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Society of Actuaries Actuary as Expert Witness (Session 82 TS). Michael L. Frank – Aquarius Capital New York City November 15, 2005. Copyright and Disclaimer.

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society of actuaries actuary as expert witness session 82 ts
Society of ActuariesActuary as Expert Witness(Session 82 TS)

Michael L. Frank – Aquarius Capital

New York City

November 15, 2005

copyright and disclaimer
Copyright and Disclaimer

The material contained in this presentation has been prepared solely for informational purposes by Aquarius Capital Solutions Group (Aquarius). The material is based on sources believed to be reliable and/or from proprietary data developed by Aquarius, but we do not represent as to its accuracy or its completeness. Test cases provided are illustrative only and do not represent any specific clients or cases. The content of this presentation is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. This document and its contents are proprietary to Aquarius. Neither this document nor its contents may be copied or reproduced in any manner without the express consent of Aquarius. Any requests or questions about this material should be forwarded to

reasons for expert witness work
Reasons for Expert Witness Work
  • Lawsuit
  • Arbitration
  • Dispute
  • Insolvency
  • Third Party Opinion
  • Insurance Entities vs Insurance Entities
  • Insurance Entities vs Non-Insurance Entities
  • Non-Insurance Entities vs Non-Insurance Entities
type of projects
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
Arbitration Process
  • Initial Dispute & Legal Involvement
  • Internal Planning Meetings
  • Development of Analysis (Outside Expert Witness)
  • Depositions
  • Re-evaluation
  • Arbitration Hearings
  • Settlement Discussions
  • 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
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
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
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 (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
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
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
the disease management co reinsurance food chain case 3









The Disease Management Co. Reinsurance “Food Chain” – Case #3
reinsurance claims dispute case 4
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
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
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
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
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
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
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
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
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
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
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
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
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
Future Opportunities
  • Always Litigious Situations
  • New Developments
  • Resources
thank you
Thank you

Michael L. Frank, ASA, MAAA, FCA

President & Actuary

Aquarius Capital

Phone: (914) 933-0063