Society of ActuariesActuary as Expert Witness(Session 82 TS) Michael L. Frank – Aquarius Capital New York City November 15, 2005
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Reasons for Expert Witness Work • Lawsuit • Arbitration • Dispute • Insolvency • Third Party Opinion
Disputes • Insurance Entities vs Insurance Entities • Insurance Entities vs Non-Insurance Entities • Non-Insurance Entities vs Non-Insurance Entities
Type of Projects • Reserve Opinions • Forensic Claim Reviews (Case #1) • Reinsurance – Underwriting & Claims (Cases #3 & 4) • Treaty Settlements - Commutations • Opinions on Risk Transfer? • Loss of Life Expectancy (Case #5) • Structured Settlements • Opinions on Insurance Industry Practices (Case #6) • Commission Related Disputes • Portfolios in Dispute • Other Economic Related Opinions • Impact of Program Changes (Case #2)
Arbitration Process • Initial Dispute & Legal Involvement • Internal Planning Meetings • Development of Analysis (Outside Expert Witness) • Depositions • Re-evaluation • Arbitration Hearings • Settlement Discussions
Qualifications • Work Experience • Experience on the subject matter • Previous expert witness experience • Other expertise – Claim audits, underwriting reviews • Previous Employment • Importance of Titles (e.g., Chief Actuary) • Credentials as an actuary – FSA vs ASA • Does this matter? • Other Designations • Licensed Broker - Good or Bad? • Conflicts of Interest
Challenges of Expert Witness Work • Being impartial • Sticking to the facts • Educate the “court” on a subject • Addressing conflicts of interest • Understanding the “Big Picture” • Knowledge of the topic • Ability to articulate • Integrity • Availability of Time
Self-Funded Employer (Case #1) • Employer or Association forms a health insurance program on a self-funded basis • Pool goes insolvent • Claims costs > Funding levels • Forensic audit request to diagnosis issue • Assess if need for legal intervention
Forensic Audit Review (Case #1) • Independent audit done to evaluate: • Adequacy of funding levels • Inflation factors • Reserve completion factors • Population changes • Review of plan changes • Fiduciary’s responsibilities (paid claims correctly) • Review of TPA • Evaluate if expense levels are reasonable • Review of reinsurance recovery if any
Disease Management Company (Sample Case) • Disease Management Company (DMC) assumes risk from Health Plan (HMO) • DMC guarantees as savings: • better contracts (lower average costs) • reduced admits (frequency/utilization) • reduced length of stay (LOS) • DMC purchases reinsurance to protect financial guarantee (aggregate stop loss)
Disease Management Reinsurance (Case #2) • Program runs in a deficit and DMC needs to pay claims on the program • Savings not realized due to actions of one of the parties resulting in a dispute • Actuarial Expert Witness used to assess value of dispute • Reporting over program is in dispute and delay settlement
Reinsurance Dispute (Case #3) • Disputed reporting between DMC and HMO results in late reporting to reinsurer • DMC may now have a claim • DMC has trouble recouping reinsurance recoveries from reinsurance due to late reporting
REINSURER DISEASE MGMT CO. INTERMEDIARY HMO CONSULTANT(S) DIRECT BROKER/GA EMPLOYER The Disease Management Co. Reinsurance “Food Chain” – Case #3
Did you know that reinsurers may buy reinsurance (retrocession)?
Reinsurance Claims Dispute(Case #4) • Employer Buys Stop Loss Insurance • Employer’s Administrator Pays Claims • Carrier Takes Minimal Risk • Has third party underwriter • Buys Reinsurance • Reinsurer Denies Claims • Dispute over enrollee eligibility • Dispute over claims adjudication • Known claimant not on disclosure statement
Reinsurance “Food Chain”(Case #4) • Employer contracts with carrier • Fully insured arrangement • Self-funded: specific and/or aggregate stop loss • Carrier’s administration options: • Provided directly to employer • Outsourced admin and/or marketing through TPA • Outsourced underwriting through MGU • Reinsurer assumes risk from carrier
Reinsurance Transactions - Impact of “Disputed” or Litigious Claims on Financials • Disputed claims have become a common practice in reinsurance in late 90’s and today due to historical losses • Workers Comp, LMX, reinsurance pools • Reinsurers have been assessing the likelihood of legal settlements • Probability of arbitration success factored into valuations • Claim Valuation/Reserving: Art vs. Science? • Combination of actuarial and legal input in valuation process • Time will tell based on empirical data (actual settlements) • Legal actions may have a material impact on financial statements
Loss of Life Expectancy(Case #5) • Accident • Job Related • Non-Job Related • Assessment of Loss of Life Expectancy (LE) • Medical Director Reviews • Actuarial Assessments • Legal Guidance • Reduction in LE to determine economic value
Role of Medical Director (Case #5) • Reviewed individual case files • Multiple physician and hospital records • Report • Summarize medical findings • Established a mortality load based on level of health of individual
Role of Actuary (Case #5) • Provide impact of economic loss of life • Establish life expectancies • Calculations before & after mortality load • Establishment of appropriate table • Sample Calculations • US 1991 Male & Female Tables • Used for Economic Value calculation
A Life Settlement Transaction(Case #6) • Transactions in which an insurance policyholder sells his/her insurance policy to a life settlement provider for cash compensation, often using the proceeds to purchase a different investment or other financial product. • The sale of a life insurance policy that would have otherwise been surrendered or lapsed.
Who is typically involved in a life settlement transaction? • Client • Insured, Policyholder & Beneficiaries • Referring Party • Life Settlement Broker • Life Settlement Provider • Life Settlement Funder • Reinsurers • Medical Underwriting
What happens to the policy once sold? • Client receives a payment for the policy • Payment will be greater than policy cash surrender value • Client free to use money as desired (may have tax consequences) • Policy ownership and beneficiary are transferred to life settlement provider along with any rights associated with transfer • Insured remains unchanged • Life settlement provider could sell policy later • Client is no longer responsible for paying premiums • All premium payments and obligations are the duty of the purchaser
Life Settlement Provider • Purchase policies w/ 3rd party (institutional or private equity) funds. • Responsibility include: • Purchasing policy • Gathering data • Coordinating with medical underwriting and pricing the transaction • Insurance department compliance • Handling the legal agreement and ownership transfer • Responsible for the ongoing tracking and maintenance of the policy including payment of premium and collecting of death benefits • Similarities to Managing General Underwriter (MGU) in the insurance and reinsurance market.
The Realities of Life Settlements • Life settlement company collects a benefit when insured dies. • The buying company may not keep it for the life of the policy. • It could be sold one or more times • Insured has no control once its sells its policy. • Life settlements have less regulation than traditional insurance market. • Reason for selling policy may have changed
Life Settlements- Need for Expert Witness (Case #6) • Evaluate a portfolio in receivership • Provide opinions on insurance practices • Handle quantitative analysis to measure disputes • Disputes at different levels of the life settlement “food chain”
What was learned from Expert Witness Work? • Develop better work products • More accurate and consistent work • Peer reviews • Obtain a different perspective of client projects • Better understanding of client’s use of final product • Become more of a student of the professional • Additional review of Actuarial Standards of Practice
Future Opportunities • Always Litigious Situations • New Developments • Resources
Thank you Michael L. Frank, ASA, MAAA, FCA President & Actuary Aquarius Capital Phone: (914) 933-0063 E-Mail: email@example.com Website: www.aquariuscapital.com