Casualty Loss Reserve Seminar Loss Portfolio Transfers

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Casualty Loss Reserve SeminarLoss Portfolio
Transfers

• Presented September 18, 2000
• by
• Gustave A. Krause, Arthur Andersen LLP.
• Charles Woodman, Marsh, Inc.
• Bruce S. Zaccanti, Arthur Andersen LLP.

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Loss Portfolio Transfers

• What is a Loss Portfolio Transfer (LPT)
• For Many reasons an organization my have a large
  volume, (Portfolio) of claims/losses that have
  become an administrative or financial impediment
  for an organization. In order to try and maximize
  resources and reduce incurred balance sheet
  expenses, outstanding letters of credit, and/or
  cost of credit, the seller of a portfolio of
  losses/claims, seeks a buyer to assume the
  financial and administrative responsibility for
  the losses via a commutation or novation of the
  entire or significant portion of the loss
  portfolio.

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Loss Portfolio Transfers

• Issues for the Seller of the Portfolio to
  consider
• Claim Reserving/Administration
• Is the population of claim reserves accurately
  reserved to reflect the true ultimate exposure to
  the potential buyer?
• In order to facilitate the study of the adequacy
  of each loss require the current claim
  administrator or insurance carrier to Top Sheet
  each loss with enough information to allow the
  buyer to quickly evaluate each item of the loss
  details. Specific items to be included in the Top
  Sheet should include
• Date of Loss
• Date of Loss Report to TPA/Carrier
• Jurisdiction of Loss
• Details Description of Loss, including medical
  background and legal activity
• Potential Subrogation or Second Injury Fund
  Recoveries
• Strategy for Claim Management, including time
  frames for resolution
• Does the selling organization have a large enough
  staff of in-house people that could be negotiated
  into the agreement the buyer in order to ensure
  transfer of intellectual claim capital with the
  loss/claim population?

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Loss Portfolio Transfers

• Finance Agreements
• What are the terms of the claim administration
  cost. Cradle to Grave, Life of Claim, or Two
  year, then time and expense?
• Risk Management Information Systems
• Is the current carrier capable of quickly
  transmitting all of the loss file and financial
  details from the current resident system to the
  buyers system?
• Are the files in electronic (Paperless Format) or
  are they hard copy?
• Reinsurance Agreements
• Are the terms of the reinsurance agreement
  allowable or flexible enough that the buyer and
  seller can easily allow for the transfer of large
  loss payment to the buyer and will the coverage
  be impacted positively or negatively to either
  party as a result of the sale of the portfolio.
  Additionally, can an cut-through agreement be
  set-up to allow immediate cashflow from the
  reinsurer to the buyer?
• Claim Administration Finance Agreement
• Will the seller of the claims be able to recover
  monies deposited in escrow accounts as soon as
  the loss portfolio occurs and is interest still
  payable during the time of transition?
• Will the claim administrator or insurance carrier
  charge any addition fee for managing the losses
  while the portfolio transfer is in process?

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Loss Portfolio Transfers

• Tax and Finance Administration
• Once the loss portfolio transfer occurs from the
  Seller to the Buyer how quickly can the letter of
  credit be returned to the selling organization?
• What financial tax implications occur for the
  organization and is there a specific time that
  the Seller should consider this transaction due
  to the reduction of reserve expense (if recorded)
  and the realization of cash which now may be tax?

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Loss Portfolio Transfers

• Actuarial Analysis
• Has the Seller a cashflow analysis of the
  portfolio for sale? Specific items for
  consideration might included
• Loss Development Factors
• Changes in Claim Counts (Re-Opened Losses)
• Timing of Subrogation or Second Injury Fund
  Recoveries
• Actual versus estimate recoveries on Subrogation
  and Second Injury Fund claims
• Interest factor used to evaluate the cashflow
  discounts
• Variation in Loss Reserves (Aggregate and Large
  Individual Cases)
• Litigation or potential settlements of large
  blocks of losses in a short time period
• Increases or decreases in reported claims.

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Loss Portfolio Transfers

• Issues for the Buyer of the Portfolio to
  consider
• Claim Reserving/Administration
• Is the organization purchasing the portfolio of
  losses familiar with the line or lines of
  business being purchased and will the increased
  claim load require additional staff or cost to
  administer?
• Are the claim experts who reviewed the Top-Sheets
  and claim details comfortable that the loss
  details, action plans and case reserves
  accurately reflect the exposure of the losses?
  (Specifically, subrogation and second injury fund
  recoveries?)
• What pricing options is the seller of the
  portfolio likely to consider? Remember they want
  to exit entirely from this population of losses!
  (Offering and pricing Life of Claim is best)!
• Are the Top Sheets for each loss within the
  portfolio under consideration documented with
  enough accurate information to allow the buyers
  claim administration experts, underwriters and
  actuaries to assess the aggregate and individual
  loss details.

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Loss Portfolio Transfers

• Again, specific items to be included in the Top
  Sheet should include
• Date of Loss
• Date of Loss Report to TPA/Carrier
• Jurisdiction of Loss
• Details Description of Loss, including medical
  background and legal activity
• Potential Subrogation or Second Injury Fund
  Recoveries
• Strategy for Claim Management, including time
  frames for resolution

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Loss Portfolio Transfers

• Finance Agreements
• Are the are the terms of the claim administration
  and loss portfolio (insurance, captive,
  self-insurance, etc..) agreements flexible or
  cost efficient to allow the buyer to integrate or
  incorporate the new portfolio into a new or
  existing plan . Some consideration to contemplate
  should include
• Tax Implications?
• Letter of Credit?
• Cost of Credit?
• Claim Administration Fees?
• Risk Management Information System Fees Storage
  costs?
• Impact of cash payment to current surplus,
  equity, share price, etc...
• Risk Management Information Systems
• Is the Buyers system(s) capable of quickly
  accepting and incorporating the functionality
  required of the claim administrators,
  underwriters, and accounts?
• Again, if the files in an electronic format can
  the Buyers system handle the storage capacity and
  operational flexibility required with all
  pertinent loss details for administration without
  losing timing for potential subrogation or
  second-injury fund recoveries.

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Loss Portfolio Transfers

• Reinsurance Agreements
• Again, are the terms of the reinsurance agreement
  allowable or flexible enough that the buyer and
  seller can easily allow for the transfer of large
  loss payment to the buyer and will the coverage
  be impacted positively or negatively to either
  party as a result of the sale of the portfolio?
• Claim Administration Finance Agreement
• We suggest that several options be presented to
  the seller of the claims in order to allow them
  to transfer the loss portfolio as easily and
  economically as possible for both parties,
  however, the, most common terms sought from a
  seller to a buyer is life of the claim. Life of
  the claim charges allow the buyer and seller
  certainty in the negotiation and final sale of
  the entire portfolio of claims.

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Loss Portfolio Transfers

• Tax and Finance Administration
• Once the loss portfolio transfer occurs from the
  to the buyer to the seller how quickly will the
  buyer, if at all be required to adjust it current
  credit of collateral position? What is the
  financial impact of these transactions to other
  strategic objectives or activities planned for
  the organization?
• Again, what financial and/or tax implications
  occur for the organization and is there a
  specific time that the buyer should consider this
  transaction due to the potential increase of
  incurred expense and the disbursement of cash
  which may impact surplus or operations goals and
  objectives?

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Loss Portfolio Transfers

• Actuarial Analysis
• Has the buyer requested enough loss detail and
  claim history and cashflow detail to perform an
  analysis of the portfolio for sale on a
  standalone and combined book of business basis?
  Again, some specific items for consideration
  might included
• Loss Development Factors
• Changes in Claim Counts (Re-Opened Losses)
• Timing of Subrogation or Second Injury Fund
  Recoveries
• Actual versus estimate recoveries on Subrogation
  and Second Injury Fund claims
• Interest factor used to evaluate the cashflow
  discounts
• Variation in Loss Reserves (Aggregate and Large
  Individual Cases)
• Litigation or potential settlements of large
  blocks of losses in a short time period
• Increases or decreases in reported claims.

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Loss Portfolio Transfers

• What Does the actuary do?

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Loss Portfolio Transfers

• What Does the actuary do?
• Estimate Needed Reserves

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Loss Portfolio Transfers

• What Does the actuary do?
• Estimate Needed Reserves
• Estimate Payment Cash Flows

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Loss Portfolio Transfers

• What Does the actuary do?
• Estimate Needed Reserves
• Estimate Payment Cash Flows
• Estimate Present Values

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Loss Portfolio Transfers

• What Can/Should the actuary do?

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Loss Portfolio Transfers

• What Can/Should the actuary do?
• Assist in the Negotiation

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Loss Portfolio Transfers

• What Can/Should the actuary do?
• Assist in the Negotiation
• Help Commute Reinsurance

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Loss Portfolio Transfers

• What Can/Should the actuary do?
• Assist in the Negotiation
• Help Commute Reinsurance
• Test Scenarios to Quantify Risk

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Loss Portfolio Transfers

• What Can/Should the actuary do?
• Assist in the Negotiation
• Help Commute Reinsurance
• Test Scenarios to Quantify Risk
• Review Contract Wording