using your actuary as a strategic business partner presented by bill montanez, jim shoop, and jeff...

Using your Actuary as a Strategic Business Partner

Presented by Bill Montanez, Jim Shoop, and Jeff Doffing

Overview

• Ace Hardware Overview

• Risk Management Perspective– “Make sure the numbers are low.” vs. “What

are the numbers telling you about our business?”

• Broker Perspective– “I just need your loss pick.” vs. “How can we

best optimize our client’s total cost of risk?”

• What is the Actuary’s Perspective?– Move from “Make fun of your actuary” to “Have

fun with your actuary!”

• Q&A

Ace Hardware Overview• Ace Hardware Corporation (Ace)

– Headquartered in Oak Brook, Illinois, Ace Hardware Corp. is the largest retailer-owned hardware cooperative in the industry.

• Ace Insurance Agency– 4,600 Retailer owned & operated stores

• New Age Insurance Ltd. (NAIL)– Wholly owned captive insurance company of

Ace (Class 3)– Direct insurer of Ace’s corporate property &

casualty exposures– Reinsurer of retailer property & casualty

exposures (3rd party business)

Captive Reserve Analysis & Reserving PhilosophyACE HARDWARE

ALL VALUES IN MILLIONS

ESTIMATED RESERVE NEED $16.3

ACE HARDWAREALL VALUES IN MILLIONS

REASONABLE RANGE OF SOLUTIONSDISCOUNTEDOPTIMISTIC OPTIMISTIC CONSERVATIVE 70% CONFIDENCEEXPECTED EXPECTED EXPECTED EXPECTED LEVEL

ESTIMATED RESERVE NEED $13.3 $14.8 $16.3 $18.8 $22.3

Partner -Yes Strategic - ?

ACE HARDWAREALL VALUES IN MILLIONS

REASONABLE RANGE OF SOLUTIONSDISCOUNTEDOPTIMISTIC OPTIMISTIC CONSERVATIVE 70% CONFIDENCEEXPECTED EXPECTED EXPECTED EXPECTED LEVEL

(A) NAIL CARRIED RESERVE $25.4 $25.4 $25.4 $25.4 $25.4(B) ESTIMATED RESERVE NEED $13.3 $14.8 $16.3 $18.8 $22.3(C) RESERVE RELEASE $12.1 $10.6 $9.1 $6.6 $3.1

(D) AFTER TAX INCOME EFFECT $8.0 $7.0 $6.0 $4.4 $2.0(E) EXISTING NAIL EQUITY $16.1 $16.1 $16.1 $16.1 $16.1

(F) REVISED NAIL EQUITY $24.1 $23.1 $22.2 $20.5 $18.2

Strategic Business Partner

Vendor – Yes Partner - ?

Risk Management Perspective

• Captive Paid Losses vs. TPA Paid Losses– Who is minding the store?

• Risk Management: staff capacity/skills• Captive Manager: insufficient invoice detail• Claims Administrator: claimant focus

– Result?• Over payments by captive

– Excess of retention» Occurrence or aggregate

– Solution?• Actuarial Reconciliation/Monitoring


• Managing Expectations of Senior Management– Singular end of year actuarial analysis can

lead to unexpected year end adjustments– Executives don’t like year end surprises!!!– Solution?

• Actuarial Early Warning Systems– Quarterly actual vs. projected analysis– Estimate year end income statement

effect– Estimate future capital requirements

– Result?• Allows management time to react and plan


• Risk Management Support for Board Presentations– Demonstrate captive financial strength via:

• Premium to surplus ratios over time• Reserve to surplus ratios over time• Equity stress testing at various confidence

levels of reserves• Income statement stress testing by

comparing current year premiums to reserve risk

– Reserve risk = variability from expected


• ROI Support for Investment in Risk Control & Claims Management Initiatives– Cost savings projected and realized for

specific frequency reduction initiatives– Cost savings projected and realized to limit

average claim size

• Benchmarking– Frequency & severity trends by state– Analyze retail stores separate from distribution

centers – compare to self over time and to similar risks

in the same industry


• Geographic Strategy Assistance– Pricing the risk

• Florida coastal properties– Growing the business

• State specific profit pockets

• Audit Support– Not simply providing information to the audit

actuary – Review the audit actuary conclusions– Represent the client’s specific issues that may

be overlooked by the audit actuary


• Captive Financial Strategy Analysis – Asset/Liability Matching

• Estimating optimal investment mix of fixed income investments & equities given surplus, reserve durations, and reserve risk

– Is my captive under/over capitalized?• Effectively rating the captive

– Based on underwriting & investment risk» Collateral reduction» Collateral support from captive

– New product introductions & recommendations• Analyze risk/reward tradeoffs

Broker Perspective

• Submission Assistance– Garbage In = Garbage Out– Identifying & quantifying trends– Effects of Changing TPAs

• Differences in claim definitions– In WC, medical only vs. indemnity

• Reserving for ALAE• Differences in reserving philosophy

Collateral Analysis/NegotiationACE HARDWARE - CORPORATE

COLLATERAL ANALYSISUNDISCOUNTED AS OF 12/31/08

AON'S ESTIMATED COLLATERAL REQUIREMENT: $2,143,000ST. PAUL'S ESTIMATED COLLATERAL REQUIREMENT: $3,200,000

DIFFERENCE: ($1,057,000)

ACE HARDWARE - CORPORATECOLLATERAL ANALYSIS - ONE YEAR PAYMENT CREDIT

UNDISCOUNTED PROJECTED AS OF 12/31/09



ACE HARDWARE - CORPORATECOLLATERAL ANALYSIS - ONE YEAR PAYMENT CREDITDISCOUNTED - 4% PER ANNUM PROJECTED TO 12/31/09



Excess Pricing – Keep the Carrier Honest

CoverageRenewal Loss

PickRenewal

Loss RateRenewal Excess

Renewal Excess

RateCorporate AL

AON $1,209,600 $1,600 $173,880 $230

Initial Carrier Quote $1,611,285 $2,131 $270,000 $357

Difference $401,685 $531 $96,120 $127

CoverageRenewal Loss

PickRenewal

Loss RateRenewal Excess

Renewal Excess

RateCorporate AL

AON $1,209,600 $1,600 $173,880 $230

Revised Carrier Quote $1,441,000 $1,906 $233,000 $308

Difference $231,400 $306 $59,120 $78

Analyzing Risk/Reward Tradeoffs(A) (B)

7/1/06-07CARRIER

PROGRAM EXCESSOPTION CHARGE

1) Retail Property - $350,000 $940,0002) Retail Property - $750,000 $578,600

(C) (D) (E) (F) (G)EXPECTED ADDITIONAL

ANNUAL 90% RISKEXPECTED EXPECTED (SAVINGS ) CONFIDENCE VERSUSRETAINED TOTAL COST VS. CURRENT TOTAL COST CURRENT

LOSS & ALAE OF RISK PROGRAM OF RISK PROGRAM$1,937,000 $2,877,000 N/A $3,686,000 N/A$2,259,000 $2,837,600 ($39,400) $4,013,600 $327,600

(A) (B)

7/1/07-08CARRIER

PROGRAM EXCESSOPTION CHARGE

1) Retail Property - $350,000 $1,105,5002) Retail Property - $750,000 $587,000

(C) (D) (E) (F) (G)EXPECTED ADDITIONAL

AON ANNUAL ANNUAL 90% RISKEXPECTED EXPECTED (SAVINGS ) CONFIDENCE VERSUSRETAINED TOTAL COST VS. CURRENT TOTAL COST CURRENT

LOSS & ALAE OF RISK PROGRAM OF RISK PROGRAM$1,800,000 $2,905,500 N/A $4,068,689 N/A$2,150,000 $2,737,000 ($168,500) $4,939,704 $871,015

Summary• If you truly want a strategic business partner, find

an actuary who:– Knows your industry– Brings a strategic business solution mindset

instead of a technical solution mindset– Learns your company’s culture & develops

solutions accordingly– Looks at their proposed solution from your

perspective before they deliver it to you.– Anticipates questions and is prepared with

responses– Builds rapport with your management– Develops trust by acting with integrity

Summary

Q&A

using your actuary as a strategic business partner presented by bill montanez, jim shoop, and jeff...

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