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FN 101 – THE LEXICON OF RISK FINANCING BASICS EXPLAINED Wednesday, April 30 9:00 am – 11:00 am. Moderator – Shaun Jackson Director of Risk Management, El Pollo Loco, Inc. [email protected] (714)599-5180 Speaker – Scott Silitsky - PowerPoint PPT Presentation
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FN 101 – THE LEXICON OF RISK FINANCING BASICS EXPLAINED
Wednesday, April 309:00 am – 11:00 am
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Moderator – Shaun JacksonDirector of Risk Management, El Pollo Loco, Inc.
[email protected] (714)599-5180
Speaker – Scott SilitskyVP Contracts & Risk Manager, ThyssenKrupp Elevator Company
[email protected] (954)597-3016
Coordinator/Speaker - Barbara Benson GrinnellVice President, Willis
[email protected] (985)727-4039
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What to ExpectAfter attending this session, you should be able to:
• Incorporate risk finance terms and tools into your skill set
• Understand how to use risk financing assessment tools
• Practice effective communication or risk finance concepts
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Agenda
• Introduction• Basic loss development• Loss analysis• Cash flow comparisons of market quotes• Conclusion
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Basic Loss Development
• Purpose: To use the growth patterns of historical losses to predict ultimate losses on policy years that are still open and developing
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Sources of Loss Development Factors
• Industry-provided– Insurance carriers– Rating bureaus– Independent consultants– Actuaries
• Organization-specific
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Casualty Coverage’s
• Workers’ compensation• Automobile liability• General liability• Products liability
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Loss Development Triangles
• Types of triangles– Incurred loss development– Paid loss development– Frequency loss development
• Per occurrence retention– Limited– Unlimited
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Incurred But Not Reported Claims
• Incurred But Not Reported (IBNR) claims caused by– Delay between occurrence and reporting of the claim– Actual amount for which a claim will settle is unknown– Indeterminate amount of time between a claims first
report and when all activity on that claim ceases
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Sample Company – Loss Run SummaryValuation Date: 12/31/2007 Valuation Date: 12/31/2011Policy Period Incurred Paid # Claims Policy Period Incurred Paid # Claims1/1-12/31/07 352,429 150,254 120 1/1-12/31/07 715,846 625,000 152
1/1-12/31/08 554,123 498,741 149 Valuation Date: 12/31/2008 1/1-12/31/09 1,344,098 1,300,000 160 Policy Period Incurred Paid # Claims 1/1-12/31/10 980,544 758,474 165 1/1-12/31/07 459,510 274,587 150 1/1-12/31/11 816,337 321,587 135 1/1-12/31/08 276,952 145,210 101
Valuation Date: 12/31/2012Valuation Date: 12/31/2009 Policy Period Incurred Paid # ClaimsPolicy Period Incurred Paid # Claims 1/1-12/31/07 718,434 701,058 152 1/1-12/31/07 591,215 525,112 152 1/1-12/31/08 564,587 525,000 149 1/1-12/31/08 393,833 312,541 140 1/1-12/31/09 1,488,670 1,356,987 161 1/1-12/31/09 592,449 256,874 130 1/1-12/31/10 1,322,208 1,254,123 167
1/1-12/31/11 1,104,286 645,874 160 Valuation Date: 12/31/2010 1/1-12/31/12 402,087 195,120 105 Policy Period Incurred Paid # Claims1/1-12/31/07 659,874 565,899 152 Valuation Date: 12/31/20131/1-12/31/08 500,123 478,001 148 Policy Period Incurred Paid # Claims1/1-12/31/09 1,053,915 501,245 155 1/1-12/31/07 718,434 718,434 152 1/1-12/31/10 644,873 295,741 140 1/1-12/31/08 570,145 545,879 149
1/1-12/31/09 1,588,127 1,485,214 161 1/1-12/31/10 1,549,531 1,301,258 170 1/1-12/31/11 1,087,525 1,001,234 175 1/1-12/31/12 578,368 418,547 145 1/1-12/31/13 402,966 150,145 99
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Sample Co. – Incurred Loss Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/08 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/09 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/10 644,873 980,544 1,322,208 1,549,531 1/1-12/31/11 816,337 1,104,286 1,087,525 1/1-12/31/12 402,087 578,368 1/1-12/31/13 402,966
Elapsed Months from InceptionIncurred Loss Triangle
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Sample Co. – Incurred Loss Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/08 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/09 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/10 644,873 980,544 1,322,208 1,549,531 1/1-12/31/11 816,337 1,104,286 1,087,525 1/1-12/31/12 402,087 578,368 1/1-12/31/13 402,966
Elapsed Months from InceptionIncurred Loss Triangle
24 month incurred losses12 month incurred losses
578,368402,087
=
= = 1.438
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/08 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/09 1.000 1.779 1.275 1.108 1.067 1/1-12/31/10 1.000 1.521 1.348 1.172 1/1-12/31/11 1.000 1.353 0.985 1/1-12/31/12 1.000 1.438 1/1-12/31/13 1.000
Incremental Growth TriangleElapsed Months from Inception
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Sample Co. – Incurred Loss Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/08 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/09 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/10 644,873 980,544 1,322,208 1,549,531 1/1-12/31/11 816,337 1,104,286 1,087,525 1/1-12/31/12 402,087 578,368 1/1-12/31/13 402,966
Elapsed Months from InceptionIncurred Loss Triangle
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/08 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/09 1.000 1.779 1.275 1.108 1.067 1/1-12/31/10 1.000 1.521 1.348 1.172 1/1-12/31/11 1.000 1.353 0.985 1/1-12/31/12 1.000 1.438 1/1-12/31/13 1.000
Incremental Growth TriangleElapsed Months from Inception
EMFI 12 24 36 48 60 72 84Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000
Average all policy years
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Sample Co. – Incurred Loss Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/08 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/09 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/10 644,873 980,544 1,322,208 1,549,531 1/1-12/31/11 816,337 1,104,286 1,087,525 1/1-12/31/12 402,087 578,368 1/1-12/31/13 402,966
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/08 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/09 1.000 1.779 1.275 1.108 1.067 1/1-12/31/10 1.000 1.521 1.348 1.172 1/1-12/31/11 1.000 1.353 0.985 1/1-12/31/12 1.000 1.438 1/1-12/31/13 1.000
EMFI 12 24 36 48 60 72 84Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000 Adjusted Inc. Avg. 1.000 1.408 1.295 1.126 1.057 1.007 1.000
Elapsed Months from InceptionIncurred Loss Triangle
Incremental Growth TriangleElapsed Months from Inception
Remove any “irregular” averages
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Sample Co. – Incurred Loss Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/08 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/09 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/10 644,873 980,544 1,322,208 1,549,531 1/1-12/31/11 816,337 1,104,286 1,087,525 1/1-12/31/12 402,087 578,368 1/1-12/31/13 402,966
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/08 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/09 1.000 1.779 1.275 1.108 1.067 1/1-12/31/10 1.000 1.521 1.348 1.172 1/1-12/31/11 1.000 1.353 0.985 1/1-12/31/12 1.000 1.438 1/1-12/31/13 1.000
EMFI 12 24 36 48 60 72 84Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000 Adjusted Inc. Avg. 1.000 1.408 1.295 1.126 1.057 1.007 1.000 Cumulative Average 1.000 1.408 1.823 2.052 2.169 2.184 2.184
Elapsed Months from InceptionIncurred Loss Triangle
Incremental Growth TriangleElapsed Months from Inception
36 month cumulative average X 48 month incremental average
1.823 X 1.126 = 2.052
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Sample Co. – Incurred Loss Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/08 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/09 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/10 644,873 980,544 1,322,208 1,549,531 1/1-12/31/11 816,337 1,104,286 1,087,525 1/1-12/31/12 402,087 578,368 1/1-12/31/13 402,966
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/08 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/09 1.000 1.779 1.275 1.108 1.067 1/1-12/31/10 1.000 1.521 1.348 1.172 1/1-12/31/11 1.000 1.353 0.985 1/1-12/31/12 1.000 1.438 1/1-12/31/13 1.000
EMFI 12 24 36 48 60 72 84Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000 Adjusted Inc. Avg. 1.000 1.408 1.295 1.126 1.057 1.007 1.000 Cumulative Average 1.000 1.408 1.823 2.052 2.169 2.184 2.184
EMFI 12 24 36 48 60 72 84Development Factor 2.184 1.551 1.198 1.064 1.007 1.000 1.000
Elapsed Months from InceptionIncurred Loss Triangle
Incremental Growth TriangleElapsed Months from Inception
= 84 month cumulative avg.
24 month cumulative avg.
2.184
1.408=
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Sample Co. – Incurred Loss Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/08 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/09 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/10 644,873 980,544 1,322,208 1,549,531 1/1-12/31/11 816,337 1,104,286 1,087,525 1/1-12/31/12 402,087 578,368 1/1-12/31/13 402,966
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/08 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/09 1.000 1.779 1.275 1.108 1.067 1/1-12/31/10 1.000 1.521 1.348 1.172 1/1-12/31/11 1.000 1.353 0.985 1/1-12/31/12 1.000 1.438 1/1-12/31/13 1.000
EMFI 12 24 36 48 60 72 84Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000 Adjusted Inc. Avg. 1.000 1.408 1.295 1.126 1.057 1.007 1.000 Cumulative Average 1.000 1.408 1.823 2.052 2.169 2.184 2.184
EMFI 12 24 36 48 60 72 84Development Factor 2.184 1.551 1.198 1.064 1.007 1.000 1.000
Discovery Schedule Cumulative 45.8% 64.5% 83.5% 94.0% 99.3% 100.0% 100.0% Incremental 45.8% 18.7% 19.0% 10.5% 5.3% 0.7% 0.0%
Elapsed Months from InceptionIncurred Loss Triangle
Incremental Growth TriangleElapsed Months from Inception
1 / development factor
= 1 / 2.184 = 45.8%
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Sample Co. – Paid Loss Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 150,254 274,587 525,112 565,899 625,000 701,058 718,434 1/1-12/31/08 145,210 312,541 478,001 498,741 525,000 545,879 1/1-12/31/09 256,874 501,245 1,300,000 1,356,987 1,485,214 1/1-12/31/10 295,741 758,474 1,254,123 1,301,258 1/1-12/31/11 321,587 645,874 1,001,234 1/1-12/31/12 195,120 418,547 1/1-12/31/13 150,145
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 1.000 1.827 1.912 1.078 1.104 1.122 1.025 1/1-12/31/08 1.000 2.152 1.529 1.043 1.053 1.040 1/1-12/31/09 1.000 1.951 2.594 1.044 1.094 1/1-12/31/10 1.000 2.565 1.653 1.038 1/1-12/31/11 1.000 2.008 1.550 1/1-12/31/12 1.000 2.145 1/1-12/31/13 1.000
EMFI 12 24 36 48 60 72 84Incremental Avg. 1.000 2.108 1.848 1.051 1.084 1.081 1.025 Adjusted Inc. Avg. 1.000 2.108 1.661 1.051 1.084 1.081 1.025 Cumulative Average 1.000 2.108 3.503 3.680 3.988 4.310 4.417
EMFI 12 24 36 48 60 72 84Development Factor 4.417 2.095 1.261 1.200 1.108 1.025 1.000
Payout Schedule Cumulative 22.6% 47.7% 79.3% 83.3% 90.3% 97.6% 100.0% Incremental 22.6% 25.1% 31.6% 4.0% 7.0% 7.3% 2.4%
Paid Loss TriangleElapsed Months from Inception
Incremental Growth TriangleElapsed Months from Inception
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Sample Co. – Frequency Triangulation - WCPolicyYear 12 24 36 48 60 72 841/1-12/31/07 120 150 152 152 152 152 152 1/1-12/31/08 101 140 148 149 149 149 1/1-12/31/09 130 155 160 161 161 1/1-12/31/10 140 165 167 170 1/1-12/31/11 135 160 175 1/1-12/31/12 105 145 1/1-12/31/13 99
PolicyYear 12 24 36 48 60 72 841/1-12/31/07 1.000 1.250 1.013 1.000 1.000 1.000 1.000 1/1-12/31/08 1.000 1.386 1.057 1.007 1.000 1.000 1/1-12/31/09 1.000 1.192 1.032 1.006 1.000 1/1-12/31/10 1.000 1.179 1.012 1.018 1/1-12/31/11 1.000 1.185 1.094 1/1-12/31/12 1.000 1.381 1/1-12/31/13 1.000
EMFI 12 24 36 48 60 72 84Incremental Avg. 1.000 1.262 1.042 1.008 1.000 1.000 1.000 Adjusted Inc. Avg. 1.000 1.262 1.042 1.008 1.000 1.000 1.000 Cumulative Average 1.000 1.262 1.315 1.325 1.325 1.325 1.325
EMFI 12 24 36 48 60 72 84Development Factor 1.325 1.050 1.008 1.000 1.000 1.000 1.000
Discovery Schedule Cumulative 75.5% 95.3% 99.2% 100.0% 100.0% 100.0% 100.0% Incremental 75.5% 19.8% 4.0% 0.8% 0.0% 0.0% 0.0%
Number of Claims TriangleElapsed Months from Inception
Incremental Growth TriangleElapsed Months from Inception
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Discovery and Payout Patterns• General/products liability
– Slowest patterns– Longest tail because of investigation, litigation, and time lag between
report and occurrence date• Workers’ compensation
– Payout increases steadily over time– Benefits are statutorily defined– Duration of injury and amount of medical treatment unknown
• Automobile liability– Relatively quick patterns– Relatively no lengthy litigation
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Loss Analysis – Forecasting and Ultimate Liability Analysis
• Ultimate liability projections– Adhere to FASB and GASB requirements regarding
contingent liabilities
• Loss forecasting– Part of the budgeting and marketing process
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Sample Co. – WC Remaining Liability Projections
(a) (b) (c) (d) (e) (a x b) (c - d)
Policy YearIncurred Losses
@ 12/31/13
Loss Development
Factor Ultimate LossesPaid Losses @
12/31/13Remaining Liabilities
1/1-12/31/07 718,434 1.000 718,434 718,434 - 1/1-12/31/08 570,145 1.000 570,145 545,879 24,266 1/1-12/31/09 1,588,127 1.007 1,598,815 1,485,214 113,601 1/1-12/31/10 1,549,531 1.064 1,648,625 1,301,258 347,367 1/1-12/31/11 1,087,525 1.198 1,302,747 1,001,234 301,513 1/1-12/31/12 578,368 1.551 897,261 418,547 478,714 1/1-12/31/13 402,966 2.184 879,900 150,145 729,755
Total 6,495,096 7,615,927 5,620,711 1,995,216
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Sample Co. – WC Loss Forecast
(a) (b) (c) (d) (e) (f) (g)(a x b) (c x d) (e / f)
Policy Year
Incurred Losses @ 12/31/13 LDF
Ultimate Losses
Inflation Factor @ 7%
Inflated Ultimate Losses
Number of Employees
Inflated Ult. Loss Per
Employee
1/1-12/31/07 718,434 1.000 718,434 1.606 1,153,648 700 1,648 1/1-12/31/08 570,145 1.000 570,145 1.501 855,634 800 1,070 1/1-12/31/09 1,588,127 1.007 1,598,815 1.403 2,242,421 900 2,492 1/1-12/31/10 1,549,531 1.064 1,648,625 1.311 2,161,011 950 2,275 1/1-12/31/11 1,087,525 1.198 1,302,747 1.225 1,595,921 975 1,637 1/1-12/31/12 578,368 1.551 897,261 1.1449 1,027,274 1,000 1,027 1/1-12/31/13 402,966 2.184 879,900 1.070 941,493 900 1,046
1/1-12/31/11 1,443,000 1.000 1,443,000 900 1,603
Assumptions:1. Client specific loss development factors2. No losses in excess of the per occurrence limit3, Workers' compensation inflation rate = 7% per year4. Forecast includes all policy years
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(a) (b) (c) (d) (e) (f) (g)(a x b) (c x d) (e / f)
Policy Year
Incurred Losses @ 12/31/13 LDF
Ultimate Losses
Inflation Factor @ 7%
Inflated Ultimate Losses
Number of Employees
Inflated Ult. Loss Per
Employee
1/1-12/31/07 718,434 1.000 718,434 1.606 1,153,648 700 1,648 1/1-12/31/08 570,145 1.000 570,145 1.501 855,634 800 1,070 1/1-12/31/09 1,588,127 1.007 1,598,815 1.403 2,242,421 900 2,492 1/1-12/31/10 1,549,531 1.064 1,648,625 1.311 2,161,011 950 2,275 1/1-12/31/11 1,087,525 1.198 1,302,747 1.225 1,595,921 975 1,637 1/1-12/31/12 578,368 1.551 897,261 1.1449 1,027,274 1,000 1,027 1/1-12/31/13 402,966 2.184 879,900 1.070 941,493 900 1,046
1/1-12/31/11 1,116,000 1.000 1,116,000 900 1,240
Assumptions:1. Client specific loss development factors2. No losses in excess of the per occurrence limit3, Workers' compensation inflation rate = 7% per year4. Forecast excludes policy years 1/1-12/31/07 through 1/1-12/31/10
Excluded
Sample Co. – WC Loss Forecast
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Risk Financing
• Determining the most cost-effective way to pay or fund for losses
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Risk Financing Continuum
Risk Transfer Risk Retention
Guaranteed Cost
Large Deductible
Qualified Self-Insurance
Captive
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Risk Financing Continuum
Risk Transfer Risk Retention
Guaranteed Cost
Large Deductible
Qualified Self-Insurance
Captive
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Large Deductible
• Loss retention plan• Excess insurance covers losses above deductible• Positive cash flow• Ability to influence program costs• Access to insurer services• Collateral requirements• Tax deduction disadvantage
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Qualified Self Insurance
• Formalized retention program• Excess insurance purchased for losses exceeding limit• Qualification requirements vary by state• Positive cash flow• Ability to influence program costs• Unbundled services• Administrative requirements
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Factors Influencing Design of Risk Financing Programs
• Expected losses• Market conditions• Corporate
philosophy• Risk control
commitment• Financial position
• Geographical locations
• Loss payout patterns• Effective tax rate• Corporate ownership• Cash flow
comparisons
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Cash flow Comparisons
• Definition: Using the net present value of alternative market quotes to determine the most cost-effective program
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Present Value Analysis
$ today is worth more than $ tomorrow because of investment
income implications.
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Investment Income
• Fund losses at a discount, additional money will be added as interest is earned
• Varied by program and payout• One decision tool to select the ideal program
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Tax Implications
• Need to consider when the losses and premium can be deducted from taxable income
• Different programs are treated differently• Should involve corporate tax department
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Costs Included
• Expected losses• Primary and excess
premiums• Claims handling• Taxes• Assessments• Loss Control
• Broker fees• Collateral• Fronting costs• Residual market
loads• Boards and bureaus• State funds
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Case Study
• Compare the net present value of the following programs– Guaranteed cost– Self-insurance
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Sample Co. – 1/1-12/31/14 WC Guaranteed Cost Cash Flow
(a) (b (c) (d) (e) (f)(b x 34%) (b - c) (d x f)
MonthPremium
Cash Flow Tax EffectAfter-Tax
Cash FlowDiscount
Factor
Discounted After Tax
Cash Flow1 125,000 42,500 82,500 1.0000 82,500 2 125,000 42,500 82,500 0.9967 82,231 3 125,000 42,500 82,500 0.9935 81,962 4 125,000 42,500 82,500 0.9902 81,695 5 125,000 42,500 82,500 0.9870 81,428 6 125,000 42,500 82,500 0.9838 81,163 7 125,000 42,500 82,500 0.9806 80,898 8 125,000 42,500 82,500 0.9774 80,634 9 125,000 42,500 82,500 0.9742 80,371
10 125,000 42,500 82,500 0.9710 80,109 11 125,000 42,500 82,500 0.9678 79,847 12 125,000 42,500 82,500 0.9647 79,587
Total 1,500,000 510,000 990,000 972,424
Assumptions:1. Premium is paid in 12 monthly installments at the first of the month2. Losses are discounted at a 4% discount rate3. The effective tax rate is 34%
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Sample Co. – 1/1-12/31/14 WC Self Insurance Cash Flow
Month
Cumulative Payout
Schedule
Incremental Payout
Schedule Paid Losss Letter of
Credit Fee Excess
Premium Claims
Handling Admin.
Expenses Fees & Assess.
Total Cash Flow
After-Tax Cash Flow
Discount Factor
Discounted After-Tax
Cash Flow
1 0.09% 0.09% 1,004 5,000 8,333 50 5,000 2,500 21,888 14,446 1.0000 14,446 2 1.18% 1.09% 12,164 8,333 608 21,106 13,930 0.9967 13,884 3 2.35% 1.17% 13,057 8,333 653 22,043 14,549 0.9935 14,454 4 3.71% 1.36% 15,178 8,333 759 24,270 16,018 0.9902 15,862 5 5.34% 1.63% 18,191 8,333 910 27,434 18,106 0.9870 17,871 6 7.15% 1.81% 20,200 8,333 1,010 29,543 19,498 0.9838 19,182 7 9.15% 2.00% 22,320 8,333 1,116 31,769 20,968 0.9806 20,561 8 11.32% 2.17% 24,217 8,333 1,211 33,761 22,283 0.9774 21,779 9 13.85% 2.53% 28,235 8,333 1,412 37,980 25,067 0.9742 24,420
10 16.57% 2.72% 30,355 8,333 1,518 40,206 26,536 0.9710 25,767 11 19.47% 2.90% 32,364 8,333 1,618 42,316 27,928 0.9678 27,030 12 22.64% 3.17% 35,377 8,333 1,769 45,479 30,016 0.9647 28,956
Subtotal 22.64% 252,662 5,000 100,000 12,633 5,000 2,500 377,796 249,345 244,212
24 47.73% 25.09% 280,004 3,868 14,000 297,873 196,596 0.9460 185,970 36 79.29% 31.56% 352,210 2,614 17,610 372,434 245,806 0.9096 223,578 48 83.31% 4.02% 44,863 1,036 2,243 48,142 31,774 0.8746 27,789 60 90.29% 6.98% 77,897 835 3,895 82,626 54,533 0.8409 45,860 72 97.58% 7.29% 81,356 486 4,068 85,910 56,700 0.8086 45,848 84 100.00% 2.42% 27,007 121 1,350 28,479 18,796 0.7775 14,614
Total 100.00% 1,116,000 13,958 100,000 55,800 5,000 2,500 1,293,258 853,550 787,871
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Sensitivity Analysis
• How do optimistic and pessimistic loss projections alter the net present value decision of the various program alternatives?
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Sample Company – Net Present Value Cash Flow Comparison
$428,825
$787,871
$1,505,963
972,424 972,424 972,424
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
Optimistic Expected Pessimistic
Loss Scenario
Ne
t C
as
h F
low
Self Insurance
Guaranteed Cost
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In Conclusion…•Key Points
–Loss development–Loss analysis–Cash flow comparisons
•Questions•Please complete the session survey on the RIMS14 mobile application.
