toxicdumpingkillingtrees;UnderwritersoffScot-free,who’llactuallypayforme.
Wedidn’tstartthe(insurable)fireItwasalwaysburningSincetheworld’sbeenturningWedidn’tstartthe(insurable)fireNo,wedidn’tlightitButwetriedto(compensate)foritStripSearches,eminentdomain,MirandaRightsaresuchapain;HurricaneAndrew,Northridgeearthquake;EliotSpitzerkillsfinite,contingentcommissionsgoodnight;Medicalandsocialinflationequalspremiumescalation;Katrinarainsdownforaweek,NewOrleansspringsaleak;Lehman,AIGcrashes,GreatRecessionlashes;InvestorseyeInsuranceprofit,softmarketbeyondalllogic;UnderwritersoffScot-free,who’llactuallypayforme;Wedidn’tstartthe(insurable)fireItwasalwaysburningSincetheworld’sbeenturningWedidn’tstartthe(insurable)fireNo,wedidn’tlightitButwetriedto(compensate)forit
PoolingBackgroundMaterial
PoolingBasics–FillingthePool
Imaginegettingaletterinthemailinformingyouknowthatyourcarinsurancecompanyhascancelledyourpolicy.Or,tripledthepremium.Naturally,youmightjustcallanotherinsurancecompany,right?Now,imaginealltheinsurancecompaniesyoucallrejectyou.Whatdoyoudo?
Thisisexactlythepositionthatpublicentityriskmanagersinthe1980’sfoundthemselvesinwhenthecommercialinsurancemarketplacehadadistasteforpublicentityrisks.So,theriskmanagerssaid,“forgetthem,we’regoingtostartourowninsurancecompany”.Thisisasimpleideal,butittookhardworktosuccessfullyexecutethatideal.Theresultoutcomewasthepoolingsectorthatweallbelongtotoday.Sufficetosay,thehardworkpaidoff…
So,whatisapool?
“Amember-owned,member-governed,intergovernmentalcooperativethroughwhichagroupofpublicentities-themembers-contributetoasharedfundthatinturnpaysclaimsforandprovidesriskmanagementservicestotheparticipatingmembers.”
Whilepoolsaredefinedas“somethingotherthaninsurance”inmoststates,thefundamentalpurposeofriskpoolingisnotunlikeconventionalinsurancetoprotectprogramparticipantsagainstunexpectedlosses.
Likeconventionalinsurance,poolstypicallytransferriskfromoneentitytoanothercentralrisksharingauthority–thepool.Unlikecommercialinsurance,however,apool’sprimarypurposeistomanageandreducerisk–notjustfinanceit.
Someofthebenefitsenjoyedbypoolmembersare:• Coverage:Unlikeinsurancecompaniesthatarefoundedtomakeaprofitandusemostlystandardlanguage
contractsfortheinsurancecoveragetheyprovide,poolstypicallycrafttheirowncoveragedocuments.This
providesthememberswiththeavailabilityofcoverage,terms,andlimitswhicharebestsuitedtoaddresstherisksofthemembers.
• Services:Riskmanagementistypicallyseenasadetractionfromaninsurancecompany’sbottomline.Thepoolingcommunityhascommittedmuchmorelaborandcapitaltoreduce,mitigate,andpreventlossesfromhappening.Thesecustomizedriskmanagementservicesareprovidedtomeetyourmembers’riskmanagementandadministrationneeds.
• Financialsavings:Reducedlosses,loweroverhead,leverageinthepurchaseofcatastropheinsurance(or“reinsurance”),andinvestmentincomethataccruestothemember-owners,allallowapooltoofferlowercostsoverthelongrunthancommercialinsurance.
• Budgetarystability:Thefinancialadvantages,togetherwithprudentfundingandmembercommitment,hasprovidedgreaterbudgetarystabilitytomembers.Thecommercialinsurancemarket,however,vacillatesgreatlydependingonanumberofinternalandexternalfinancialconditions.
Formations
Poolsareorganizeddifferentlyineachstate–afunctionofstatelaw.Theinitialformationanditsincorporatingdocumentsdeterminehowyourpoolinteractswithitsmembershipandregulators,andgenerallydoesnotallowforinterstatemembership.
Dependingwhereyoulivearoundthecountry,poolsmightbecalledJointPowersAuthorities,InterlocalAgreements,Trusts,Reciprocals,Funds,RiskRetentionGroups,andevenMutualInsuranceCompaniesandCaptiveInsuranceCompanies.Alloftheseareslightlydifferentinorganizationandregulatoryrequirements,butgenerallytheyallfunctionsimilarlytoyourownpool.
FoundationDocuments
Regardlessofpoolformationtype,youshouldhavemanyofthesamecorelegaldocuments.Thosearethepool’s‘Bylaws’andits‘MembershipAgreement’,whichsetforththeresponsibilitiesandrelationshipbetweenthepoolandeachmember.
Amongallthosegoverningdocuments,therecontainsprovisionswhichshouldaddressatleastthefollowing:• Membershipeligibilitycriteria• Obligationsofmembers• Membershiptermination• Powersanddutiesofgoverningbodies• Ownershipanduseanddistributionofassets• Assessments• Professionalcertifications(includingactuarialreviewsandfinancialaudits)• Governancepoliciesprovidingaframeworkforoperationalissue(i.e.targetsurplus,fundingcriteria,etc.)
Regulations
Themethodofpoolingregulationvariesfromstatetostate.Eachstatehastheauthoritytoregulatemunicipalinsuranceandriskpooling,mostoftendisparatelyso.Accordingly,it’scrucialtoknowyourstate’sregulationstoensurecomplianceandtheabilitytocontinueoperations.Evenlargely“unregulated”poolsneedtounderstandtheauthorityunderwhichtheyoperate,andbeawarethat,whileastatemaynotexercisemuchregulatoryoversighttoday,thatconveniencecouldchangetomorrow.
CoverageDocumentandLinesofBusiness
Intheinsuranceindustry,organizationssuchastheISO(“InsuranceServicesOffices”)promulgatestandardizedcoveragelanguagethat,intheory,helpsregulatorswiththeapprovalprocess,andleadstowardmoreconsistentcoverageinterpretations.Nevertheless,disputesarise,andwhentheydo,thereisahugebodyofcourtcaselawtofallbackon.
Sincemostpoolsaren’ttechnicallyinsurers,theircoveragedocumentsarenot“insurancedocuments”;theyaremanuscriptcontractsbetweenthepoolandthemember,andgenerallyinterpretedunderContractLaw,ratherthanInsuranceLaw.Mostpoolsrefertotheircoveragedocumentsasthe“MemorandumofCoverage”,oran“MOC”.
WhetherISOformsormanuscriptcontracts,MOC’sshouldincludecertainsectionsthatallowforconsistentunderstandingandinterpretation.Theseinclude:
• Declarations:Also,referredtoasthe“DEC”page,thisusuallysinglepagequicklyoutlinesthespecificcoverage,limitdeductibles,andendorsementsthateachparticularmemberhaspurchased.
• Definitions:Identifiesandclearlydefineskeytermsforpurposesofthatparticularcoverage.• CoverageAgreement:Thebodyoftheagreementthatexplainswhattheexactcoverageasitisintended.• Conditions:Requirementsofthememberintheeventofaclaim,suchascooperatingwiththeinvestigation,
andtakingstepstominimizetheloss.• Exclusions:Clearlyexpressedrestrictionstotheintendedcoverage,someofwhichmaybequitestandard
(suchasasbestos,orlossescausedbywar),andsomewhichmaybespecifictothatpool(suchassubsidence,forapoolwithcoastalexposure).
• Endorsements:Standardormanuscript,theseareaddedtoanindividualmember’sMOCtochange,add,ordetractcoverage.Endorsementsarenegotiatedandagreeduponbyboththememberandthepool.
Ingeneral,thereareeighttypesofcoveragepoolsmightoffer:• Property• Boiler&Machinery(or,EquipmentBreakdown)• Crime&Fidelity• Liability• AutoLiability• Workers’Compensation• HealthorEmployeeBenefits• UnemploymentInsurance
WhataretheBasicDutiesofaPoolBoardMember?
Thelegalstructureofthepoolanditsboard–whetherdirectorsortrustees–presentslegalnuancesintherolesandresponsibilitiesofboardmembersthatarepool-specific.Thereare,however,somegeneralcharacteristicsthathelpensuretheboardpromotesthecooperativeculturethatisinstrumentaltoapool’ssuccess:
• Asamemberoftheboard,yourdutyistothepool–NOTtothememberyourepresent• Youarenotexpectedtobeatechnicalexpert,butyouareexpectedtoengagetechnicalexpertisewhen
needed,andtoalwaysactingoodfaith• Youareexpectedtodeliberateanddebatewithyourcolleaguesontheboard,butonceactionistaken,you
mustsupportthataction.Inotherwords,“TheBoardspeakswithonevoice.”
PoolingBusinessModel
Thebusinessmodelofinsuranceandpoolingisinterestingandwhollydisparatefromatypicalbusinessmodel.Belowaresomesimplediagramstopointoutthedifferences.
§ Inatypicalbusiness,rawmaterialsarecombinedtocreateanewproduct,whichisthensoldtotheconsumer.
• Takingaclosersteptowardsinsuranceproducts,intheFinancialProductsBusinessModelcapitalissecuredtomakeinvestmentvehicles,whichearnsinterestforitsriskholders.
• IntheInsuranceBusinessModelpremiumsarecollectedfrompolicyholderstopayforallaccidentallossesforeachofthosepolicyholders.Anyprofit(premiums–claimcosts)belongstotheinsurancecompanyanditsshareholders.
• Publicentitypoolingissimilartoinsurance,butthedifferenceisthe“profit”isreturnedtothepolicyholders(or,poolmembers).
WidgetPart
WidgetFactory WidgetforSale
$$$$$$$
$$$
$$$
$$$$$$$$
Financial Institution $$$
Premium
Premium
Premium
Premium
Insurance Company Claims
Contribution
Contribution
Contribution
Contribution
Public EntityPool Claims
Additionally,therearesomeinterestingaspectstothebusinessmodelofinsurancecompaniesandpublicentitypoolsversusthetraditionalbusinessmodel.Inmostbusinesses,youmakeaproductsuchasawidget.Thecostofmakingthatwidgetisknown,becauseyouhavetospendalmostallofthecostofmakingthatwidgetbeforeyousellittoaconsumer.Whenyousellthewidget,youaddupallthecoststomakeit,putinalittleprofit,andchargethecustomerthatprice.
Forinsuranceandpoolingcontracts,youchargethecustomerfirstintheformofpremiumsorcontributions,andthenyearsanddecadeslateryoufindouthowmuchthatproductcosts.Thatunknowncostforallthoseyearsanddecadesisreserves,whichareestimatedbytheclaimsstaffandanactuary.Likeallpredictions,theestimatesareneverassumedtobeentirelycorrect.Thoseunknownestimateshavetobebookedonourbalancesheetandincomestatement.Fortunately(quiteliterally),thereisabenefittothisbusinessmodel.Allthosebookedreservessittingonyourbalancesheetcanbeinvestedtogenerateinvestmentincome.Thisinvestmentincomecanusedtoeithergarneradditional“profit”ortolowerthecostofpremiums/contributions.
PoolingBasicsSession#1a–Underwriting
Monday,October3,1:45-3:00pm
PoolingandRiskTransferWhatisRiskTransfer?Risktransferhappenswhenapool’smemberstransfersomeoralloftheriskoffinanciallossawayfromthemselvesandtothepool.Forthistransferofrisk,thememberpaysthepoolapremium/contribution.Themember’sportionofretainedriskiscalledthe“Deductible”.Poolsarestructuredtoassumethistransferredrisk,buttheythenonlyretainsomeportionofit,andfurthertransferanotherportionofit.Thistransferredportioncangotoeitheranotherpoolortoacommercialreinsurer.Thepool’sretainedportionofriskiscalledits“Self-InsuredRetention”(SIR).
Theamountofrisktransferredbythemembertothepoolisdeterminedbythecoveragedocument(the“MOC”),whichmaydefineportionsofeachlossthatthememberhastoreimbursetothepool(the“deductible”);portionsthepoolretainsforeachloss(“self-insuredretention”);limitstotheamountthepoolwillcover(coverage“limit”);andotherdefinitions,terms,conditions,andexclusionsthatdefinewhetherornottheriskorclaimiscoveredbythepool.Inmuchthesameway,poolsretainsomeoftheriskoflossexposuresthataretransferredtothemfromtheirmembers,andtheyinturnmaytransferriskontoexcessinsurersorreinsurers.Lookatthecoverageareasprovidedtoyourmembersandidentifyyourlargestexposures.
• Whatisaworst-casescenarioforlosses?• Whateffectwouldthathaveperlineofcoverage?• Howmanylargelossescanthesurplusabsorb?
WhatisUnderwriting?Underwritingistheprocessbywhichthepoolevaluateswhichmemberstooffercoverageto,anddeterminesthepremium/contributionseachmembershouldpayforthecoveragesoffered.Howwellapooldoesbothwillinfluencehowwellapoolmanagesits“underwritingrisk,”whichistheriskthatlossesandexpenseswillbegreaterthanthecontributionscollectedplustheinvestmentincome.
Contributions+InvestmentIncome>Losses+Expenses
Liability Coverage - Per Occurrence
Reinsurance #2
Reinsurance #1
Pool SIR => $100k
Member Deductible
$10,000,000
$5,000,000
$1,000,000
$100,000
$1,000$0
Herearesomegenerally-accepteduniversalunderwritinggoals:• Determinethetypesofriskthepooliswillingtoaccept,bydefiningthetypesofpublicentities,including
“demographics”likegeography,size,andmanagementstructure.Thisistheclassicdiversityversushomogeneityofriskdebate.
• Establishmember-specificunderwritingandratingcriteria,whichcapturesmostofyourintendedmarket,rewardingthegoodrisksandeliminating/minimizingthebadrisks.
• Makesurethattheguidelinesyouuseareappliedconsistently,asunfairdiscriminationinhowyouselectandpricememberswillleadtoconflictandevenlawsuitswithinthepool.
• Knowwhattheriskofcatastrophiclossesmaybeandhowitmightvaryforcertainmembers.Avoidexcessivesubsidizationofcertainmembersattheexpenseofothers.
Calculatingthepremiumorcontributionsofeachmemberisamarriagebetweenactuaryandunderwriter.Generally,mostratingsystemsincorporatingthesestepsinoneformoranother:
• Experiencerating• Exposurerating• Premiumallocation• Schedulerating
DifferencesofInsuranceandPoolingUnderwritingWhileinsuranceandpoolingunderwritingaresimilar,theydohavethreedistinctdifferences.Theseare:
• Communityrating• Useofdataanalytics• Howtheyacceptorrejectrisk
UnderwritingBiasItisimpossibletoremovebiasfromourlives,andthisistrueforunderwriters.Therearemanybiasestoavoid(https://en.wikipedia.org/wiki/List_of_cognitive_biases)tobecomecompletelyobjective,asnobleasthatgoalis.Relatedtobiasesistheconceptofdiscrimination,andbystatelawtherearecertaindiscriminationswecannotusewhileunderwriting(gender,race,religion,etc).But,essentially,thejoboftheunderwriteristofindadiscriminatorybasisamongthepolicyholderstowardsrisk.Ifyouhavetwoschoolsthatyouareunderwriting,andoneschoolisthoughttobetwiceasriskyastheother.Intuitively,youshouldchargethefirstschooltwiceasmuchcontributionasthesecond,right?But,whatbasisareyoumakingthatdeterminationof“twicetherisk”,absentanylossdata.Ifthefirstschoolhadtwiceasmanystudents,thenyoucouldmakearationalargumentthatitwouldbetwiceasrisky.But,ifyouweretoassesstherisklevelagainstaprotectedclass(forinstance,thefirstschoolisAllBoysandthesecondschoolisAllGirls),thenthatisillegal.So,underwritersneedtomakeasobjectiveselectorstoriskaspossible.Onecommonbiasis‘IngroupBias’,whichisthetendencytogivepreferentialtreatmenttootherstheyperceivetobemembersoftheirowngroup.So,backtotheschoolexample,perhapsevenwithtwiceasmanystudentsthefirstschoolgetsthesamepremiumasthesecondschool,merelybecauseitresidesinthesametownastheunderwriterlives.
PoolingBasicsSession#1b–TheLifeofaClaim
Monday,October3,3:00-4:00pm
Whatarethebasictypesofclaims?Property–Oftenreferredtoas1stpartycoverage.Damagetopropertyoftheinsured/member.
Liability–Oftenreferredtoas3rdpartycoverage.Damageorinjurytoanotherparty.
Workers’Compensation–Onthejobinjury.
Otheruniquetypesofclaims:Crime,CyberLiability
ClaimsManagementProcessSixkeystepsinhandlingaclaim.
• Reportingtheclaim• Determiningcoverage• Investigation• Determiningliability• Determiningdamages• Settlement/Trial
o Closingtheclaimfile
NineStories
ReportingtheClaimKeycomponents:
- Timelyreporting- Adequateinformation(who,what,when,where,howorwhy)- Preventfurtherlossordamage
DeterminingCoverageKeycomponents:
- Whattypeofaclaim(property,liability,crime,cyber,workerscompensation,etc.)- Reviewcoveragedocument(s),reinsurance/excess- Reviewschedule(property)- Ifnocoverageorlimitedcoverage,denyclaimorinvestigateunderareservationofrights
InvestigationKeycomponents:
- Contactallpartiesinvolved,getstatements- Obtainalldocumentation,policereports,incidentreports,medicalreports- Phonevs.facetoface
DeterminingLiabilityKeycomponents:
- Negligence(atfaultparty/parties)- Comparativenegligence(lawsdifferfromstatetostate)- WorkersComp(state’sdefinitionoftheemployer’sresponsibilitytoanemployeeforinjuriesthatariseinthe
courseofemployment)- Subrogation(propertyclaims)
DeterminingDamagesKeyComponents:
- Obtainandevaluateallinvoices,bills,documents- Reasonableness- Property(actualcashvaluevs.replacementcost)- Generaldamages(painandsuffering,mentaloremotionaldistress)- Specialdamages(medicalbills,treatment,costtorepair)
Settlement/Trial
- Settlementauthoritylevels- Negotiatesettlementdirectlywithmember/claimant/attorney- ObtainProofofLoss(property)orReleaseofClaim- Mediation/Arbitration- Trial- WorkCompclaimstendtoremainopenforlongerperiodsoftime- Paymentofclaim/closingfile
Otherconsiderations:Reservepractices
BoardofDirectorsresponsibilitiesinclaims
Litigation–prosandcons,cost(financially/emotionally/reputational)
Independentclaimsaudits
PoolingBasicsSession#1c–ActuarialScience
Monday,October3,1:45-3:00pm
TheProbabilitiesandStatisticsofPredictingtheFutureActuariesplayavitalroleintheoperationandsuccessofpoolsbyprovidinganalysiscrucialtothefinancialviabilityofpools.Quitesimply,whenapooloffersitsproduct–indemnificationcoverage–itcannotknowforsurewhatitsfinalcostfortheproduct–theclaimsitwillpay,andwhenitwillpaythem–willbe.Thatiswhereactuariescomein.Actuariesaretrainedintriedandprovenstatisticalmethodsofmakingfuture“guesses”asaccurateaspossible.Thepool’sactuaryshouldalsobeinvolvedinestablishingthefundingrequirementsfortheupcomingyear,orthe“rates”thepoolwillchargemembers.Thisinvolvesprojectionsoffuturelosses,basedonpastexperienceandwhetherotherchangesareoccurring(suchaschangesincoverages,thelitigationenvironment,orbenefitslevelsinworkers'compensation)andaddingothercosts,suchasadministrativeexpensesandreinsurancecosts.Actuariesusemathematics,statistics,economics,andfinancetoanalyzethefinancialconsequencesofrisk.Inthiscase,therisksanalyzedarerelatedtothecoveragesor“riskscovered”bypools.
FundingStudiesSo,howdoyoufundforalossthathasyettooccur?Or,inbusinessterms,howdoyoupriceaproductyouaresellingtoday,whenyoudon’tknowtheultimateproductioncostsformanyyears(orevendecades)?Anactuaryconductsalossprojectionanalysis,whichisanestimateoftheretainedlossesthatwilloccurduringaspecifictimeperiodinthefuture,basedonthecoverageprovidedbythepooltoitsmembers.Inordertoprojectthelossesforthecomingperiod,anactuarywillreviewthehistoricallossesandexposuresassociatedwithpreviousperiods.Heorshewillalsoaskforinputfrommanagementonwhatmightbedifferentnextyear,intermsofchangingmembershiporcoverages,forexample.Anactuarywillfirstestimatetheultimatelossesforeachofthepreviousperiodsbasedonseveralactuarialmethods.Theincurredandpaidlossdevelopmentmethodsarethemostcommonandbasicmethodsused.ReserveStudiesAnactuarialreserveanalysisestimatesapool’soutstandingliabilitiesresultingfromtherisktransfercontractstheyhavewritteninthepast.Oneuniquecharacteristicofrisktransferproductsisthattheproductsarepricedbeforethepolicyiswritten,butthefinalcostmaynotbeknownforsometimesdecadeslater.Forpropertyrisks,itmayonlybefiveyears–yourbuildingburnsdown,youbuildanotherone.But,forworkers’compensation,aninjuredworkermighthavealifetimeofbenefits.Theliabilitiestobefundedconsistoftwocomponents:
1.Casereservesarethereserveamountsshownonthelossrun.Theyaretypicallyestimatedbyaclaimadjuster,lawyer,orotherinsuranceprofessional.Theyrepresenttheamountofmoneyestimatedforfuturepaymentsrelatedtoaparticularclaim.
2.IBNRreservescanbethoughtofascomposedoftwofurtherparts–PureIBNRreservesandreservesfordevelopmentonknownclaims.
• PureIBNRreservesaretheestimatedamountneededforclaimsthathavehappenedbuthavenotbeenreportedtothepoolyet.
• Reservesfordevelopmentonknownclaimsareestimatedadditionalamountsneededtoultimatelysettleknownclaimsinadditiontothecurrentcasereserves.
PoolingBasicsSession#2a–FinancialReportingandAuditing
Tuesday,October4,10:00-11:00am
BalanceSheetandIncomeStatementBasics
Animportantpartofanyorganizationisitsfinancialhealth.Twokeycomponentsofassessingandreportingfinancialhealtharebalancesheetsandincomestatements.Wewillexplainthebasicsofeachandhowtheyinterrelate.
ABalanceSheet(BS)isastatementofacompany’sfinancialpositionataparticularmomentintime.Thisfinancialreportshowsthetwosidesofacompany’sfinancialsituation:whatitownsandwhatitowes.Whatthecompanyowns,calledits"assets,"isalwaysequaltothecombinedvalueofwhatthecompanyowes,calledits"liabilities,"andthevalueofitsshareholders’equity.
Assets=Liabilities+ShareholderEquity
Thisiswhyitiscalleda"balancesheet",asthetwosidesmustbeequal.Youmayalsohearthisas"theleftequalingtheright."Ifthecompanyweretodissolve,thenitsdebtswouldbepaid,andanyassetsthatremainedwouldbedistributedtotheshareholdersastheirequity.Bankruptcyoccursinsituationswhereshareholderequityiszero,andthecompanyowesmoreliabilitiesthanitownsassets.
AnIncomeStatement(IS)showstherevenuesfrombusinessoperations,expensesofoperatingthebusiness,andtheresultingnetprofit(orloss)ofacompanyoveraspecificperiodoftime.Weusuallyseethisreportedquarterlyandannually.
BSandISastheyapplytoPools
Thepool’sbalancesheetlookverysimilar,excepttherearetwotopicswearegoingtospendsomemoretimeonlaterinthiscourse:InvestmentandReserves.Theseareuniqueitemstopoolsandinsurancecompanies.Poolsandinsurancecompaniesarerequiredtoretainhugeamountofcapitalasreservesforfutureclaimpayments(CaseReservesareforknownfuturepaymentsandIBNRReservesareforunknownfuturepayments).Thisextracapitalsitsinaninvestmentportfolioforyearsandyear,so‘Investments’isalargeticketitemforpoolsandinsurancecompaniestomonitor.
Second,thepool’sincomestatementisusuallycalled“StatementofOperationsandChangesinMemberSurplus.”Therearesomesubtledifferences,suchasrevenueisprimarilypremiumsorcontributions,butagain,wehavethesetwouniqueelementscalled"InvestmentIncome”and“ClaimsandLAE"(whichincludesCaseandIBNRreserves).
InvestmentIncome,listedontheincomestatements,isincomethatanorganizationreceivesasaresultofusingtherevenuetheygeneratetoinvestinvariousinvestmentvehiclestogenerateadditionalincome.So,poolshavetokeepallthismoneyinbothcaseandIBNRreservesforyearsandevendecades,butinthemeantimetheyareearningmoneyonthatmoney.
Asof12/31/14AssetsCash 3,500,000Investments 75,000,000PremiumsReceivable 600,000PrepaidExpense&otherAsset 2,000,000TotalAssets 81,100,000
LiabilitiesAccountsPayable&AccruedExpenses 3,000,000UnearnedPremiums 5,500,000CaseReserves(Loss&LAE) 25,000,000IBNRReserves 15,000,000TotalLiabilities 48,500,000
MembersSurplus 32,600,000
TotalLiabilitiesandSurplus 81,100,000
BalanceSheet
Reinsurance
Reinsuranceisessentially“insuranceforinsurancecompanies,”or,inourcase,“insuranceforpools”.Thepool’scoveragedocumentdefinescoverage,andthereinsurer“followstheform”ofthepool’scoveragedocument.Typically,controloftheclaimremainswiththepoolaswell,andthereinsurer“followsthefortunes”ofthepoolintermsofhowtheclaimisresolved.
Thebenefitsofreinsuranceare:• Yourabilitytocontroltheinterpretationandapplicationofthecoveragedocumentissuedtothemember• Makingyourowncoveragedecisions• Adjustingyourownclaims
Year2014OperatingRevenuesGrossPremiumsEarned 42,000,000ReinsurancePremiumsCeded (5,200,000)OtherIncome 43,000TotalOperatingRevenues 36,843,000
Non-OperatingRevenuesInvestmentIncome 3,250,000ChangeinInvestmentFairValue (1,500,000)TotalNon-OperatingRevenues 1,750,000
TotalRevenues 38,593,000
OperatingExpensesClaimsandLAE 31,000,000ReinsuredRecovered,net (1,540,000)OtherAdministrativeExpenses 7,450,000InterestExpense 245,000TotalExpenses 37,155,000
NetChangeinMemberSurplus 1,438,000
MemberSurplus-Beginning 31,162,000MemberSurplus-End 32,600,000
StatementofOperationsandChangesinMbrSurplus
ExcessInsurance
Coverageabove,orin“excess,”ofwhatyourpoolprovides.Theinsurancesellerwritesthepolicyasanadditiontothepool’scoverage,determinesitsowncoverageandcontrolstheclaims.
Thebenefitsofexcessinsuranceare:• Itmaybeeasiertoobtain,includingavailablecheaperandhigherlimits• Itrequireslessexpert/brokerorstaffinvolvement• Coverageandpaymentsareavailableregardlessoftheunderlyingcoverageofthepool
Year2014OperatingRevenuesGrossPremiumsEarned 42,000,000ReinsurancePremiumsCeded (5,200,000)OtherIncome 43,000TotalOperatingRevenues 36,843,000
Non-OperatingRevenuesInvestmentIncome 3,250,000ChangeinInvestmentFairValue (1,500,000)TotalNon-OperatingRevenues 1,750,000
TotalRevenues 38,593,000
OperatingExpensesClaimsandLAE 31,000,000ReinsuredRecovered,net (1,540,000)OtherAdministrativeExpenses 7,450,000InterestExpense 245,000TotalExpenses 37,155,000
NetChangeinMemberSurplus 1,438,000
MemberSurplus-Beginning 31,162,000MemberSurplus-End 32,600,000
StatementofOperationsandChangesinMbrSurplus
PoolingBasicsSession#2b–RiskManagement,TheFutureofPooling,andQuestions&Answers
Tuesday,October4,11:00-12:15pmRiskManagementinthePoolingContext"Riskmanagement"isacorefunction–somewouldsayTHEcorefunction–ofpools.Mostdefinitionsofriskmanagementinvolvetheprocessoftheidentification,assessment,andtreatmentofrisk,where"risk"isuncertaintyandusuallyviewedasnegative,asinthepossibilityofloss,damage,orharm.Youwillhearreferencestoanumberofprograms,activitiesorfunctions,allofwhichareformsofriskmanagement.Someofthemorecommoninclude:
• Lossprevention:Referringtoeffortstokeepbadoutcomesfromhappeninginthefirstplace,oftenthroughbettertrainingofemployeestoavoidinjurytothemselvesorothers;adoptionandenforcementofgoodpoliciesforpublicofficialstofollow;wellnessprogramstoimproveemployeehealth;anduseofpreventivemaintenanceprogramsforpropertiesandpublicinfrastructure.
• Losscontrol:Referringtoeffortstoreducethesizeofanylossthatdoesoccur,throughpromptreporting,proactiveclaimmanagement,andpostincidentoraccidentreview.
• Safety:Mostcommonlyassociatedwithemployeeon-the-jobinjuryprevention,butalsoapplicabletocreatingandassuringsafeenvironmentsforthepublic,orsafeoperationofvehiclesorequipment.
• Training:Agrowingareaofactivityforpools,especiallyusingnewtechnologyforefficiency,andoftentoincludecomplianceissues.
Oneofthemostimportant,yetchallenging,aspectsofriskmanagementisdetermininghowmuchtoinvestinriskmanagementprogramsandservices(i.e.measuringtheireffectiveness).Howdoyouknowifthespecificinvestmentsactuallyhadanimpactonthelosscosts?Maybethereductionwouldhavehappenednomatterwhat.Maybeitisjustgoodluck.CreatingaCultureofRiskManagementPerformanceimprovementprotocols:Toencouragetherightbehavior–andforthebenefitoftherestofthemembership–poolsadoptprogramsthatrequirememberstomakechangesinordertostayinthepool,andevenrefuserenewal,ifnecessary.Thismightalsotaketheformofincentivizedpricingforthosemembersofthepoolsthatadheretostrictsafetypracticesorrecommendedchangestoexistingpolicies.Casestudies:Sharingthepositiveresultsofonememberwithothers,andleveragingpilotprogramsacrossthewholepoolmembership,isanaturalwayforpoolstoimprovetheirriskmanagementculture.Dataanalysis:Poolsnowhave20to40yearsofdata,andtoolstobetteranalyzethedata,tounderstandwhatworks,andwhatdoesn't,thatcanhelpthepoolengageitsmembersinthevalueofriskmanagement.TheFutureofPublicEntityPoolingWhatdoesthefuturehold?That’satoughquestion,butAGRiPhastakenthestepstoensurewestartthinkingaboutthefutureinadisciplinedway.ThroughourResidentFuturistRebeccaRyan,wecanbrieflytalkaboutfoursegmentsofthefuturethatwillaffectpooling(and,notinsignificantly,therestofourlives,aswell).GenerationalShiftsAstheBabyBoomergenerationmovestowardsretirement,theoriginalfoundersofthepoolingmovementwillbetakingalltheirinstitutionalknowledgewiththiswhentheyleavethepool.Additionally,anationwideshortageofGenerationX’erstoreplacethemwillleadanemployee’smarketforemployment.Poolswillhavetoremaincompetitivetoretainthebeststaffing,andcontinuetoinnovatetointerestyoungerworkers.
TechnologyThereisnodoubtthattechnologyhasandwillcontinuetochangeourlivesandourbusinessmodels.But,howso?Whocouldhavepredicted20yearsagohowtheInternetandsocialmediawouldfundamentallychangebusinessmodelscenturiesold?So,whatisnext?Noonecansayforcertain,butit’sagoodbettogoaskyourinternwhatheorshethinks…LeadershipChangesAsthepoolingstaffturnsoverinfavorofayounger,moretechnologicallymindedemployee,poolmanagementneedstocontinuetoengagenotonlythem,butthepoolmemberrepresentatives,aswell.On-sitemeetings,mailedflyers,andphysicallocationsarenolongerimportant.Newmanagersmustintegratenewmethodstoengagenewemployeesandconstituencies.Newmanagersmustharnessthepowerofinformationanddisseminateittoeveryoneseamlesslyandconstantly.CatastrophicWeatherIrregardlessofwhocausedit,thereislittledoubtthatweatherpatternsarechangingfromhistoricaldata.Patternsarebecomingmoreerraticandsevere,andcatastrophicweatherisplaguingareaswherepreviouslytherewasnone.Aspoolsgrapplewiththeseenormouslossevents,riskmanagersandunderwritershavetore-doubletheireffortsandre-thinkwhatwaspreviouslyimprobable.Moregenerally,poolsneedtoleadthechargeofinfluencingpublicentitiestore-thinktheirinfrastructure,maintainedproperties,andsocialservices.
