The Ins & Outs Of Self-Insurance

1. The Ins & OutsOf Self-Insurance Southwest Actuarial Forum December 4, 2007 Ed Costner, ACAS, MAAA Casualty Actuarial Consultants, Inc.

2. The Ins & Outs of Self-Insurance • Definition of Self-Insurance– retain some portion of the risk of loss • Lines of Coverage to Discuss • Workers Compensation • Liability Insurances • General Liability • Professional Liability • Auto Liability

3. The Ins & Outs of Self-InsuranceWorkers Compensation Three Choices for Coverage • Qualify to be Self-insured • Must qualify on a state by state basis • Terms between the S-I and each state where they qualify • Provide evidence of financial responsibility • Provide evidence of acceptable excess insurance • Must collateralize retained losses to each state • Must report to each state annually • Buy a policy from a licensed, admitted insurance company • Group Self-Insurance

4. The Ins & Outs of Self-InsuranceWorkers Compensation Other Features of Individual Self-Insured WC • Acquire excess insurance • Report on retained losses to each state (actuarial reports?) • Select TPA • More control over loss adjustment • Loss control and safety • Financial issues • Federal income tax issues • Guaranty fund(s)? • Long term financial commitment Extra Credit Problem!

5. The Ins & Outs of Self-InsuranceWorkers Compensation Buy A Policy – Agreement between the insured & insurer - Retrospectively Rated • Specific & aggregate retentions • Basic charge • [(L x LCF) + B] x TM • Provide collateralization for the retained losses to the insurance company • Incurred loss and paid loss retros • Financial Issues • ‘Bundled’ vs. ‘Unbundled’ - Deductible Policies - Reinsure your insurance company into your captive

6. The Ins & Outs of Self-InsuranceWorkers Compensation Deductible Policies • Same issues as retros • Primarily designed to avoid premium tax Captive Reinsurance • Must establish a captive insurance company • Front company insures the risk • Captive reinsures the front company only for the losses within its retention • Retention agreement between captive and front • Captive (unauthorized reinsurer) must collateralize assumed losses to the front (Schedule F) • Captive is subject to regulation by state or country of domicile Extra credit problem!

7. The Ins & Outs of Self-InsuranceWorkers Compensation • Group Self-Insurance Funds • Organizations agree to pool the risk of loss • Enabling legislation - ‘Sponsored by an association in business for purposes other than insurance in (state) for more than five years’ • Members have joint and severable liability • Excess insurance required • Rules of operation set by each state • Members are charged a premium and participate in profits and losses (assessments) • Fund purchases services from vendors • Similar to an insurance company except that the surplus of the organization includes the members’ net worth • Zero sum game

8. The Ins & Outs of Self-InsuranceWorkers Compensation • Services Required by Group Self-Insurance Funds • General Administration including premium billing, collection, and financial records • Claims Administration including medical fee review • Safety and Loss Control • Investment Services • Actuaries • Outside CPAs

10. HISTORICAL PROFITABILITY ANALYSIS-PER $100 PAYROLL(Losses Limited to Prior Retentions)(Excludes Investment Income, Income Taxes, and Dividends)

11. The Ins & Outs of Self-InsuranceLiability Insurances • Ways to Self-Insure • Deductibles • Self-insured retentions • Retros • Captive Reinsurance • Self-Insurance Groups • Risk Retention Groups Limited only by certificate of insurance needs Extra Credit Problem!

12. The Ins & Outs of Self-InsuranceLiability Insurances • Risk Retention Groups • Federal enabling legislation • Licensed and regulated by state of domicile • Authorized to write liability insurance in all states • Some insurance departments HATE RRGs • No guaranty mechanism • No WC, no property (currently) • Since surplus is required – stock or mutual • Profits belong to the owners Extra Credit Problem!