Loss Forecasting/Submissions

March 2004

Professionally written insurance submissions with detailed claims data that has been authenticated, trended, and developed is a critical necessity in marketplace negotiations.

by Peter M. Polstein

It never ceases to amaze me the number of submissions received by underwriters which contain useless claims information. Late this past year, I was hired as a consultant on a significant risk to ascertain if the damage caused by prior poor underwriting on behalf of an agency was repairable. One of the documents which was provided turned out to be a submission to the marketplace, by a consultant who was paid a substantial amount of money, with claims information which was worthless.

To be brutally honest, the entire submission lacked professionalism, but the claims portion—which might have swayed underwriters’ opinion toward a more positive stance—was literally 30 pages of unintelligible numbers, without totals, and without adequate description of loss. From the perspective of the client, the knowledge that over 20 insurers declined was a bitter pill to swallow, and one which certainly could have been more positive had at least the loss data been creditable.

What Is the Responsibility of the Broker/Agent?

Situations like the one described above beg the question as to what responsibility the broker or agent has to his prospective or existing client in the submission to the marketplace. Is it simply appending the insurer’s loss runs, assuming that the loss data is reasonable, to the submission, and when questions are asked by the marketplace, answering them? Or, is there a subjective arena of expertise which will play to the strength of the submission, and guarantee at least a favorable look at the prospect?

The answer simply is that the least questions asked by the marketplace, due in part to the quality of the submission, will usually elicit an affirmative reaction from underwriters. Irrespective of the quality of the loss run, most do not adequately provide descriptions of loss, and more importantly, the data has neither been trended nor developed. If the prospective insured is midsize to large, the marketplace is going to place its own values on the loss data, which will usually be dramatically higher than the incurred on the run.

What Information Should Be Included?

I believe that the submission to the marketplace requires an essential amount of professional, creditable loss information, which is ultimately defensible. To provide that information, the insurer’s loss run will require that it be authenticated as to actual loss date, cause, and an investigation on the part of the agent/broker that each claim is fair insofar as reserves and expenses, and most importantly, that it was not closed and continues to be carried on the run.

Once that has been established, those losses need to be trended and developed so that a defensible loss picture can be provided to the marketplace. Rarely will actuarial data vary between the submission and the marketplace to any extent, as long as the study uses industry factors.

Most insurers will want to see the raw data by the actuary, which will for the most part require at least 5 years of exposure, loss, and occurrence limits. Additionally, the submission should be prepared to defend the loss picture at other than “expected” which is the 55 percent confidence level, which leaves too much potential for additional development. It is wise to bring the factors up to “ultimate” or the 95 percent confidence level if for no other reason than to gain knowledge of worst-case scenarios.

Further, many submissions will provide developed losses at various limits, which will include the Increase Limit Factors which ultimately provide Trended Developed Loss Rates at various levels. To defend a loss picture without this critical information, how can anyone with any certainty state that Loss Cost Rate by either payroll, sales, or units is sufficient to contain the losses? This drill is imperative for those clients where deductibles, self-insured retentions, or loss sensitive programs are being considered.

Some may say the expense of an actuary is not a profitable venture for the size of my office, or the average size of risk. The fact is that there are a number of computer-generated programs which are available at very reasonable costs, whose components mirror those utilized by the Tillinghasts of the world.

Other Critical Segments

There are some critical segments as an adjunct to this topic which must be addressed. First of all, if there are so-called catastrophic losses within the data, they must be addressed from the standpoint of how and why they occurred, and what has been done to minimize the continuation of losses of this nature. The same holds true for repetitive claims and frequency.

Next, there are instances, especially in the commercial liability arena, where claims administration and defense play a critical role in whether the risk retains a profitable posture. For example, I have brokered a fair number of weapons manufacturers where the liability potential for severe loss, especially in this litigious environment, requires a high degree of expertise in defense. There are a very limited number of attorneys throughout the United States who can provide expert defense. I was fortunate enough to have met two of these experts who created a defense posture which afforded the underwriting community a profit on each account. Underwriters agreed to have counsel provide total defense from the ground up, without any intervention from the insurers’ claims department.

Obviously, all claims were reported to the insurer, and standard claims files were set up, but counsel provided reserve estimates and kept the insurer apprised on a scheduled basis of activity, as well as quarterly and annual loss runs, which contained exemplary data. The only requirement was that any potential loss which appeared to impair the limit by 50 percent would require reporting to the excess marketplace.

Of note, in each case, the risk was underwritten on a self-insured retention, with each being responsible for the payment of loss within the retention to counsel. With the exception of one insured, none of the remaining insureds required collateral to cover the retentions that were significant. One last comment on this particular example: none of the risks ever impaired their retentions utilizing this defense approach, which led to extremely competitive first layer risk bearing covers.

While this example may be unique because of the risk, there are any number of additional categories within the construction industries, heavy machinery, marine manufacturing where this applies and has proven to be an effective claims procedure.

Professionally written submissions, as I have stated in prior articles, are more than an ACORD form with loss runs appended. Loss forecasting, and the capacity to defend a position, is now and will continue to be a critical necessity in marketplace negotiations.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author’s employer or IRMI. This article does not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.