It’s interesting that people and money tend to behave the same way. They go where they are wanted and stay where they are well treated. Insurance is definitely a business that needs people and money. People are needed to sell, underwrite, manage, and administer the business. Money is needed to pay the people and fund the risk of possible adverse experience. Some insurance companies have relatively more people resources than they have money. Others have relatively more money than people. These two types of companies can get together in transactions that help both of them. Those transactions are called REINSURANCE.

What can happen to cause you to have a bad year? Wouldn’t it be nice to put aside money in good years and have it available for bad years? Wouldn’t it be even nicer if you could deduct the money you put aside in good years on your income taxes? That’s exactly what you can do with a personal captive insurance company.

However, we tend to use technology to make our products and services more complicated. Increasing complication creates more opportunity for basic errors. Unfortunately, I’ve been seeing more and more basic errors with my clients recently. One of the challenges has been tracking policies in force. If we start with the policies in force at the beginning of a period, add the policies issued during that period, and subtract the policies cancelled during the period, we should get the policies in force at the end of the period. When that’s not true then you start asking a few questions. You find out that some old policies had not been charged the fees that they should have. When the back fees were charged the policies had no remaining value and they were cancelled. However, they did not show up on the normal list of cancelled policies. There was a special list of cancelled policies for this program. This is the kind of thing that can ruin an actuary’s whole day.

The rating and underwriting restrictions on fully-insured medical plans covering small groups caused many companies to shift to self-funded plans. The regulations for self-funded plans are significantly less burdensome and the absence of rate restrictions allows healthy groups to pay significantly less premium. The participants in this newly expanded small-group self-funded market have been learning about its characteristics. As usual, the simple lessons are the most important. It turns out that healthy people are more likely to work in organizations with other healthy people. By the same token, sicker people are likely to work in organizations with sicker people. This pattern is particularly striking in smaller companies, such as those with 50 or fewer employees.

Such financial statements can be published in annual reports, along with an opinion from an independent auditing firm. While the statements are still the responsibility of management, an audit opinion stating that the statements comply with Generally Accepted Accounting Principles gives them substantial credibility. Further, such statements are required in Form 10-K by the US Securities and Exchange Commission for publicly-traded companies. Sometimes the absolute level of GAAP earnings is not as important as the pattern of those earnings. Investment advisors like to see a stable pattern of earnings that can be projected into the future. Earnings that show an erratic pattern might not be considered reliable for making future projections, and could therefore lead to lower market valuations. GAAP rules for insurance organizations require a special set of actuarial assumptions be used to calculate reserves and deferred acquisition costs. These assumptions are supposed to represent a “best guess” for future experience plus a provision for adverse deviation. Management is responsible for setting these assumptions, but they receive significant scrutiny from independent auditors. One can imagine that reasonable people can come up with a fairly wide range of GAAP assumptions for the same insurance risk.

An entrepreneur is defined as a person who organizes and operates a business, taking on greater than normal financial risks in order to do so. An intrapreneur is defined as a manager within a company who promotes innovative product development and marketing. I love working for both as their consulting actuary. As a consulting actuary I am naturally reactive, rather than proactive. I want to be a member of my client’s team, striving to achieve the team’s objectives. I’m most comfortable when those objectives are clearly defined and communicated. My best clients are always unrealistic, at least to some extent. Their goals and objectives are often a stretch, and sometimes require some good luck along the way. If I believe the stated goals are impossible to achieve I will certainly say so. However, if the stated goals are possible, but difficult, I will generally sign on and do my best to help.

Then, through a program similar to the current Medicare Advantage program, the federal government would pay a fixed premium to the private healthcare plan on behalf of the citizens enrolled in that plan. The private healthcare plan could then accept that premium as the total required amount to cover that citizen or offer additional benefits and coverage to that citizen at an additional premium.

Company liabilities, either current or future, can be transferred to a captive insurance company without changing the valuation of those liabilities on the GAAP financial statements. However, once in the insurance company, the liabilities must be valued according to state insurance laws, which are intentionally conservative. That means that the value of a liability is likely to be larger in a captive insurance company than it is in a general-purpose corporation. 

Even companies that end up being very successful are disappointed initially. Two key points must always be remembered. First, you must project what you expect to happen, and compare actual results with that expectation. Second, every financial statement has a purpose, and when a financial statement is used for a purpose that it was not intended to serve, false impressions are created.