ORSA for Captives. Vermont Captive Insurance Association 2013 Annual Conference. Moderator: Sandy Bigglestone, Director of Captive Insurance, VT DFR

Transcription

1 ORSA for Captives Vermont Captive Insurance Association 2013 Annual Conference Moderator: Sandy Bigglestone, Director of Captive Insurance, VT DFR Panelist: Joelle Hren, VP, American Excess Insurance Exchange RRG Panelist: Tim Cremin, FCAS, MAAA, Consulting Actuary, Milliman, Inc. August 15, VCIA All Rights Reserved

2 Presentation Outline Three perspectives: Regulatory Captive Owner Actuarial 1

3 Regulatory Perspective 2

4 ORSA? 3

5 Introduction to Own Risk and Solvency Assessment (ORSA) - Regulatory Perspective Background Solvency II and IAIS ICPs (European regulation) Solvency Modernization Initiative (NAIC & U.S. regulation) NAIC Model Act and Guidance Manual for ORSA Companies subject to ORSA (premium threshold, or circumstantial exceptions) Testing phase and effective date Primary goals and requirements Links: Model Act: Guidance Manual: 4

6 Requirements under ORSA Conduct an ORSA (in both a normal and stressed environment) Internally document the process and results Provide a high-level ORSA Summary Report annually to the Commissioner 5

7 Potential Benefits of ORSA to Captives and Risk Retention Groups Financial Analysis Risk-Focused Examinations Group Supervision Confidentiality Establish a measurable business risk plan Overall purpose: Identify strengths and weaknesses 6

8 Captive Perspective 7

9 American Excess Insurance Exchange Risk Retention Group ( AEIX ) Who is AEIX Vermont domiciled group captive risk retention group formed in 1990 for non-profit healthcare systems Provides high excess (catastrophic) professional and general liability insurance Managed by Premier, Inc., a collaborative healthcare alliance of more than 2,800 member hospitals and health systems and 93,000-plus other healthcare sites whose mission is to improve the health of communities 8

10 American Excess Insurance Exchange Risk Retention Group ( AEIX ) AEIX s Mission Provide hospitals and health systems access and availability to professional liability insurance coverage Provide long-term premium stability Achieve superior underwriting performance independent of market cycles through unique claims management, risk and quality programs. 9

11 How Does AEIX Assess Capital Needs? Traditional Assessment Risk Based Capital Underwriting Risk Asset Risk Credit Risk 10

12 How Does AEIX Assess Capital Needs? AEIX Assessment 23 Years of medical malpractice experience Market cycles Economic cycles Investment cycles Medical malpractice frequency and severity cycles Respect the volatility is it a trend or is it an outlier? Underwriting risk is primary focus Write $40M in per claim policy limits, retain $20M per claim Average self-insured retention is $5.5M Average AEIX claim payment is $5M Largest AEIX claim payment is $17.5M ($22.5M ground-up) 11

13 How Does AEIX Assess Capital Needs? AEIX Assessment (continued) How much surplus is enough? It is not zero It is not more usually Considerations Number 1 Goal, ALWAYS = pay all claims Long tailed line of business with the statute of limitations up to 18 years in some states 12

14 How Does AEIX Assess Capital Needs? AEIX Assessment (continued) Considerations Second Goal = create value for owners Educate and inform Board, operate with full financial transparency Can AEIX generate better returns with more surplus than the owner can? Trade-off retaining capital versus returning capital» Requires informed and experience judgment of the risk of failure versus the owners demand for returned capital 13

15 AEIX Surplus Adequacy Giving back (dividends) is nice, asking for more (capital contribution) can be deadly High risk tolerance (underwriting and investments) 350% of company action level is floor Annual DFA modeling, review risk/reward tradeoffs of risk retention/risk transfer and asset allocations AM Best BCAR modeling and peer comparisons 14

16 AEIX Surplus Adequacy (continued) AEIX frequency and severity trends combined with subjective analysis of the current and future state of the medical malpractice marketplace Strategic priorities and initiatives, risk mitigation projects Detailed and conservative dividend policy focused on long term commitment 15

17 Actuarial Perspective 16

18 Breaking Down ORSA O = Own Your own unique risk profile Not a one-size-fits-all regulatory template A = Assessment = Measurement Measure what? R and S = Risk and Solvency Measure how? Measure S using probability (of insolvency) Measure individual risks (R) as ratios of surplus Account for correlation when aggregating individual risks 17

19 The ORSA Framework Identify the major risks Establish a process for measuring the major risks Manage and mitigate the major risks Document the process and results 18

20 Example Captive Program Single-parent captive Captive insures casualty program deductibles (WC, GL, AL) $250,000 per occurrence deductible/retention Approximately 1,000 claims per year Average claim size = $10,000 $10 million of annual expected losses $2.5 million of surplus 19

21 Identifying the Major Risks Primary concerns Unexpected increases in claim frequency and severity could threaten solvency Cost of insurance above the $250,000 retention Fronting carrier solvency Parent s operational and strategic risks 20

22 Identifying the Major Risks Lower level of concern for this program One-time large loss event Asset value and liquidity risk Captive s operational and strategic risks (e.g., claims administration, loss of business due to competitive market forces) 21

23 Measuring the Major Risks Ongoing process (at least annually) - not a one-time exercise Document and track changes over time Measuring strategic and operational risks Correlation among risks 22

24 Measuring the Major Risks 1. Unexpected changes in claim frequency and severity threaten solvency 23

25 Effect of Claim Frequency on Surplus Example Captive Program: Expected Losses 10,000,000 Surplus 2,500,000 Percent Probability Claim Above Level Ultimate Impact on Percent of Counts Expected (Poisson) Losses Surplus Surplus 1,000 0% 50% 10,000, % 1, % 79% 10,250,000 (250,000) -10% 1, % 94% 10,500,000 (500,000) -20% 1, % 99% 10,750,000 (750,000) -30% Leverage Ratio = 4 to 1 24

26 Measuring the Major Risks 2. Cost of insurance above the $250,000 deductible/retention Cost/Benefit analysis of higher retentions Get quotes for higher retentions Compare savings in excess layers to additional losses retained Evaluate additional losses retained at the expected level and also at higher confidence levels (for example, losses at the 75 th, 90 th, and 95 th percentile levels) Take into consideration the additional capital needed to support a higher retention 25

27 Retention Level Analysis Retention: ,000 (1) Expected Retained Losses 10,000 11,150 11,500 (2) Excess Insurance Premium 2, (3) Expected Cost of Risk 12,000 11,800 11,625 (4) 90th Pctile Retained Losses 12,500 14,500 16,000 (5) Excess Insurance Premium 2, (6) 90th Pctile Cost of Risk 14,500 15,250 16,125 (7) Capital Required, (4) - (1) 2,500 3,350 4,500 (8) Capital for Layer 850 1,150 (9) Change in Excess Premium 1, (10) Change in Expected Losses 1, (11) Margin in Premium, (9) - (10) (12) Ratio of Margin to Capital for Layer, (11)/(8) 24% 15% (13) Internal Cost of Capital 15% 15% 26

28 Manage and Mitigate the Major Risks Cost of insurance above the $250,000 retention: Increase the retention (based on the retention level analysis) Evaluate mitigation strategies in the context of risk appetite What probability of insolvency is the company (and the regulator) willing to tolerate? What percent of surplus is the company willing to risk on a single claim? 27

29 Document the Process and Results Ongoing process (at least annually) - not a onetime exercise Integrate with business plan, tax and cash flow planning, cost of capital analysis, pro forma financial projections, actuarial analyses, etc. Integrate with parent s enterprise risk management program 28

30 Document the Process and Results ORSA Summary Report What are the major risks and how were they identified? How are the major risks measured? What are the results and how have they changed over time? How are they expected to change in the future? How are the major risks currently mitigated and what are the options for further mitigation? Cost versus benefit of further mitigation 29

31 Questions? 30

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