Benchmarking is useful in loss reserving and ratemaking assignments from at least two perspectives. First, to the extent a program’s loss development data is not of sufficient size to be fully reliable, benchmarks are needed to supplement the information to make reliable estimates of unpaid claims liabilities. Second, once an analysis is complete, benchmarking your program’s results to others (i.e., competitors, peer companies or industry aggregates) is useful for comparison purposes.

The benchmarks used to supplement your data are only as good as the nature of the underlying data. A benchmark for commercial auto liability, for instance, may not be predictive of an insurance program for tow truck operators as the former is very broad and the latter is a very narrow business class. Likewise, a benchmark loss development pattern based on countrywide data may not be predictive of future loss emergence of a book of business in California. Pinnacle strives to construct benchmarks for any given analysis as close as possible to replicating the nature of the underlying data being reviewed.
 

Nothing can save money and secure customer satisfaction like superior claims service. Whether your claims organization is state-of-the-art or facing some challenges, the secret to improving the claims process lies within the information you already have. With the help of new data analysis techniques, you can better understand how key factors such as reporting delays, vendors, independent adjusters, attorney involvement, injury type and claimant characteristics impact your claims process.

Claims predictive analytics services include:

• Developing claims settlement value estimation models based on claim characteristics at various points of the claims process
• Creating an “early warning system” for identifying large and extraordinary claims
• Analyzing industry claims data sources to estimate the impact of law and regulation changes
• Evaluating claims service providers to determine their value
• Identifying report, contact and settlement lags to determine their effect on claim settlement values
• Developing a fraud detection system

Assessing the reasonableness of indicated loss and loss adjustment expense reserves after the analysis is completed is an essential element of the loss reserve analysis. In particular, measures such as loss ratios, changes since the prior evaluation, implied claim frequencies and severities and costs per unit of exposure are a few of the diagnostic tests employed when considering the reasonableness of indicated reserves.

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.

Pinnacle represents the interests of both buyers and sellers of blocks of business. At other times, our independent analysis is used as a reference point between competing valuations of the unpaid claims obligations. Regardless of the viewpoint, our analysis will reflect an independent evaluation of a program’s indicated unpaid claims liabilities often reflecting provisions for the time value of money (i.e., discounting) and uncertainty (risk margins).

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)

Commutation pricing often requires an actuarial review of the net present value of the outstanding losses to the treaty. Pinnacle provides extensive experience in reinsurance reserving and treaty analysis needed for commutations pricing. Pinnacle can estimate the value of the commutation and help negotiate the commutation pricing.

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.

Our experience goes beyond typical actuarial functions to risk and product management and underwriting. Pinnacle is uniquely qualified to assist in reinsurance underwriting audits. Many of our consultants have experience as underwriters, risk managers and product managers. In addition, our actuaries have extensive experience using and interpreting the results of vendor catastrophe models. We can help you understand and validate the underlying exposure data used by the catastrophe models ensuring accurate results.

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.

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.