Frequently Asked Questions
What makes your analysis better?
Our model is a very rigorous financial model incorporating thousands of stochastic simulations (layman’s term – “Monte Carlo Analysis”). We build this model acknowledging the reality that there is much we don’t know about the future. We don’t know what your revenue, expenses or investment returns will be next year. We don’t know whether you will get hit with a 1-in-100-year catastrophe expense next year, in 50 years, or some other time. As a result, what we do is build a model that randomly selects each unknown item for each year (i.e., revenue, expense and investment returns) based on the likelihood of it occurring (e.g., the equity market may have a return as high as +50% and it is possible that the model will select +50% for the equity returns in a given year, but the model will select a +7% return a lot more often). Then we use those numbers to determine the results at the end of the year. For a 100-yearmodel, 100 years of data are independently simulated. Our computer software reviews and logs the results. Then it starts the whole process over and creates a brand new 100-year model. For most of our projects, we simulate over 1,000 100-year models!
This large number of models allows us to understand what will happen to your perpetual care fund over a wide variation of future events. We then review the results of the models to determine probabilities of any particular event (such as the perpetual care fund balance moving to a specific target). These probabilities are reported to you in an easy-to-understand manner (e.g., “There is a 25% chance that the perpetual care fund will run out of money at some time within the next 100 years.”).
Some other businesses don’t do an analysis of this type. Who should get one?
Any cemetery that plans to have its perpetual care fund solvent for the next 100 years should build a 100-year financial model. Without a model, management will not have any idea if its perpetual care fund will be there for the long run. Over the past 24 months or so, many parties are paying much more attention to issues related to perpetual care funds. Our Principal, Hayden Burrus, has performed more perpetual care adequacy studies than anyone else. Perpetual care adequacy is a management issue whose time has come. There is nobody better to partner with when analyzing this issue than PerpetualCareAdequacy.com
What are the main conclusions?
In our most typical assignment, cemetery executives are asking us to help them answer the question, “What are the chances that we will run out of money?” So our answer to them is in the form of a probability; and our headline conclusion is something like, “If current management practices remain in place for the duration of this study, there is a 23% chance that the perpetual care fund will run out of money.” Other clients ask us to forecast an expected balance, or a probability of the balance reaching a certain threshold. We custom-build the perpetual care model to answer the questions executives are asking. Read our case study article in ICMA for an overview of how we arrived at the conclusions in a recent study.
Our operation is unique. Will your analysis still be relevant?
Yes. We make sure our analysis is relevant to you. We do this by creating a custom financial model specifically for your perpetual care fund. We will interview your management team to understand all of the cash flows and business practices that affect the balance of the perpetual care fund. We then turn the information we learn into business rules for your custom financial model. If you expect some of these business rules to change in the future, we can incorporate the changes into the model as well.
How long does it take?
Depending on your needs, HB Actuarial Services can complete the entire study in just one to two weeks. Over the course of our study, we build a customized financial model containing all of the cash flows affecting your perpetual care fund. In preparing the financial model, we will ask your management team questions related to how your perpetual care fund works in the “real world”. Often management will want time to reflect on the questions and gather additional data. This back and forth between HB Actuarial and management lengthens the time until we have a completed product. A more typical time frame from engaging the analysis to completion is about six to eight weeks.
How often do we need to do the perpetual care study?
Once we create a financial model for your perpetual care fund, you should update the model whenever business practices affecting the perpetual care fund change (e.g., changes in contribution rates, changes in inventory, pricing, asset allocation, one-time contributions or withdrawals, etc.). In addition, it is best to perform a new analysis once every few years based on the most recent perpetual care fund balance and remaining inventory.
How much does it cost?
Costs relate to the complexity of the financial model and the services requested. We can safely say that costs are significantly less than investment advisory fees. In addition, in most cases you will need to incur the cost of a perpetual care adequacy study only once every few years.
Do I need a degree in statistics to understand it?
No way! Our company motto is “Complex Calculations Made Easy to Understand” and we live up to that motto. Our text report contains our conclusions presented in the style of a management report. Our executive summary may lead with a conclusion such as “There is a 25% chance that the perpetual care fund will run out of money at some time within the next 100 years.” We get frequent praise for the understandability of our reports.
Indeed our model is a very rigorous financial model incorporating stochastic simulations (layman’s term – “Monte Carlo Analysis”). Yet during our analysis of the results of the model, we ask ourselves questions about your perpetual care fund that we believe you would ask us; then dive into the statistics of the model to get the answer. The answers to these questions compose the bulk of the executive summary portion of our report. We do have a redacted version of the executive summary of a perpetual care adequacy analysis available for your review if you request.
It seems your study assumes our management of the perpetual care fund will never change. We are making changes next year. Can you consider that?
If you expect some of these business rules to change in the future, we can incorporate those into the model. After all, we are building a model custom-made for your perpetual care fund.