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ACTUARIAL SERVICES
ADVISORY
SOP 97-3 & Other Balance Sheet Reserves:The Devil’s in the Details
Las VegasSeptember 2004
2
SOP 97-3 & Other Balance Sheet Reserves:The Devil’s in the Details
Moderator:
Richard A. Hofmann, Senior Manager, KPMG LLP
SOP 97-3, Focus on DOL Special Fund
William G. Stanfield, Actuarial Manager, KPMG LLP
Other Insurer Concerns:
Claus S. Metzner, Actuary, Milliman USA
SAO & Reinsurer Concerns –
Sharon C. Carroll, Manager, KPMG LLP
Questions & Answers
3
SOP 97-3: Why Is This An Issue?
Advent of Large Deductible Policies
Designed to Reduce Taxes & Assessments
Self Insurers Still Taxed on Full Premiums
Caused Increase in Assessment Rates, Especially in Premium Based States
Many Employers Abandon Self-Insurance for Large Deductibles, Especially in Florida
Statutory Caps on Assessment Rates Cause Failure of Funding Mechanisms
4
SOP 97-3: Why Is This An Issue?
Rapid Expansion of Competitive RatingRating Bureaus Publish Loss Costs, not RatesSelf Insurers Taxed Using Fabricated RatesInsurers Taxed Based on Lower Net Premiums
ADA & Second/Subsequent Injury FundsMany States Terminate Eligibility for Recoveries Some Employers Are Taxed But Are Ineligible to Receive Recoveries
AICPA SOP 97-3 Reserve RequirementsLegislative Activity to Alter Assessments
Insurers Push for Premium Based Assessments
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Growth of Large Deductibles
Analysis of Workers Compensation Financial Data Market Growth Trends & Voluntary/Residual Payroll Distribution
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Average Accident Date
In M
illio
ns
of
Do
llars
Residual Market Implied Voluntary MarketImplied Alternative Market Unit Stat Plan
6
Summary of Assessments
WC Administrative FundsSecond/Subsequent Injury FundsGuaranty FundsOther Funds
OSHA/Safety/Loss Prevention ProgramsFraud Unit/Insurance Department FundingMajor Medical/Vocational Rehab ProgramsOccupational Disease Funds (IN, MI, WA)Self-Insurance Units (NY, RI, TX)Statistical Advisory Organization (ME)
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WC Administrative Funds
General Revenue (9)AK, CA(80%), HI, IL, IN, IA, MI, MN, UT
Split Funding Mechanisms (4)CA(20%), ME, MT, OK, VT
Exposure Based Assessments (2) - MD, NMPremium Based Assessments (18)
AR, AZ, CA(I), CO, FL, GA, ID, KY, ME(I), MA, MO, MT(I), NE, NC, OK(I), OR, RI, SC, TN, TX, VA, VT(I), WV
Loss Based Assessments (14)AL, CA(SI), CT, DE, DC, KS, LA, ME(SI), MS, MT(SI), NV, NH, NY, OH, OK(SI), PA, RI(NDD), VT(SI), WA, WI
Unclear (2) - NJ, SDNo Self-Insurance (2) - ND, WY
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Overview of Assessment Bases
Conflicting Goals: Equity vs. Simplicity
Split Funding Mechanisms
Exposure Based Assessments
Premium Based Assessments
Estimated with True-Ups
Estimated no True-Ups
Actual with Deferrals
Actual no Deferrals
Loss Based Assessments
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Premium Based Assessments:Several Types
Payrolls by Class (Needs to Be Audited)x Rates by Class (from Bureau/Company Rate Manual)= Manual Premiumx Experience Modification (Needs to Be Verified)+ Expense Constant= Bureau Standard Premium (Applies to Self Insurers)x Rate Deviations and/or Schedule Credit/Debits= Insurer Standard Premium- Premium Discounts, Dividends or Retro Adjustments= Collected (Net) Premium
10
Loss Based Assessments
Total Paid Losses (20):
WCA Only: DE, ME, MS, VT
SIF Only: GA, HI, IA, NE, SC, SD
WCA & SIF: AL, CT, DC, KS, LA, MT, NV, NH, PA, WA
Indemnity Paid Losses (11):
WCA Only: CA, WI
SIF Only: AK, ID, IL, IN, MI, MN, NJ
WCA & SIF: NY, OHPercent of Awards:
Death: MS, OK(WCA), WI($5000)
PTD: OK(WCA,SIF)
PPD: NC, OK(WCA,SIF), WI($7000)
No Dependency Death Claims: CA(SIF), NM, RI, TX
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SOP 97-3 Assessments: General Overview
Assessment Bases Are Constantly Changing
Several Types of Funds:Administrative Funds
Second Injury Funds
Guaranty Funds
Several Types of Assessment Bases:Premium vs. Losses
Estimated vs. Actual
True-Ups or Deferrals
Actuarial Input Needed to Avoid Overpayment
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Presenter’s contact detailsRichard A. Hofmann, ACAS, MAAASenior Manager, KPMG LLP(314) [email protected]
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2004 KPMG LLP, a member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A.03617G/SL