Note: On Monday, October 15, the Milliman Chicago casualty practice facilitated an actuarial roundtable discussion for the Chicago chapter of the Risk and Insurance Management Society (RIMS) covering four topics that have received a good bit of attention recently. Participants represented local businesses from healthcare service providers to nonprofits to international fast food corporations. Attendees were encouraged to share their experiences on each of the topics. This is the third article in our four-part series discussing each topic.

Understanding the background
Allocations are key when there are several divisions or locations within a company. The risk managers were asked how they are allocating costs to divisions. Many replied that they are using an allocation formula that has been in place for a long time and have not contested or questioned the reasoning behind the formula. Many risk managers also do not modify their formulas for the increased costs in claims that are due to inflation. Many risk managers felt that if the allocation is "not broken" then it doesn't need to be modified and don't take advantage of their actuaries to calculate the allocations even though they understood the expertise and independence their actuaries could bring.

Management of allocation system
Risk managers have used a combination of losses (dollars and counts) and exposures in their allocations. Some also complete their allocations on a quarterly basis while others may only complete annual allocations of the funding. Many have suggested that, to increase buy-in, risk management should visit the locations and explain the formula in person. Most managers are fine with the allocation formula if they can easily understand it. However, almost all risk managers mentioned that divisions always feel like they are paying too much. One attendee mentioned that she preferred to have an outside, unbiased actuary to deflect any criticisms she personally received from her divisions; she can point to the objective actuarial calculations.

Concerns by management
The largest concern by risk management was about the stability of the allocations, which was complicated by the goal of having these allocations control losses. Risk management suggested that they wanted divisions to report losses quickly and at an appropriate amount. But there was concern that not all claims were being reported because then they would be included in the risk manager's loss experience and result in higher allocation amounts. A solution was mentioned of counting a loss as half the amount if it was reported within three days and at the proper amount initially.