Volume 1, Number 3


Mergers & Acquistions:
Insurance Program
Due Diligence

Where to Begin?

What Does the
Broker Add?

Final Report

How to Subscribe/Unsubscribe

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Articles & News

Mergers & Acquisitions:
Insurance Program Due Diligence

Companies considering a merger or acquisition typically go through a planning process with regard to the successful operation of the post-transaction entity. Financial projections for the future business plan and structure are completed to evaluate the viability of the transaction. Each party involved generally assembles a team of internal staff and outside consultants to assist in the evaluation of the transaction. A risk manager and broker should be part of the team dedicated to insurance matters. 

As a risk manager or broker, you add value by analyzing the potentially significant impact on the current insurance program. Your expertise on

• exposure to loss, 

• the regulatory environment, 

• accounting requirements and 

• corporate finance 

provides valuable input in the transition to the new corporate structure.

Where to Begin?

The due diligence process is the stage of the transaction during which business plans are assembled and the details of the transaction are prepared. As a risk manager in this process, your chief duties are to determine

The first step of the analysis of outstanding liabilities is to gather the necessary data. This involves

• documenting all reported claims, 

• reviewing the most recent actuarial analysis and

• determining self-insured and uninsured risks.

The target company's third party administrator (TPA) can help with documenting all reported claims. A current loss run will include information on each claim. The TPA will also have insights into potentially different philosophies of loss reserving and claim identification.

You should then use actuarial techniques to determine outstanding liabilities by calculating the anticipated future development of the incurred claims. An actuarial report will yield valuable information on 

• development patterns,

• settlement patterns, 

• benchmarking, 

• loss control and 

• inconsistencies in the historical loss data.

Be aware of a red flag such as a recent claims audit that led to a noticeable drop in reserves.

Consider completing your own actuarial analysis to determine if a claims audit changed loss reserving patterns.

What Does The Broker Add?

As a broker, you will be invaluable in determining any gaps in coverage by benchmarking the target company's program with your program. You will determine where there is overlap and where coverage is missing. You will also research the insurance requirements for the states where the target company operates.

Your first step is to gather all information concerning the current and historical insurance program. This includes all insurance policies and a complete description of all self-insured programs. By capturing the complete information on 

• carriers, 

• brokers, 

• TPAs, 

• policy numbers, 

• limits, 

• deductibles, 

• retentions and 

• premiums,

you can begin to map out how to address the new risk exposures.

For more information about SIGMA, visit our web site or 
contact SIGMA president
 Al Rhodes, ACAS, MAAA,
by email or at 615-352-3944.

The Final Report

Your final report should recommend strategies to reduce your company's exposure to loss. Going forward, the likely scenario is to roll the target company's risks into your insurance and loss control programs. The big question involves the past exposures. Consider the idea of a loss portfolio transfer. Though this would involve paying a premium based on the expected liabilities plus a risk transfer charge, getting rid of the liabilities may be the best answer. 

If the suggestion is to retain the liabilities, then prepare a payout schedule and net present value analysis of the liabilities. The liabilities can then either be fully funded (on a net present value basis) or be budgeted to the year of expected payment. Since it may take many years for all claims to close this analysis will have to be updated yearly.

For more about loss portfolio transfers, read our article
 "Loss Portfolio Transfer - A Simplified Guide" 
by risk management consultant Nathan Rum.
 (PDF format, Acrobat reader required.)

Need the Acrobat reader? Click below to go to Adobe's site and get their free download.

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We love hearing from you! If you have questions or suggestions for the newsletter, contact me.

Sincerely,
Al Rhodes
President, SIGMA Actuarial Consulting Group

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