IBNR

1. Retentions Incurred Loss Runs Loss Development NPV Triangles Frequency Risk Financing Discovery Cash Flows IBNR LDF Payout Schedules Accruals Workers’ Comp Loss Forecast

2. FN 101 – THE LEXICON OF RISK FINANCING BASICS EXPLAINEDTuesday, April 1710:15 am – 11:30 am Moderator –Shelly Hubicki Manager – Risk Finance/Risk Management & Insurance, The Boeing Company Michelle.M.Hubicki@boeing.com (312)544-2177 Speaker – Scott Silitsky VP Contracts & Risk Manager, ThyssenKrupp Elevator Company Scott.silitsky@thyssenkrupp.com (954)597-3016 Coordinator/Speaker - Barbara Benson Grinnell Vice President, Willis Benson_Ba@willis.com (985)727-4039

3. Agenda • Introduction • Basic loss development • Loss analysis • Cash flow comparisons of market quotes • Conclusion

4. Basic Loss Development • Purpose: To use the growth patterns of historical losses to predict ultimate losses on policy years that are still open and developing

5. Sources of Loss Development Factors • Industry-provided • Insurance carriers • Rating bureaus • Independent consultants • Actuaries • Organization-specific

6. Casualty Coverage’s • Workers’ compensation • Automobile liability • General liability • Products liability

7. Loss Development Triangles • Types of triangles • Incurred loss development • Paid loss development • Frequency loss development • Per occurrence retention • Limited • Unlimited

8. Incurred But Not Reported Claims • Incurred But Not Reported (IBNR) claims caused by • Delay between occurrence and reporting of the claim • Actual amount for which a claim will settle is unknown • Indeterminate amount of time between a claims first report and when all activity on that claim ceases

9. Sample Company – Loss Run Summary

10. Sample Co. – Incurred Loss Triangulation - WC

11. Sample Co. – Incurred Loss Triangulation - WC = 24 month incurred losses 12 month incurred losses 578,368 402,087 = = 1.438

12. Sample Co. – Incurred Loss Triangulation - WC Average all policy years

13. Sample Co. – Incurred Loss Triangulation - WC Remove any “irregular” averages

14. Sample Co. – Incurred Loss Triangulation - WC Multiply each consecutive incremental average by the previous cumulative average 36 month cumulative average X 48 month incremental average 1.823 X 1.126 = 2.052

15. Sample Co. – Incurred Loss Triangulation - WC = 84 month cumulative avg. 24 month cumulative avg. 2.184 1.408 = = = 1.551

16. Sample Co. – Incurred Loss Triangulation - WC 1 / development factor = 1 / 2.184 = 45.8%

17. Sample Co. – Paid Loss Triangulation - WC

18. Sample Co. – Frequency Triangulation - WC

19. Discovery and Payout Patterns • General/products liability • Slowest patterns • Longest tail because of investigation, litigation, and time lag between report and occurrence date • Workers’ compensation • Payout increases steadily over time • Benefits are statutorily defined • Duration of injury and amount of medical treatment unknown

20. Discovery and Payout Patterns • Automobile liability • Relatively quick patterns • Relatively no lengthy litigation

21. Loss Analysis – Forecasting and Ultimate Liability Analysis • Ultimate liability projections • Adhere to FASB and GASB requirements regarding contingent liabilities • Loss forecasting • Part of the budgeting and marketing process

22. Sample Co. – WC Remaining Liability Projections

23. Sample Co. – WC Loss Forecast

24. Sample Co. – WC Loss Forecast Excluded

25. Risk Financing • Determining the most cost-effective way to pay or fund for losses

26. Risk Financing Continuum Guaranteed Cost Large Deductible Qualified Self-Insurance Captive Risk Transfer Risk Retention

27. Large Deductible • Loss retention plan • Excess insurance covers losses above deductible • Positive cash flow • Ability to influence program costs • Access to insurer services • Collateral requirements • Tax deduction disadvantage

28. Qualified Self Insurance • Formalized retention program • Excess insurance purchased for losses exceeding limit • Qualification requirements vary by state • Positive cash flow • Ability to influence program costs • Unbundled services • Administrative requirements

29. Factors Influencing Design of Risk Financing Programs • Expected losses • Market conditions • Corporate philosophy • Risk control commitment • Financial position • Geographical locations • Loss payout patterns • Effective tax rate • Corporate ownership • Cash flow comparisons

30. Cash flow Comparisons • Definition: Using the net present value of alternative market quotes to determine the most cost-effective program

31. Present Value Analysis $ today is worth more than $ tomorrow because of investment income implications.

32. Investment Income • Fund losses at a discount, additional money will be added as interest is earned • Varied by program and payout • One decision tool to select the ideal program

33. Tax Implications • Need to consider when the losses and premium can be deducted from taxable income • Different programs are treated differently • Should involve corporate tax department

34. Costs Included • Expected losses • Primary and excess premiums • Claims handling • Taxes • Assessments • Loss Control • Broker fees • Collateral • Fronting costs • Residual market loads • Boards and bureaus • State funds

35. Case Study • Compare the net present value of the following programs • Guaranteed cost • Self-insurance

36. Sample Co. – 1/1-12/31/12 WC Guaranteed Cost Cash Flow

37. Sample Co. – 1/1-12/31/12 WC Self Insurance Cash Flow

38. Sensitivity Analysis • How do optimistic and pessimistic loss projections alter the net present value decision of the various program alternatives?

39. Sample Company – Net Present Value Cash Flow Comparison

40. In Conclusion… • Key Points • Loss development • Loss analysis • Cash flow comparisons • Questions