1 / 28

Call 3 Ratemaking for Captives & Alternative Market Vehicles

Call 3 Ratemaking for Captives & Alternative Market Vehicles. Introduction. Captive Basics Ratemaking Issues Ratemaking Examples Financial Considerations of a Captive. Captive Basics. Types of Captives Domiciles Reasons to Form a Captive. Captive Basics – Types of Captives .

kaz
Download Presentation

Call 3 Ratemaking for Captives & Alternative Market Vehicles

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Call 3 Ratemaking for Captives & Alternative Market Vehicles Ann M. Conway, FCAS, MAAA

  2. Introduction • Captive Basics • Ratemaking Issues • Ratemaking Examples • Financial Considerations of a Captive

  3. Captive Basics • Types of Captives • Domiciles • Reasons to Form a Captive

  4. Captive Basics – Types of Captives • According to Best’s Captive Directory, a captive can be defined as a closely held insurance company, where much or all of the captive’s business is typically supplied by and controlled by its owners. • Single Parent • Direct • Fronted

  5. Captive Basics – Types of Captives (continued) • Group Captive – can be either direct writing or fronted • Sponsored Cell Captive (Rent a captive); two ways to share in results • Percentage participation • Protected cell • Risk Retention Group – variant of a captive with a few key differences • On-shore vehicle • Can write directly • Restricted to certain coverages • Agency Owned Captive • Special Purpose Vehicle

  6. Captive Basics – Types of Captives (continued) • A comparison of Captive Structures

  7. Captive Basics - Domiciles • Can be either on-shore (Vermont, South Carolina) or offshore (Caymans, Bermuda) • Over 30 US States have some form of captive legislation • The most popular domiciles are Bermuda, Cayman and Vermont • Domicile differences include • Capital requirements • Regulatory oversight • Cost • Infrastructure

  8. Captive Basics – Reasons to Form a Captive • Cost reduction • Benefit from good loss experience • Reduce expense • Retain investment income • Improve cash flow • Acceleration of tax deductions • Provision of capacity • Centralize risk financing • Management of retentions • Direct access to reinsurance • Supporting business partners

  9. Ratemaking Issues – Cash Flows The following chart shows simplified cash flows associated with a captive.

  10. Ratemaking Issues – Data • Exposures without losses • No closed claims data • Combined coverage information • Incomplete/inconsistent exposures • Missing claim counts • Partial loss data

  11. Ratemaking Issues – Industry Statistics • Loss development data • Size of loss curves • Trend • Loss costs • Statutory changes

  12. Example One – Adding A Coverage to a Captive • An indemnification policy for a self-insured workers compensation program where the self-insurer retains the first $500,000 of any occurrence. The company has an existing captive and adding this coverage would allow more diversification in the captive. • Analysis Approach • Calculate losses limited to $100,000 • Develop a limited pure premium • Compare large loss experience to industry • Incorporate discounting, risk margins and expenses • Discounting • Approach varies by domicile • Investment yield should consider captive asset structure • Risk margins may be mandated or elective • Closed no pays and/or medical only claims can dampen variability • Often data doesn’t reflect “unlimited” severity

  13. Example One – Adding A Coverage to a Captive (continued)

  14. Example One – Adding A Coverage to a Captive (continued)

  15. Example One – Adding A Coverage to a Captive (continued) • “Typical” captive expenses can include • Captive management • Excess or reinsurance • Claims handling • Actuarial, audit, legal fees • Taxes • Investment expenses • LOC costs • Other, including travel and domicile charges • In the example the new coverage is assigned a pro-rata amount of expense

  16. Example One – Adding A Coverage to a Captive (continued)

  17. Example Two – Allocating Premiums for a New Group Captive • Four physician groups consider establishing a captive to react to increases in premium and retentions • Analysis approach • Data review • Develop an ”experience mod” • Apply the mod to industry pure premiums • Adjust for policy form, retention level, discounting, risk margins and expenses • Data review • Exposure information is not provided for all policy years • Average values of open claims do not track average paids, nor does frequency track loss volume • The data quality appears to vary by entity

  18. Example Two – Allocating Premiums for a New Group Captive (continued)

  19. Example Two – Allocating Premiums for a New Group Captive (continued) • Experience Mod Approach • Determine at what loss limit it is credible • Estimated ultimate losses are calculated by multiplying basic limit incurred losses by loss development factors • Ultimate losses are divided by exposures on a base class basis • Actual loss costs are compared with expected loss costs to determine an experience modification factor (experience mod) • Individual accident year results are weighted (using exposures and reporting patterns) to calculate overall experience mod factors • A credibility weighted experience mod is calculated, and an experience mod is selected • The selected experience mod is applied to the industry expected loss cost to calculate an experience-modified loss cost • The product of the experience-modified loss cost and projected exposures estimate losses for the forecast period • Results are then allocated by practice

  20. Example Two – Allocating Premiums for a New Group Captive (continued)

  21. Example Two – Allocating Premiums for a New Group Captive (continued)

  22. Example Three – Develop Premium Estimates for Non-Traditional Exposures • Analyze process to generate an insured event • Develop frequency and severity (or pure premium) estimates • Consider timing of cash flows, expenses and risk margins • Example assumes two ways in which a claim could arise: • A vaccinated worker contracted smallpox (direct exposure); or • A vaccinated worker infected a co-worker (indirect exposure) • Estimate claim frequencies for direct exposures and indirect exposures and combine the implied ultimate claims from the two potential exposure sources. The key variables underlying the claim frequency projection are: • The percentage of workers vaccinated • The estimated percentage of non-vaccinated workers exposed to vaccinated workers • The estimated percentage of vaccinated and non-vaccinated workers contracting smallpox

  23. Example Three – Develop Premium Estimates for Non-Traditional Exposures (continued)

  24. Example Three – Develop Premium Estimates for Non-Traditional Exposures (continued) • To simplify the example, we assume one of three outcomes (using a workers compensation industry claim categorization) • Outcome A - A fatal claim • Outcome B - A permanent total claim • Outcome C - A temporary total claim • Percentage probabilities are assigned to each outcome based on external data and input from the healthcare system and estimated severities are developed for each of the scenarios • An overall estimated severity is determined by calculating the weighted average of the estimated cost of the three outcomes • The frequency and severity assumptions are then combined to calculate expected losses • Expected losses are adjusted to reflect discounting, risk margins and operating expenses.

  25. Example Three – Develop Premium Estimates for Non-Traditional Exposures (continued)

  26. Example Three – Develop Premium Estimates for Non-Traditional Exposures (continued)

  27. Financial Considerations of a Captive • There are long-term advantages to prudent pricing • Enhancing the flexibility to change the program retention • Increasing the ability to raise premiums (i.e., by adding new members to a group captive or adding additional coverage to a single parent captive) • Providing the flexibility to support a higher than average level of claim payments in a single year without liquidating assets • Positioning the captive to meet solvency requirements of the domicile or a rating agency • Some key financial ratios are: • The premium to surplus ratio, which reflects a company’s exposure to pricing errors; a range of “normal” leverage ratios for captives is from 1:1 to 5:1 • The reserves to surplus ratio, which measures a company’s exposure to reserve errors. A range of reserve to surplus ratios for captives is 3:1 to 5:1. At higher leverage ratios, a relatively small increase in reserve levels would have a significant impact on surplus. • Risk retention to surplus ratio – A number of domiciles use the “10% rule” (i.e., a company may not expose more than 10% of its surplus to any single risk or loss)

  28. Financial Considerations of a Captive (continued) • Reinsurance is a key tool in “managing” a captive. Uses include: • Protection from catastrophe losses • Providing capacity • Supporting growth • Providing an exit strategy

More Related