Interacting with auditors is an everyday occurrence for Pinnacle’s consultants. We must balance responsiveness to the auditor's needs with the need to represent the interests of the program in a professional manner. Generally accepted actuarial procedures often lead to varying opinions on the indicated unpaid claims liabilities, so the actuary provides documentation in the report supporting the analysis sufficient to satisfy the auditors that the assumptions used and conclusions reached are reasonable and supported by the data.  Pinnacle consultants deal with auditors daily and our work products routinely pass scrutiny by auditors both large and small.

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.
 

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.

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.

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.

Pinnacle provides financial examination support to many state insurance departments. This support is usually peer review or independent loss evaluations and loss adjustment expense reserve liabilities.

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.

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)

Developing net loss reserves often requires an estimate of ceded loss reserves and distinct knowledge and skills. Pinnacle has the special skills and knowledge to understand the unique nature of various reinsurance treaty types and their potential impact on loss reserve estimates.

We have prepared pro formas for start ups and insurance department-required due diligence for mergers and acquisitions.

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.

Information coming soon.

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.

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.