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.
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