Determining Appropriate Retentions San Diego RIMS Monthly Meeting November 17, 2011 Brian Mercer, Principal.

Determining Appropriate RetentionsSan Diego RIMS Monthly MeetingNovember 17, 2011

Brian Mercer, Principal

Copyright 2007, Integro USA Inc.

2

Agenda

Today we explore two ways to think about setting deductibles:

1. Benchmarking against similar organizations

2. Analytic approach to matching deductibles to your organization’s risk tolerance


3

Benchmarking


4

Benchmarking deductibles

Sources for benchmarking Your broker Your insurer RIMS survey Advisen Your professional network

Your organization’s tolerance for risk is more important than your revenue Capacity to pay claims Organizational attitudes


5

Analytic Approach


6

What Factors Drive the Retention Decision?

Market Price

Risk Tolerance

Expected Losses

Volatility

Collateral

Interest Rates

Tax Rates

Cost of Capital

Payment Patterns


7

Risk Tolerance


8

Determining a peer group: CareFusion


9



10


Other Category 13s

Health Care REIT

Agilent

Best Buy

DirectTV

Nordstrom

Time Warner

Humana


11

Benchmarking D&O Deductibles

25M 25M

0.0M

2.5M

5.0M

7.5M

10.0M

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Risk Tolerance Category

Securities Retention

Non Securities Retention


12

Simplified Risk Tolerance Approach


13

Perception of Risk Tolerance by Role

Source: IBM Institute for Business Value

CFO

CEO


Adventuresome VisionariesImage Makers

Operational LeadersDaily Operators


14



CFO

CEO

Sales





15



CFO

CEO

Sales

Marketing


Line Executive




16



CFO

CEO

COO

Sales

Marketing

CIO


Line Executive




17



CFO

CEO

COO

Sales

Internal Audit

Marketing

CIO


CRO

Line Executive




18



CFO

CEO

COO

Sales

Internal Audit

Marketing

Risk Manager

CIO


CRO

Line Executive




19

Considering the Downside


Risk Manager


Risk managers are among the most risk-averse professionals in the organization, because the focus is on the downside of risk Brokers Consultants Insurers Career concerns


20

Expected Losses and Volatility


21



22



23

Thinking about the likelihood of rare events

Back of the envelope ways to calculate the likelihood of events:Example 1: Imagine a rare event, such as a permanent disability, which

happens only once every 5 years The odds of this happening 3 times in a year is 0.8%

Type this into Excel =(1/5)^3

Example 2: Imagine a more common event that happens about four times per

year on average, such as a car accident The odds of this happening 10 or more times in a year is 2.9%

Type this into Excel =POISSON(4,10,TRUE)


24

Thinking about the likelihood of rare events

Using Insurance Pricing TablesExample 3: Imagine you have a good

handle on the typical number of large WC accidents that occur per year– In a typical year you have

2 large WC claims resulting in $100k or greater in damages

You can use an insurer table to determine the likelihood of a very bad claim, resulting in $250k in payments

Type this into Excel =2/276*50

You should expect .36 claims to exceed $250K (about 1 every three years)


25

Principles of setting deductibles

Set deductibles in line with your organization’s risk tolerance.

Set deductibles at high levels, but not so high that a claim

would impact your future earnings beyond the cost of the claim

itself

Prevent “microphone” risk

Consider the total cost of risk transfer:

– Premium

– Retained claims

– Cost of providing collateral


26

Summary

Both benchmarking and analytics are helpful ways to determine appropriate deductibles. To ensure that your choice of deductible is defensible, you should systematically consider: The price of alternative deductibles The odds that you’ll have a large claim What similar sized (and shaped) companies are doing

Determining Appropriate Retentions San Diego RIMS Monthly Meeting November 17, 2011 Brian Mercer, Principal.

Documents

integro usa

ibm institute

benchmarking slide

carefusion slide

business value cfo ceo

perception of risk tolerance

principal slide

role source