-8-
the Bornheutter-Ferguson method4 to project ultimate values, by
accident year, of each self-insurer fund; (ii) determined
frequency and severity components; (iii) performed Monte Carlo
simulations5 of the underlying net losses to obtain the potential
liability of each self-insurer fund at various confidence levels;
and (iv) compared simulation results to the policy retention
points and claim payments. KPMG Peat Marwick estimated that
Crossroads' reserves were $22,000,000 as of December 31, 1991,
and $30,400,000 as of December 31, 1992. KPMG Peat Marwick's
reserve estimates included losses for retroceded policies.
b. Crossroads' Reserves for Unpaid Losses
Crossroads' management established its reserves based on its
analysis of the business environment and industry trends, claims
experience, and the KPMG Peat Marwick actuarial reports.
Crossroads recorded reserves in the amounts of $19,410,000 as of
December 31, 1991, and $22,994,000 as of December 31, 1992, on
its financial statements. These reserves were net of losses for
retroceded policies. Crossroads' financial statements were
4 The Bornheutter-Ferguson method is an actuarial technique
used to estimate the value of a company's reserves by subtracting
its paid losses from its reserves.
5 Using the Monte Carlo simulation technique, KPMG Peat
Marwick estimated Crossroads' potential liability by performing
500 simulations of Crossroads' underlying net ultimate losses for
each fund year and sorting the results of the simulations from
lowest to highest to estimate confidence levels.
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