Companies that choose to self-insure face a path paved with unique accounting challenges. An actuary with industry knowledge, a deep understanding of self-insurance balances, and a familiarity with audit and accounting processes can assist with risk assessment, financial modeling, and forecasting. For example, actuaries can offer insights into strengthening a company’s internal controls and recognizing the significant impact an actuarial report has on the audit process.
In this article, we explore what companies should look for when hiring an actuary for a self-insurance program. We will discuss essential qualifications and attributes that help leaders make strategic decisions, whether they are new to self-insurance or planning to augment a current program.
This article is the third in a three-part series designed to help interpret self-insurance liabilities and to challenge how well the estimation process is working.
In part one of our series, we discuss why companies self-insure and what this balance represents:
In part two of our series, we will expand on accounting for self-insured balances and related pitfalls:
Actuary Titles and Certifications
Like many professionals, actuaries often specialize, acquiring credentials and certifications related to certain types of work, including duties associated with self-insurance programs. Actuarial Standards of Practice exist to prevent an actuary from performing work for which they lack necessary knowledge and experience. Companies seeking an actuary may look for an Associate (A) or a Fellow (F) — with Fellows possessing deeper knowledge than Associates — credentialed by the following organizations:
- Casualty Actuarial Society (CAS) members focus on property and casualty insurance, such as workers’ compensation, automobile liability, general liability, and related fields.
- Society of Actuaries (SOA) members focus more on life and health insurance and employee benefit plans.
Both organizations noted above use “Associate” or “Fellow” in conjunction with the organization’s name. For example, “ACAS” means the candidate is an Associate member of the Casualty Actuarial Society, while “FCAS” indicates Fellow status in the same organization.
How Industry Knowledge Affects the Actuary Report/Assumptions
Choosing an actuary with industry knowledge is crucial because a company’s self-insurance requirements may vary based on its industry. Depth of industry knowledge may differ widely between actuaries with similar credentials and years of experience. For example, an actuary who has focused on long-haul trucking auto liability laws in multiple states might be unfamiliar with the unique aspects of medical professional liability in a single state.
Continuous learning is integral to actuarial work — whether it’s state-specific regulations, a company’s claims handling practices, or the nuances of a particular business. However, actuaries equipped with relevant experience, resources, and a clear approach, can perform their duties more efficiently and effectively. As a result, the actuary’s analyses can yield more meaningful insights and recommendations that can deliver significant value to the company.
Above and Beyond the Year-End Reserve Balance
An actuary can do more for a company than estimate a year-end self-insurance balance and provide a funding estimate for the following year. While reviewing a company’s data, an actuary’s observations about trends, deviations from industry standards, development characteristics, and more can lead to strategic and potentially money-saving business decisions.
A well-crafted actuarial report could reveal underlying causes for concern that might otherwise go unnoticed. For example, rising estimates and higher-than-expected losses could indicate declining safety standards within the company. Bringing such matters to the company’s attention can empower leaders to proactively address problems, potentially shedding light on claim frequency and future self-insurance reserve requirements. However, it’s important to recognize that, while actuaries can help monitor improvements and provide valuable analysis, they typically do not offer direct operational recommendations.
Willing to Have Tough Discussions
A well-documented actuarial report, supported by clear communication from the actuary, can reduce confusion about self-insurance processes. The actuary’s sound reasoning and strong justification for their decisions can promote productive discussions with the company, fostering trust and collaboration. This approach enables the company to address self-insurance issues constructively and proactively.
A company needs to understand how the actuary arrived at the assumptions contained in the actuarial report before acting upon it. An unclear or incorrect report may lead the company to take unnecessary actions, such as changing its third-party administrator or risk management director, or implementing new internal controls.
Communication can falter when the actuary is hesitant to highlight concerns, possibly fearing negative reactions from the company or questions about their work. A proactive, confident actuary will be transparent about the rationale for their self-insurance estimates. This may require tough discussions with the company about its accounting processes, audit standards, self-insurance budgeting, and reporting.
Actuaries and the Audit Process
It is crucial to choose an actuary who recognizes the impact their analyses can have on the audit of a company with a self-insured program and other reporting obligations.
Actuarial Standards of Practice define the appropriate methods, sources of information, and processes that actuaries should use when developing estimates. These standards also recommend that documentation be clear enough for an actuary in a similar role to understand and follow the estimates — an approach that often differs widely from what an accountant or auditor needs to verify and document financial information.
As discussed in previous articles, many actuarial estimates are considered high-risk according to auditing guidance. As a result, auditors may retain their own actuaries to perform an independent review that is more rigorous than what is typically required by Actuarial Standards of Practice. Common documentation errors or shortcomings include:
- Failing to provide a well-documented range around the actuarial estimate when management records differ from the actuary’s findings.
- Failing to clearly document the sources of assumptions, leading to extended, back-and-forth discussions about how assumptions were determined.
- Inadequately reconciling the data used with the appropriate source and failing to adequately document changes made before the actuarial analysis.
- Lacking clarity on whether an unpaid estimate to be audited should be reported as net of insurance or gross of insurance, with an offsetting insurance recoverable under appropriate US GAAP guidance.
- Omitting documentation for the source of discount rates used when appropriate.
- Not estimating the liability for unreported loss for entities with excess claims-made insurance policies — a common issue for healthcare entities and construction defect coverages.
An actuary who understands audit requirements can help provide several key benefits to companies, including a smoother audit process, proper documentation of estimates, risk mitigation, and lower audit costs. As companies with self-insured programs address their often-unique accounting challenges, actuaries can help smooth the way.
Understanding the Role of Actuary for Self-Insurance
A robust, well-thought-out actuarial report helps position companies that self-insure to better manage administrative tasks, including reserve balances. Preparing that report requires an actuary with appropriate credentials and industry experience. Our Actuarial Services team can help. Please contact us to learn how to make the most of your actuary relationship.
Have questions? Contact our Actuarial Services team today.