Actuarial Checklist For The Insurance And Risk Management Professional

by Al Rhodes

The responsibilities of risk managers, risk management consultants, accountants, and brokers increase as insurance programs become more complex. An experienced casualty actuary must help manage these new responsibilities. This report poses several questions that will arise when you shop for a casualty actuary and answers them frankly and concretely.

There are two reasons to use an actuary: (1) Some insurance programs require an actuary to review loss experience, and (2) an actuary is needed for technical/insurance management expertise to meet business or state requirements. The following is a list of frequently performed actuarial analyses:

• Actuarial reserve certifications
• FASB 112 requirements
• GASB 10 requirements
• Satisfaction of self-insurance requirements
• Negotiation of security requirements and letters of credit
• Acquisition due diligence analyses
• Evaluation of expected liabilities for financial statements
• Insurance budgeting
• Determination of funding requirements within deductible or self-insured retention
• Negotiation of price for aggregate coverage
• Selection of retention levels
• Cost allocations
• Payout analysis indicating the probable amount of payments by fiscal year
• Current-value analysis which indicates the current value of expected future payments at one or more designated discount rates

Often insurance professionals consider the actuary to be strictly a technician. However, actuaries should be viewed as management consultants who happen to have technical expertise. To utilize all the skills an actuary has to offer, be prepared to discuss all issues that affect your company. Before you consult with an actuary, be prepared to discuss the following questions:

• What is the scope of the analysis?
• What are you trying to accomplish with an actuarial analysis?
• What are the coverages to be analyzed?
• Which operational details of your company might determine loss experience?
• Have there been any acquisitions or divestitures?
• Has there been a change in claims handlers?
• Who has handled the claims?
• Has there been a change in reserving philosophy?
• What types of loss control programs have been implemented and when?
• Is your casualty program occurrence or claims-made?

Although actuaries add value in many ways, the reason most people bring actuaries into a project is to take advantage of their technical expertise and obtaining as much of the available data as possible. The following is a sample of the data needed to complete most actuarial analyses:

• Historical first dollar loss experience displayed in a triangular format whose corners are incurred losses, paid losses, and claim counts. Further divisions may include pure loss/ALAE, indemnity/medical, bodily injury/property damage, and total counts (including those with only costs).
• For Workers Compensation, a breakdown of losses by state is necessary because of the varying state benefit levels.
• A current loss run on tape, diskette, or hard copy.
• Your exposure to loss such as payroll, sales and number of vehicles for all completed and projected policy periods.
• Policy periods for which data is available.
• Per-occurrence and aggregate limitations for all policy periods.
• Information on whether allocated loss adjustment expenses are included within or are in addition to the loss limitation.
• Indicate whether salvage and subrogation have an impact on losses.

Planning ahead is the most effective way to minimize the cost of any actuarial project. The following items should be considered as early in the process as possible:

• If a presentation is required, decide early in the project to minimize travel expenses. You may accomplish a significant portion of the project over the phone (which is a money saver), but do not discount the value of a face-to-face meeting when the results need to be distributed to several people.
• Coordinate with the data provider to streamline the process.
• Provide as much data at the start of the project as possible. Even if the project is months away, initiate the data-gathering process as soon as it becomes feasible.
• Offer multi-year contracts to your actuarial provider to allow you to negotiate a budgeted expense that prevents unexpected increases in billable rates.

Actuarial consulting services can be a valuable resource for your organization. Communication and early preparation will increase the effectiveness of actuarial products as management tools. We hope that this actuarial checklist will help you obtain the services your organization requires.