Actuarial support

Pinnacle helps mid-sized agencies provide the same services as the large brokers

By Michael J. Moody, MBA, ARM

Today’s risk management programs are much more sophisticated than those of just a few years ago. The array of risk financing alternatives continues to grow; and while most of the alternatives had been the exclusive domain of the Fortune 500 companies in the past, today they are available to most mid-sized corporations. It’s common for mid-sized corporations to utilize single parent captives, risk retention groups, and self-insurance. As a result, agents and brokers servicing mid-sized accounts have had to expand the scope of services they provide to their clients to remain competitive.

For the most part, middle market agents and brokers have been able to successfully compete with the larger international brokers by partnering with independent third-party service providers. In that regard, there are a wide variety of service providers including captive managers, lawyers, loss control professionals and actuaries that can supplement the value-added services that a middle market agent/broker can provide to its clients. Actuaries have become a critical part of the middle market agents/brokers’ strategic marketing plans.

Start at the beginning

While actuaries are typically associated with things like reserve analysis and probability studies, their work should begin much earlier in the process, according to Robert Walling, III, FCAS, MAAA, principal and consulting actuary for Pinnacle Actuarial Resources, Inc. Walling says that due in large part to the complexity of today’s risk management programs, agents and brokers are beginning to get actuaries involved with their customers much sooner.

Walling notes that the actuarial involvement is typically reserved for mid-sized agents’ or brokers’ largest accounts. The reason for this, he says, is that “they are getting a lot of pressure to provide the same types of products and services that a larger, international broker could provide.” While there are any number of situations that could require an actuary’s involvement, more and more, Walling says, they start a relationship by assisting with retention and limits study. “A key piece of the puzzle is what is the proper retention level and what is the best funding method to do that?” Frequently, Walling states, “This is done in advance of any alternative risk transfer feasibility study, just to determine what the client is looking for from a strategic standpoint in his overall risk management program.”

Once the organization has determined their appetite for risk, they can begin to consider which ART approaches best meet the client’s needs. This would then lead to a more formal analysis of the various funding options. Whether it is a captive feasibility study, self-insured program, or even a high deductible plan, much of the actuarial work that was completed during the risk appetite study becomes a critical element of the study. And as Walling points out, “It always comes down to the quality of the data.” If the client has good quality loss and exposure data, more credibility can be given to their specific experience and thus, it is much easier to design a risk management program that meets their specific needs. Walling says that the actuary can be invaluable during this important phase of the work.

Beyond the basics

Once the client’s risk appetite has been established, the most cost-effective method of financing this range of risk can be determined. This would encompass the more traditional types of actuarial work. Among the more popular approaches to today’s risk management programs are captive insurance companies, either as a single parent captive or in a group setting, such as a rent-a-captive, group captive or risk retention group. Today, it is common to provide a comparative funding analysis for several types of ART programs compared to the current funding method. These studies not only provide detailed projections on an ultimate cost basis, but on a discounted cash flow method as well. Walling states that many potential captive owners have their financial officers involved in this aspect of the study.

The three major areas that Walling gets involved in are captive feasibility studies, self-insured feasibility studies and medical malpractice trust studies. Each of these alternatives has a variety of advantages and disadvantages, and the actuarial projections are the key piece of the feasibility work. Walling points out that while the actuarial work is used extensively during the feasibility phase of the work, it is also an important part of the business plan that will be used to secure the approval of the regulatory agency. He also says his work is being used increasingly in reinsurance and fronting negotiations, and he expects this trend to continue.

Both the captive and self-insurance feasibility studies are usually performed for clients that may be targets of the larger, international brokers. However, medical malpractice trusts are different. By and large, most med mal trusts are done for local hospitals or doctor groups, and these are frequently already customers of the mid-sized agents. Most health care institutions prefer to retain a relationship with local agents and brokers rather than larger, international brokers. Walling also notes that actuaries’ working relationships with med mal groups tend to be more hands on, since they work closely with the client in structuring not only the trust, but the claims management and loss mitigation strategies in concert with the local agent or broker.

Additional valued services

Federal government regulations such as the Sarbanes-Oxley Act of 2002 have also resulted in more value-added services from the actuary. Walling says a perfect example is his work with some risk retention groups. Normally, the actuary would develop its funding recommendations as part of the annual review of the RRG, but today, some participants are requiring more detailed analysis of the specific charges from the RRG. If the participant is a public company, they need a more detailed analysis of the allocation from the RRG in order to attest to and sign the 404 document. Walling indicates that this is occurring much more over the past couple of years.

There also is an increased interest from middle market agents and brokers in designing captives for high net worth individuals. And while these types of captives have needs that are different from those of traditional captives, they are ideally suited for middle market brokers. The captives can be established as 831 (b) captives, which allows them to have investment income up to $1.2 million tax free, and they can be used in a variety of estate planning situations.

Planning for the future

Walling says middle market agents and brokers are showing increased interest in enterprise risk management, based on questions they get from their clients. The brokers are looking to the actuary to assist them in exploring ERM, he says, including the roles for captives and self-insurance.

Pinnacle also is working with middle market agents and brokers on developing agency management applications based on predictive modeling. Walling notes that there are “two major opportunities that present themselves in this area: customer response modeling and loss ratio modeling.”

The customer response modeling deals with the value that an agency adds to an insurer’s book of business by increasing select metrics. These metrics could include hit ratios on new business or retention ratios on policy renewals. By developing these types of statistics, the agency can use them for such things as attracting other insurers, identifying insurers that are not providing competitive quotes, or enhancing a current insurer’s perception of the agency in order to obtain a better revenue plan. It can also be used, according to Walling, to obtain greater advertising opportunities or expand products and/or services from an insurance company.

The loss ratio modeling can be used to identify the relative underwriting profitability among insurers. While this type of analysis has been used by insurance companies to identify their more profitable agencies, the same data can be of use to the agency. Walling says that a loss ratio model might be used to identify prospective insureds for an agency captive insurance program. Or these ratios can be used to identify industry segments where the agency is having poor loss experience or potential areas where additional loss prevention services could be helpful.

Summary

In order to effectively compete for today’s middle market account, agents and brokers need to have access to state-of-the-art risk management technology. For most mid-sized agents and brokers, it is difficult to justify an expenditure of this magnitude. Many times the most cost-effective solution is to have access to independent, third-party service providers. According to Walling, “By working with independent service providers, middle market agents and brokers can still provide a full array of ART market, value-added services without fear of competition from the service provider’s brokerage side of the house.” *