Insurance Advisory Services for State Regulators

 

Rehabilitation Support

Elucidor consultants have served state insurance departments by providing professional reviews of rehabilitation plans and projections. They have actively managed distressed insurance companies working for insurance commissioners and stakeholders.

The scope of Elucidor’s rehabilitation management activities is wide. Elucidor consultants have helped commissioners to actively oversee distressed companies. Elucidor consultants have acted on behalf of stakeholders in impaired companies by serving on Rehabilitation Committees and Rehabilitation Boards. In addition Elucidor has provided managers, commissioners and rehabilitators with critically important professional actuarial work.

Two Elucidor consultants filled key roles in the historic rehabilitation of Mutual Benefit Life, a previously well-rated life insurance company domiciled in New Jersey.

  •  Ken Watson served as the CFO of Mutual Benefit Life during the rehabilitation phase, a position requiring him to oversee operations of the entire company, including staff retention and HR management, claim settlements, negotiations with each of the diverse stakeholders, investment property preservation and valuation and cash flow management. For Ken’s resume, click here
  • Johan Lotter, a credentialed actuary, served on MBL’s Rehabilitation Advisory Board and later as the MBL Board Member representing the unsecured general creditors. For Johan’s resume, click here

The MBL rehabilitation was the largest insurance company rehabilitation project in US history and is noted as the most successful rehabilitation to date, with full restoration of policyholder benefits and full recovery by the unsecured general creditors. Ken Watson and Johan Lotter played key roles in the structuring of the rehabilitation plan and its ratification by the court. Later Ken and Johan were key members of the team that worked with Goldman Sachs and a consortium of banks, including Bank of America, Credit Suisse, Citibank and Bear Stearns to engineer the sale of the MBL insurance and annuity portfolios to SunAmerica and other insurance companies.

Both of these veteran consultants are available to provide you with instant expertise in practical rehabilitation, runoff and liquidation projects.

Howard Zail, Elucidor Partner and Perry Wiseblatt, Principal, both credentialed actuaries, are also available to provide stakeholders with support. Both Howard and Perry have had decades of experience in senior management of insurance and reinsurance businesses.

 

Cash Flow Projections

Whether the client’s task at hand is an insurance company rehabilitation, liquidation or rate filing, the common challenge is to perform accurate cash flow projections. Cash flows are based on assumptions about future claims rates, investment income and expenses. Of these variables, future claims rates are often hardest to predict accurately. Useful prediction of any claims rate provides two critical measures: a mean claim rate and a distribution around the mean claim rate. This distribution is the key to enabling managers, rehabilitators, commissioners and other stakeholders to stress test the consultant’s cash flow predictions. In the absence of scientifically derived distributions around the mean rates, it is almost impossible to perform rational stress testing of cash flow projections. All that can be done is to choose an arbitrary error band and to do stress tests that rest on professional judgment only. Defending recommendations based on professional judgment only can pose difficulties in a rehabilitation hearing where stakeholders have opposing interests. The defense of actuarial assumptions that are supported by the data can clear away unfounded objections and defeat unreasonable objectors and interlopers.

In summary, Elucidor’s view is that professional judgment should be supplemented by statistical analysis. Elucidor has implemented reliable scientific predictive modeling tools that enable clients to quantify the credibility of alternative projection scenarios. This modernized actuarial approach enables clients to rely on scientific evidence as a basis for preferring a specific scenario. This presents fewer problems than simply relying on “judgment”.

Elucidor analytics helps clients to defeat challenges that the preferred stress test basis is biased. Such challenges generally emanate from opponents and judges and can lead to rejection of a submitted rehabilitation plan.

If any of these issues are anticipated at companies you are supervising, managing or rehabilitating, Elucidor can help. Elucidor can provide you with more detailed, accurate estimates of future experience as well as reliable, defensible credibility criteria, both measures of tremendous value in your decision making, your justification of your preferred projection and your ability to structure plans that are defensible.

Below are three examples of actuarial assumptions impacting cash flows that can be significantly improved using Elucidor’s predictive modeling methodologies.

1. Life Mortality Table Applicability

Most US companies use one of the industry mortality tables (“SOA tables”) to project in force business. Generally, a typical life insurance company would select, from the available SOA tables, a base table deemed to be broadly applicable to its portfolio and then make adjustments, sometimes sweeping adjustments, based on professional judgment and a “feel” for the business, always hoping that the experience “down the line“ will not forcefully contradict the chosen and adjusted table.

But the available SOA tables have different characteristics: different patterns of slope by duration, different relationships between smoker mortality and non-smoker mortality and they are, to boot, based on experience studies applicable to different epochs and markets.

For example, many companies are, today, still using the SOA 1975-80 table for insured lives, simply applying a flat discount across all ages and durations. The SOA 1975-80 tables reflect experience almost 40 years old. Elucidor knows that the durational slopes of these tables are unsuitable for predicting modern insured life mortality. A number of companies have suffered substantial mortality losses because they followed the above rate-setting methodology.

Simply using a specific table with sweeping adjustments is seldom justified. Durational convergence of the 2008 VBT RR Tables is a vexing issue. Yet the working group that prepared the tables decided the magnitude by “majority vote”. Elucidor offers a less democratic, more defensible and more scientific data driven approach to derivation of mortality rates for use in cash flow projections.

The choice of the mortality table for use in a cash flow projection is no simple task. Knowledge of emerging deviations from one’s chosen basis is difficult to glean using traditional actuarial methods. Traditional actuarial methods rely on large data. They are not helpful when all that is available are “small” data.

Elucidor’s predictive analytics service offers an improvement on traditional actuarial methods. Elucidor supplements traditional actuarial methods with predictive analytics techniques built on multiple regression and Bayesian approaches in a Generalized Linear Modeling setting. This approach will result in a more accurate mortality table, with reliable credibility bands, scientifically determined. Elucidor’s methods work well in a “small data” environment.

2. Structured Settlement/Immediate Annuity Mortality

The industry mortality tables available for projecting Structured Settlement and Immediate Annuity cash flows are aggregate tables, rather than select and ultimate tables: they do not vary by issue year or duration since issue. For substandard lives, companies will incorporate an “age rate-up”, onto its aggregate table, making the assumption that the policyholder is actually a few years older. This is a very inaccurate methodology. When lives are underwritten a rational select and ultimate mortality assumption is essential. In the case of substandard Lives, factors should be applied that relate their mortality to that select and ultimate table.

Even annuitant lives that are not underwritten will often show select and ultimate behavior. It stands to reason that one who buys an immediate annuity with no (or limited) period certain will be in good health. These lives will have mortality that follows select and ultimate behavior. Yet available industry standard tables do not make this distinction.

Elucidor’s methods, when applied to Structured Settlements and Immediate Annuities, will result in select and ultimate mortality tables, incorporating the applicable historical experience, reflecting the mortality of substandard lives, where appropriate.

 3. Long Term Care Morbidity

There are no long term care claim cost or incidence tables in current use that are applicable for any one company’s business. Any available table used to project claims will either be based on the data of several companies, or will be based on data of non-insured lives. The population, policy forms, underwriting standards and criteria, and claim management procedures of any one company are not representative of any existing table population. This means that the claim cost slopes of any one company’s business, which will be the key contributor to future block results, are likely to emerge differently than predicted by any table in use.

There is not enough experience to obtain a reliable estimate of an individual company’s future experience using traditional actuarial methods. However, Elucidor’s state-of-the-art methods can produce much more accurate morbidity assumptions, with higher confidence, on the basis of actual historical experience. Claim costs can be estimated separately by their individual components of incidence (probability of claim), continuance (length of claim), and salvage (discount off of the maximum policy benefit).

In addition, the number of variables Elucidor is able to take into account is much larger than would be used in traditional analysis. For example, standard vs. preferred experience is incorporated into most traditional studies using primarily broad brush assumptions about projected mortality convergence. In Elucidor’s analysis, the analysis of durational convergence is based on hard science rooted in multiple regression mathematics and Bayesian inference. Durational convergence issues relating to married and unmarried portfolios are settled much more credibly employing Elucidor’s multiple regression techniques and Bayesian inference.

Where traditional actuarial methods rely on marginal analysis resulting in one dimensional ratings, Elucidor effectively identifies complex interactions in multiple dimensions using multiple regression mathematics and Bayesian inference.

Elucidor’s Bayesian estimation is a scientifically sound methodology for obtaining statistical distributions for all estimated rates. This methodology enables Elucidor to forecast not only expected results, but also to provide confidence intervals around these results.

The following significant benefits stem from Elucidor’s analysis:

  • Elucidor will produce more reliable projections of future results, based on more accurate actuarial assumptions;
  • Elucidor provides distributions around the best estimate actuarial assumptions, allowing a more reliable estimate of the probabilities governing liability outgo and how these probabilities change when policy benefits or premiums are revised.

For more information about Bayesian Estimation, click here

For more information about Generalized Linear Models, click here