Total Cost of Risk: The Captive Focus Hugh Rosenbaum, Retired Principal, Towers Watson Jim Blinn, Executive Editor of RIMS Benchmark Survey and EVP of Advisen Ltd. Joel Chansky, Principal, Milliman James Snell, Director of Risk Management, MAC Risk Management Tuesday, March 8, 2016 11:15am-12:15pm
What is Total Cost of Risk (TCOR)? Premiums Retained Losses Administration Expenses
Treatment of Captives Issues in Calculation Premiums paid to a captive, including fronting Premium or retained loss? Reinsurance premiums paid by the captive Losses retained in a captive Risk margins in a captive? Other captive administrative costs?
Chronology of the RIMS Benchmark Survey 1979: Cost of Risk Survey was started by RIMS and Risk Planning Group/Tillinghast 1996: RIMS Benchmark Survey conducted by RIMS and Ernst & Young 2002: Advisen Ltd. & RIMS partner 2003: Advisen Ltd. puts the results of the survey online
TCOR vs Insurer Operating Ratio
Benchmarking Results Printed Book Online Benchmarking
Data We Collect Demographics & Exposure: Revenue, Insured Property Value, Number of Employees, Payroll, Vehicles, Total Assets. Policy Information: Line of Coverage, Effective/Expiration Date, Insurance Company, Premium, Limit, Retention/Attachment Point. Retained Loss Information: By Line of Coverage Administration Expense: Broker Costs, TPA Fees, Risk Management Department Costs.
The Captive Questions Do we know if an insurer is a captive? Does the Captive have a DUNS Number? Should we treat the Premiums paid to the Captive as Premiums? As Retained Losses? Do we know anything else about the Captive such as: Fronting Fees Reinsurance Costs Administrative Costs
Technical aspects Components of Cost of Risk: Static versus Dynamic Different Methods to Calculate Cost of Retained Losses Examples
Static versus Dynamic Components Static Premium General and Administrative Expenses Dynamic the uncertain part of cost of risk Retained Losses constantly changing; updated at least annually by the captive s actuary based on most recent claim activity and updated assumptions/inputs
Static versus Dynamic Components Retained Losses Incurred but not reported (IBNR) reserves are a big part of the uncertainty, but are not all of it Risk margins Discounting to present value Range of reserves
Estimated Ultimate Loss & ALAE (in $000's) Examples of Fluctuations in Losses Ultimate Losses Over Time 37,000 35,000 33,000 31,000 29,000 27,000 25,000 23,000 21,000 AY 2011 AY 2012 AY 2013 AY 2014 AY 2015 AY 2016 19,000 0 12 24 36 48 60 AY 2011 27,423 28,060 26,735 21,875 27,360 28,242 AY 2012 28,966 28,457 26,903 28,772 29,047 AY 2013 31,395 30,564 31,208 31,092 AY 2014 32,116 34,891 33,967 AY 2015 34,519 33,836 AY 2016 35,485 Age (in Months)
Estimated Annual Cost (in $000's) Sample Annual Cost of Retained Losses 50,000 40,000 30,000 34,519 20,000 10,000 27,423 28,966 31,395 32,116 35,485 Current Year Prior AYs 10,773 0 637 (1,834) (7,245) (567) (10,000) 2011 2012 2013 2014 2015 2016 Year Estimated Annual Cost = Projected Ultimate Loss + Change in Estimated Ultimate Losses from Prior Accident Years Estimated Annual Cost = Projected Ultimate Loss + Change in Estimated Ultimate Losses fro
Cost of Retained Loss Calculation How is the cost of risk calculated if the losses keep changing? Examples of three different retained loss calculation methods
Method 1 Select loss pick for upcoming accident year; do not change prior accident years retained losses Year Method 1 Retained Loss 2011 27,423 2012 28,966 2013 31,395 2014 32,116 2015 34,519 2016 35,485
Method 2 Select loss pick for upcoming accident year; re-state prior accident years retained losses based on updated loss estimates Retained losses used in cost of risk calculation are updated each year Method 2 Retained Loss for As of: Year 1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 2011 27,423 28,060 26,735 21,875 27,360 28,242 2012 28,966 28,457 26,903 28,772 29,047 2013 31,395 30,564 31,208 31,092 2014 32,116 34,891 33,967 2015 34,519 33,836 2016 35,485
Method 3 Select loss pick for upcoming accident year; re-state prior accident years retained losses but account for the changes in current calendar year retained losses Method 3 Retained Loss Current Prior Total Accident Accident Cost of Year Year Years Risk 2011 27,423 27,423 2012 28,966 637 29,603 2013 31,395 (1,834) 29,561 2014 32,116 (7,245) 24,871 2015 34,519 10,773 45,292 2016 35,485 (567) 34,918
Summary of Methods Method 1 Method 2* Method 3 Year Retained Loss Retained Loss Retained Loss 2011 27,423 28,242 27,423 2012 28,966 29,047 29,603 2013 31,395 31,092 29,561 2014 32,116 33,967 24,871 2015 34,519 33,836 45,292 2016 35,485 35,485 34,918 * In this method the retained losses are re-calculated annually based on the most recent estimate of accident year losses for the given year. Values here represent the most recent estimate.
Ahold Captive Insurance Program Retentions: WC first $5 million per occurrence GL first $2 million per occurrence Annual premiums Self-insurance liabilities Reinsurance liabilities Capital & surplus: 15 20% of total assets
Ahold Captive Structure Royal Ahold Holding Companies Holding Companies Ahold USA Operating Companies The Mollyanna Company Ahold Insurance N.V. Europe Operating Companies MAC Risk Management, Inc. Global Insurance Entities
Components of TCOR Over 90% of total costs are allocated to U.S. operations. Captive premiums: Workers compensation General liability Property Auto liability Commercial premiums: Excess on property Excess on WC, GL & AL Other lines Other: Claims self-administration Collateral & captive overhead Broker fees 80% 10% 10% Total 100%
TCOR Corporate Governance View
TCOR Operating Companies View