5 Changes in Your Risk Profile Your Actuary Wants to Know About

When is the last time you read through an actuarial report and felt confident in your understanding of the numbers?

For most program managers, actuarial analysis is a bit of a mystery … the calculations and estimates provided are central to the success of their business, yet their justifications remain unclear. And many managers may be just fine with that, as long as they trust their actuary’s judgment.

However, the best analyses require strong collaboration between actuaries and their clients. With a better understanding of what actuaries do, program managers can better identify the pieces of information needed to produce accurate estimates of future losses, IBNR reserve requirements and optimal self-insured retention levels.

“We use historical data to make assumptions about what will happen going forward. But when businesses undergo significant changes, that historical data may no longer be predictive or sufficient. If a client company is not aware of all the information we need to know, it could significantly impact our results,” said Aaron Hillebrandt, principal and consulting actuary, Pinnacle Actuarial Resources.

“That’s why we try to educate companies as much as possible about what we do, and the data points that are most helpful for us.”

Insurers have certainly experienced COVID-19 impacts that actuaries need to measure, but other significant shifts should also be taken into account. Here are five key changes businesses may undergo that program managers should communicate to their actuarial partners.

1) Changes in Exposures and Premium Base

Amid economic shutdowns enacted throughout the pandemic, many businesses were forced to halt or significantly reduce operations, resulting in less foot traffic, lower sales, smaller payrolls, fewer miles driven, etc. — all metrics used to quantify exposure and calculate premiums.

“Some insurers chose or were mandated to give some premium refunds or rebates. But in most cases, the amount of premium rebate may have not been the full amount of what they saved from the reduced exposure,” Hillebrandt said.

Disparities between exposure versus premium reduction may be accounted for in a few different ways, which ultimately affects the bottom line. Actuaries need the full picture to understand how to adjust loss projections and IBNR reserves going forward. Those figures may also be impacted by premium non-payment or policy cancelation by clients that suffered financially during the crisis.

“As an actuary, we would need to understand if that premium number that we’re given in the data reflects any rebates, non-payments or cancellations,” Hillebrandt said. “Those changes impact what level of exposure we expect to see going forward.”

2) Changes in Loss Development Patterns

The pandemic also had varying impacts on claim management, with both positive and negative effects on loss development patterns. One major hiccup was the sudden transition to remote work. For some adjusters, this meant more distractions and IT issues, impaired productivity and subsequently longer claim cycles.

“Every individual and organization is different, but in general, things may not work as efficiently when everyone is working from home. Case logs and pending matters can build up. The flip side of that, however, is that fewer new claims may be reported due to business slowdowns and/or closures. That could allow adjusters to spend more time on older cases and get them closed faster. It all depends on the type of claim and the organizations that process them. The impact will vary from company to company,” Hillebrandt said.

Court closures are a similar story. A claimant interested in pursuing a lawsuit may be more inclined to settle rather than face protracted litigation — especially if economic hardship has piqued the need for quick payment. For cases already in litigation, however, canceled court dates mean extra months of attorneys’ fees and medical bills if injuries are involved.

“The cost of medical care is also impacted by people delaying treatment during the pandemic. Lower costs initially may later balloon if claimants’ conditions worsen as a result,” Hillebrandt said.

“If program managers are noticing these changes in how claims are developing, it’s important to communicate that to actuaries so we know how to interpret the data we see.”

3) Shifts in Claims Handling Philosophy

Global crises aren’t the only stimuli that spark changes in claims handling and loss development. Hiring a new claims manager or switching to a new TPA can create significant ripple effects to the underlying claims data. Where one person or organization may prefer to settle early and often, another may be keener to mount a defense.

“New team members or partners often want to do something different to make a mark and show their value. For example, I had a client that had the same in-house claims manager for a long time. Typically, their losses would develop upwards over time, but suddenly their data came in and there was massive downward development, especially in case reserves,” Hillebrandt said.

“It turned out the claims supervisor had retired, and the new hire decided to adjust case reserves on older claims that hadn’t been revisited in years and that were less costly than anticipated. We had to reflect that change in our analysis.”

Actuaries can create consistency across disparate approaches to reserving by applying actuarial techniques to adjust previous years to current average case reserve levels. But they need to know exactly how the approach is changing and what case reserving methods are being applied in order to do that.

4) Implementation of Loss Prevention Initiatives

If a new practice has the potential to produce big drops in losses or claims, actuaries want to know about both the substance and timing of the changes. Implementation of risk mitigation strategies may justify a recalculation of loss estimates and adjustment of IBNR reserves … but actuaries need to see the data.

“It’s easy to provide qualitative data and say, ‘Here are the changes we made. Forget about those big claims we had in the past; they won’t happen again.’ But in this scenario, quantitative data is really important,” Hillebrandt said.

Risk managers should not only have reports demonstrating the ROI of planned interventions, but they should also capture data to illustrate the true impact of their initiatives.

“I’ve certainly seen it a number of times where the company makes a change, and their initial estimate of the impact isn’t the same as the impact that actually emerges. Perhaps it wasn’t managed well, or training wasn’t sufficient, or some unexpected roadblock popped up. Even when a company is very confident in the potential of their loss prevention plans, we have to trust the data. The proof is in the pudding,” Hillebrandt said.

5) Adjustment of Self-insured Retentions

In the face of hardening market conditions, many insureds keep more risk in-house by increasing self-insured retentions, driven by higher premiums and/or reduced carrier appetite for risk. But they may not be using the most appropriate methods to estimate the optimal retentions.

“They might obtain commercial market quotes for the excess policies and see what the difference in cost is going to be. But there’s a big opportunity there for them to involve us in that process to examine the total cost of risk, which includes both the retained and commercially insured layers,” Hillebrandt said.

“We can quantify both expected losses and the variation in losses you might expect in a given year as the retention increases, depending on the desired confidence level. If a company wants to consider a 90% confidence level, that means we figure out how much money to set aside to make sure it’s enough in 9 out of 10 scenarios. We can determine what additional risk margin you need to be 90% confident with a $250,000 retention, $500,000 retention, and $750,000 retention,” he continued.

Keeping actuaries informed of planned changes in SIRs can minimize the risk of unexpected shortfalls.

“We don’t want people to just focus on the total cost of risk, which is the expected value. They also need to be aware of much more volatility they’re going to see when the SIR goes up,” Hillebrandt said.

Trust in a True Actuarial Partner

Insurance companies and their clients should look for actuaries that value relationships and collaboration. Actuaries that take the time to understand your business and explain their numbers will deliver clearer and more meaningful results.

“We don’t want to be that firm that just supplies a product; we want to be a partner. We want to have two-way communication throughout the process. We kick off any partnership with a meeting or a call to level set all these things and explain what information we’re looking for from the client and how we like to see the communication flowing back and forth,” Hillebrandt said.

“Pinnacle really shines when we work down in the trenches with the client, helping them figure things out and overcome problems as they arise instead of just sending out a 200-page report full of numbers.”

All of Pinnacle’s actuaries are trained to do more than just run the numbers. They understand how to ask the right questions and explain their calculations and judgment calls.

“We have a whole area of our company focused on development for all levels of our staff, from our entry level analysts to our more senior analysts to our junior credentialed actuaries to our consultants to our directors and principals,” Hillebrandt said.

“But there’s an informal side to training too. We’ve got a really good supervisory and mentorship structure where we work with our younger actuaries to prepare them for next-level roles and to ensure they know how best to provide value.”

To learn more, visit: https://www.pinnacleactuaries.com.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Pinnacle Actuarial Resources. The editorial staff of Risk & Insurance had no role in its preparation.

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