Payout Profile – Term Of The Day
The payout profile or LDF are important to a company’s return on investment. This is becoming very important to recently founded Captives. The first few years that a Captive is in existence are the make or break years. LDF’s (Loss Development Factors) go hand-in-hand with payout profiles.
The profile is actually a schedule illustrating the typical rate of dollars paid out in claim settlements over time. The three insurance entities that must see this data as critical are:
- Reinsurers – when analyzing the funding risk for their insureds
- Captives – the tax advantages can be enormous
- Self Insureds – inaccurate funding has contributed to some of their failures
One client that we recently analyzed found that their funding techniques for a large deductible program were not accurate. Their payout profile indicated they were spending 80% of their Workers Comp dollars on claims in their third year. This was due to the settlements of denied claims.
Payout profiles and LDF’s usually have a time horizon of 10 years. I recommend 15 years as a final backstop. A highly accurate LDF or payout profile will enable a company to invest for the maximum ROI (return on investment). As the stock markets have fallen appreciably over the last few years, the margins on investments are very thin.
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