HB1101 provides a detailed definition of the industrial insured captive. Essentially, though, the bill defines industrial insureds as having:

(1)  assets greater than $50 million;

(2)  more than 100 employees;

(3)  annual insurance premiums greater than $200 thousand per line of business.

Industrial insured captives are allowed to insure for their member companies all commercial lines of business except workers’ comp, they must maintain unimpaired paid-in capital of at least $200 thousand and surplus of at least $500 thousand. The bill also permits captive reinsurance companies with much higher capital requirements to reinsure workers’ compensation risk.

Captive insurers of all types will be required to perform an actuarial analysis as part of its initial feasibility study. Then, it also must file annually an actuarial opinion on loss and loss adjustment expense reserves provided by an independent actuary. HB Actuarial Services is licensed to provide this independent actuarial opinion.

How are E-mods Changing?

Going forward, losses from lost-time claims larger than $5,000 will be weighted more heavily in the formula that determines an employer’s e-mod. This effect will be strongest among small lost time claims – ($5,000 to $15,000 claim size). As a result, to the extent that employers are successful at preventing lost time claims, they will see their e-mods go down. On the opposite side of the coin, those employers that are less successful than their peers at preventing these claims will see their e-mods increase. The change in the e-mod formula is designed to be revenue neutral, meaning that premium increases to some employers will be offset by premium decreases to other employers. NCCI is transitioning into this formula over a three year period.

NCCI decided to implement this change because they found that those employers with the lowest e-mods (under 0.90) had much better loss ratios even after application of the e-mod credit; those employers with the highest e-mods (over 1.10) had much worse loss ratios even after the e-mod debit. The goal of the NCCI experience rating plan is to have all risks have equal expected loss ratios after the application of e-mods, making each employer equally desirable from an insurance company standpoint. The change described above is a big step towards accomplishing that goal.

Insurance Companies

This change means that expected profitability for insurance policies is much less affected by the e-mod of the insured employer. Insurance company underwriters and decision makers should not rely as heavily on the e-mod of the employer to help them decide whether to underwrite that particular employer.

Self-Insured Employers

This change means that the risk management / safety focus of self-insureds should be on preventing all lost time claims, regardless of size. After all, the fewer lost-time claims an employer experiences, the less likely the employer will experience a large (over $250K) lost time claim. Just 1 or 2 large lost time claims will significantly affect the profitability of most self-insurance programs.

He views the process he used to make baseball decisions as equivalent to the actuarial process:

“…when we used sabermetrics. It was essentially looking at a baseball team like an actuary would…”

“And what I mean by that is that an actuary will probably be a better advisor as to whether you should sign a player or not sign a player based on the information they have…”

We at HB Actuarial Services have long known that the actuarial process has value in all data intensive business decision making. Be like Billy Beane and give us a call at (561) 279-2323 to discuss your unique business issues today.

Also – We agree that the casting of Brad Pitt as Billy Beane was perfect.

All he’s asking for is a mere $25 Billion. His case stems from the fact that on September 16, 2008 the government forced AIG to give up 79.9% of the company in exchange for it’s $85 Billion aid package (later increased to over $180 Billion) to keep the company afloat.

A quick summary of his complaint suggests that he thinks it is unfair that many financial institutions were offered generous loans at favorable interest rates during the financial crisis, while AIG had to give up 80% of the company in order to get the finances it needed.

I wonder if Mr. Greenberg believes that the shareholders of Lehman got a better deal. They didn’t hand over any of their company to the Federal Government. While I am impressed with Greenberg’s moxie, as a taxpayer I side with the Feds.

Updated 2/22/2012

Here I look at industry claim statistics to understand whether the 80/20 Rule applies to workers’ comp claims. Consider the following statistics (gathered and rounded from NCCI data):

• Percentage of all Claims that are Lost Time Claims: 24%
• Percentage of all Losses that are from Lost Time Claims:    93%

Right away we see that, if anything, workers comp claims follow a rule even more dramatic than the 80/20 rule – 93% of all losses come from 24% of all claims, and these claims are easy to identify (lost time claims).

Now I’ll check to see if workers’ comp lost time claims follow a similar rule

• Cost of Average Lost Time Claim:                             $55,000
• Cost of Median Lost Time Claim:                               $27,000 (50% of lost time claims larger than this)
• Percentage of losses excess of $27,000:                  38%

Using some math and an understanding of the loss distribution curve, I calculate

• Percentage of losses from claims excess of $27,000:           87%

So, for lost time claims, 87% of all losses come from 50% of all claims. Not quite an 80/20 rule, but pretty close. Finally, I combine the information from the two rules derived above:

• Percentage of all Claims that are larger than $27,000:          24% x 50% = 12%
• Percentage of all Losses from claims larger than $27,000:   93% x 87% = 81%

Now we have the information to answer the question “Do workers’ comp claims follow the 80/20 rule?”

Absolutely they do! Actually the effect is even more dramatic. 81% of all losses come from only 12% of all claims. So, if someone at your company tells you that we’d have had a good year if it wasn’t for a small number of large lost time claims, you can comfort them by explaining that’s the Pareto principle at work.

Aon Benfield reports that on average, casualty rate levels continue to be  positive in Q3 2011 . Rate increases are more broadly based than in prior quarters with Workers’ Comp and Property leading the way. In Q3, D&O rates continue to be the outlier as rate decreases seem to persist in that line.

Insurers aren’t seeing the benefits of rising rates, National Underwriter reports that for the first 9 months of 2011, the industry P&C combined ratio has risen to 105.3. And that’s after the effect of favorable reserve development.

On the other side of the insurance spectrum, they estimate that global reinsurer capital declined 4% from $470 billion at December 31, 2010 to $450 billion at September 30, 2011, the reduction of 6% in the first quarter being offset by growth of 1% in both the second and third quarters. This calculation is a broad measure of capital available for reinsurance and includes both traditional and non-traditional forms of reinsurance capital. The cause for the exit of reinsurance capital may be the paltry return on equity 2.8% for the first 9 months of 2011 compared to a 10.4% return for 2010.

All the data points in the same direction – rising rates across the board. Maybe we are finally heading towards a hard market. Stay tuned.

• Only 9% of all members of the casualty actuarial society (FCAS or ACAS) sign an actuarial opinion in any given year.
• 64% of those opining actuaries are consultants employed independently from the insurance company.
• 27% of those opining actuaries opined on only 1 insurance company.
• 7% of those opining actuaries are opining on at least 14 insurance companies.
• 85% of all insurance companies do not book the opining actuary’s estimate of liabilities for loss and loss adjustment expense reserves.
• Twice as many insurance companies booked loss reserves above the actuarial estimate as below the actuarial estimate.
• The percentage of companies booking loss reserves below the actuarial estimate has risen significantly in the past five years.

Our actuarial opinion services page contains our philosophy on actuarial opinions. Contact us if you’d like to discuss this topic more.

The NCCI has to make a few behind the scenes changes to secure the approval. The only one worth mentioning is to the roofers class code (5551). They don’t get any rate change at all.