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ACTUARIAL SERVICES

ACTUARIAL SERVICES. SOP 97-3 & Other Balance Sheet Reserves: The Devil’s in the Details. Las Vegas September 2004. ADVISORY. SOP 97-3 & Other Balance Sheet Reserves: The Devil’s in the Details. Moderator: Richard A. Hofmann, Senior Manager, KPMG LLP SOP 97-3, Focus on DOL Special Fund

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ACTUARIAL SERVICES

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  1. ACTUARIAL SERVICES SOP 97-3 & Other Balance Sheet Reserves:The Devil’s in the Details Las VegasSeptember 2004 ADVISORY

  2. SOP 97-3 & Other Balance Sheet Reserves:The Devil’s in the Details • Moderator: • Richard A. Hofmann, Senior Manager, KPMG LLP • SOP 97-3, Focus on DOL Special Fund • William G. Stanfield, Actuarial Manager, KPMG LLP • Other Insurer Concerns: • Claus S. Metzner, Actuary, Milliman USA • SAO & Reinsurer Concerns – • Sharon C. Carroll, Manager, KPMG LLP • Questions & Answers

  3. SOP 97-3: Why Is This An Issue? • Advent of Large Deductible Policies • Designed to Reduce Taxes & Assessments • Self Insurers Still Taxed on Full Premiums • Caused Increase in Assessment Rates, Especially in Premium Based States • Many Employers Abandon Self-Insurance for Large Deductibles, Especially in Florida • Statutory Caps on Assessment Rates Cause Failure of Funding Mechanisms

  4. SOP 97-3: Why Is This An Issue? • Rapid Expansion of Competitive Rating • Rating Bureaus Publish Loss Costs, not Rates • Self Insurers Taxed Using Fabricated Rates • Insurers Taxed Based on Lower Net Premiums • ADA & Second/Subsequent Injury Funds • Many States Terminate Eligibility for Recoveries • Some Employers Are Taxed But Are Ineligible to Receive Recoveries • AICPA SOP 97-3 Reserve Requirements • Legislative Activity to Alter Assessments • Insurers Push for Premium Based Assessments

  5. Growth of Large Deductibles

  6. Summary of Assessments • WC Administrative Funds • Second/Subsequent Injury Funds • Guaranty Funds • Other Funds • OSHA/Safety/Loss Prevention Programs • Fraud Unit/Insurance Department Funding • Major Medical/Vocational Rehab Programs • Occupational Disease Funds (IN, MI, WA) • Self-Insurance Units (NY, RI, TX) • Statistical Advisory Organization (ME)

  7. WC Administrative Funds • General Revenue (9) • AK, CA(80%), HI, IL, IN, IA, MI, MN, UT • Split Funding Mechanisms (4) • CA(20%), ME, MT, OK, VT • Exposure Based Assessments (2) - MD, NM • Premium Based Assessments (18) • AR, AZ, CA(I), CO, FL, GA, ID, KY, ME(I), MA, MO, MT(I), NE, NC, OK(I), OR, RI, SC, TN, TX, VA, VT(I), WV • Loss Based Assessments (14) • AL, CA(SI), CT, DE, DC, KS, LA, ME(SI), MS, MT(SI), NV, NH, NY, OH, OK(SI), PA, RI(NDD), VT(SI), WA, WI • Unclear (2) - NJ, SD • No Self-Insurance (2) - ND, WY

  8. Overview of Assessment Bases • Conflicting Goals: Equity vs. Simplicity • Split Funding Mechanisms • Exposure Based Assessments • Premium Based Assessments • Estimated with True-Ups • Estimated no True-Ups • Actual with Deferrals • Actual no Deferrals • Loss Based Assessments

  9. Premium Based Assessments:Several Types Payrolls by Class (Needs to Be Audited) x Rates by Class (from Bureau/Company Rate Manual) = Manual Premium x Experience Modification (Needs to Be Verified) + Expense Constant = Bureau Standard Premium (Applies to Self Insurers) x Rate Deviations and/or Schedule Credit/Debits = Insurer Standard Premium - Premium Discounts, Dividends or Retro Adjustments = Collected (Net) Premium

  10. Loss Based Assessments • Total Paid Losses (20): • WCA Only: DE, ME, MS, VT • SIF Only: GA, HI, IA, NE, SC, SD • WCA & SIF: AL, CT, DC, KS, LA, MT, NV, NH, PA, WA • Indemnity Paid Losses (11): • WCA Only: CA, WI • SIF Only: AK, ID, IL, IN, MI, MN, NJ • WCA & SIF: NY, OH • Percent of Awards: • Death: MS, OK(WCA), WI($5000) • PTD: OK(WCA,SIF) • PPD: NC, OK(WCA,SIF), WI($7000) • No Dependency Death Claims: CA(SIF), NM, RI, TX

  11. SOP 97-3 Assessments: General Overview • Assessment Bases Are Constantly Changing • Several Types of Funds: • Administrative Funds • Second Injury Funds • Guaranty Funds • Several Types of Assessment Bases: • Premium vs. Losses • Estimated vs. Actual • True-Ups or Deferrals • Actuarial Input Needed to Avoid Overpayment

  12. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Presenter’s contact detailsRichard A. Hofmann, ACAS, MAAASenior Manager, KPMG LLP(314) 444-1461rhofmann@kpmg.comwww.kpmg.com © 2004 KPMG LLP, a member firm of KPMG International, a Swiss cooperative. All rights reserved.Printed inthe U.S.A.03617G/SL

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