- 49 -
petitioner was realizing losses on none of the experience-rated
group contracts. In explanation, petitioner’s expert notes that
the experience-rated group contracts had reserve mechanisms that
allowed petitioner potentially to recoup losses relating to
particular experience-rated group contracts. Petitioner,
however, was not insulated from losses relating to experience-
rated group contracts, and every experience-rated group contract
could produce an unrecoverable loss for petitioner. The
retrospective credit contracts could be terminated by the groups
at will even if they had a deficit account, and petitioner could
only recoup a shortage with respect to its retrospective refund
contracts if the contracts produced excess premiums in subsequent
years.
By not taking into account contract-specific characteristics
relating to experience-rated group contracts, petitioner’s expert
concluded that the average experience-rated group contract would
not experience a loss, and his valuation did not reflect or
identify which experience-rated group contracts should be so
treated as loss contracts and valued accordingly.
The error of petitioner’s expert’s approach in this regard
is illustrated by an example involving Pennsylvania Farmer’s
Union, and facts that generally postdate January 1, 1987, but
that nevertheless illustrate the problem with petitioner’s
valuation approach. As of January 1988, Pennsylvania Farmer’s
Union maintained with petitioner three experience-rated,
retrospective credit group contracts with a cumulative deficit of
Page: Previous 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 NextLast modified: May 25, 2011