LOCAL GOVERNMENT SELF-INSURANCE PROGRAM (LGSI)

Guidelines for Self-Insured Joint Property and Liability Pool
Reporting Claim Liabilities

Adopted as revised June 2001 by the State of Washington Joint Property and Liability Advisory Board

Purpose

These guidelines are intended to assist joint local government self-insured property/liability pools subject to RCW 48.62 (hereafter pools) in the reporting of their claim liabilities on financial statements. Suggestions have been made for various subject areas with a goal of achieving some consistency between the pools in the approaches taken to present claim liabilities.

The State of Washington Property and Liability Advisory Board recommends these guidelines for pools. These guidelines are designed to provide flexibility for joint pools in their accounting applications as long as the pool’s financial status and claim liabilities are clearly communicated to pool members.

SUBJECT AREAS:

FORMAT:

Pool financial reports should comply with Generally Accepted Accounting Principles (GAAP) and adhere to accounting standards promulgated by 1) Governmental Accounting Standards Board (GASB), 2) Financial Accounting Standards Board (FASB) and 3) the Washington State Auditor’s annual instructions for financial reporting.

The largest liability is usually the unpaid losses and loss adjustment expenses referred to as Claim Reserves. A liability for unpaid claims cost, including estimates of costs relating to incurred but not reported (IBNR) claims, should be accrued when the covered event occurs or, for claims-made policies, in the period when the event that triggers the coverage occurs. A separate entry should show a reserve for Unallocated Loss Adjustment Expenses (ULAE). As defined by "GASB", these expenses include costs specifically associated with a particular claim, such as legal fees on litigated claims. Allocated Loss Adjustment Expenses are to be included in the individual case reserves. The method used to determine any claim "runoff" expenses should be footnoted.

The financial statement prepared by a pool should also include, under Required Supplemental Information, a Ten-Year Claims Development Information table that illustrates how the pool’s losses have developed over time.

DOCUMENTATION:

Joint risk pools should maintain sufficient documentation to support the aggregate claim liability information reported on the balance sheet. When appropriate, this documentation should include loss and loss reserve schedules by year, development calculations, discounting practices, excess or reinsurance adjustments, and any actuarial reports used.

REINSURANCE AND EXCESS INSURANCE:

In accordance with Governmental Accounting Standards Board pronouncements, estimated reinsurance (and excess insurance) receivables based on unpaid claims and claims adjustment expenses are netted against estimated claims payable. Estimated reinsurance (and excess insurance) receivables based on paid claims and claims adjustment expenses are recognized as an asset with a corresponding reduction in claims expense. Disclosure of the amount of estimated reinsurance (and excess insurance) receivables is recommended.

ACTUARIAL REPORTS:

An actuarial report can provide important information for use in establishing rates and determining the amount of claim liabilities to be shown on the balance sheet. The actuarial report shall document that all claims data (paid claims and loss reserves) have been reconciled with the risk pool's records prior to the completion of the actuarial report.The following information is intended to be a guide for the use of the information contained in the actuarial report.

  • Estimated Ultimate Loss – The actuarial report provides this number for each prior year and the current year. This number is used to calculate IBNR. When calculating IBNR or determining the claim liabilities to be shown on the balance sheet, it is important to always start with the estimated ultimate loss projections.
  • IBNR – IBNR represents the future liability on claims which occurred, but have not been reported, prior to a certain date, as well as future development on claims already reported.

    The calculation for IBNR is the estimated ultimate loss minus the current year cumulative paid losses and open claim reserves. If a pool uses interim financial statements during the year the IBNR for the current year should be prorated.

    Claims experience for older years may cause the cumulative paid losses and open case reserves to exceed the original estimated ultimate loss. In this case, the estimated ultimate loss needs to be increased to prevent a negative IBNR.

  • Claim Liability – The claim liability shown on the balance sheet – This is the open cases reserves plus the IBNR for each year. The actuarial report will estimate the joint risk pool’s outstanding claim liabilities as of a certain date. This estimate is based on the data given to the actuary. Paid loss and open reserve data at or very near the fiscal year-end date will improve the usability of the estimate. Generally, data given at the end of a fiscal year results in better estimates of IBNR projections in the actuarial report. It is important to check the paid loss and claim reserve data used to calculate IBNR to insure no significant changes have been included.
  • Use of actuarial data for rate setting – The timing of the data given to the actuary is important. Some joint risk pools provide mid-fiscal year data to their actuary for the purpose of receiving recommendations for rate setting and the next year budget development. In this case, the actuarial report will project fiscal year- end paid losses by year and case reserves. These projections are then used to estimate a year-end IBNR. These projections provide valuable information for joint risk pool budgeting and for monitoring the financial solvency of the program. However, these mid-year projections should not be used on a fiscal year-end balance sheet. Rather, utilize the estimated ultimate loss numbers and use the fiscal year-end paid losses and open claims reserves to calculate the year-end IBNR.

DEDUCTIBLE:

Many joint risk pools offer the opportunity to their members to take a deductible for all lines of coverage or for certain lines of coverage. Some pools advance deductible payments on particular claims then seek reimbursement from the member. Once a deductible payment is invoiced, it should be shown on the balance sheet as a receivable. When deductibles exceed 20% of total outstanding claims liability, disclosure should be made in the footnotes.

DECLARATIONS:

Footnotes to the financial statements should be used to disclose information relevant and material to a reader of the financial statements. The following list is not intended to be all-inclusive. Other disclosures may be necessary for a clear understanding of the financial statements and operation of the insurance pool.

  • Liabilities determined thru use of an actuary report or purchase of aggregate stop loss coverage
  • Type of stop loss coverage
  • Confidence level of actuarial figures reported
  • Use of discounted or undiscounted figures
  • Method used to discount claims (including discount factor)
  • Changes in assumptions used in development of estimates
  • Significant types of losses that are not covered by re-insurance/excess insurance
  • Reasons for large fluctuations in reserves
  • Disclose if IBNR based on other than year-end data
  • Disclosure of pool and member deductibles
  • Claims reserving following Joint Pool Claims Reserving Guidelines
  • Liabilities that exceed the self-insured retention
  • Type of coverage – ie: claims paid; claims made; occurrence based
  • Claims a pool believes are not reasonably estimable
  • Define the method used to determine any "runoff" expenses