In recent years the expansion of presumption disability laws have shifted significant cancer treatment costs for firefighters and other public safety officials from the healthcare system to the workers’ compensation system. These laws impact the public entity risk-pooling community that insures the workers’ compensation benefits of their municipality members. In her latest article, Milliman’s Chris Kogut discusses the details of these cancer presumption laws and offers a solution to risk pools to quantify the cost implications.
Coverage. The presumption laws that propose to cover all cancer types pose a nearly insurmountable task of quantifying the impact, given the fact that more than 200 different types of cancer can develop in the body. The array of possibilities is exponential considering cancer can develop from almost any type of cell in the 60 different organs in the human body. Listing specific cancers in presumption laws greatly increases the usefulness of medical statistics in estimating claim costs and understanding the underlying incidence and mortality and treatment patterns of the specific illness.
Prior injuries. Some presumption laws are proposing to provide coverage for past incidences of cancer to all firefighters and other public safety officials, either on an unlimited basis or with some specified number of years. These benefits would generally include lost-time pay, death benefits, and reimbursement for medical costs. Public safety officials who have served more than one day (or minimum service) would be entitled to a presumption that their cancer is job-related, regardless of when the cancer was diagnosed or treated within the retroactive period. The introduction of retroactive coverage makes the estimation of the cost impact of the law more difficult to calculate.
Solution. While there are numerous limitations in any forecast of future liabilities, the development of an approach to quantify and understand the potential realm of possibilities on a pool-by-pool basis can be performed. The unknown equations may seem overwhelming, but they are manageable. In fact, determining a pool’s potential liabilities is at its core a frequency and severity problem that actuaries work with on a regular basis. While many assumptions may need to be made, which is due to lack of data, there are a number of approaches that can be used to inform pool managers of a pool’s potential liabilities, given certain parameters.
Providing workers’ compensation benefits to public safety officials with cancer through presumption disability laws is here to stay. Each risk pool needs to quantify the impact of the legislation and recognize the new risks it is assuming to avoid getting burned.
To read the entire article, click here.
The Milliman Risk Institute organizes bi-annual advisory board meetings where members discuss the enterprise risk management (ERM) landscape, ERM strategies, and other facets of ERM. In this video, Milliman’s Mark Stephens and Vikas Shah discuss the latest perspectives from senior risk executives with Elaine Du.
To learn more about the Milliman Risk Institute, click here.
Companies today that are most successful in managing enterprise risk are moving faster to adopt best tools and practices. This enables them to better anticipate, analyze, and manage risks and to better navigate a volatile and rapidly changing business environment. The end result, as discussed in this white paper based on a survey of 125 North American companies by the Milliman Risk Institute, is a virtuous circle—the leading firms develop better risk tools, embed them in all levels of the organization, integrate them into strategic and resource-allocation decisions, and regularly update them.
To request a copy of the paper, click here.
Lately, the insurance industry has begun to adopt cloud-based computing systems to conduct complex actuarial modeling. This Wired article spotlights Milliman’s cloud-based solution Integrate and highlights its impact on the Phoenix Group’s actuarial modeling performance.
In 2013, Phoenix completed an ambitious three-year project to modernize and consolidate its disparate computing systems with an integrated cloud-based platform. The improvements have been dramatic, according to Phoenix. More than 900 manual processes have been reduced to 44, and the time it takes the company to produce quarterly data has been cut from four months to just three days. The project paid for itself after 18 months.
“The actuarial transformation project has allowed us to streamline our systems so that we can reduce the amount of manual processing,” says Nick Watkins, head of actuarial reporting at Phoenix Group. “And then the power of cloud computing has allowed us to produce the number of additional results we need in a much shorter timeline and only when we need it.”
The computing platform, known as Integrate, is built around a financial modeling system developed by Milliman, a global firm that provides consulting and technology for actuarial reporting and risk management. The cloud component, managed by Microsoft Windows Azure, has proven to be a crucial improvement for Phoenix.
Milliman’s Pat Renzi is also quoted in the article discussing the advantages that Integrate provides insurers over legacy actuarial modeling platforms.
The cloud allows every actuary in the company simultaneous, real-time access to risk models. Rather than, say, 50 actuaries making manual changes on desktop PCs to discrete portions of a risk model and then struggling to reassemble the pieces, now all the actuaries work in the cloud simultaneously on the same model. Any changes that need to be confirmed by other actuaries can be accessed through a browser, permanently eliminating the clunky practice of sending spreadsheet files over email.
“The cloud gives a perfect opportunity to build that complete engine that does allow people to collaborate,” says Pat Renzi, global practice leader at Milliman. “With older, legacy systems, you have these processes where you get some data from here and somebody does some stuff to it and jams it into some other program, and then five people take data out of that. So there’s a lack of confidence in the numbers they’re actually reporting.”
To learn more about Integrate, click here.
Milliman won the “Service Provider of the Year” award at the inaugural Middle East Insurance Industry Awards (MIIA). The award, presented by the Middle East Insurance Review, was given to Milliman for “helping the MENA insurance industry enhance its stability and growth by offering services to insurers in an exemplary manner.” The award was announced November 17 in Dubai.
For an entire recap of the event, click here.
Healthcare organizations pursuing a merger and acquisition (M&A) transaction should seek an actuarial analysis to estimate their medical malpractice exposure. When seeking guidance from an actuary, executives need to consider several details that go into estimates like loss-development assessments, frequency and severity trends, and the accuracy of utilization data. Milliman actuary Richard Frese discusses these three details in his recent HFM magazine article entitled “Actuarial considerations of medical malpractice evaluations in M&As.” Here’s an excerpt:
A Loss-Development Assessment
An actuary applies mathematical models to estimate unknown losses or future losses based on prior history. Unknown losses are referred to as incurred but not reported (IBNR) losses. IBNR losses include claims that have not yet been reported, further loss development on known claims, claims that will reopen, and claims that may be in the pipeline but have not yet reached the status of a full suit. The sum of the known case reserves and the IBNR equals the liability on the balance sheet. The actuary tries to use as much of the hospital’s or health system’s history as is credible in developing a loss-development analysis. When there is not full credibility, an actuary blends in an industry standard or may use only this standard. When assessing future loss development, the actuary makes judgments. Even a slight variation in one of the actuary’s selections can have a significant impact on a loss estimate, particularly the tail factor, which explains the longer development of a tail factor in medical malpractice. Loss development will vary significantly between jurisdictions. Healthcare leaders should try to understand the actuaries’ thought processes and challenge the actuaries when the analysis does not line up with their assumptions. In an M&A transaction, it may be appropriate for an acquiring organization to assume the loss development of the acquired entity will follow the loss development of the acquirer. In this instance, leaders for the entity being acquired should be asked to value the reserves and payments so that the methodologies are consistent. Management may also request a scenario that assumes loss development of the acquired entity follows its own historical pattern. Loss control also becomes a question during an M&A transaction. The acquired organization may lose the motivation to engage in safe practice and defend claims. If the acquired entity has claims-made coverage, the acquirer may require that all claims be reported to the current insurance program.
Frequency and Severity Trends
The costs of claims usually rise over time, but the rate at which they occur can vary. When forecasting losses, actuaries examine both frequency and severity trends. Trends may be estimated based on the hospital’s or health system’s own data, if credible, or may need to be supplemented with industry information. A change in trends will affect future loss estimates. Considering that pro forma financial statements may require a projection of the next three years, it is important that the trends examined be appropriate so that the funding is adequate, not deficient or excessive. An actuary also may apply a trend for exposure when projecting future losses (commonly measured in occupied-bed equivalents), but such a projection often is based exclusively on the hospital’s or health system’s own growth or decrease in utilization and/or physicians.
Accuracy of Utilization Data
An actuary assumes that losses are proportional to the hospital’s or health system’s utilization—as measured by the number of inpatients beds, procedures, and physicians, for example. An organization’s leaders should ensure that metrics are detailed and accurately represent the operations of the hospital or health system. Some data may reflect increases over time, while other data may illustrate reductions that have occurred, so it is important to capture all available statistics. The definition of utilization metrics may vary by hospital. An organization’s leaders should discuss with the actuary what constitutes a record of each metric. This conversation is critical because an actuary will convert the statistics into occupied-bed equivalents and will need to ensure the proper weight or conversion factor is applied. In addition, some actuaries apply an industry cost per occupied bed to the number of occupied beds to arrive at an estimate of losses. This estimation will be skewed if the bed conversion factors that are applied are incorrect.
Insurers have been cautious about re-entering the homeowners flood insurance market due to high risks related to floods. In his Best Review’s article “High water mark,” Milliman’s Matt Chamberlain discusses the reasons behind the industry’s trepidation. He also provides perspective on how geographic information systems (GIS) can help insurers develop granular rating plans. Here is an excerpt:
There are several reasons why flood has been considered an uninsurable risk. First, flood is a localized peril; a distance of a few hundred feet, or less, can make a large difference in risk. This produces an information asymmetry, because the insured has a clear understanding of the local topography, while the insurer does not. The insured knows how far the house is from water, and whether it is on the top of a hill or if it is in a depression.
Insurers, on the other hand, typically use large rating territories for homeowners insurance, in some cases larger than a county. If these territories were to be used for flood insurance, it would create the potential for adverse selection. Insureds that were at highest risk of a flood would be most likely to want the coverage, and if insurance companies do not have a means of distinguishing higher-risk from lower-risk policies, anti-selection would result….
Geographic Information Systems, when coupled with the new flood catastrophe models to provide a very granular rating plan, may help insurance companies overcome these risks. Territories can be based on “hydrological units,” or watersheds, so that areas that water is not likely to flow between are not grouped together. Within a territory, appropriate rating factors are distance-to-coast (relating to storm surge risk), distance-to-river/stream (relating to river flood risk), and elevation (because all else being equal, there is lower flood risk at higher elevations).
Using all of these rating factors produces a rating plan that is able to distinguish different levels of risk even among points that are near each other. This produces true risk-based pricing that is likely to be sustainable in the long run. The top map at right shows this approach and compares it to the traditional method of rating flood insurance used by the NFIP, shown at bottom.
The video below presents an example of how GIS can improve pricing strategy.
Insurance and reinsurance companies have charted a new approach to capital management. The financial crisis has shown that undertakings cannot assume that capital will be readily available as and when it is needed and, even if it is available, it may not be accessible at the right price. Solvency II will change the way insurance and reinsurance undertakings determine their regulatory capital requirements, as well as introduce new rules with regard to what forms of capital can be used to meet those requirements. As a result, Solvency II will bring about both challenges and opportunities for undertakings. This paper aims to address some of the key issues for insurers and reinsurers with regard to capital management in a Solvency II world.
The Monetary Authority of Singapore (MAS) has proposed enhancements to its existing risk-based capital (RBC 1) framework. The updated framework, RBC 2, would impose more stringent capital requirements on insurers. A recent article by The Business Times (subscription required) cites Milliman’s Richard Holloway, managing director of Milliman’s South-East Asia and India life insurance consulting team, discussing an analysis estimating the total capital requirements insurers would need to fulfill the terms proposed under RBC 2:
An analysis of the top six insurers, by actuarial services provider Milliman, estimated that proposed changes would lead to increases in the total capital requirements as at end December 2012 of 128 per cent and 170 per cent, for the participating and non-participating funds, respectively.
Equity charges are to rise to at least 40 per cent for most equity classes under RBC 2, from 16 per cent now.
RBC 2 introduces explicit credit spread and interest rate mismatch risk requirements to replace the existing specific and general debt risk requirements.
“Under RBC 1, the debt specific risk charge for an investment grade bond with more than 24 months to maturity is 1.6 per cent”, explains [Mr. Holloway], “but under RBC 2, the credit risk charges will be applied by considering the impact of increases in credit spreads, which vary by the credit rating of the bond. This approach leads to the risk charges increasing with the duration of the bond. For example, we estimate an equivalent risk charge for an A-rated 10-year bond would be 13.8 per cent (compared with the 1.6 per cent for RBC 1).”
He does note, however, that this can be reduced if the matching adjustment – which allows insurers to adjust the liability discount curve if they hold assets with matching cash flows – can be applied.
This paper provides more details on the specific proposals announced in April. The proposals take into account the feedback received from the industry following the first RBC 2 consultation review in June 2012.
Milliman today announced that the firm has been selected by Royal London, a UK-based mutual insurance company, to lead a transformation of the insurer’s actuarial systems and processes.
“At Royal London we want to be in a position to react quickly to market changes and new opportunities for further growth,” says Shaun Cooper, Group Chief Actuary for Royal London. “This requires robust actuarial and financial reporting tools and processes. We sought a provider who offered us a complete solution which would meet our current and future needs. Milliman’s consulting expertise, in concert with its Integrate™ platform, gives us the capabilities we need to access information faster and with a greater degree of confidence to make strategic decisions.”
Integrate is a revolutionary financial projection solution for the life insurance industry. Milliman reports its Integrate customers are gaining unprecedented speed and control in financial reporting amidst changing market dynamics and the demand of new regulations.
“Being selected by Royal London for this project is a testament to our leadership position in next-generation financial reporting systems and processes,” says Milliman Principal Neil Cantle. “We believe our combined consulting expertise and enterprise-grade solutions enable substantial improvements in financial reporting, while providing a fast and scalable approach to sophisticated financial projections. Today, managing risk, maximising productivity, and unlocking the full potential of the actuarial staff is paramount, and Milliman’s solution delivers the much needed cost efficiency and scalability companies require to meet the increasing demand for more reliable and timely information.”