layout: true background-image: url(img/rims_wide.jpg) background-size: contain --- class: left ## Transportation Industry Session ###### IND20/251 ### Speakers: - Rajesh Sahasrabuddhe, Partner, Oliver Wyman Actuarial Consulting --- # Learning Objectives **At the end of this session, you will:** * Understand the financial and management implication of discounting retained claim liabilities + Effect of Insurance Programs + Effect of Technology --- # Disclaimers * Oliver Wyman is not a public accounting firm and does not provide accounting advice. -- * I am an actuary. I am not an accountant. -- * In particular, I am a property-casualty actuary - so I know (almost) nothing about discounting retiree medical or pension liabilities. --- # Current Practices * Raise your hand if you ... -- + Record liabilities on a discounted basis -- + Record liabilities on a nominal / undiscounted basis -- + Don't know the basis of your recorded liabilities -- * Should you discount? Why or Why not? --- # Goals for Presentation * Discounting Self-Insured Claim Liabilities -- + Accounting guidance -- + Actuarial guidance -- * Applications -- + Insurance programs -- + Technology and telematics --- # Accounting Guidance * Current accounting guidance does not specifically address claim liabilities for non-insurance entities. As such, we rely on general accounting guidance that applies to all businesses. -- + US GAAP: "FAS 5", *Accounting for Contingencies* -- + [Statement of Financial Accounting Standards No. 4](http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220126761&acceptedDisclaimer=true), March 1975 -- + [Account Standards Codification 450-20 Loss Contingencies](https://asc.fasb.org/subtopic&trid=2127163) -- + U.S. Securities and Exchange Commission -- + [Accounting and Disclosures Relating to Loss Contingencies](https://www.sec.gov/interps/account/sabcodet5.htm#Y) --- # Accounting Guidance [IFRS: IAS 37 *Provisions, Contingent Liabilities and Contingent Assets*](http://eifrs.ifrs.org/eifrs/bnstandards/en/2016/ias37.pdf) * Risks and uncertainties -- + The risks and uncertainties that inevitably surround many events and circumstances shall be taken into account in reaching the best estimate of a provision. -- + Risk describes variability of outcome. A risk adjustment may increase the amount at which a liability is measured. ... Care is needed to avoid duplicating adjustments for risk and uncertainty with consequent overstatement of a provision. --- # Accounting Guidance [IFRS: IAS 37 *Provisions, Contingent Liabilities and Contingent Assets*](http://eifrs.ifrs.org/eifrs/bnstandards/en/2016/ias37.pdf) * Present Value -- + Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation. -- + Because of the time value of money, provisions relating to cash outflows that arise soon after the reporting period are more onerous than those where cash outflows of the same amount arise later. Provisions are therefore discounted, where the effect is material. -- + The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted. --- # Actuarial Guidance [Actuarial Standard of Practice No. 20, *Discounting of Property/Casualty Unpaid Claim Estimates*](http://www.actuarialstandardsboard.org/asops/discounting-propertycasualty-unpaid-claim-estimates/) * Section 3.3 _Payment Timing for Discounting_ Actuarial guidance for the development of the payment pattern * Section 3.4 _Discount Rates_ Actuarial guidance related to the selection of the discount rate (Risk-Free Approach, Portfolio Approach, Discount Rates Requested by Another Party) --- # Additional Risk #### and Risk Management Opportunities --  --- # Magnitude of Discount ### Commercial Auto Liability |Year | Est Unpaid |1.0% |2.0% |3.0% |4.0% |1.0% |2.0% |3.0% |4.0%| |:---: |----: |----: |----: |----: |----: |----: |----: |----: |----:| |2007 |0.259 |0.995 |0.990 |0.985 |0.981 |0.258 |0.256 |0.255 |0.254| |2008 |0.803 |0.988 |0.977 |0.966 |0.955 |0.793 |0.784 |0.775 |0.767| |2009 |1.127 |0.983 |0.966 |0.950 |0.934 |1.108 |1.089 |1.071 |1.053| |2010 |1.852 |0.981 |0.963 |0.945 |0.928 |1.817 |1.783 |1.750 |1.719| |2011 |3.593 |0.982 |0.965 |0.949 |0.933 |3.529 |3.467 |3.408 |3.351| |2012 |7.401 |0.984 |0.968 |0.952 |0.938 |7.279 |7.162 |7.049 |6.941| |2013 |15.793 |0.985 |0.970 |0.956 |0.942 |15.549 |15.315 |15.090 |14.874| |2014 |30.811 |0.984 |0.969 |0.954 |0.940 |30.323 |29.854 |29.404 |28.970| |2015 |51.841 |0.982 |0.965 |0.949 |0.933 |50.917 |50.029 |49.178 |48.359| |2016 |78.764 |0.979 |0.960 |0.941 |0.923 |77.144 |75.593 |74.107 |72.683| |<b>Total |<b>192.245 |<b>0.982 |<b>0.964 |<b>0.947 |<b>0.931 |<b>188.716 |<b>185.333 |<b>182.087 |<b>178.969| --- # Magnitude of Discount ### Workers Compensation |Year |Est Unpaid |1.0% |2.0% |3.0% |4.0% |1.0% |2.0% |3.0% |4.0%| |:---: |----: |----: |----: |----: |----: |----: |----: |----: |----:| |2007 |6.269 |0.943 |0.891 |0.843 |0.799 |5.912 |5.585 |5.286 |5.011| |2008 |6.041 |0.942 |0.889 |0.841 |0.797 |5.689 |5.370 |5.078 |4.812| |2009 |7.444 |0.942 |0.889 |0.841 |0.798 |7.010 |6.618 |6.262 |5.938| |2010 |9.450 |0.943 |0.892 |0.846 |0.804 |8.913 |8.430 |7.993 |7.597| |2011 |12.455 |0.946 |0.898 |0.855 |0.815 |11.786 |11.185 |10.643 |10.153| |2012 |17.080 |0.951 |0.906 |0.866 |0.830 |16.235 |15.477 |14.794 |14.176| |2013 |24.549 |0.956 |0.916 |0.880 |0.847 |23.460 |22.482 |21.599 |20.798| |2014 |36.969 |0.961 |0.926 |0.894 |0.865 |35.527 |34.226 |33.047 |31.974| |2015 |57.475 |0.966 |0.934 |0.906 |0.880 |55.499 |53.706 |52.072 |50.577| |2016 |86.472 |0.968 |0.938 |0.912 |0.887 |83.690 |81.152 |78.823 |76.679| |<b>Total |<b>264.203 |<b>0.960 |<b>0.924 |<b>0.892 |<b>0.862 |<b>253.723 |<b>244.230 |<b>235.597 |<b>227.717| --- # Base Case Example As an example, if you expect claims for a policy year to be paid out over a ten year period at a 3.0% interest rate, you would need to set aside $0.932 today for every dollar of estimated ultimate claims. |Rate |5 Years |10 Years |15 Years |20 Years |25 Years | |:-----:|:------------:|:-----------:|:------------:|:------------:|:------------:| |<b>0.0%|1.000|1.000|1.000|1.000|1.000| |<b>0.5%|0.990|0.988|0.987|0.987|0.986| |<b>1.0%|0.979|0.977|0.975|0.974|0.973| |<b>1.5%|0.969|0.965|0.963|0.961|0.960| |<b>2.0%|0.959|0.954|0.951|0.949|0.947| |<b>2.5%|0.949|0.943|0.939|0.937|0.935| |<b>3.0%|0.940|0.932|0.928|0.925|0.923| |<b>3.5%|0.930|0.922|0.917|0.914|0.911| |<b>4.0%|0.921|0.912|0.906|0.903|0.900| |<b>4.5%|0.912|0.902|0.896|0.892|0.889| |<b>5.0%|0.903|0.892|0.886|0.882|0.879| --- # Insurance Programs * There is greater uncertainty in excess layers than in working layers (by definition) * The purpose of an insurance program is to transfer risk (uncertainty) * Excess layers pay later than working layers * The Payment Pattern for Retained Loss will be shorter than Payment Pattern for Excess Loss * Assuming Normal Yield Curve: Discount Rate(Retained Loss) < Discount Rate(Excess Loss) * Therefore PV Factor(Retained Loss) > PV Factor(Excess Loss) * The Risk Manager should consider this in everlasting insurance programs --- # Technology and Telematics <div style="text-align: left; 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Driscoll and Associates: * Companies can see 2-10 times ROI, and one fleet realized a 30-percent cost savings. Consider these recent examples: After installation and implementation of a telematics system: * OmniSource had an ROI of about 10 months. * Aqua America Inc. experienced a 187-percent ROI on their telematics pilot, * Cox Enterprises found its ROI to be less than one year.