Tag Archives: captive insurance

Captive actuaries are as indispensable as your traffic app

One of the primary rewards from operating a captive is the ability to place more emphasis on the risk management process, in order to stabilize annual budgets, reduce long-term costs, and utilize capital more effectively. To accomplish these goals, captives rely on experienced service providers to manage almost all of their operations.

An actuary is one of these indispensable service providers. Simply put, actuaries can quantify the level of risk, which allows the company to better manage it. And actuaries provide value throughout a captive’s life cycle, from formation to dissolution (if applicable). Risk factors change all the time, so having an actuary review your experience regularly is crucial to avoiding problems.

Speaking of avoiding problems, we all love the functionality of the Waze traffic app, which steers us from one location to another in the most efficient manner possible. At its core, this traffic app helps you figure out what path to take to avoid unexpected delays, thereby reducing stress levels. Anyone who has traveled I-95 in Connecticut knows this value first-hand.

Actuaries essentially function like a Waze app for captives. They largely provide a means to keep captives on the right path by avoiding surprises and reducing potential for management stress.

Initially, actuaries are engaged in feasibility processes to help ensure a company knows what to expect as it sets out on its journey to create a captive. Where necessary, actuaries utilize data from the local environment (the industry) to supplement the company’s own experience. The main deliverable of the feasibility study is a five-year pro forma financial model, which includes a projected income statement and balance sheet of a new captive’s financial business plan. Actuaries provide these projections on both an expected loss outcome basis and an adverse loss scenario basis; this is because it is crucial to understand the potential risks involved, not just what to expect on average. Both the captive business owner and regulator are key stakeholders for whom the feasibility study reduces stress levels right from the outset.

Once the journey begins (the captive is formed), actuaries perform ongoing loss reserving and loss forecasting (budgeting). As the captive’s losses emerge, the actuary has to gauge how much weight to place on an individual insured’s experience versus that of the industry when estimating ultimate losses. This is a delicate balance amidst the “noise” of random variations in losses. In the end, actuaries hold the keys to how fast the captive can travel from a loss recognition standpoint.

Periodically, at least every three years, the actuary should update the pro forma model, adjusting to the conditions of the road map that was created. This provides a continuous means of reasonableness testing of underlying assumptions, including loss ratios, loss development patterns, loss payment (discount) factors, expenses, investment income, taxes, etc.

All of this effort ultimately supports a smooth ride—the issuance of fairly stated financial statements with adequate funding of loss reserves. The actuary’s road map and process needs to be transparent enough to allow another actuary to essentially reproduce the analysis (even though no two actuaries would use all of the same assumptions or necessarily take the same route to the destination). During the process, the captive’s actuary needs to engage in dialogue with the audit firm’s actuary to ensure audit sign-off is secured; this helps to arrive at your final destination from a financial reporting standpoint.

As actuaries, we certainly wish our models could be as straightforward as the Waze traffic app. Even though we face complex questions, our processes and expertise have proven to be successful in navigating the risky terrain of running a captive insurance company. In Connecticut, our tourism branding is “Still Revolutionary.” In today’s ever advancing age of big data and analytics, using actuaries to help captives take calculated risks to justify the potential rewards noted above is still a state-of-the-art approach. And the Hartford, Connecticut area has the highest number of actuaries per capita in the United States. Talk about an opportunity. So you may want to consider the Waze-like advantages of using an actuary to help you navigate a new route to establishing a captive in Connecticut.

This blog post was first published by the Connecticut Captive Insurance Association.

Milliman consultant makes Captive Review Power 50 list

Milliman’s Mike Meehan was named to the 2016 Captive Review Power 50 (subscription required). The Power 50 is a ranked list recognizing the 50 most influential professionals in the global captive insurance industry.

“I am honored and humbled to have my name included among this group, which contains so many individuals for whom I have the utmost respect,” he said about the distinction.

A.M Best recently interviewed Mike from the 2016 Cayman Captives Forum about the domicile’s captive market. He’ll be a speaker at the upcoming CICA Conference in San Diego from March 12 to 14. For more information, click here.

Captive considerations for healthcare organizations

A captive insurance program can offer healthcare organizations several benefits such as broader coverage, improved cash flow, and direct access to reinsurance markets. However, not every organization is suited for a captive. Its management must assess the benefits and drawbacks before creating one. Milliman’s Richard Frese provides perspective in his article “Captive insurance: Is it the right choice for your insurance exposures?” He also discusses the background of captives, how organizations should choose a domicile, selecting coverage policies, actuarial analysis for loss projections, and considerations when shutting down a captive.

Adequate pricing for captive insurance takes communication

Actuaries and risk managers must communicate effectively when pricing captive insurance. Changes in coverage, operations and exposures, and loss control initiatives may require adjustments in premiums. Milliman consultant Mike Meehan provides some perspective in his article “Pricing for captives: Communication is key to getting it right.”

From an actuarial perspective, pricing a coverage for a captive often involves looking at the past experience of that coverage and adjusting the results to reflect inflation (for both losses and exposures), legislative changes, updated expense forecasts, etc. When a captive has been in business for a number of years, has a statistically credible history of losses, and is keeping the terms of the coverage consistent from year to year, this is a reasonable approach. Challenges arise when the captive has no credible loss history, when the risks that a captive is insuring are different or altogether new, or when the terms of the policy are different from what had been covered previously. In situations such as these, good communication becomes critical between the risk manager and the actuary that is involved in the pricing. This ensures that the pricing exercise is done correctly.

For example, consider a “Firm ABC” that had been purchasing professional liability coverage from the commercial market for a number of years. The terms of the policy have historically excluded coverage for asbestos-related claims. Firm ABC is now going to insure its professional liability claims through a newly established, wholly owned captive insurance company. The actuary pricing this coverage would typically rely on the historical loss experience of Firm ABC, assuming it has credible experience, or perhaps on industry loss costs used to price this type of coverage. If the actuary is not aware that there has been an expansion in coverage, namely the inclusion of asbestos coverage, the resulting premium could be inadequate.

This situation can work in reverse as well. Consider the same example, except now Firm ABC had been purchasing professional liability insurance that did include coverage for asbestos-related claims. If that same Firm ABC were to decide that it was now going to insure that coverage through a captive, however, and exclude the asbestos-related claims from coverage, then adjustments would need to be made during the rating process. Otherwise the premiums, based on loss experience or loss costs with provisions for asbestos-related claims, could be excessive. The risk manager, the underwriter, and the broker typically have the in-depth knowledge related to the subtle differences in coverages that aren’t necessarily identifiable by an actuary reviewing only loss runs. Communicating this information will help the actuary make sure that the necessary adjustments in the calculation of premiums are being made.

Meehan also participated in a recent panel discussion held by A.M. Best during the Vermont Captive Insurance Association’s annual conference. The discussion focused on some considerations that potential sponsors should think about if they decide to form a captive.

Milliman wins a 2015 US Captive Services Award

Milliman has received a 2015 US Captive Services Award, presented by Captive Review magazine. The awards recognize excellence and innovation in the U.S. marketplace. This article provides some coverage of the awards ceremony.

Here is an excerpt:

Milliman was able to demonstrate its leading position and experience in serving a broad captive marketplace. They have a large and strong captive practice allowing them to meet the demands of a significant client base. The Milliman submission pointed to specific examples of serving the wider captive industry in both educational and legislative activities.

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Captive Review’s Lucy Kingston presents a US Captive Services award to Milliman consultants Mike Meehan (l.) and Joel Chansky (r.).