Self-Insured Reserving

1. Self-Insured Reserving Brian Beckman, KPMG LLP Kevin Bingham, Deloitte Touche LLP George Levine, KPMG LLP Leon Palmer, Director, UTC September, 2005

2. In-House Actuarial Perspective • In-House Actuary’s Involvement • In-House vs. Consulting Actuary • Self-Insurance Risk Areas • Range of Reasonable Reserves • Discounting

3. 1. In-House Actuary’s Involvement • Setting Reserves/Accruals • Maintenance of Actuarial Data Base • Interface with Other Departments: Finance, Accounting, Controllers Dept., Legal, Tax • Captive Certification • Communicate--Operating Units, Auditors (Internal + External), Brokers • Budget (Forecast) and Allocation to Operating Units

4. 2. In-House vs. Consulting Actuary IN-HS. CONS. • Setting Reserves/Accruals  • Maintenance of Actuarial Data Base  • Interface with Other Departments   • Captive Certification (Independence)   • Communication   • Budget and Allocation   • Formal Actuarial Report 

5. 3. Self-Insurance Risk Areas • Underwriting Risk • Interest Rate Risk (If Discounting) • Timing Risk • Collectibility of Insurance/Reinsurance Risk • Accounting Risk (Payments to TPAs) • Monitoring Loss Payments/Expense Payments

6. The P/C Company Risk Assumption Process Business Design Underwriting Process Product Rate Plan and Coverage Underwriting Guides Markets Targeted Producer solicits/binds coverage, or policy renews Policy expires and may be renewed or audited Underwriter verifies risk acceptability and price Claims are received or estimated Policy is submitted to Underwriter Transactional Data Systems Resulting Financial Flows Underwriting Expenses result Premiums Written and Earned Losses received, recorded, estimated 6

7. The Self-Insured Company Claim Payment Process Insurance Company/TPA Indemnified Party Claims are received or estimated Injured Party Receives Payment Transactional Data Systems Reports produced generating loss triangles, etc. to estimate accruals Claims data placed into Actuarial Data Base Claims Data Sorted by Insured Claims Limited to Self-Insured Retention Claims Billed to Self-Insurer Self-Insurer Systems Claims data delivered to actuary RECONCILIATION Bills received from TPA Claims paid to TPA Claims recorded into General Ledger 7

8. 4. Where does one carry Accruals? Range of Reasonable Reserve Estimates • Range Defined in Actuarial Standard of Practice # 36—Section 3.6.4 • Range of Estimates that could be produced by appropriate actuarial methods or alternative sets of assumptions that the actuary judges to be reasonable

9. 4. Range of Reasonable Reserves (cont.) • Accounting Literature: Financial Accounting Standards No. 5: “Accounting for Contingencies”—Accrue Loss When • Probable Asset Impaired or Liability Incurred • Amount of Loss Can be Reasonably Estimated

10. 4. Range of Reasonable Reserves (cont.) • “FASB Interpretation # 14: Reasonable Estimation of the Amount of a Loss—An Interpretation of FASB 5” • When an Amount In Range Appears Better than Another, Accrue that Amount • When No Amount is Better than any Other Amount, Accrue the Minimum Amount in the Range

11. 4. Range of Reasonable Reserves (cont.) • Company must accrue within range, or audit difference posted—MATERIALITY and implications up to Accountant • Illustrates Difference Between Actuary’s and Accountant’s View of Best Estimate and Range • Actuary: Point Estimate is More Probable than other points//Accountant: Book It (Under FASB5) • Accountant: All Points in A Reasonable Range are equally Likely, so Book the Minimum {In Spite of the Existence of A Point Estimate} • SSAP #55: Statutory Accounting Management’s Best Estimate

12. 5. Discounting • For GAAP purposes, discounting is optional • Staff Accounting Bulletin 62: • Risk-free rate or settlement rate (arms-length transaction, < risk-free rate) locked in by accident year • Floating risk-free or settlement rate: entire liability redetermined at end of each period • Amount and timing of payments fixed or reliably determinable