Pinnacle helps alternative market risk owners, managers and service providers select risk retentions that optimize the balance between risk capitalization and market conditions. Often these are formal feasibility studies that involve future forecasts of the program’s profitability and solvency.

Helping you select a program structure that best suits your needs is a value added service. This advice is based on our work with the various forms of facilities, be they self-insurance, captives, Risk Retention Groups, pools or large deductible plans.

Pinnacle’s feasibility studies allow you to make informed decisions about the capitalization of your captive.

Pinnacle provides unique qualifications to assist in collateral negotiations. Loss reserve analyses prepared by Pinnacle may be used as a negotiating tool as it relates to the collateral associated with deductible and/or retentions maintained. Our approach is designed to maximize the usefulness of a program’s actual data. Our extensive expertise with alternative markets, self-insured programs and reinsurance provides us with valuable perspectives on the multitude of factors that can impact collateral negotiations.

Allocation of program costs by member is most equitable when the allocation mechanism uses three distinct elements – exposure, geographic cost differences and actual loss experience. Members with more exposure should pay more than smaller members. Members with operations in jurisdictions with higher than average insurance claims costs should pay more than members located in lower cost areas. Members with more losses per unit of exposure should contribute more than members with lower average costs. Our experience shows that the consideration of these three elements leads to cost allocations that are more broadly accepted by members than those that employ simple pro-rata or arbitrary divisions of overall costs.

Management sometimes wishes to reflect the time value of money in funding projections, accruals for unpaid claims liabilities and other valuations. The two most important parameters for doing so are the assumed interest rate and the underlying claim payment pattern. Assessing reasonable values for these parameters is not trivial as the interest rate may need an adjustment for risk while the claim payment pattern may not be readily available.

Once a dividend has been declared, the proceeds must be distributed equitably amongst the members.  Likewise, if an assessment is indicated, how will such monies be collected? The relative contribution of individual members to profitability of the group should factor heavily into any dividend calculation. Likewise, the assessments indicated for the program as a whole can be traced to the members giving rise to shortfalls in funding.

Indicated dividends may be formula driven, but determining the loss amounts to factor into the equation can be problematic. We generally focus on the actual experience of the individual member for such a determination. To the extent the loss information is not of a sufficient size to be credible from a statistical viewpoint, we would blend in the data for the program as a whole. A similar line of reasoning applies if/when assessments are needed to cover funding shortfalls.

Expenses for any insurance program are categorized as variable or fixed. Variable expenses include the cost of:

• Commissions, brokerage and/or royalty fees
• Taxes, licenses & fees (TL&F), including federal excise tax
• Provisions for underwriting profit and contingencies

Certain other expenses for alternative market programs are considered variable as well, including:

• Claims administration
• Excess and/or aggregate coverage costs
• Fronting fees
• Fees for other vendors (such as loss control)

Fixed expenses would include item fees for legal, captive management, auditing and actuarial services.

Ultimate losses in a loss reserve exercise may be broken down into two components – ultimate claim counts and ultimate average claim severities. Claim frequencies are affected by changes in coverage or product line mix or geographic diversity, safety culture, loss control efforts and employee education. Average claim severities typically trend upwards but may be influenced by risk management techniques such as managed care, vendor analysis, and attitudes towards early settlements. Pinnacle can help you review your claims experience to determine potential improvement areas to control rising costs.

Management often desires to be conservative when setting an accrual for unpaid claims liabilities. Routinely we employ a variety of methods to derive indicated accruals for unpaid claims liabilities at a variety of higher confidence levels to help you assess the potential variability in future loss outcomes. Using evaluation methods to reflect process risk, parameter risk and/or model risk, we can help you find out what you need to know about indicated reserves at specified higher levels of statistical confidence.

Future loss fund projections generally rely on commonly accepted actuarial methodologies, all of which contain certain assumptions regarding expected loss ratios, loss development patterns, retention levels, benefit levels, potential recoveries and trends in costs and exposures. The approach to projecting future losses will generally rely on past claims experience.

Typically there will be a subtle trade-off between stability and responsiveness. A stable method for producing loss fund projections will generally use more years of data in the experience period. A responsive method relies more on data for the past few years. The right balance will be dependent on a variety of factors, including the volume of underlying data, the coverage(s) involved, consistency of the data during the experience period and wishes of management.

Setting a reasonable accrual for unpaid loss and loss adjustment expense obligations is one of the most critical functions of management in preparation of a program’s financials. Performing such analyses is our bread and butter, but emphasis is always placed on using the program’s actual data to the maximum extent possible (rather than relying on external benchmarks) in order to reflect your program’s unique loss characteristics.

When necessary, we will rely on our library of industry, state and insurer/TPA specific benchmarks. These benchmarks allow us to derive reasonable estimates of the accrual for unpaid claims liabilities to the extent your program’s data is not of sufficient volume or reliability to be fully credible for analysis.

You expect your consulting actuary to interact daily with captive managers, auditors, fronting carriers, reinsurers and other service providers, presenting the analysis of the program’s liabilities for unpaid claims – generally the largest item on the Liability side of the balance sheet. Pinnacle leverages its good working relationships with dozens and dozens of service providers, regulators and managers in jurisdictions around the globe to your advantage.

Loss reserve projections generally take one of four forms:

• Point estimate of mean expected loss and loss expense reserves (i.e., “actuarial central estimate" or best estimate)
• Reasonable range of indicated loss and loss expense reserves
• Reserves at a specified higher level of statistical confidence
• Stochastic forecast of the range of all possible outcomes (i.e., a distribution of potential loss and loss expense reserve estimates)

Reinsurance loss reserving requires special skills and knowledge. The reinsurance reserving actuary must understand the unique nature of various reinsurance treaty types and their potential impact on reserve estimates. Pinnacle’s consultants understand reinsurance contract language and have the skill set required to properly evaluate reinsurance loss reserves.

Analysis of a program’s ceded reinsurance reserves can take several forms. A typical loss reserve analysis may first estimate indicated loss and loss adjustment expense reserves on a direct and assumed basis, then separately reviews indicated ceded reserves to determine indicated net reserves by subtraction. Other times, the analysis begins with net data and adds the indicated ceded reserves to develop estimates of amounts on a direct and assumed basis. The reinsurance program may combine elements of quota share, surplus share, excess of loss, aggregate excess, clash and catastrophe coverages.

Pinnacle’s approach to each loss reserve analysis is customized to the unique characteristics of each program. Differences in lines of coverage, number of exposure periods, gross versus net, annual or quarterly loss evaluations, and detail by state are different for virtually every assignment. We have found a predetermined loss reserving template doesn’t work efficiently for the unique characteristics of individual programs. Our templates are custom designed to accommodate your needs.

Rate level adequacy is an important feature of every successful insurance program. Reasonable projections of future loss and loss expenses underlie the determination of premium contributions, after reflecting expected expenses for the program. Considerations about future rate levels incorporate a large number of factors including expected trends in costs and exposures, loss development, changes in past and future benefit levels, impact of deductibles, appropriate loadings for assessments, expenses and underwriting profit.

Alternate considerations may include anticipated investment income, provisions for dividend returns, recoveries from deductibles, other insurance coverage (e.g., accidental death & disability) or excess recoveries.

The regulators reviewing the financial condition of the program will rely on the actuarial report in support of the program’s financial statements. There are occasions when a formal Statement of Actuarial Opinion (SAO) may be required as well. We provide such analysis and SAOs routinely and interact with regulators on an as needed basis.

Analysis of reinsurance contracts may focus on the relative cost versus coverage provided. Competing options quoted by excess carriers will have trade-offs from a cost/benefit viewpoint. A specific review of the proposed reinsurance contract may focus on the risk transfer elements of the coverage itself in order to determine whether or not it is a bona fide contract from an accounting viewpoint. A third analysis commonly requested relates to potential collectability problems with reinsurers.

Pinnacle’s consultants can help you realize your strategic objectives by helping you optimize your reinsurance program. We can provide an independent review of your reinsurance strategies to help you determine if you are meeting your reinsurance objectives -- whether those objectives are surplus relief or cost effectively managing underwriting variability.

Pinnacle’s experience and exposure-based pricing models evaluate all property and casualty lines. Our pricing models provide independent cost evaluations of both ceded and assumed reinsurance programs. We also provide additional pricing support during renewal season.

The level of risk assumed in any insurance program is critical to its long-term success. How much risk to assume is dependent on management attitudes, market conditions, expected costs for excess coverage and several other factors. The risk/reward trade-offs that accompany such considerations often relate to the capitalization level of the program itself and management’s appetite for risk.

The timely reporting requirements of financial results sometimes leads to a mismatch between the evaluation date of the data and the date shown on the financial statement. Projections of claim activity in the next few months are often requested to accommodate such time constraints. The roll forward projection of future expected loss and loss expense reserves is calculated based on interpolated loss and loss expense payment and reporting patterns. The assumption inherent in this approach is that actual claim activity in the roll forward period will not be materially different than projected.

An actuarial review of insurance programs in the alternative markets can include an evaluation of various service providers. These benchmarking exercises can assess claim reporting and settlement patterns; average case reserves; closed, report or ultimate claims severities for all claims or a specific claim type (e.g., lost time workers compensation claims); or a myriad of other metrics. Industry benchmarks, as well as results for similar programs, may be used in the analysis. Expense benchmarking of service providers for comparable programs can also be performed. Pinnacle strives to construct benchmarks that are as close as possible to the nature of the underlying data.

Certain jurisdictions require a formal Statement of Actuarial Opinion (SAO). Domestic property/casualty insurance companies must furnish an SAO in conjunction with their Annual Statement filings with state regulators each year. Likewise, risk retention groups, self-insured groups and captive insurance companies may be required to file an SAO with state regulators. Offshore domiciles such as Bermuda also require SAOs being filed periodically.

Pinnacle consultants are qualified and approved to prepare SAOs and know the requirements in each jurisdiction. We interact with regulators regularly to understand their needs and concerns. Pinnacle produces hundreds of formal Statements of Actuarial Opinion in any given year.
 

Trend refers to changes in the value of underlying exposure, premiums, claim counts or average claim severities. Future cost projections are heavily dependent on trend assumptions; factors may be developed either from a particular organization’s data, data from similar organizations or from benchmarks derived from broader sources. Trends may vary considerably depending on the line of coverage and/or exposure involved.