Reserving for Self-Insureds

1. Reserving for Self-Insureds Leon Palmer – United Technologies Corporation Director, Risk Management leon.palmer@utc.com Casualty Actuarial Society September 12, 2005 1:30 PM – 3:00 PM Boston, Massachusetts

2. Agenda • United Technologies Corporation • Retention Philosophy • Risk Management • Customers • Deliverables • Complexities – 2 Examples • How to improve

3. UNITED TECHNOLOGIES • Holding company structure • > $40 B Sales • > 60% Sales outside US • > 15% Sales are US & Foreign military • 6 major companies • Each > $2 B Sales • Pratt & Whitney, Carrier, Otis, Sikorsky, Hamilton Sundstrand, UTC Fire & Security • Multi-industry • Aerospace, construction, security (not low risk industries) • Acquisitive

4. Hazard Risk – Retention Philosophy • Retain risk commensurate with EPS, cash flow and balance sheet strength… • Maximize internal loss funding tools • Transfer cat risk exposures Self –insured reserving is key to philosophy!

5. Team

6. Very dependent on high quality self insured reserves… • Accuracy • Timeliness • Continuous improvement process (ACE) • Communication • Reports & data • Verbal • Internal & external customers

7. Deliverables - all lines, all businesses • Plan – Current year • Plan – 3 Years • Re-estimate of all open prior years (30 years) • Captive reserve reviews – 3 captives • Bankrupt insurer and ‘scheme’ analyses • ‘Monitoring’ vs Plan – quarterly • Ad hoc • Drill down on spikes/trends • Manufacturing re-alignments & plant closings • M&A purchase support – pre acquisition • M&A – Purchase Accounting adjustments – post acquisition

8. Customers #’s of groups • Controller X 7 • Planning X 7 • Health and Safety X 7 • Legal X 7 • Internal Audit X 1 • Business Development X 7 • Risk Management X 1 • Make vs. buy support • Benchmarking • Finance Committee – BoD X 1 • External Auditors X 1 • DCAA X 4 • SEC – SARBOX X 1 (at least 44 groups)

9. Business Development - Example Target > $2 B annual revenues Global UK headquartered Professional Risk Management staff Major broker firm, insurers, audit firm Large losses in claim history Financially ‘challenged’

10. Business Development - Example Individual case reserving by Legal and RM No “IBNR” Diluted “Incurred” reserving GAAP/UTC estimated shortfall > $20M 2 years later Original estimates still look good Local acquired entities still not ‘accepting’ Self-insured culture - slow to implement

11. Government Contracting - Example Hamilton Sundstrand & DCAA - WC 2 inch thick book 15 page ‘summary’ Every actuarial method ‘known to man’ 8 Sections to book Every year discussion Industrial vs. Aerospace Weighting of methodologies 2003 review; same thing but….

12. Government Contracting - Example ‘show me…’ • . • . . . . . . • . . . . . . • 1,074 1,526 1,891 2,215 • . . . . • . . . • . .

13. How do we improve Use quality processes and tools! Annual review of processes and customer feedback Deloitte –actuarial firm Risk Management Data providers Customers Process ‘maps Identify ‘turn backs’ Conduct ‘root cause analyses’ Implement ‘permanent fixes’ Repeat each year!