Loss Reserving

Loss reserving is a process of estimating reasonable accruals for the unpaid loss and loss adjustment expenses that must be posted on a balance sheet. As this is often times the largest liability in a company’s financials, the accrual has a very significant impact on income and surplus (or net worth).

Pinnacle tailors our analysis of indicated reserves to your particular situation. Our loss reserve analyses are used to support statements of actuarial opinion (SAOs), audit opinions, financial examinations, insurance company liquidations and rehabilitations and as expert opinions in lawsuits. We rely on a wide variety of traditional actuarial methods to develop reasonable estimates of unpaid claims liabilities. The results of such a study can be stated as a point estimate, a reasonable range of outcomes or as a statistical distribution of all possible outcomes. There are many factors that influence the analysis of indicated reserves, including internal factors such as safety programs, loss control efforts or management changes.

There are external influences as well - regulatory/judicial climate, the economy or weather patterns. Our consultants spend considerable time and effort to understand the unique climate in which your company operates before customizing our analysis to include the real world influences likely to influence the true accrual for unpaid claims liabilities. We also have significant expertise with insurer liquidators and rehabilitators.

Our experience with property/casualty insurance programs is both broad and deep, with no two programs alike. From financial analysis of companies and their management to expert witness testimony regarding our findings and recommendations, you can rely on our support.

Publications and Media

October 12 2017 APEX Webinar
State of the Florida Homeowners Market
Authored by Derek W. Freihaut and Arthur R. Randolph II.

August 2017 APEX Webinar
Actuarial Considerations for Allocating IBNR Reserves
Authored by Joseph A. Herbers and Aaron N. Hillebrandt.

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Case Studies

Florida Department of Financial Services
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Florida Department of Financial Services

The Florida Department of Financial Services (DOFS) oversees and administers the runoff of domestic Florida insurance companies in rehabilitation. Typically, when a company's financial condition is perilous, the DOFS obtains court orders to oversee the company’s administration and manage the orderly adjudication of all unpaid claims liabilities.

Measuring the extent of those claims liabilities involves uncertainty as to the number and severity of those claims. Further complicating the issue relates to the attitudes of claimants and their attorneys as regards to settlement of such claims knowing the company itself is under regulatory supervision. 

We assisted the DOFS in a formal way with the runoff of three nonstandard auto writers, all part of a company group. The nature of the exposure was such that the unpaid claims were dominated by bodily injury and property damage liability claims. Our modeling of the anticipated future settlements considered input from company claims representatives, the DOFS itself and the company’s auditors.

At the outset of the assignment, the company’s surplus was impaired significantly. During the process, the DOFS was able to achieve significant concessions on the part of claimants given the uncertain financial condition of the carriers involved. The outcome was when the last claim was paid, the company shell that remained had a positive surplus balance. 

Self Insured Loss Reserve Analysis
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Self Insured Loss Reserve Analysis

Pinnacle was approached by a major, national manufacturer to perform a loss reserve analysis of their retained workers compensation, auto liability, general liability and products liability loss exposures. The previous actuary worked for a large broker which the customer felt presented a conflict of interest. In addition, the actuary used industry benchmarks that the customer felt did not accurately represent their loss development behavior. Pinnacle worked with the customer to better understand their loss exposures, claims handling practices, and corporate risk management philosophy. We worked with the company to gather better internal data and refine the industry benchmarks to better reflect their third party administrator, industry focus and geographic mix. These refinements, and many others, led to a more accurate analysis of the company’s retained loss exposures, a reduced provision for unpaid claims on their balance sheet, and reduced collateral requirements from their fronting carrier.

U S Domestic Statement of Actuarial Opinion
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U S Domestic Statement of Actuarial Opinion

Domestic U.S. property/casualty insurers and risk retention groups are required to file an Annual Statement with state regulators each year by March 1. Part of that filing includes the submission of a formal Statement of Actuarial Opinion (SAO) by a qualified Appointed Actuary as to the reasonableness of held loss and loss adjustment expense reserves. The SAO must be one of five types:

  • Reasonable
  • Inadequate/Deficient
  • Excessive/Redundant
  • Qualified
  • No Opinion

In addition to the SAO, most jurisdictions require an Actuarial Opinion Summary (AOS) providing more detail on the Appointed Actuary’s specific findings by March 15. Lastly, a formal report narrative in support of the SAO and AOS is required to be available by May 1.

As the SAO is a compliance document, the primary audience is state regulators but the individual company must arrange for the service to be provided.

A recent SAO for one of our clients touched on many of the required disclosures:

  1. The adequacy of held reserves on a net basis were below the low end of our range of reasonable reserves until we took into account anticipated salvage and subrogation recoveries.
  2. The unearned premium reserves for long duration contracts were substantial and we conducted a review to determine they were adequate
  3. The Company held material loss and loss adjustment expense reserves for pools and associations. In order avoid having to issue a Qualified Opinion, we separately computed indicated reserves for two of the pools/associations, and obtained an SAO from the Appointed Actuary for the National Workers Compensation Reinsurance Pool.
  4. Reinsurance recoveries were in doubt for certain carriers as balance were sometimes overdue by more than 90 days. After reviewing the reinsurers’ A. M. Best ratings, we made the required disclosures about reinsurance collectability. 

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