EVERYBODY LOVES EQUITY - MIKE MISCHKOT (CIS OREGON), DOUG GOFORTH (KLCIS), CHRIS MCKENNA (NLC MUTUAL) NLC-RISC STAFF CONFERENCE OCTOBER 24, 2018 ...
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Everybody Loves Equity
Mike Mischkot (CIS Oregon), Doug Goforth (KLCIS), Chris McKenna (NLC Mutual)
NLC-RISC Staff Conference
October 24, 2018
Little Rock, Arkansasu What is Equity? u What business goals can Surplus support? u How is Surplus policy implemented? Agenda u Survey Results and Discussion
Defining Equity and Surplus • “Equity” or “Surplus” is the difference between Assets and Liability at a given evaluation date • “Targeted Equity” is the amount of equity an organization determines is needed to protect itself from unexpected future adverse events • The difference between “Equity” and “Targeted Equity,” (sometimes referred to as “Surplus Equity”) is the amount available for company to support new endeavors, dividends, etc.
u Reward current membership
u Retain members
What u Attract new members
business u Distribute funds back to origin
Promote rate stability
goals can u
u Incentivize risk management activities
surplus u Support contingent arrangements
support? u Improve competitive position in
product and/or pricing
u Flexibility with financing optionsImportant Distinction – Two Frameworks
u Direct Benefits
u External
u Declared
u Set aside
u Usually “Distributed” on a per member basis
u Internal
u Fund programs and activities
u Indirect Benefits
u Latitude and protection in endeavors with unknown outcomesDirect Benefits of Surplus
u Direct Benefits
u External
u Declared
u Set aside
u Usually “Distributed” on a per member basis
u Internal
u Fund programs and activities
u Indirect Benefits
u Latitude and protection in endeavors with unknown outcomesDistinction within Direct Benefits
u Subsidy
u Impacts the rate per exposure
u Benefits all members equally, regardless of participation and
experience
u Indirect Benefits
u Typically benefits individual members, to varying degrees,
dependent on specific factorsIndirect Benefits of Surplus u Contingency u Compliance u Increased Capacity u Alternative financing options / risk transfer
Aligning Surplus Uses with Goals
What are your Goals? Direct / Indirect Benefits of Surplus
u Reward membership u Rate Stability
u Retain membership u Fund Programs
u Grow membership u Coverage/product enhancement
u Distribute funds u Alternative risk financing/risk
u Incentive risk management transfer
activities u Contingency Support
u Improve competitive u Compliance
position in product and/or
price u CapacitySpecific Uses of Surplus
u Distribution
u Derived from past participation
u Basis of calculation
u Past participation
u Loss experience (gross or capped losses)
u Current participation
u Both
u Eligibility to receive
u Current member, or return within specified time
u Current status not considered
u Write checks, apply invoice credits, or bothSpecific Uses of Surplus (cont’d)
u General rate subsidy
u Benefits current and new members regardless of past participation
u May increase market share
u Potential pitfalls
u Lose track of “true” rate
u ”Targeted equity” requirement increasing while actual surplus
decreasingSpecific Uses of Surplus (cont’d)
u Program Funding
u Loss control / other programs
u Risk management grants
u Coverage / product enhancementEnabled by Surplus
u Contingency Funding
u Adverse development
u Legislative changes
u Increased SIRs
u Multi-year rate guarantees
u Reinsurance arrangements
u Investment Portfolio Risk
u PricingEnabled by Surplus (cont’d)
u Alternative financing options / risk transfer
u Retro programs
u Loan program
u Compliance
u Demonstrate sound financial condition
u Barrier to competiion
u Workers’ Compensation Department
u RegulatorsHow to Start?
u Illustrative examples from two pools
u Elements
u Purpose of the policy
u Definitions
u Equity, reserves, surplus, etc.
u Restricted, unrestricted, available for use
u Procedure
u Uses
u Governance
u Parameters and limitationsHow to determine “Targeted” Equity?
Less Sophisticated More Sophisticated
Regulatory-Based Financial Stress Testing Capital Model
Approaches Benchmarking
16Policy Dynamic Exhibits
CIS P/C Net Position - Claims & Rate Stabilization Reserves
As of June 30,
FY2017 Actual FY2018 Actual
Assets $ 86,246,093 $ 90,211,102
Liabilities 49,281,418 49,761,064
Net Position $ 36,964,675 $ 40,450,038
Claims Reserve
Claims Liability @ 95% Confidence $ 24,890,000 $ 24,851,000
Claims Expense 75% Contingency Margin 3,721,000 2,830,000
Liability Retro Program Reserve 1,000,000 1,000,000
SIR Allowance 2,000,000 2,000,000
Closeout Allowance 100,000 100,000
Total Claims Reserve $ 31,711,000 $ 30,781,000
Rate Stabilization Reserve
Unspecified reserve for Future Rate Stabilization $ 5,253,675 $ 9,669,038
Total Rate Stabilization Reserve $ 5,253,675 $ 9,669,038Policy Dynamic Exhibits
CIS PC Policy Compliance Format - As of June 30,
FY2017 FY2018 FY2019
Actual Actual Budget
Net Member Contribution $ 34,296,173 $ 34,254,571 $ 35,776,000
Net Position 36,964,675 40,450,038 44,456,038
Net Contribution to Net Position 92.8% 84.7% 80.5%
1 in 250-Year Capitalization $ 41,946,000 $ 41,946,000 $ 41,946,000
1 in 500-Year Capitalization 47,378,000 47,378,000 47,378,000
Current difference from 1 in 250 (4,981,000) (1,496,000) 2,510,000
Current difference from 1 in 500 (10,413,000) (6,928,000) (2,922,000)
Current dollar equivalent for 5% change $ 1,890,000 $ 2,255,000 $ 2,601,000Survey question: Which of these tools does your pool use in
determining “Target Equity” (10 respondents)?
Regulatory-based
Financial Benchmarking
Stress Testing
Capital Modeling
None
0 1 2 3 4 5 6 7
19Survey question: What does your pool do with increases in
surplus (10 respondents)?
Expand Risk Mgmt Programs
Value-added Services and Policy
Enhancements
Declare Dividends
Subsidize rates
Increase Retentions
0 2 4 6 8 10
20Survey question: What factors does your dividend plan
consider for determining distributions to members? (10
respondents)?
Loss ratio (gross or capped)
Current member at time of
distribution
Longevity of membership
0 2 4 6 8 10
21Contact Information for Panelists Michael J. Mischkot, CFO Citycounty Insurance Services (CIS) mmischkot@cisoregon.org Chris McKenna, Vice President NLC Mutual cmckenna@nlcmutual.com Doug Goforth, Deputy Executive Director Kentucky League of Cities Insurance Service (KLCIS) dgoforth@klc.org
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