Work Comp Insights: Benefits of an Actuarial Consultant

By | March 7, 2014

Work Comp InsightsUnderstanding and utilizing a consulting actuary provides a competitive advantage for risk management professionals. While there is no guaranteed way to predict the future, an actuarial analysis looks at historical data to provide you with a forecast of coming financial situations, giving you the opportunity to prepare for upcoming expenses. It can also help you justify current programs and negotiate lower rates with insurance providers.

 

Budgeting and Setting Reserves

An actuarial analysis is imperative to appropriately account for outstanding liabilities relating to risk financing programs. First, an analytically sound estimate of ultimate incurred losses is required to fully recognize the amount of the liability. Next, an estimate of the timing of the payments in a cash flow analysis is needed to appropriately budget the cash requirements. Budgeting without reference to an actuarial analysis can lead to significant financial mistakes, which leave an organization unprepared to handle a loss. Financial Accounting Standard 112 (FAS 112) requires that certain employment benefits, such as workers’ compensation, be accounted for according to specific standards. This can be met by an actuarial analysis.

 

Alternative Loss Financing Decisions

Selecting an appropriate loss financing plan involves a wide ranging set of issues. But there is one point everyone agrees on: the losses are the largest and most significant piece of any plan. Since the losses are being financed, the loss estimate has the biggest impact on which program is the best option. Therefore, an actuarial analysis is a critical first step to any loss financing decision. Once a plan is selected, whether it is self-insurance, a captive, a large deductible program or some other type of loss-sensitive alternative, an actuarial analysis is commonly an annual — or in some cases more frequent — project.

 

Benchmarking

Determining the effectiveness of a loss control or loss prevention program can take years. But with the use of an actuarial analysis and pure loss rates (the dollars of loss per unit of exposure), effectiveness of a program can be gauged more quickly. Actuaries can review data from years prior to a program’s implementation and determine an average loss rate to be used as a benchmark. Then a new pure loss rate can be computed soon after the completion of the first year of the program. Comparing the new pure loss rate against the benchmark will help you assess the effectiveness of the program, and this comparison can be updated annually for an ongoing assessment.

 

Negotiating Security Requirements

The negotiation of security requirements is one of the most critical situations in which an organization can benefit from a relationship with a consulting actuary. The methodology that an insurance company uses to establish the amount of a security requirement is not always obvious. The risk manager should work with a consulting actuary to complete a thorough actuarial analysis that considers the unique circumstances of the organization. This would include numerous factors such as changes in reserve philosophy, growth or downsizing, new loss control programs, mergers or divestitures, potential claim recoveries, unique characteristics of specific divisions within the company and other such factors. An actuarial analysis is the most powerful negotiating tool an organization can use when discussing security requirements with an insurance company.

Benefits of an Actuarial Consultant


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