THE COMIC-CON OF RISK FINANCING

THE COMIC-CON OF RISK FINANCING RIF006 Speakers: Barbara Benson, VP Risk Solution, Willis Towers Watson Scott Silitsky, VP Risk Management, thyssenkrupp Elevator Corporation

Learning Objectives At the end of this session, you will: Learning Objective 1 Incorporate risk finance terms and tools into your skill set Learning Objective 2 Understand how to use risk financing assessment tools Learning Objective 3 Practice effective communication of risk finance concepts

Agenda Introduction Basic Loss Development Loss Forecasting Accrual Analysis Risk Financing

Basic Loss Development Purpose: To use the growth patterns of historical losses to predict ultimate losses on policy years that are still open and developing Sources of Loss Development Factors Industry-provided Insurance carriers Rating bureaus Independent consultants\ Actuaries Organization-specific

Loss Development Casualty Coverage s Workers compensation Automobile liability General liability Products liability Loss Development Triangles Types of triangles Incurred loss development Paid loss development Frequency loss development Per occurrence retention Limited Unlimited

Incurred But Not Reported (IBNR) Claims IBNR caused by Delay between occurrence and reporting of claim Actual amount for which claim will settle is unknown Indeterminate amount of time between a claims first report and when all activity on that claim ceases

Comic-Con Enterprises Loss Run Summary Valuation Date: 12/31/2009 Valuation Date: 12/31/2013 Policy Period Incurred Paid # Claims Policy Period Incurred Paid # Claims 1/1-12/31/09 352,429 150,254 120 1/1-12/31/09 715,846 625,000 152 1/1-12/31/10 554,123 498,741 149 Valuation Date: 12/31/2010 1/1-12/31/11 1,344,098 1,300,000 160 Policy Period Incurred Paid # Claims 1/1-12/31/12 980,544 758,474 165 1/1-12/31/09 459,510 274,587 150 1/1-12/31/13 816,337 321,587 135 1/1-12/31/10 276,952 145,210 101 Valuation Date: 12/31/2014 Valuation Date: 12/31/2011 Policy Period Incurred Paid # Claims Policy Period Incurred Paid # Claims 1/1-12/31/09 718,434 701,058 152 1/1-12/31/09 591,215 525,112 152 1/1-12/31/10 564,587 525,000 149 1/1-12/31/10 393,833 312,541 140 1/1-12/31/11 1,488,670 1,356,987 161 1/1-12/31/11 592,449 256,874 130 1/1-12/31/12 1,322,208 1,254,123 167 1/1-12/31/13 1,104,286 645,874 160 Valuation Date: 12/31/2012 1/1-12/31/14 402,087 195,120 105 Policy Period Incurred Paid # Claims 1/1-12/31/09 659,874 565,899 152 Valuation Date: 12/31/2015 1/1-12/31/10 500,123 478,001 148 Policy Period Incurred Paid # Claims 1/1-12/31/11 1,053,915 501,245 155 1/1-12/31/09 718,434 718,434 152 1/1-12/31/12 644,873 295,741 140 1/1-12/31/10 570,145 545,879 149 1/1-12/31/11 1,588,127 1,485,214 161 1/1-12/31/12 1,549,531 1,301,258 170 1/1-12/31/13 1,087,525 1,001,234 175 1/1-12/31/14 578,368 418,547 145 1/1-12/31/15 402,966 150,145 99

Comic-Con Enterprises Incurred Loss Triangulation-WC Incurred Loss Triangle Policy Elapsed Months from Inception Year 12 24 36 48 60 72 84 1/1-12/31/09 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/10 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/11 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/12 644,873 980,544 1,322,208 1,549,531 1/1-12/31/13 816,337 1,104,286 1,087,525 1/1-12/31/14 402,087 578,368 1/1-12/31/15 402,966

Comic-Con Enterprises Incurred Loss Triangulation-WC Incurred Loss Triangle Policy Elapsed Months from Inception Year 12 24 36 48 60 72 84 1/1-12/31/09 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/10 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/11 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/12 644,873 980,544 1,322,208 1,549,531 1/1-12/31/13 816,337 1,104,286 1,087,525 1/1-12/31/14 402,087 578,368 1/1-12/31/15 402,966 Incremental Growth Triangle Policy Elapsed Months from Inception Year 12 24 36 48 60 72 84 1/1-12/31/09 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/10 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/11 1.000 1.779 1.275 1.108 1.067 1/1-12/31/12 1.000 1.521 1.348 1.172 1/1-12/31/13 1.000 1.353 0.985 1/1-12/31/14 1.000 1.438 1/1-12/31/15 1.000 24 month incurred losses = 12 month incurred losses 578,368 402,087 = = 1.438

Comic-Con Enterprises Incurred Loss Triangulation-WC Incurred Loss Triangle Policy Elapsed Months from Inception Year 12 24 36 48 60 72 84 1/1-12/31/09 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/10 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/11 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/12 644,873 980,544 1,322,208 1,549,531 1/1-12/31/13 816,337 1,104,286 1,087,525 1/1-12/31/14 402,087 578,368 1/1-12/31/15 402,966 Incremental Growth Triangle Policy Elapsed Months from Inception Year 12 24 36 48 60 72 84 1/1-12/31/09 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/10 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/11 1.000 1.779 1.275 1.108 1.067 1/1-12/31/12 1.000 1.521 1.348 1.172 1/1-12/31/13 1.000 1.353 0.985 1/1-12/31/14 1.000 1.438 1/1-12/31/15 1.000 EMFI 12 24 36 48 60 72 84 Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000 Average all policy years

Comic-Con Enterprises Incurred Loss Triangulation-WC Incurred Loss Triangle Policy Elapsed Months from Inception Year 12 24 36 48 60 72 84 1/1-12/31/09 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/10 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/11 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/12 644,873 980,544 1,322,208 1,549,531 1/1-12/31/13 816,337 1,104,286 1,087,525 1/1-12/31/14 402,087 578,368 1/1-12/31/15 402,966 Incremental Growth Triangle Policy Elapsed Months from Inception Year 12 24 36 48 60 72 84 1/1-12/31/09 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/10 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/11 1.000 1.779 1.275 1.108 1.067 1/1-12/31/12 1.000 1.521 1.348 1.172 1/1-12/31/13 1.000 1.353 0.985 1/1-12/31/14 1.000 1.438 1/1-12/31/15 1.000 EMFI 12 24 36 48 60 72 84 Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000 Adjusted Inc. Avg. 1.000 1.408 1.295 1.126 1.057 1.007 1.000 Remove any irregular averages

Comic-Con Enterprises Incurred Loss Triangulation-WC Incurred Loss Triangle Policy Elapsed Months from Inception Year 12 24 36 48 60 72 84 1/1-12/31/09 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/10 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/11 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/12 644,873 980,544 1,322,208 1,549,531 1/1-12/31/13 816,337 1,104,286 1,087,525 1/1-12/31/14 402,087 578,368 1/1-12/31/15 402,966 Incremental Growth Triangle Policy Elapsed Months from Inception Year 12 24 36 48 60 72 84 1/1-12/31/09 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/10 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/11 1.000 1.779 1.275 1.108 1.067 1/1-12/31/12 1.000 1.521 1.348 1.172 1/1-12/31/13 1.000 1.353 0.985 1/1-12/31/14 1.000 1.438 1/1-12/31/15 1.000 EMFI 12 24 36 48 60 72 84 Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000 Adjusted Inc. Avg. 1.000 1.408 1.295 1.126 1.057 1.007 1.000 Cumulative Average 1.000 1.408 1.823 2.052 2.169 2.184 2.184 Multiply each consecutive incremental average by the previous cumulative average

Comic-Con Enterprises Incurred Loss Triangulation-WC EMFI 12 24 36 48 60 72 84 Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000 Adjusted Inc. Avg. 1.000 1.408 1.295 1.126 1.057 1.007 1.000 Cumulative Average 1.000 1.408 1.823 2.052 2.169 2.184 2.184 Multiply each consecutive incremental average by the previous cumulative average Step 1: 12 month cumulative average X 24 month incremental average 1.000 X 1.408 = 1.408 Step 2: 24 month cumulative average X 36 month incremental average 1.408 X 1.295 = 1.823 Step 3: 36 month cumulative average X 48 month incremental average 1.823 X 1.126 = 2.052 Step 4: 48 month cumulative average X 60 month incremental average 2.052 X 1.057 = 2.169 Step 5: 60 month cumulative average X 72 month incremental average 2.169 X 1.007 = 2.184

Comic-Con Enterprises Incurred Loss Triangulation-WC EMFI 12 24 36 48 60 72 84 Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000 Adjusted Inc. Avg. 1.000 1.408 1.295 1.126 1.057 1.007 1.000 Cumulative Average 1.000 1.408 1.823 2.052 2.169 2.184 2.184 EMFI 12 24 36 48 60 72 84 Development Factor 2.184 1.551 1.198 1.064 1.007 1.000 1.000 Step 1: 84 month cumulative average / 12 month cumulative average 2.184 / 1.000 = 2.184 Step 2: 84 month cumulative average / 24 month cumulative average 2.184 / 1.408 = 1.551 Step 3: 84 month cumulative average / 36 month cumulative average 2.184 / 1.823 = 1.198 Step 4: 84 month cumulative average / 48 month cumulative average 2.184 / 2.052 = 1.064 Step 5: 84 month cumulative average / 60 month cumulative average 2.184 / 2.169 = 1.007 Step 6: 84 month cumulative average / 72 month cumulative average 2.184 / 2.184 = 1.000

Comic-Con Enterprises Incurred Loss Triangulation-WC Development Factor 2.184 1.551 1.198 1.064 1.007 1.000 1.000 Discovery Schedule Cumulative 45.8% 64.5% 83.5% 94.0% 99.3% 100.0% 100.0% Incremental 45.8% 18.7% 19.0% 10.5% 5.3% 0.7% 0.0% Discovery Schedule = 1 / development factor

Discovery and Payout Patterns General/product liability Slowest patterns Longest tail because of investigation, litigation, and time lag between report and occurrence date Workers compensation Payout increases steadily over time Benefits are statutorily defined Duration of injury and amount of medical treatment unknown Automobile liability Relatively quick patterns Relatively no lengthy litigation

Loss Analyses Forecasting and Ultimate Liability Analysis Ultimate liability projections Adhere to accounting requirements regarding contingent liabilities Loss forecasting Internal budgeting Marketing purposes

WC Remaining Liability Projections Policy Year Comic-Con Enterprises (a) (b) (c) (d) (e) (a x b) (c - d) Loss Incurred Losses Development Paid Losses @ Remaining @ 12/31/15 Factor Ultimate Losses 12/31/15 Liabilities 1/1-12/31/09 718,434 1.000 718,434 718,434-1/1-12/31/10 570,145 1.000 570,145 545,879 24,266 1/1-12/31/11 1,588,127 1.007 1,598,815 1,485,214 113,601 1/1-12/31/12 1,549,531 1.064 1,648,625 1,301,258 347,367 1/1-12/31/13 1,087,525 1.198 1,302,747 1,001,234 301,513 1/1-12/31/14 578,368 1.551 897,261 418,547 478,714 1/1-12/31/15 402,966 2.184 879,900 150,145 729,755 Total 6,495,096 7,615,927 5,620,711 1,995,216

WC Loss Forecast Policy Year Comic-Con Enterprises (a) (b) (c) (d) (e) (f) (g) (a x b) (c x d) (e / f) Incurred Inflated Inflated Ult. Losses @ Ultimate Inflation Ultimate Number of Loss Per 12/31/15 LDF Losses Factor @ 7% Losses Employees Employee 1/1-12/31/09 718,434 1.000 718,434 1.606 1,153,648 700 1,648 1/1-12/31/10 570,145 1.000 570,145 1.501 855,634 800 1,070 1/1-12/31/11 1,588,127 1.007 1,598,815 1.403 2,242,421 900 2,492 1/1-12/31/12 1,549,531 1.064 1,648,625 1.311 2,161,011 950 2,275 1/1-12/31/13 1,087,525 1.198 1,302,747 1.225 1,595,921 975 1,637 1/1-12/31/14 578,368 1.551 897,261 1.1449 1,027,274 1,000 1,027 1/1-12/31/15 402,966 2.184 879,900 1.070 941,493 900 1,046 1/1-12/31/15 1,443,000 1.000 1,443,000 900 1,603 Assumptions: 1. Client specific loss development factors 2. No losses in excess of the per occurrence limit 3, Workers' compensation inflation rate = 7% per year 4. Forecast includes all policy years

Excluded WC Loss Forecast Comic-Con Enterprises Policy Year (a) (b) (c) (d) (e) (f) (g) (a x b) (c x d) (e / f) Incurred Inflated Inflated Ult. Losses @ Ultimate Inflation Ultimate Number of Loss Per 12/31/15 LDF Losses Factor @ 7% Losses Employees Employee 1/1-12/31/09 718,434 1.000 718,434 1.606 1,153,648 700 1,648 1/1-12/31/10 570,145 1.000 570,145 1.501 855,634 800 1,070 1/1-12/31/11 1,588,127 1.007 1,598,815 1.403 2,242,421 900 2,492 1/1-12/31/12 1,549,531 1.064 1,648,625 1.311 2,161,011 950 2,275 1/1-12/31/13 1,087,525 1.198 1,302,747 1.225 1,595,921 975 1,637 1/1-12/31/14 578,368 1.551 897,261 1.1449 1,027,274 1,000 1,027 1/1-12/31/15 402,966 2.184 879,900 1.070 941,493 900 1,046 1/1-12/31/15 1,116,000 1.000 1,116,000 900 1,240 Assumptions: 1. Client specific loss development factors 2. No losses in excess of the per occurrence limit 3, Workers' compensation inflation rate = 7% per year 4. Forecast excludes policy years 1/1-12/31/09 through 1/1-12/31/12

Risk Financing Determining the most cost-effective way to pay or fund for losses Risk Financing Continuum Guaranteed Cost Large Deductible Qualified Self- Insurance Captive Risk Transfer Risk Retention

Factors Influencing Design of Risk Financing Programs Expected losses Market conditions Corporate philosophy Risk control commitment Financial Position Geographical locations Loss payout patterns Effective tax rate Corporate ownership Cash flow comparisons

Terms Related to Cash Flow Comparisons Cash flow Using the net present value of alternative market quote to determine the most cost-effective program Investment income Fund losses at a discount, additional money will be added as interest is earned Varies by program and payout Once decision tool to select the ideal program Tax implications Need to consider when the losses and premium can be deducted from taxable income Various programs are treated differently Should involve corporate tax department

1/1-12/31/16 WC Guaranteed Cost Cash Flow Comic-Con Enterprises (a) (b (c) (d) (e) (f) (b x 34%) (b - c) (d x f) Month Premium Cash Flow Tax Effect After-Tax Cash Flow Discount Factor Discounted After Tax Cash Flow 1 125,000 42,500 82,500 1.0000 82,500 2 125,000 42,500 82,500 0.9967 82,231 3 125,000 42,500 82,500 0.9935 81,962 4 125,000 42,500 82,500 0.9902 81,695 5 125,000 42,500 82,500 0.9870 81,428 6 125,000 42,500 82,500 0.9838 81,163 7 125,000 42,500 82,500 0.9806 80,898 8 125,000 42,500 82,500 0.9774 80,634 9 125,000 42,500 82,500 0.9742 80,371 10 125,000 42,500 82,500 0.9710 80,109 11 125,000 42,500 82,500 0.9678 79,847 12 125,000 42,500 82,500 0.9647 79,587 Total 1,500,000 510,000 990,000 972,424 Assumptions: 1. Premium is paid in 12 monthly installments at the first of the month 2. Losses are discounted at a 4% discount rate 3. The effective tax rate is 34%

1/1-12/31/16 WC Self Insurance Cash Flow Comic-Con Enterprises Month Cumulative Payout Schedule Incremental Payout Schedule Paid Losss Letter of Credit Fee Excess Premium Claims Handling Admin. Expenses Fees & Assess. Total Cash Flow After-Tax Cash Flow Discount Factor Discounted After-Tax Cash Flow 1 0.09% 0.09% 1,004 5,000 8,333 50 5,000 2,500 21,888 14,446 1.0000 14,446 2 1.18% 1.09% 12,164 8,333 608 21,106 13,930 0.9967 13,884 3 2.35% 1.17% 13,057 8,333 653 22,043 14,549 0.9935 14,454 4 3.71% 1.36% 15,178 8,333 759 24,270 16,018 0.9902 15,862 5 5.34% 1.63% 18,191 8,333 910 27,434 18,106 0.9870 17,871 6 7.15% 1.81% 20,200 8,333 1,010 29,543 19,498 0.9838 19,182 7 9.15% 2.00% 22,320 8,333 1,116 31,769 20,968 0.9806 20,561 8 11.32% 2.17% 24,217 8,333 1,211 33,761 22,283 0.9774 21,779 9 13.85% 2.53% 28,235 8,333 1,412 37,980 25,067 0.9742 24,420 10 16.57% 2.72% 30,355 8,333 1,518 40,206 26,536 0.9710 25,767 11 19.47% 2.90% 32,364 8,333 1,618 42,316 27,928 0.9678 27,030 12 22.64% 3.17% 35,377 8,333 1,769 45,479 30,016 0.9647 28,956 Subtotal 22.64% 252,662 5,000 100,000 12,633 5,000 2,500 377,796 249,345 244,212 24 47.73% 25.09% 280,004 3,868 14,000 297,873 196,596 0.9460 185,970 36 79.29% 31.56% 352,210 2,614 17,610 372,434 245,806 0.9096 223,578 48 83.31% 4.02% 44,863 1,036 2,243 48,142 31,774 0.8746 27,789 60 90.29% 6.98% 77,897 835 3,895 82,626 54,533 0.8409 45,860 72 97.58% 7.29% 81,356 486 4,068 85,910 56,700 0.8086 45,848 84 100.00% 2.42% 27,007 121 1,350 28,479 18,796 0.7775 14,614 Total 100.00% 1,116,000 13,958 100,000 55,800 5,000 2,500 1,293,258 853,550 787,871

Sensitivity Analysis How do optimistic and pessimistic loss projections alter the net present value decision of the various program alternatives? $1,600,000 $1,400,000 $1,505,963 Net Cash Flow $1,200,000 $1,000,000 $800,000 $600,000 $400,000 972,424 972,424 972,424 $787,871 $428,825 Self Insurance Guaranteed Cost $200,000 $0 Optimistic Expected Pessimistic Loss Scenario

In Conclusion Key Points Loss development Loss analysis Cash flow comparisons Questions