Actuaries Critical in J

Predicting Reserves When choosing an actuary, the critical questions that should be asked are the ones that get right to the heart of the matter.

oseph A. Herbers, managing principal at Pinnacle Actuarial Resources, has serviced numerous captives as an actuarial consultant for a quarter of a century. His expertise has gar- nered him an extensive network of service providers includ-

ing captive managers, TPAs, auditors, reinsurers and brokers. Best’s Review spoke with him in his Bloomington, Ill., office. BEST’S REVIEW: In your experience, what are the critical suc-

cess factors for captives? HERBERS: Captives that are successful in the long run are those

that pay a lot of attention to loss control and safety, and an overall commitment to a culture of mitigating claims from happening in the first place, and if and when claims do occur, trying to keep the costs of those claims at manageable levels. BR: What are common pitfalls that inhibit the long-term viability

of a captive? HERBERS: In my experience, the captives that have run into

difficulty are those that may change service providers from time to time, trying to seek out a low-cost provider rather than seeking out a partner that has not only the experience, but also the management discipline to help those organizations with their programs and seek long-term solutions to the captives’ problems at hand. BR: Does the choice of domicile really make much of a difference? HERBERS: Experience has shown the domicile that’s being

chosen has less to do with the long-term success of a captive than the service providers that are selected and management’s attitude towards loss control and safety. BR: You have been quoted as saying that actuaries are trained to

ask questions about operational changes and to make appropriate adjustments to their analysis accordingly. Can you give an example of how that pertains to captives? HERBERS: Any time there’s a significant change in the manner

in which claims are adjudicated or reserved or paid, that can have a fundamental impact on the data that’s being reviewed by the actuary. And to the extent the actuary doesn’t take into consideration those changes, the projected reserve needs or the projected funding needs could be significantly overstated or understated. BR: Give us two questions a captive manager should ask to get

the most out of their actuary. HERBERS: First, “What has changed since last year?” Asking the

actuary about any specific changes in their assumptions from last year is of critical importance. Secondly, one could ask about how accurate the actuaries’ predictions have been in the past in predict- ing reserve needs, which in effect is asking the actuary to fill out a report card on their predictions of the past and to the extent that someone’s projections have been too low or too high in the past. It’s a legitimate question to ask—“What about the current year’s projec- tions? Are they too high or too low?”—as this should impact the cur- rent year’s reserves.

BR Click here to isten to the full interview Best’s Review August 2010

Joseph A. Herbers Managing Principal

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The actuary’s forte is actually trying to predict the future, and while manage- ment clearly has some idea about their view of the future, the actu- ary typically puts some quantitative discipline around their projection in such a way that their viewpoints are of critical importance to the long-term success of captives.

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