Single Parent Risk Retention Group

Transcription

1 Single Parent Risk Retention Group Gary Osborne, President - USA Risk Group Mike Meehan, Consultant - Milliman, Inc.

2 Liability Risk Retention Act 1986 Federal Act allowing an insurance company licensed in 1 state to write in all 50 No definition of group Industry and Regulators consensus is more than 1 Industry has used Humana model to benefit companies with subsidiaries to utilize the LRRA

3 Which Industries? Healthcare Hospitals Nursing Homes Transportation Trucking Car Rental Taxis

4 Why? Speed to Market Rate & Form flexibility Hard Cost Savings (Fronting Fees, Commission) Collateral Reduction Regulatory Compliance Access to Reinsurance

5 Cons Regulator Resistance (CA, NY and others) Pre Funding as opposed to pay as you go Market Resistance Rating Requirements NAIC accreditation standards

6 Example Trucking $10m loss pick $1m AL policy with $1m deductible Premium $700,000, collateral $25m (3 yrs) RRG $250k xs $750k Premium $750k, Capital $1.5m Collateral benefit (as old program expires - $23.5m) Capital is subject to regulatory approval and would need a strong parent financial position

7 Agenda Recent Industry Trends for CAL Actuarial Analysis for Single Parent RRG Additional Considerations 7

8 Reasons to Form a Single Parent RRG Same as those as forming a traditional captive insurance company and could include: - Reducing Cost of Risk - Underwriting Profits and Expense Reduction - Increase in Flexibility (Control) - Coverage, policy wording, administration, rates. - Market Conditions *** 8

9 Insurance Industry Trends - CAL Growth in Direct Written Premium 10.0% 9.3% 8.0% 6.0% 4.0% 2.0% 2.9% 2.0% 3.9% 4.3% 3.3% 5.5% 5.0% 0.0% 0.0% -2.0% -4.0% % Commercial Auto All Lines 9

10 Insurance Industry Trends - CAL 100.0% Commercial Auto Direct Calendar Year Loss & DCC Ratios 90.0% 80.0% 70.0% 73.3% 83.3% 81.7% 76.9% 70.4% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Texas New York Florida California Countrywide

11 Insurance Industry Trends - CAL 85.0% Net Accident Year Loss & LAE Ratios 80.0% 79.0% 76.8% 75.0% 74.9% 74.3% 71.8% AS Year 2010 AS Year 2011 AS Year % AS Year 2013 AS Year % 60.0%

12 Insurance Industry Trends - CAL 1,000,000 Commercial Auto Liability - 1 year Reserve Development 800, , , ,000 0 (200,000) AS Year 2010 AS Year 2011 AS Year 2012 AS Year 2013 AS Year 2014 (400,000) (600,000) (800,000) (1,000,000) 12

13 RRG Feasibility Study Considerations: What risks is my organization facing? What is the best way to manage my risks? Transfer Retain Finance *** 13

14 What Goes into a Feasibility Study? Basic Information Company specific Goals Constraints Operational Account background Management (claims and risk) 14

15 What Goes into a Feasibility Study? Loss Information Electronic Detailed claim run Large loss listing (outliers) Exposures Historical and prospective (vehicles, miles, sales, etc.) Descriptions/locations 15

16 What Goes into a Feasibility Study? Expense Analysis Will vary by Type of program Domicile Other Assumptions Challenges Single Entity Versus Group Program 16

17 Loss Analysis Review of Past Loss Experience Actuarial Adjustments Internal Factors (e.g. loss control) External Factors (e.g. laws) Loss Rate = Losses per unit of Exposure Expected Losses = Loss Rate x Expected Exposures Probability Levels 17

18 Expense Analysis Fronting Fees Reinsurance Claims Administration, Loss Prevention Commission & Brokerage Management Fees Legal, Audit, Actuarial, & Consulting Letter of Credit Other (Travel, Board Meeting, D&O) Taxes & Assessments 18

19 Other Assumptions (for Pro Forma Financial Projections) Premium Growth Capitalization - Amount and Form Rate of Return on Investments Loss Payout Pattern Income Taxes Adverse Scenario 19

20 What Comes Out of Feasibility Study Loss Rates/Loss Ratios/Premiums Expected Adverse Pro Forma Financial Statements Typically 5 Year Including loss payout projections Evaluation of Results 20

21 Evaluation of Results Adequacy of Capital Adequacy of Reserves (for LPT) Adequacy of Premium Minimum Number of Participants (for group) Solvency Measurements Premium / Surplus Reserves / Surplus 21

22 How Much Start-Up Capital Is Needed? Will Be Determined Based on: ürisks insured and limits provided üvariability of loss projections ürisk Margin / Selected probability level üprogram Setup / Potential for Assessments üfinancial strength of parent company üregulation / Regulator ** üother Factors 22

23 Other Considerations üexposures can be difficult to audit üsingle policy vs multiple policies ü Endorsements ühow to allocate dividends ühow to allocate assessments 23

24 Thank You! 24