rocky mountain chapter rims risk forum thursday, september 22, 2011 speaker - barbara benson...
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ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Speaker - Barbara Benson Grinnell
Vice President, Willis
(985)727-4039
2ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Agenda
• Introduction• Basic loss development• Loss Forecasting• Accrual Analysis• Risk Financing• Conclusion
3ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Basic Loss Development
• Purpose: To use the growth patterns of historical losses to predict ultimate losses on policy years that are still open and developing
4ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Sources of Loss Development Factors
• Industry-provided– Insurance carriers– Rating bureaus– Independent consultants– Actuaries
• Organization-specific
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Thursday, September 22, 2011
Casualty Coverage’s
• Workers’ compensation• Automobile liability• General liability• Products liability
6ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Loss Development Triangles
• Types of triangles– Incurred loss development– Paid loss development– Frequency loss development
• Per occurrence retention– Limited– Unlimited
Per Occurrence Retention $250,000
$3,000,000 Aggregate
Self-Funded
Excess Insurance
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Thursday, September 22, 2011
Incurred But Not Reported Claims
• Incurred But Not Reported (IBNR) claims caused by– Delay between occurrence and reporting of the claim– Actual amount for which a claim will settle is unknown– Indeterminate amount of time between a claims first report
and when all activity on that claim ceases
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Thursday, September 22, 2011
Sample Company – Loss Run Summary
Valuation Date: 12/31/2004 Valuation Date: 12/31/2008Policy Period Incurred Paid # Claims Policy Period Incurred Paid # Claims1/1-12/31/04 352,429 150,254 120 1/1-12/31/04 715,846 625,000 152
1/1-12/31/05 554,123 498,741 149 Valuation Date: 12/31/2005 1/1-12/31/06 1,344,098 1,300,000 160 Policy Period Incurred Paid # Claims 1/1-12/31/07 980,544 758,474 165 1/1-12/31/04 459,510 274,587 150 1/1-12/31/08 816,337 321,587 135 1/1-12/31/05 276,952 145,210 101
Valuation Date: 12/31/2009Valuation Date: 12/31/2006 Policy Period Incurred Paid # ClaimsPolicy Period Incurred Paid # Claims 1/1-12/31/04 718,434 701,058 152 1/1-12/31/04 591,215 525,112 152 1/1-12/31/05 564,587 525,000 149 1/1-12/31/05 393,833 312,541 140 1/1-12/31/06 1,488,670 1,356,987 161 1/1-12/31/06 592,449 256,874 130 1/1-12/31/07 1,322,208 1,254,123 167
1/1-12/31/08 1,104,286 645,874 160 Valuation Date: 12/31/2007 1/1-12/31/09 402,087 195,120 105 Policy Period Incurred Paid # Claims1/1-12/31/04 659,874 565,899 152 Valuation Date: 12/31/20101/1-12/31/05 500,123 478,001 148 Policy Period Incurred Paid # Claims1/1-12/31/06 1,053,915 501,245 155 1/1-12/31/04 718,434 718,434 152 1/1-12/31/07 644,873 295,741 140 1/1-12/31/05 570,145 545,879 149
1/1-12/31/06 1,588,127 1,485,214 161 1/1-12/31/07 1,549,531 1,301,258 170 1/1-12/31/08 1,087,525 1,001,234 175 1/1-12/31/09 578,368 418,547 145 1/1-12/31/10 402,966 150,145 99
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Thursday, September 22, 2011
Sample Co. – Incurred Loss Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/05 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/06 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/07 644,873 980,544 1,322,208 1,549,531 1/1-12/31/08 816,337 1,104,286 1,087,525 1/1-12/31/09 402,087 578,368 1/1-12/31/10 402,966
Elapsed Months from InceptionIncurred Loss Triangle
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Thursday, September 22, 2011
Sample Co. – Incurred Loss Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/05 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/06 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/07 644,873 980,544 1,322,208 1,549,531 1/1-12/31/08 816,337 1,104,286 1,087,525 1/1-12/31/09 402,087 578,368 1/1-12/31/10 402,966
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/05 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/06 1.000 1.779 1.275 1.108 1.067 1/1-12/31/07 1.000 1.521 1.348 1.172 1/1-12/31/08 1.000 1.353 0.985 1/1-12/31/09 1.000 1.438 1/1-12/31/10 1.000
Elapsed Months from InceptionIncurred Loss Triangle
Incremental Growth TriangleElapsed Months from Inception
24 month incurred losses12 month incurred losses
578,368402,087
=
=
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Thursday, September 22, 2011
Sample Co. – Incurred Loss Triangulation - WC
Average all policy years
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/05 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/06 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/07 644,873 980,544 1,322,208 1,549,531 1/1-12/31/08 816,337 1,104,286 1,087,525 1/1-12/31/09 402,087 578,368 1/1-12/31/10 402,966
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/05 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/06 1.000 1.779 1.275 1.108 1.067 1/1-12/31/07 1.000 1.521 1.348 1.172 1/1-12/31/08 1.000 1.353 0.985 1/1-12/31/09 1.000 1.438 1/1-12/31/10 1.000
EMFI 12 24 36 48 60 72 84Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000
Elapsed Months from InceptionIncurred Loss Triangle
Incremental Growth TriangleElapsed Months from Inception
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Thursday, September 22, 2011
Sample Co. – Incurred Loss Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/05 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/06 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/07 644,873 980,544 1,322,208 1,549,531 1/1-12/31/08 816,337 1,104,286 1,087,525 1/1-12/31/09 402,087 578,368 1/1-12/31/10 402,966
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/05 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/06 1.000 1.779 1.275 1.108 1.067 1/1-12/31/07 1.000 1.521 1.348 1.172 1/1-12/31/08 1.000 1.353 0.985 1/1-12/31/09 1.000 1.438 1/1-12/31/10 1.000
EMFI 12 24 36 48 60 72 84Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000 Adjusted Inc. Avg. 1.000 1.408 1.295 1.126 1.057 1.007 1.000
Elapsed Months from InceptionIncurred Loss Triangle
Incremental Growth TriangleElapsed Months from Inception
Remove any “irregular” averagesRemove any “irregular” averages
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Thursday, September 22, 2011
Sample Co. – Incurred Loss Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/05 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/06 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/07 644,873 980,544 1,322,208 1,549,531 1/1-12/31/08 816,337 1,104,286 1,087,525 1/1-12/31/09 402,087 578,368 1/1-12/31/10 402,966
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/05 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/06 1.000 1.779 1.275 1.108 1.067 1/1-12/31/07 1.000 1.521 1.348 1.172 1/1-12/31/08 1.000 1.353 0.985 1/1-12/31/09 1.000 1.438 1/1-12/31/10 1.000
EMFI 12 24 36 48 60 72 84Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000 Adjusted Inc. Avg. 1.000 1.408 1.295 1.126 1.057 1.007 1.000 Cumulative Average 1.000 1.408 1.823 2.052 2.169 2.184 2.184
Elapsed Months from InceptionIncurred Loss Triangle
Incremental Growth TriangleElapsed Months from Inception
36 month cumulative average X 48 month incremental average
1.823 X 1.126 = 2.052
Multiply each consecutive incremental average by the previous cumulative average
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Thursday, September 22, 2011
Sample Co. – Incurred Loss Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/05 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/06 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/07 644,873 980,544 1,322,208 1,549,531 1/1-12/31/08 816,337 1,104,286 1,087,525 1/1-12/31/09 402,087 578,368 1/1-12/31/10 402,966
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/05 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/06 1.000 1.779 1.275 1.108 1.067 1/1-12/31/07 1.000 1.521 1.348 1.172 1/1-12/31/08 1.000 1.353 0.985 1/1-12/31/09 1.000 1.438 1/1-12/31/10 1.000
EMFI 12 24 36 48 60 72 84Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000 Adjusted Inc. Avg. 1.000 1.408 1.295 1.126 1.057 1.007 1.000 Cumulative Average 1.000 1.408 1.823 2.052 2.169 2.184 2.184
EMFI 12 24 36 48 60 72 84Development Factor 2.184 1.551 1.198 1.064 1.007 1.000 1.000
Elapsed Months from InceptionIncurred Loss Triangle
Incremental Growth TriangleElapsed Months from Inception
84 month cumulative avg.
24 month cumulative avg.
2.184
1.408
=
1.551= =
15ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Sample Co. – Incurred Loss Triangulation - WC
1 / development factor
= 1 / 2.184 = 45.8%
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 352,429 459,510 591,215 659,874 715,846 718,434 718,434 1/1-12/31/05 276,952 393,833 500,123 554,123 564,587 570,145 1/1-12/31/06 592,449 1,053,915 1,344,098 1,488,670 1,588,127 1/1-12/31/07 644,873 980,544 1,322,208 1,549,531 1/1-12/31/08 816,337 1,104,286 1,087,525 1/1-12/31/09 402,087 578,368 1/1-12/31/10 402,966
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 1.000 1.304 1.287 1.116 1.085 1.004 1.000 1/1-12/31/05 1.000 1.422 1.270 1.108 1.019 1.010 1/1-12/31/06 1.000 1.779 1.275 1.108 1.067 1/1-12/31/07 1.000 1.521 1.348 1.172 1/1-12/31/08 1.000 1.353 0.985 1/1-12/31/09 1.000 1.438 1/1-12/31/10 1.000
EMFI 12 24 36 48 60 72 84Incremental Avg. 1.000 1.469 1.233 1.126 1.057 1.007 1.000 Adjusted Inc. Avg. 1.000 1.408 1.295 1.126 1.057 1.007 1.000 Cumulative Average 1.000 1.408 1.823 2.052 2.169 2.184 2.184
EMFI 12 24 36 48 60 72 84Development Factor 2.184 1.551 1.198 1.064 1.007 1.000 1.000
Discovery Schedule Cumulative 45.8% 64.5% 83.5% 94.0% 99.3% 100.0% 100.0% Incremental 45.8% 18.7% 19.0% 10.5% 5.3% 0.7% 0.0%
Elapsed Months from InceptionIncurred Loss Triangle
Incremental Growth TriangleElapsed Months from Inception
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Thursday, September 22, 2011
Sample Co. – Paid Loss Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 150,254 274,587 525,112 565,899 625,000 701,058 718,434 1/1-12/31/05 145,210 312,541 478,001 498,741 525,000 545,879 1/1-12/31/06 256,874 501,245 1,300,000 1,356,987 1,485,214 1/1-12/31/07 295,741 758,474 1,254,123 1,301,258 1/1-12/31/08 321,587 645,874 1,001,234 1/1-12/31/09 195,120 418,547 1/1-12/31/10 150,145
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 1.000 1.827 1.912 1.078 1.104 1.122 1.025 1/1-12/31/05 1.000 2.152 1.529 1.043 1.053 1.040 1/1-12/31/06 1.000 1.951 2.594 1.044 1.094 1/1-12/31/07 1.000 2.565 1.653 1.038 1/1-12/31/08 1.000 2.008 1.550 1/1-12/31/09 1.000 2.145 1/1-12/31/10 1.000
EMFI 12 24 36 48 60 72 84Incremental Avg. 1.000 2.108 1.848 1.051 1.084 1.081 1.025 Adjusted Inc. Avg. 1.000 2.108 1.661 1.051 1.084 1.081 1.025 Cumulative Average 1.000 2.108 3.503 3.680 3.988 4.310 4.417
EMFI 12 24 36 48 60 72 84Development Factor 4.417 2.095 1.261 1.200 1.108 1.025 1.000
Payout Schedule Cumulative 22.6% 47.7% 79.3% 83.3% 90.3% 97.6% 100.0% Incremental 22.6% 25.1% 31.6% 4.0% 7.0% 7.3% 2.4%
Paid Loss TriangleElapsed Months from Inception
Incremental Growth TriangleElapsed Months from Inception
17ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Sample Co. – Frequency Triangulation - WC
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 120 150 152 152 152 152 152 1/1-12/31/05 101 140 148 149 149 149 1/1-12/31/06 130 155 160 161 161 1/1-12/31/07 140 165 167 170 1/1-12/31/08 135 160 175 1/1-12/31/09 105 145 1/1-12/31/10 99
PolicyYear 12 24 36 48 60 72 841/1-12/31/04 1.000 1.250 1.013 1.000 1.000 1.000 1.000 1/1-12/31/05 1.000 1.386 1.057 1.007 1.000 1.000 1/1-12/31/06 1.000 1.192 1.032 1.006 1.000 1/1-12/31/07 1.000 1.179 1.012 1.018 1/1-12/31/08 1.000 1.185 1.094 1/1-12/31/09 1.000 1.381 1/1-12/31/10 1.000
EMFI 12 24 36 48 60 72 84Incremental Avg. 1.000 1.262 1.042 1.008 1.000 1.000 1.000 Adjusted Inc. Avg. 1.000 1.262 1.042 1.008 1.000 1.000 1.000 Cumulative Average 1.000 1.262 1.315 1.325 1.325 1.325 1.325
EMFI 12 24 36 48 60 72 84Development Factor 1.325 1.050 1.008 1.000 1.000 1.000 1.000
Discovery Schedule Cumulative 75.5% 95.3% 99.2% 100.0% 100.0% 100.0% 100.0% Incremental 75.5% 19.8% 4.0% 0.8% 0.0% 0.0% 0.0%
Number of Claims TriangleElapsed Months from Inception
Incremental Growth TriangleElapsed Months from Inception
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Thursday, September 22, 2011
Discovery and Payout Patterns
• General/products liability– Slowest patterns– Longest tail because of investigation, litigation, and
time lag between report and occurrence date
• Workers’ compensation– Payout increases steadily over time– Benefits are statutorily defined– Duration of injury and amount of medical treatment
unknown
19ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Loss Analysis – Forecasting and Ultimate Liability Analysis
• Ultimate liability projections– Adhere to FASB and GASB requirements regarding
contingent liabilities
• Loss forecasting– Part of the budgeting and marketing process
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Thursday, September 22, 2011
Sample Co. – WC Remaining Liability Projections
(a) (b) (c) (d) (e)(a x b) (c - d)
Policy YearIncurred Losses
@ 12/31/10
Loss Development
Factor Ultimate LossesPaid Losses @
12/31/10Remaining Liabilities
1/1-12/31/04 718,434 1.000 718,434 718,434 - 1/1-12/31/05 570,145 1.000 570,145 545,879 24,266 1/1-12/31/06 1,588,127 1.007 1,598,815 1,485,214 113,601 1/1-12/31/07 1,549,531 1.064 1,648,625 1,301,258 347,367 1/1-12/31/08 1,087,525 1.198 1,302,747 1,001,234 301,513 1/1-12/31/09 578,368 1.551 897,261 418,547 478,714 1/1-12/31/10 402,966 2.184 879,900 150,145 729,755
Total 6,495,096 7,615,927 5,620,711 1,995,216
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Thursday, September 22, 2011
Sample Co. – WC Loss Forecast
(a) (b) (c) (d) (e) (f) (g)(a x b) (c x d) (e / f)
Policy Year
Incurred Losses @ 12/31/10 LDF
Ultimate Losses
Inflation Factor @ 7%
Inflated Ultimate Losses
Number of Employees
Inflated Ult. Loss Per Employee
1/1-12/31/04 718,434 1.000 718,434 1.606 1,153,648 700 1,648 1/1-12/31/05 570,145 1.000 570,145 1.501 855,634 800 1,070 1/1-12/31/06 1,588,127 1.007 1,598,815 1.403 2,242,421 900 2,492 1/1-12/31/07 1,549,531 1.064 1,648,625 1.311 2,161,011 950 2,275 1/1-12/31/08 1,087,525 1.198 1,302,747 1.225 1,595,921 975 1,637 1/1-12/31/09 578,368 1.551 897,261 1.1449 1,027,274 1,000 1,027 1/1-12/31/10 402,966 2.184 879,900 1.070 941,493 900 1,046
1/1-12/31/11 1,443,000 1.000 1,443,000 900 1,603
Assumptions:1. Client specific loss development factors2. No losses in excess of the per occurrence limit3, Workers' compensation inflation rate = 7% per year4. Forecast includes all policy years
22ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Sample Co. – WC Loss Forecast
Excluded
(a) (b) (c) (d) (e) (f) (g)(a x b) (c x d) (e / f)
Policy Year
Incurred Losses @ 12/31/10 LDF
Ultimate Losses
Inflation Factor @ 7%
Inflated Ultimate Losses
Number of Employees
Inflated Ult. Loss Per Employee
1/1-12/31/04 718,434 1.000 718,434 1.606 1,153,648 700 1,648 1/1-12/31/05 570,145 1.000 570,145 1.501 855,634 800 1,070 1/1-12/31/06 1,588,127 1.007 1,598,815 1.403 2,242,421 900 2,492 1/1-12/31/07 1,549,531 1.064 1,648,625 1.311 2,161,011 950 2,275 1/1-12/31/08 1,087,525 1.198 1,302,747 1.225 1,595,921 975 1,637 1/1-12/31/09 578,368 1.551 897,261 1.1449 1,027,274 1,000 1,027 1/1-12/31/10 402,966 2.184 879,900 1.070 941,493 900 1,046
1/1-12/31/11 1,116,000 1.000 1,116,000 900 1,240
Assumptions:1. Client specific loss development factors2. No losses in excess of the per occurrence limit3, Workers' compensation inflation rate = 7% per year4. Forecast excludes policy years 1/1-12/31/04 through 1/1-12/31/07
23ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Risk Financing
• Determining the most cost-effective way to pay or fund for losses
• Risk financing continuum
Risk Transfer Risk Retention
Guaranteed Cost
Large Deductible
Qualified Self-Insurance
Captive
24ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Factors Influencing Design of Risk Financing Programs
• Expected losses• Market conditions• Corporate philosophy• Risk control commitment• Financial position
• Geographical locations• Loss payout patterns• Effective tax rate• Corporate ownership• Cash flow comparisons
25ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Cash flow Comparisons
• Definition: Using the net present value of alternative market quotes to determine the most cost-effective program
26ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Investment Income• Fund losses at a discount, additional money will be
added as interest is earned• Varied by program and payout• One decision tool to select the ideal program
Tax Implications• Need to consider when the losses and premium can be
deducted from taxable income• Different programs are treated differently• Should involve corporate tax department
27ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Sample Co. – 1/1-12/31/11 WC Guaranteed Cost Cash Flow
(a) (b (c) (d) (e) (f)(b x 34%) (b - c) (d x f)
MonthPremium
Cash Flow Tax EffectAfter-Tax
Cash FlowDiscount
Factor
Discounted After Tax
Cash Flow1 125,000 42,500 82,500 1.0000 82,500 2 125,000 42,500 82,500 0.9967 82,231 3 125,000 42,500 82,500 0.9935 81,962 4 125,000 42,500 82,500 0.9902 81,695 5 125,000 42,500 82,500 0.9870 81,428 6 125,000 42,500 82,500 0.9838 81,163 7 125,000 42,500 82,500 0.9806 80,898 8 125,000 42,500 82,500 0.9774 80,634 9 125,000 42,500 82,500 0.9742 80,371
10 125,000 42,500 82,500 0.9710 80,109 11 125,000 42,500 82,500 0.9678 79,847 12 125,000 42,500 82,500 0.9647 79,587
Total 1,500,000 510,000 990,000 972,424
Assumptions:1. Premium is paid in 12 monthly installments at the first of the month2. Losses are discounted at a 4% discount rate3. The effective tax rate is 34%
28ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Sample Co. – 1/1-12/31/09 WC Self Insurance Cash Flow
Month
Cumulative Payout
Schedule
Incremental Payout
Schedule Paid Losss Letter of
Credit Fee Excess
Premium Claims
Handling Admin.
Expenses Fees & Assess.
Total Cash Flow
After-Tax Cash Flow
Discount Factor
Discounted After-Tax
Cash Flow
1 0.09% 0.09% 1,004 5,000 8,333 50 5,000 2,500 21,888 14,446 1.0000 14,446 2 1.18% 1.09% 12,164 8,333 608 21,106 13,930 0.9967 13,884 3 2.35% 1.17% 13,057 8,333 653 22,043 14,549 0.9935 14,454 4 3.71% 1.36% 15,178 8,333 759 24,270 16,018 0.9902 15,862 5 5.34% 1.63% 18,191 8,333 910 27,434 18,106 0.9870 17,871 6 7.15% 1.81% 20,200 8,333 1,010 29,543 19,498 0.9838 19,182 7 9.15% 2.00% 22,320 8,333 1,116 31,769 20,968 0.9806 20,561 8 11.32% 2.17% 24,217 8,333 1,211 33,761 22,283 0.9774 21,779 9 13.85% 2.53% 28,235 8,333 1,412 37,980 25,067 0.9742 24,420
10 16.57% 2.72% 30,355 8,333 1,518 40,206 26,536 0.9710 25,767 11 19.47% 2.90% 32,364 8,333 1,618 42,316 27,928 0.9678 27,030 12 22.64% 3.17% 35,377 8,333 1,769 45,479 30,016 0.9647 28,956
Subtotal 22.64% 252,662 5,000 100,000 12,633 5,000 2,500 377,796 249,345 244,212
24 47.73% 25.09% 280,004 3,868 14,000 297,873 196,596 0.9460 185,970 36 79.29% 31.56% 352,210 2,614 17,610 372,434 245,806 0.9096 223,578 48 83.31% 4.02% 44,863 1,036 2,243 48,142 31,774 0.8746 27,789 60 90.29% 6.98% 77,897 835 3,895 82,626 54,533 0.8409 45,860 72 97.58% 7.29% 81,356 486 4,068 85,910 56,700 0.8086 45,848 84 100.00% 2.42% 27,007 121 1,350 28,479 18,796 0.7775 14,614
Total 100.00% 1,116,000 13,958 100,000 55,800 5,000 2,500 1,293,258 853,550 787,871
29ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Sensitivity Analysis
• How do optimistic and pessimistic loss projections alter the net present value decision of the various program alternatives?
30ROCKY MOUNTAIN CHAPTER RIMS RISK FORUM
Thursday, September 22, 2011
Sample Company – Net Present Value Cash Flow Comparison
$428,825
$787,871
$1,505,963
972,424 972,424 972,424
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
Optimistic Expected Pessimistic
Loss Scenario
Ne
t C
as
h F
low
Self Insurance
Guaranteed Cost