Tag Archives: Stephen DiCenso

New U.S.-based insurance restructuring mechanism approved

Oklahoma has now made good on its promise to become the leading domicile for a new U.S.-based insurance restructuring mechanism—the Insurance Business Transfer (IBT). In late November 2019, the Oklahoma Insurance Department approved the IBT application (or IBT Plan) of Providence Washington Insurance Company to transfer policies to Yosemite Insurance Company—both companies are part of Enstar Group.

With Commissioner Mulready’s approval, the IBT Plan was sent to the District Court of Oklahoma County with a request for its approval. Despite court delays resulting from the COVID-19 pandemic, on October 15, 2020, the District Court of Oklahoma issued its order of approval and implementation for the first-ever U.S. IBT, allowing for the novation of insurance policies to an assuming insurer without policyholder consent. Enstar worked diligently to push this “intracompany” business transfer forward and has now set the stage for future transfers in this space.

In this article, Milliman consultant Stephen DiCenso, who served as the Independent Expert on this transaction, discusses the benefits to restructuring mechanisms such as the IBT.

How can captive insurance boost insurtech growth?

With the immense financial and operational challenges brought on by the COVID-19 pandemic, many insurers have had to dramatically cut back on insurtech funding. Even before the coronavirus, however, obstacles existed that slowed the uptake of insurtech solutions that targeted the reduction of customers’ losses.

Why do delays in implementation occur then? Insurers rightfully want to use insurtech solutions to quickly find the insureds with the lowest risks of loss and charge them premiums that generate the most profit. At the same time, customers want to adopt these technologies to reduce costs, and they expect corresponding premium reductions.

Fortunately, these issues can be addressed with traditional captive insurance solutions, which can act as insurtech accelerators.

In this article, Milliman’s Stephen DiCenso explains why the insurance industry should use captives to enhance the existing relationships between traditional insurers and the insurtech community.

Actuaries will be key in the role of Independent Expert for legacy liabilities

In 2018, Oklahoma became the center of discussion of the U.S. run-off insurance market. Oklahoma’s Insurance Business Transfer Act created a buzz as the U.S. market now gets even closer to its first ever deal to transfer and novate insurance policies from a transferring insurer to an assuming insurer without policyholder consent by way of an insurance business transfer (IBT). This legislation gives insurers and reinsurers of U.S. risks much needed finality with respect to obligations for liabilities.

An essential voice in this process is the Independent Expert (IE), whose role has traditionally been filled by an actuary in venues outside the United States. The Independent Expert provides insight and perspective on the fairness of the transaction to the regulators and courts that must ultimately approve the transfers. Policyholder protection is the most important consideration in the IBT and the role of the IE is critical in protecting the interests of the policyholders from both the assuming and transferring companies.

Under the Oklahoma IBT law, the companies involved in transferring and assuming the business must jointly provide a list of IEs, from which one is selected by the Insurance Commissioner. The IE ultimately works for the state court and is relied upon to assess the terms of proposed transfers with specific focus on protecting the interests of the policyholders involved.

In this article, Milliman’s Stephen DiCenso and Tom Ryan provide background on this new opportunity for all companies with legacy liabilities and discuss why actuaries will be at the center of that process.

Milliman actuary named first ever U.S.-based Independent Expert after Oklahoma passes Insurance Business Transfer Act

Milliman today announced that Stephen DiCenso, FCAS, MAAA, has been appointed as the country’s first Independent Expert (IE) following the passage of Oklahoma’s Insurance Business Transfer Act. Effective as of November 1, 2018, the Insurance Business Transfer Act is the broadest legislation of its kind to-date in the United States.

An insurance business transfer (IBT), which is subject to state insurance regulatory and court-sanctioned review and approval, allows insurers with run-off business to transfer that business to another entity without obtaining shareholder consent. IBTs create considerable flexibility and financial security, and can help eliminate uncertainty, reduce administrative expense, simplify regulation, and free up capital for more profitable enterprises. Oklahoma’s IBT legislation applies to life, health, and property-casualty liabilities, and is open to both run-off and active books of business.

Modeled after an approach that has been successful in Europe, U.S. actuaries are ideally suited to serve in the role of IE, as they possess the education and training needed to ensure policyholders involved in these IBTs are protected and treated fairly.

“I am proud of my work as coauthor of the Insurance Business Transfer (IBT) Act, while a member of the Oklahoma House of Representatives. Now as the Oklahoma Insurance Commissioner, I am committed to an efficient and transparent approval process,” stated Commissioner Glen Mulready.

“I’m honored to serve as the country’s first Independent Expert following Oklahoma’s success in creating a market for insurance business transfers,” said DiCenso, a principal and consulting actuary with Milliman. “The U.S. runoff market is estimated to be $350 billion for non-life insurance, and could reach $1 trillion when factoring in life insurance and long-term care. There are major financial implications for U.S.-based insurers of all types.”

To learn more about Oklahoma’s IBT Act and the role of the IE, click here.

Captive actuaries are as indispensable as your traffic app

One of the primary rewards from operating a captive is the ability to place more emphasis on the risk management process, in order to stabilize annual budgets, reduce long-term costs, and utilize capital more effectively. To accomplish these goals, captives rely on experienced service providers to manage almost all of their operations.

An actuary is one of these indispensable service providers. Simply put, actuaries can quantify the level of risk, which allows the company to better manage it. And actuaries provide value throughout a captive’s life cycle, from formation to dissolution (if applicable). Risk factors change all the time, so having an actuary review your experience regularly is crucial to avoiding problems.

Speaking of avoiding problems, we all love the functionality of the Waze traffic app, which steers us from one location to another in the most efficient manner possible. At its core, this traffic app helps you figure out what path to take to avoid unexpected delays, thereby reducing stress levels. Anyone who has traveled I-95 in Connecticut knows this value first-hand.

Actuaries essentially function like a Waze app for captives. They largely provide a means to keep captives on the right path by avoiding surprises and reducing potential for management stress.

Initially, actuaries are engaged in feasibility processes to help ensure a company knows what to expect as it sets out on its journey to create a captive. Where necessary, actuaries utilize data from the local environment (the industry) to supplement the company’s own experience. The main deliverable of the feasibility study is a five-year pro forma financial model, which includes a projected income statement and balance sheet of a new captive’s financial business plan. Actuaries provide these projections on both an expected loss outcome basis and an adverse loss scenario basis; this is because it is crucial to understand the potential risks involved, not just what to expect on average. Both the captive business owner and regulator are key stakeholders for whom the feasibility study reduces stress levels right from the outset.

Once the journey begins (the captive is formed), actuaries perform ongoing loss reserving and loss forecasting (budgeting). As the captive’s losses emerge, the actuary has to gauge how much weight to place on an individual insured’s experience versus that of the industry when estimating ultimate losses. This is a delicate balance amidst the “noise” of random variations in losses. In the end, actuaries hold the keys to how fast the captive can travel from a loss recognition standpoint.

Periodically, at least every three years, the actuary should update the pro forma model, adjusting to the conditions of the road map that was created. This provides a continuous means of reasonableness testing of underlying assumptions, including loss ratios, loss development patterns, loss payment (discount) factors, expenses, investment income, taxes, etc.

All of this effort ultimately supports a smooth ride—the issuance of fairly stated financial statements with adequate funding of loss reserves. The actuary’s road map and process needs to be transparent enough to allow another actuary to essentially reproduce the analysis (even though no two actuaries would use all of the same assumptions or necessarily take the same route to the destination). During the process, the captive’s actuary needs to engage in dialogue with the audit firm’s actuary to ensure audit sign-off is secured; this helps to arrive at your final destination from a financial reporting standpoint.

As actuaries, we certainly wish our models could be as straightforward as the Waze traffic app. Even though we face complex questions, our processes and expertise have proven to be successful in navigating the risky terrain of running a captive insurance company. In Connecticut, our tourism branding is “Still Revolutionary.” In today’s ever advancing age of big data and analytics, using actuaries to help captives take calculated risks to justify the potential rewards noted above is still a state-of-the-art approach. And the Hartford, Connecticut area has the highest number of actuaries per capita in the United States. Talk about an opportunity. So you may want to consider the Waze-like advantages of using an actuary to help you navigate a new route to establishing a captive in Connecticut.

This blog post was first published by the Connecticut Captive Insurance Association.

The right retention

The most important decision that a corporation makes in regard to any insurable risk it faces is determining the risk financing structure, including the trade-off between retained risk and transferred risk. Deciding the optimal amount of retained risk is often more art than science. Why don’t companies always put themselves in the optimal position from a risk retention standpoint? Because there is risk—the uncertainty of what losses will be—which is perceived as difficult to quantify. Rules of thumb and anecdotal evidence often win out in decision making.

The traditional insurance language has been and is “cost of risk” (or sometimes just “expense”). This metric doesn’t tell the whole story about risk. By incorporating the element of risk into retention analysis—calculating a distribution of loss incomes, as well as considering the effects of the firmness of the insurance market and taking a financial view of risk, the retention analysis can be made as a capital resource decision, incorporating the cost of capital embedded in an insurance purchase.

Milliman’s Stephen DiCenso and John Yonkunas, of JPY Services, use a sample insurance portfolio to quantitatively compare a cost of capital approach with a traditional cost of risk approach in this Captive Review article.