Insight
Life and Health Insurance M&A
We review the M&A worldwide for life and health insurers in 2021, and an outlook for 2022 and beyond.
If you are a risk management professional of a self-insured entity, you may be currently in the process of engaging your consulting actuary to help with year-end calculations. Perhaps this is the first time you’ve talked to your actuary in awhile. However, ask yourself: When should I talk to my consulting actuary?
- Do actuaries even talk?
- Only during engagement of the actuarial work product?
- When there are operational changes impacting your company’s risk management?
If you selected c), you are correct. However, discussing these changes with your actuary may not be at the forefront of your mind. This article will provide five reasons why it should be, and when it’s appropriate to give your actuary a call.
Changing the size of your retention
If you change the size of your retention, your actuary needs this information to correctly represent limited losses in analysis of liability and loss forecasts. Your actuary can also help you determine the most appropriate size of retention given your company’s loss experience and risk appetite.
A traditional total cost of risk (TCoR) calculation typically considers two things: expected retained losses and premium for risk transfer. When evaluating an increase in retention, you may consider the trade-off between the additional retained losses and the accompanying premium savings. However, there is another component that should be considered.
Higher retentions lead to increased volatility, and that should play a part in the equation. For example, if your retention was $500,000 and is now increasing to $1 million, there is a greater potential downside of higher total losses accompanying that change, especially during a bad year.
Figure 1: Sample TCoR Calculation, Considering Volatility
| Percentile | |||||||
|---|---|---|---|---|---|---|---|
| Expected | 95% | 98% | Estimated | Total cost of risk | |||
| Retention | Retained losses | 1-in-20 | 1-in-50 | Premium | At expected | 95th percentile | 98th percentile |
| $500,000 | $23,258,000 | $27,061,577 | $28,131,370 | $8,366,000 | $31,624,000 | $35,427,577 | $36,497,370 |
| $1,000,000 | $25,733,000 | $30,822,256 | $32,288,255 | $5,226,000 | $30,959,000 | $36,048,256 | $37,514,255 |
| TCoR Trade-off | ($665,000) | $620,679 | $1,016,885 | ||||
In the sample calculation presented in Figure 1, there is an expected savings of $665,000 in TCoR by moving from a $500,000 to a $1 million retention. However, at the 95th percentile (a 1-in-20-year loss scenario), there is a $621,000 disadvantage, and this continues to increase when reviewing the 98th percentile (a 1-in-50-year loss scenario). Your actuary can help you evaluate the TCoR at not only the actuarial central estimate but also higher percentiles to help you feel comfortable in making your decision to change retentions.
Changing your insurance program structure
There are many ways that you can change your insurance program structure that would impact retained losses and, in turn, the actuarial calculation. The three structure changes mentioned below are not an exhaustive list.
- Does it make sense to explore a corridor deductible? Figure 2 illustrates a corridor deductible structure. For example, if you currently have a $500,000 deductible, but you don’t feel comfortable making the move to a $1 million deductible, a corridor option can temper the volatility of retained losses associated with a higher deductible.
In this example, you would retain the first $500,000 of each claim; however, you would also retain loss in the $500,000 excess of $500,000 layer (the layer between $500,000 and $1 million) until the $1 million aggregate is exhausted. This aggregate can exhaust either by two $1 million losses or by multiple losses between $500,000 and $1 million. Your actuary can help you determine the value of the corridor as well as the probability of entering and exhausting the corridor aggregate.
Figure 2: Corridor Deductible Illustration
- Does it make sense to explore an aggregate deductible? An aggregate can help contain loss volatility by limiting the total loss that can be retained. An aggregate can either apply to a single line of business or across multiple lines of business (referred to as a basket aggregate). Your actuary can help you measure the probability of exhausting the aggregate as well as evaluate the cost efficiency of the premium the carrier will charge for the aggregate.
- Does it make sense to explore a change in loss expense retention? For many large sensitive programs, loss expenses erode the retention along with loss. However, some programs offer a premium savings to either retain 100% of loss expenses or to share the loss expenses with the carrier on a pro rata basis. Your actuary can help you evaluate the additional amount that would be retained by this change.
Changing your insurance carrier
Moving your large deductible policy from one carrier to another may result in a collateral redundancy for multiple renewals. When you leave a carrier, the carrier will continue to evaluate the collateral need, based on the unpaid loss estimate. At the same time, you will be ramping up the collateral need with a new carrier. Figure 3 demonstrates a sample breakeven point where the blue and gold lines intersect, occurring at the beginning of the policy year incepting 2XX4. Figure 4 demonstrates the run-off with the old carrier and the ramp-up with the new carrier. The sum of the gray and orange lines in Figure 4 equals the gold line in Figure 3.
Figure 3: Sample Collateral Forecast When Evaluating Current and New Carriers, in Total
Figure 4: Sample Collateral Forecast When Changing Carriers, Separate
In addition to the collateral implications of changing carriers, if your insurance program is bundled (i.e., your insurance carrier handles your claims), then a change in the claims handler may contribute to shifts in the data.
Changing your claims handler
A change in claims handler can impact the way that the loss data is collected and provided. Each risk management information system (RMIS) is different, which may cause a mismatch in the data when it comes from multiple sources. Explaining this change to your actuary can help them understand how to summarize and analyze the data in order to maintain consistency across data sources.
A change in claims handler may also lead to other shifts in the loss data. For example, if the previous claims handler required only losses above a certain threshold to be reported, and the new claims handler is requiring all claims to be reported (even report-only claims), then this will cause a disturbance in the frequency (i.e., the number of claims normalized by an exposure basis).
If your new claims handler assigns higher initial case reserves, resulting in fewer increases as claims mature, it will impact your incurred loss development pattern. If the case reserves are closer to ultimate at earlier ages, there may be less need for a provision for future development.
Without this prior information, an actuary may look at these shifts as adverse development, when in reality the development has accelerated. This can impact the expected losses for the years post-change. Notifying your actuary will help avoid unnecessary overstatement of unpaid liability or projected future losses.
Other changes worth discussing
A few other changes that are worth discussing with your actuary include:
- Claims closure projects: Similar to strengthening case reserves, claims closure projects can produce unexpected results when reviewing the paid loss development patterns.
- Loss control/safety mitigation strategies: If you have a new initiative to reduce a particular cause or source of loss, notify your actuary. In order to reflect the impact, a short-term average may be more appropriate, and your actuary will feel more confident in making this selection.
- Changes in post-loss procedures: Nurse triage, injury counselors, telehealth, and return-to-work programs can all have an impact on the frequency and severity (average cost per claim) of losses.
- Acquisitions or divestitures: The actuary needs to be notified about how to adjust the data to best reflect the new risk profile of the company following an acquisition or divestiture for a better representation of expected losses.
- Changes to your company’s risk management, safety, or operations teams: Oftentimes, a change in team members may lead to changes in claims handling and loss mitigation. A fresh set of eyes may be able to find ways to reduce claims counts and/or costs, and thereby improve prospective loss experience.
Summary
Without the qualitative information to support shifts in the quantitative results, your actuary may jump to conclusions about the cause of changes seen in the data. Having the conversation will allow your actuary to feel more comfortable about making the appropriate adjustments to reflect the impact of operational changes at your company.
Additionally, your actuary can help evaluate the effect of changing your insurance program structure, your carrier, and your claims handler. These are all good reasons to have your actuary on speed dial!