HD88 - The Actuarial Analysis of the Potential Impact of Colleges and Universities Offering Optional Insurance Programs on the Commonwealth's Risk Management Programs


Executive Summary:
The Commonwealth of Virginia, Division of Risk Management (DRM) requested that Mercer Oliver Wyman Actuarial Consulting, Inc. (Mercer) provide an analysis of the Restructured Higher Education Financial and Administrative Operations Act SB 1327 -Chartered Universities and Colleges with respect to its impact on the DRM insurance programs. We understand that under this legislation, chartered universities and colleges have the option of participating (or not participating) in the insurance programs, administered by DRM. This analysis specifically addresses the impact of three institutions (University of Virginia, William and Mary, and Virginia Tech) withdrawing from all risk management plans (general liability, automobile, medical malpractice, and property).

The automobile and property programs are funded on an occurrence basis. That is, the actuarial projections of the fund liabilities include a provision for future payments on all incidents occurring through the valuation date. The general liability and medical malpractice programs are funded on a claims-made basis. That is, the actuarial projections of the fund liabilities include a provision for future payments on all claims reported through the valuation date. However, the actuarial projections of the fund liabilities do not include a provision for unreported claims pertaining to incidents occurring before the valuation date (i.e. the "tail liability"). If the chartered universities were to leave the general liability and medical malpractice programs, this tail liability would need to be addressed. The DRM programs may choose to charge a one time tail premium to each university to fund for this exposure. If a tail premium is not collected, the liability would-be retained in the respective funds. If a premium is collected, any amount by which the premium exceeds the actual losses would be retained by the funds. Conversely, any shortfall would have to be covered by the other state agencies. Our analysis provides an estimate of this tail liability as of June 30, 2005, separately for the University of Virginia, William and Mary, and Virginia Tech.