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May 28, 2013


The folks at Murray Bresky Consultants are just trying to scratch out a living by raising chickens - not just any chickens, but free range chickens that are "happy and healthy." Their signature breed is "fed an all-natural and all-vegetable diet that, combined with plenty of exercise, makes our birds the leanest on the market. The leisurely lifestyle eliminates the need for antibiotics to prevent diseases commonly found in chickens as a result of stress and confined living conditions. Minimally processed, without the use of preservatives or other artificial ingredients, Murray's Certified Humane Chicken is truly all chicken."

Unfortunately for the company, they secured workers comp insurance through New York Compensation Managers (NYCM), the now defunct operator of a dozen self-insurance groups in New York. NYCM claimed to offer favorable rates, strict underwriting standards and exemplary claims services. They ended up with egg on their face with their inadequate rates, suspect underwriting and rampant under-reserving of claims. In retrospect, the operation ran around like a chicken with its head cut off. By the time the problems emerged (in 2006), it was too late to shake a feather and correct the problems.

Following the SIG's failure, Murray Bresky Associates was hit with a $1.2 million assessment to make up their share of the SIG's deficit. That ain't chicken feed.

A Game of Chicken
Murray Bresky is not chickening out of a fight. Indeed, the chickens have come home to roost in the form of a lawsuit filed against NYCM and its board of trustees. The lawsuit seeks to recover the $1.2 million and then some, alleging breach of contract and breach of fiduciary duty. The case worked its way up to the NY Supreme Court, Appellate Division, where the motion by the defendents to dismiss the lawsuit was, for the most part, dismissed.

Now the defendents are walking on egg shells, facing the prospect of personal liability for the failures of the SIG. Where they once feathered their nests with the proceeds of the operation, their financial security has flown the coop. This is a legal mess perhaps best described by the late Lyndon Baines Johnson: "Boys, I may not know much, but I know chicken poop from chicken salad."

Roles and Irresponsibilities
One of the former trustees of the SIG is squawking that he was not aware that he was, in fact, a trustee. He may have signed off on a few trustee documents, he may have performed some of the functions of a trustee, but he insists that he had no memory of being appointed. He insisted that he was not a bad egg and claimed that he had no place in the pecking order. The court, however, ruled otherwise.

As the saying goes, you have to break eggs to make an omelette. Quite a few more eggs will be broken before this particular concoction is served up. Hard-boiled attorneys will parse the details to figure out who, if anyone, owes Murray Bresky Consultants and exactly how much they owe.

Pecking Orders
The courts now rule the roost. They have upheld Murray Bresky's right to sue, with the exception of some actions that are time-barred. There may well be a sunny side up in the chicken company's quest for justice. We look forward to the final resolution of this stew, the chicken scratch of a judge's signature that will put a final number on the liability of an insurance operation that flaps my wattles (ie., annoys me).

Here's a little unsolicited advice to Murray Bresky Consultants: don't count your chickens before they hatch. This one has a long way to go before the company can feather its nest with the proceeds of a complex litigation. In the meantime, their free range chickens have the run of the coop, enjoying their cage-free, stress-free lives right up to the very end. Bon appetite!

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May 20, 2013


Dennis Mealy, chief actuary for NCCI, has issued his state of the line report on workers compensation. There's a lot of good news for insurers, along with a few little red flags that might well morph into big banners of bad news. Mealy's presentation will soon be available as a webinar at the NCCI site, but for the moment, let's glean the essence from his Powerpoint presentation.

There's a lot of positive news (with apologies to those who are not up to speed in insurance jargon). Premium is up by $3.3B, about 9 percent in all. The all-important combined ratio has dropped from 115 to 109 (projected). Given suppressed interest rates, 109 is still high, but it puts profitability within reach. The calendar year loss ratio has dropped from the unacceptable - 70.8 percent - to 66 percent. Pre-tax operational gains are plus 5 percent.

There is (mostly) good news in the loss area: frequency of lost-time claims is down an average of five per cent across all sectors. Indemnity claim costs are up just slightly, as are severity costs. Even in assigned risk pools - insurers of last resort - results have improved, with combined ratios down to 112 percent, compared to 117 in the two prior years.

At the same time - and directly related to the improving results - discounting of premiums has diminished from -7.6 percent to a projected level of -4.5 percent. [Perhaps even the sceptical rate setters in Massachusetts will begin to see the relationship between (slightly) higher rates and a healthy market. If they continue their intransigence on rate increases, the Massachusetts miracle will soon collapse in a heap.]

Who Pays?
In all success stories - however modest - there are winners and losers. In workers comp, the winners are employers with low losses; the losers tend to be those with relatively high losses. NCCI has upped the ante by changing the way experience mods are calculated.

Beginning in January and rolling throughout this year, NCCI is implementing a new mod calculation, raising the split point of primary losses from $5,000 to $10,000. (See Tom Lynch's detailed explanation beginning here.) For many experience rated risks, the change has been positive. Despite paying slightly higher rates in many states, the cost of insurance has remained stable or even dropped. Here is NCCI's summary of the new rating plan impact:

- 12 percent of risks see premiums decreasing by 5 to 15 percent
- 76 percent see plus or minus changes within 5 percent
- 11.3 percent see increases in the 5 to 15 percent range
- less than 1 percent see increases above 15 percent (these are the folks who have been calling...)

The Big (Cloudy?) Picture
Mealy's presentation offers a good news/bad news overview of workers comp. On the plus side, we have seen a slight increase in premiums, a reduction in frequency, stable severity and a good capital position for the industry in general.

On the negative side, the slow pace of economic recovery is troubling, as is the structural unemployment that threatens the livelihoods of aging, middle class workers. Underwriting is confronted with unprecedented instability in predicting risk: today's low loss company might well be tomorrow's catastrophe. Low interest rates impede profitability. Alternative markets - the new opt-out law in Oklahoma being a prime example - threaten to drain good risks from the market and leave higher risks in conventional coverage. Finally, it is too soon to know the impact of health care reform, though in the long run, it seems likely that virtually universal health care should reduce cost-shifting into workers comp.

Perhaps we should add the impact of global warming to the negative side. As storms increase in magnitude, the risks to those who are working when storms hit also increase exponentially.

As the Chinese curse would have it, we live in "interesting times." For the moment, from the rather narrow perspective of the workers compensation market, things look cautiously and incrementally better. But as they say in New England, if you don't like the weather, just wait a minute. It was clear and warm a few moments ago. Suddenly, the wind picks up, the wind chills and the rain comes pouring down. Like a harried underwriter, we struggle to find shelter in the unexpected storm.

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May 7, 2013


In the Insider's decade of exploring workers comp, we have encountered many unusual instances of compensability, legitimate claim denials and outright fraud. But rarely have we found cases where a claims administrator, in this case, a TPA, simply refuses to pay for medically necessary treatment. The saga of the late Charles Romano reminds us that the great bargain of workers comp is not just between employers and their workers; it includes the good faith effort of claims adjusters to carry out the letter - and spirit - of the law.

Charles Romano worked as a stocker for Ralph's Grocery Company, a California-based operation that is part of the Kroger chain. It is worth noting from the outset that Kroger is self-insured for comp, with Sedgwick serving as the TPA. As a stocker, Romano presumably did a lot of lifting and reaching. He suffered a work related injury involving his shoulder and back in August of 2003.

A Solution Worse than the Problem
After conservative treatment failed to resolve the problem, he underwent surgery in December 2003. What had seemed like a relatively simple solution to a shoulder problem quickly descended into a grave, life-threatening situation: Romano contracted a MRSA infection following the surgery, which led directly to total paralysis. He suffered renal failure and several heart attacks, which were related to the MRSA infection. After enduring inadequate medical treatment directly related to the TPA's denial of treatment, Romano died in May 2008.

Nearly three years after the initial surgery, a workers comp administrative law judge (WCJ) ordered that the TPA pay for all the medical expenses related to the infection. Without consulting with medical professionals, the TPA unilaterally refused all payments - totalling, by this time, hundreds of thousands of dollars. The TPA appealed the adverse ruling.

In February 2012, a workers comp administrative law judge imposed penalties for delay of treatment in eleven specific instances, finding that the TPA "failed in its statutory duty to provide medical care, egregious behavior which increased the suffering of a horrifically ill individual." He imposed the maximum $10,000 fine for each denial of treatment.

Unappealing Appeal
The TPA appealed the penalties for delayed treatment. In what surely qualifies as a new definition of chutzpah, the TPA contended that penalties were not appropriate, among other reasons, because the claimant had died. Well, duh, the routine denial of treatment throughout the course of the illness was a significant factor in the death. Romano simply did not receive medically necessary treatments to address his formidable medical conditions.
NOTE: The penalties, even when maxed out at $10,000 per incident, is dwarfed by the suffering inflicted upon Romano.

The Workers Comp Appeals Board upheld the penalties [For a link to a PDF of the lengthy ruling, Google "Charles Romano Trust vs. Kroger Company]:

The WCJ's Report makes it clear that he imposed the harshest penalties possible under section 5814 because of defendant's extensive history of delay in the provision of medical treatment; the effects of those delays on a paralyzed, catastrophically ill employee; the lengths of the various delays; and defendant's repeated failure to act when the delays were brought to its attention.

Lest the ruling be considered in any respect ambiguous, the court went on to say: "We have rarely encountered a case in which a defendant has exhibited such blithe disregard for its legal and ethical obligation to provide medical care to a critically injured worker."

Risk Transfer, Risk Retention
It is tempting to conclude that the TPA's actions were related to their customer's risk assumption - otherwise known as self insurance. It is one thing to purchase insurance (risk transfer) and have the insurance company assume liability for a catastrophic loss. It is quite another for a self-insured company to absorb a loss of this magnitude on its own. (Presumably Kroger had some form of stop loss in place.) Despite the multiple findings of compensability, despite the judicial determination that the horrendous MRSA infection was indeed work related, the TPA persisted in denying treatments and rejecting payments, long after Romano's untimely death.

As Mark Twain famously noted, "denial is not just a river in Egypt." It's also a poor strategy for managing claims. In his last years, the unfortunate Charles Romano certainly had to confront health issues beyond anyone's worst nightmare; denial for him was not an option. For reasons that remain unclear, when it came to paying for Romano's extensive and expensive care, the TPA chose a path of full catastrophe denial .

In the findings of the court, this denial was in itself an unmitigated disaster for the acutely vulnerable Romano, accelerating his precipitous decline and death. In the interests of saving their client some serious bucks, the TPA dug in its heels and refused to accept the compensability of a claim that had been adjudicated as compensable. In doing so, they violated the spirit and letter of the workers comp contract and earned themselves, in this particular instance at least, a place on the Insider's Management Wall of Shame.

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April 30, 2013


When Jakob Hutter founded the Hutterian Brethren Church in the 1530s, he was not worried about workers comp (which would not exist for another 350 years). He just wanted the freedom to practice his communal religion in what is now Germany/Austria. He incurred the wrath of Ferdinand I, who, in the name of the gentle Jesus, arrested and tortured Hutter and then burned him at the stake. An inauspicious beginning to what has proven to be a stubborn, if marginal sect.

The Hutterites eventually fled Europe and found their way to the western United States and Canada. Montana has about 30 Hutterite communities in the conservative Lehrerleut tradition, each involving about 100 or so members. Community members do not own property or earn wages, they do not pay for clothing and shelter and they receive free medical care, including care for any disabling injuries. (The Hutterites, surprisingly, do have a website.) For many years they worked on their farms and, like the Amish in Pennsylvania (blogged here), they were exempt from workers comp.

As the Lehrerleuts branched out into construction work beyond their own communities, the issue of unfair competition was raised by secular contractors. As a direct result, the Montana legislature passed HB 119, which defined religious communities as "employers" and community members as "employees." The Lehrerleuts sued (although normally participation in law suits is a violation of their faith). A deeply divided court ruled against the Lehrerleuts: they must participate in the state's workers comp system. The next step will be an appeal to the U.S Supreme Court.

A Bad Match
The complex relationship between employment laws and religious groups is far beyond the scope of this blog. We focus, instead, on the interesting conundrums raised by trying to force the Hutterites into the comp system. To put it mildly, this is an awkward fit.

First and foremost, the Hutterites do not pay wages. Without wages, there can be no comp premiums, as these are calculated by multiplying class rates times payroll. Perhaps the court would require that the Hutterites take the total cost of a job, subtract materials, and consider the remainder "payroll." But even so, this would be an approximation for what is an exacting requirement for other employers.

Then there is the issue of filing a claim. Every member of the Hutterite community signs a pledge not to file claims against the community and not to sue anyone for anything. Thus, even if a comp policy were to exist, it would never be used. To make this point even more dramatic, the majority of the Montana justices pointed out that the Hutterites were free to excommunicate any member who did file a claim. What an odd concession: the justices did not bother to explain how this would not be retaliation.
NOTE TO INSURERS: Write this policy! Even in the event of catastrophic injury, no claim will be filed.

And if Hutterites are subject to workers comp, what about the Fair Labor Standards Act and OSHA requirements? The Montana court has not imposed these virtually universal standards on the Hutterites, but why not? What happens to the minimum wage when there are no wages? Can you limit hours worked when there is no payroll to track? How will you monitor underage community members operating equipment?

No Simple Solution
Forcing the Hutterites into the comp system may sound simple, but surely it is not. The majority quotes retired Supreme Court Justice Sandra Day O'Connor, who rejected a challenge brought by Native Americans to enjoin a United States forest service road through sacred areas:

However much we might wish that it were otherwise, government simply could not operate if it were required to satisfy every citizen's religious needs and desires. A broad range of government activities -- from social welfare programs to foreign aid to conservation projects -- will always be considered essential to the spiritual well-being of some citizens, often on the basis of sincerely held religious beliefs. Others will find the very same activities deeply offensive, and perhaps incompatible with their own search for spiritual fulfillment and with the tenets of their religion. The First Amendment must apply to all citizens alike, and it can give to none of them a veto over public programs that do not prohibit the free exercise of religion. The Constitution does not, and courts cannot, offer to reconcile the various competing demands on government, many of them rooted in sincere religious belief, that inevitably arise in so diverse a society as ours. That task, to the extent that it is feasible, is for the legislatures and other institutions.

In the specific instance of religious communities and workers comp, the record across the United States is fairly consistent, for the most part favoring religion. The Amish have a specific exemption from workers comp in Indiana, Pennsylvania, Missouri, Kentucky and Ohio. There are pending requests for exemptions in Minnesota and Tennessee. Supreme Courts in a number of states have upheld the right of churches to govern their internal affairs. Federal legislation exempts the Amish from collecting Social Security taxes.

The Hutterites are no flash-in-the-pan phenomenon. For nearly 500 years they have wandered the earth, seeking the right to worship in a manner of their own choosing. Work, like everything they do, is an integral part of their worship. In telling them how to work, we are telling them how to worship - and that is a line that we cross at our collective peril. If the community were abusing its members, government intervention would be necessary. But if the goal is simply to level the free enterprise playing field, that is hardly sufficient cause for imposing conventional standards on a highly unconventional community.

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February 7, 2013


The Insider is very much looking forward to the Workers Compensation Research Institute (WCRI) annual conference, taking place on February 27-28 in the virtual epicenter of wonkiness, Cambridge MA. There is always much food for thought in these annual gatherings of insurance execs, state officials, policy makers, attorneys, medical specialists, employers and safety/loss control practitioners.

This year's agenda has zeroed in on the fundamental medicine-related conundrums facing workers comp systems across the country. All of us in workers comp long for insights into the following:
- Unnecessary medical care and its impact on treatment guidelines. (Back surgery, anyone?)
- Medical price regulation: what are the essential elements of an effective fee schedule? (Beware of the state where the doctors love comp...did someone mention "Connecticut"?)
- The Opioid epidemic: treatment protocols involving the generous and prolonged distribution of opioids are destroying lives across the country. Why are so many doctors so clueless about the proper use of pain killers? Whatever happened to "do no harm"?

WCRI's head honcho, Dr. Richard Victor, will host a discussion on health care policy involving (the presumably liberal) Howard Dean and (the assuredly conservative) Greg Judd. The dialogue might not equal the fireworks of July 4th on the Esplanade, but it might come close. The Insider will be listening closely for any indications of that rarest of phenomena: a common ground.

From Gorilla to ?
Last year, Dr. Victor concluded the conference with a discussion of the "gorilla in the room": the enormous and perhaps insoluble problem of structural unemployment among the 20 million people who lost jobs in the recent recession. For many of these people, especially those in their 50s and 60s, there is little prospect of returning to jobs with anywhere near the same rate of pay as before. Many will find themselves lost in the new economy, cobbling together part-time employment without benefits, while struggling to hold onto housing where mortgages exceed the value of the home. Tough times and, so far, not much in the way of effective solutions.

This year Dr. Victor will have to find some other animal analogy to glean lessons from history: Giraffe in the closet? Rhino in the den? He tells us that the lesson might have something to do with the first century Ephesians, toward whom St. Paul addressed some rather famous snail mail. While some might find such a teaser a bit obscure and full of religious overtones, the Insider looks forward to the story. Indeed, we look forward to this year's entire conference with great anticipation. There are few things better for policy wonks - our people! - than listening to the latest research from WCRI. Diligent note-taking will be in order.

If you count yourself among those with wonkish tendencies and you haven't signed up yet, you'd best jump on it immediately. If you have any questions about the conference, contact Andrew Kenneally at WCRI: 617-661-9274.

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January 10, 2013


This is Part 5 in 5 part series on Experience Rating changes. See Part 1: The Experience Rating Process: Significant Changes Are Imminent; Part 2 A Basic Review of Claim Losses, the Building Blocks of Experience Rating; Part 3 Primary and Excess Losses: Big Changes Beginning in 2013, and Part 4 Dealing with Reserves: When Do Losses Really Count?

We finish this series of blog posts with a brief discussion of "Expected Losses" and "Expected Loss Rates."

The entire experience rating process is driven by "expected losses," the total losses insurance actuaries expect you to suffer. But what exactly are "expected losses" and where do they come from?

Expected losses are contained in the premium rates you pay for each classification of worker. Expected primary loss rates and expected excess loss rates (called the "D ratio") are a percentage of the total rate.

For example:
Class rate - $5.00
Expected losses - about 50% of the rate - $2.50
Expected primary losses about 20% of total losses - $0.50

These percentages do vary somewhat, but will be close to the above estimates.

Thus, the calculation for expected losses for $500,000 in payroll for the above class would be:

Manual premium = $500,000 times $5.00 divided by 100 = $25,000
Expected losses = $25,000 times 50% = $12,500
Expected primary losses = $12,500 times 20% = $2,500

Note that even with half a million dollars in payroll, the expected primary losses are only $2,500. This amount would be exceeded by relatively small losses or one big loss.

One final note: under the new rating plan in PY 13, expected primary losses will increase by about 50%. Using the above example, the new rating plan raises primary rates as follows:

Expected primary losses = $12,500 times 30% = $3,750

In other words, primary losses will go up as the split point goes up, but not fast enough to help employers with significant losses.

Expected losses and expected loss rates have significance in workers comp program performance measurement. Here's why. A good way to measure how well a company manages workers comp is to track how much it spends in losses per hundred dollars of payroll. Then, one can compare that number with the expected loss rate, which is a rate per hundred dollars of payroll. If losses per hundred are running higher than expected losses per hundred, one can readily see that a problem exists, which can be immediately addressed.

After 20 years of stability, the experience rating process is about to undergo significant changes. Educated employers will track these changes and make any needed adjustments to their workers comp cost control programs.

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January 7, 2013


This is Part 4 in 5 part series on Experience Rating changes. See Part 1: The Experience Rating Process: Significant Changes Are Imminent; Part 2 A Basic Review of Claim Losses, the Building Blocks of Experience Rating and Part 3 Primary and Excess Losses: Big Changes Beginning in 2013. Part 5 will be posted later this week.

Did you know that a well-managed program aimed at assuring a low experience modification can produce a significant competitive advantage? In the following section, we will show you why and how.

Previously, we discussed the disproportionate impact that frequency has on an employer's workers' compensation premiums. The first $5,000 - soon to be $10,000 and higher - of each claim (primary losses) is counted dollar for dollar in the calculation of the experience modification. Losses above the primary level are discounted substantially. Therefore, a lot of small claims can raise premiums faster than a single large claim. Once again, for an excellent overview of experience rating, we recommend the National Council on Compensation Insurance's (NCCI) white paper.

When are the numbers actually crunched to determine an employer's experience mod and, ultimately, the policy year premium? Do employers have to obsess about reserves throughout the policy year or is there an optimal time to review losses?

When it comes to determining the experience rating for the next policy year, there is only one day that really counts. About six months after the end of the policy year, the insurer will prepare and submit a summary of losses spanning the prior three years (called the "unit statistical report") to NCCI or the appropriate state rating bureau. For employers with open claims in prior years, it is essential to make sure that the numbers contained in the unit stat report are accurate and reflect an up-to-date understanding of the status and strategy for closure of each open claim. If an employer does not have access to its loss run online, a program deficiency, in our view, then the agent or broker should be tasked with getting it.

When Should you Review Losses?
So when should employers review open claims? Large employers will be doing this pretty continuously, but employers at or below the mid-level of the middle market in premium size are different. Here's a suggestion: If your company has more than a half dozen open claims, you should review the losses at least quarterly. Get a loss run. Schedule a conference call with your claims adjuster and discuss each open claim to make sure that you have a clear and effective strategy to achieve closure.

NOTE: If there are open claims, you should be working steadily throughout the year with your adjuster to return any injured employee to full or modified duty. If, due to the severity of the injury, return to work appears unlikely, you should work toward closure by settling the claim. In the world of insurance, "the only good claim is a closed claim." A quarterly review process ensures that you have an appropriate focus on every open claim.

For employers with few open claims, quarterly reviews are usually not necessary, although being actively involved with your claim adjuster in the management of each open claim is essential. At a minimum, request a loss run three months after the end of the policy year. This gives you plenty of time to review the status of any open claims and take action toward resolution before the unit stat review is submitted. Three months into your new policy, you have fully three months to impact reserves on old claims prior to the submission of that all-important unit stat report. Once that report is submitted, the numbers can only be changed if there is a clerical error.

The Bottom Line
Educated employers and managers don't spend every waking moment worrying about reserve levels for open claims. There is that one time of year, however, when a laser-like focus on open claims can be very helpful in controlling losses. Make note of your policy end date, move forward three months, and place an alert in your calendar to review your loss runs. You will be taking action just ahead of that one crucial moment when reserves really count.

Even more important than all of this is a vigorous, aggressive and continuous procedure to bring injured workers back to work as soon as possible following injury, if not to full duty, then at least to modified duty. Pursuing this goal is the surest way to keep the cost of losses at an absolute minimum and experience modification at its actuarially lowest level.

That's a true competitive advantage!

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January 2, 2013


This is Part 3 in 5 part series on Experience Rating changes. See Part 1: The Experience Rating Process: Significant Changes Are Imminent and Part 2 A Basic Review of Claim Losses, the Building Blocks of Experience Rating
Parts 4 and 5 will be posted next week.

Previously, we offered a basic review of workers comp claim losses, the building blocks of experience rating. Now it's time to go deeper.

As we've seen, workers comp claims are made up of what has been paid and what has been "reserved" for future payments throughout the life of the claim. The "total incurred amount" projects total indemnity payments (lost wages), medical bills and expenses estimated to be paid for any given claim. From 1990 through 2012, the first $5,000 (called the "split point") of the "total incurred" amount of each claim is considered "primary," and all of it counts in the experience rating calculation. Any amount above $5,000 is considered "excess" loss, and is discounted in the experience rating calculation by at least 70%. Moreover, any amount above a state-specific rating point (ranging from about $125,000 to as high as $250,000) is excluded from the calculation; it does not count at all in the calculation of your experience rating.

Primary losses going up!
For the first time in 20 years, the Primary Loss split point is about to change. Beginning in Policy Year 2013 (PY 2013), primary losses will increase from the first $5,000 of each claim to the first $10,000. In subsequent years, primary losses will continue to rise, reaching $15,000 by PY 15.

So what does this mean? Experience rating places more emphasis on the frequency of injuries than on the severity. Given the increasing severity of claims over the past decade, NCCI has decided to make experience rating more sensitive to severity.
Under the current rating system, only the first $5,000 of each claim is primary; this means that one big claim will have a limited impact on the experience mod: the first $5,000 enters the calculation dollar for dollar, but all the losses above $5,000 will be sharply discounted.

The new rating system has been adopted by all NCCI states for 2013, and it will become effective concurrently with each state's approved rate/loss cost filing on or after 1 January 2013. NCCI has published a chart detailing the split point changes effective dates for each state (PDF).

Under the new system, the first $10,000 of each claim will be primary and, as in the current (and soon to be old) system, all primary losses will enter the experience rating calculation dollar for dollar. For employers with individual losses above $5,000, the experience mod is likely to run higher than under the current rating system. (And keep in mind that the primary loss split point will continue to rise to the level of $15,000 by 2015.)

Here is a simple comparison of the current and pending rating systems in action:

Employer 1:
1 claim at $20,000 / Current Primary = $5,000 / Pending Primary = $10,000
Employer 2:
2 claims at $5,000 / Current Primary = $10,000 / Pending Primary = $10,000

Under the current system, all other things being equal, Employer 1 would have a lower experience mod than Employer 2 for two reasons, even though total losses are $10,000 greater than Employer 2's total losses. First, Employer 1 has $5,000 less in primary losses. Second, Employer 1's excess loss of $15,000 would be discounted by 70% to $4,500 in the calculation making total calculable losses of $9,500, compared to Employer 2's total calculable losses of $10,000.

Under the new rating system, Employer 1 would be the one with the higher mod, because its primary losses would be equal to Employer 1's, but Employer 1 would also have $3,000 of excess losses included in the calculation (10,000 - [10,000 x 70%]).

The split point change will lead to some interesting, as yet unaddressed, developments. For example, consider a loss that happened in PY 2010 to a driver for ABC Limo. The loss would first appear in ABC Limo's Mod calculation for 2012. Let's say its total incurred value at that time was $15,000. In 2012, before the split point changes, $5,000 would be primary and $10,000 excess. Fast forward to the Mod calculation for 2013, and let's suppose that the claim was closed during 2012 for a total of $10,000. The 2013 Mod calculation, with the split point having been changed, effective January, 2013, will show $10,000 primary and $0.0 excess. Consequently, the closed claim of $10,000 will affect ABC Limo's mod more adversely in 2013 than the open claim of $15,000 did in 2012. This will happen to many employers, and their advisors would be well-advised to advise them beforehand.

Medium-sized Employer, Big-sized Trouble
Here's the worst-case scenario for a lot of medium-sized employers (premium in the $20-$100,000 range): if they have a frequency problem (a lot of relatively small injuries) and a severity problem (a few relatively big losses), the new split point for primary losses will more than likely increase their experience mod, perhaps substantially.

If you find yourself in this position, with an experience modification well above 1.0, you need to learn more about the intricacies of the rating process itself. There are opportunities for minimizing the impact of your losses. All of which are the subject of our next Experience Rating post.

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December 19, 2012


This is Part 2 in 5 part series on Experience Rating changes. See Part 1: The Experience Rating Process: Significant Changes Are Imminent. Parts 3 to 5 will be posted after the holidays.

When you report a claim to your insurance carrier where outside medical bills are involved, the insurer will estimate the ultimate cost of the claim. For medical-only claims, the estimate is small; for lost time claims, it might range anywhere from a few thousand to hundreds of thousands of dollars, depending upon the severity and duration of the injury.

Your company's claim losses are described in detail on a loss run, a written summary available through your agent or directly from your insurance company. The loss run lists what has already been paid plus what is projected for payment over the life of the claim. The projected, but as yet unpaid, amount is called the "reserve," because it's the amount set aside, or reserved, for future payments. The amount already paid plus the reserved amount is called the "total incurred amount."

Example: John Doe injured his back one year ago:

Paid at the time of the loss run: $ 45,600
Reserved for future payments: $ 60,000
Total Incurred amount: $105,600

Reserves are based on the insurance claim adjuster's investigation into the nature of the injury (diagnosis and prognosis) and the insurer's experience with similar cases. The total incurred amount is the insurer's best estimate of the ultimate cost of the claim: the expected payments for lost wages (indemnity), medical treatment, disability and nurse case management, rehabilitation, attorney fees and other related expenses over the duration of the claim.

The same injury to two workers might result in very different reserves. Among the factors included in setting reserves are:

  • Education level
  • Co-morbidities (medical problems which may impact recovery such as high blood pressure, diabetes, obesity, drug addiction, etc)
  • Age (younger workers generally heal faster than older workers)
  • Transferable skills (if unable to return to the original work, whether the injured worker has marketable skills)

The initial reserve is usually posted within 30 days. Once posted, reserves are periodically updated to reflect any changes in the course of the claim. The costs of a projected settlement are usually included in the reserve.

In terms of experience rating, whether a claim is medical-only or indemnity means a lot. Why? Because, with the exception of Massachusetts, medical only claims are discounted by 70% in the experience rating calculation (Massachusetts, a non-NCCI state with its own Rating Bureau, does not discount medical-only claims). However, once any indemnity payments are incurred, there is no discount for any medical costs already paid or projected to be paid, and the loss, up to its first $5,000 counts full value in experience rating. This first $5,000, the "split point," is called Primary Loss, and it, as well as Excess Loss, all dollars above $5,000, is the subject of our next post. In it we address the imminent and upward change in the split point.

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December 17, 2012


Here at the Insider we realize that we have readers from different areas of the insurance world, some directly related to workers' comp and others indirectly related. Some of our readers are risk managers at large Fortune numbered companies. Other readers are with agencies and brokerages, large and small. Still others work in various roles for insurers. Because in just a couple of weeks the insurance industry's experience rating system will undergo its first significant change since 1990, we've decided, beginning today, to present a 5-part series aimed at those readers for whom this change will have direct and immediate impact.

For some readers, what we'll be presenting will be old news. If you're in this group, this is the time to hit the "delete" key. Also, to be candid, the first, and possibly second, post may appear too basic for some, but we believe we have to prime the pump before we can draw the water. For everyone else, hang around; there might be something to learn. We're talking directly to middle and small market employers and the agents, brokers and consultants who serve them. Essentially, anyone affected by experience rating.

The goal: Reduce the cost of workers comp insurance
Other than reducing payroll, in most cases the only way for an insured employer to reduce its workers compensation premium is by reducing experience modification, which is the end result of the experience rating process. Experience rating is complex, but it contains elements responsive to strategic planning and employer control. That's why understanding experience rating is so important.

First, some basics. Coming up with an employer's workers comp premium is, essentially, a two-step process. The first step multiplies the employer's premium class rate by its payroll in hundred-dollar increments. That is: rate times each hundred dollars of payroll. This is called the "manual premium." In the second step the insurer multiplies the manual premium by the "experience modification factor," which is derived from a mathematical calculation that examines the employer's claim loss history over the most recent three-year period in relation to its industrial peers. The application of the "mod" will either raise or lower the manual premium, resulting in a competitive advantage or disadvantage. This is why keeping the mod low is so vital.

NOTE: For a comprehensive basic primer on experience rating, we recommend going to the source: The National Council on Compensation Insurance (NCCI) website provides a well-written document (PDF) that will walk you through the fundamentals of experience rating.

In the next four posts we offer the following:

  • First, a basic review of claim losses, the building blocks of experience rating

  • Second, an explanation of the difference between Primary and Excess Loss, as well as a description of the 2013 Split Point change

  • Third, a recommendation for dealing with Reserves

  • Fourth, a discussion of Expected Losses, Expected Loss Rates and a wrap-up.

Keep in mind that in experience rating, size matters. Large insureds with large premiums are expected to have higher losses than smaller insureds. Indeed, because their margin of error is smaller, companies with premiums in the $10,000 to $100,000 range can easily find themselves in a lot of trouble with just a few injuries.

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October 17, 2012


Today we examine two states, side by side on the map, going in opposite directions in their workers comp rates: Connecticut, which has the dubious distinction of being the second most expensive state (only Alaska is higher) and Massachusetts, ranked 44th for overall costs, with rates so low the market is beginning to implode. These states may be headed in opposite directions, but each faces a pending crisis.

Messing with the Miracle
We begin with Massachusetts, which my colleague Tom Lynch summarized brilliantly a few weeks ago. After nearly two decades of rate reductions, MA employers are now paying about the same rates as existed in the early 1980s. Compared to the other New England states, MA rates are consistently lower, some times one fourth that of their neighbors. So it is hardly surprising that the Workers Compensation Rating and Inspection Bureau (WCRIB) sought an increase in the rates: they initially requested 18 percent, with the realistic hope of ending up somewhere in the vicinity of 6 to 8 percent. A rate increase of this magnitude would maintain the state's position as the lowest among the major industrial states, still far below its New England neighbors.

The response of the state's Division of Insurance is, in its methodology and ultimate result, a public work that might make the infamous Big Dig seem prudent and reasonable. The Division dismantles the entire application, demeaning and ultimately dismissing virtually every data element supporting the rate increase. While it is true that some of the data was inconsistent - due largely to the idiosyncracies of insurer submissions - the report's conclusion that no rate increase was merited defies common sense. Indeed, when the attorney general opines that higher rates "would greatly increase the cost of doing business in Massachusetts and have a deleterious effect on the overall employment level," one can only wonder what they have been smoking - perhaps the substance on the ballot up for legalization next month.

One the mainstays of the Division's argument is the fact that insurance carriers continue to offer rate deviations: proof, in the Division's eyes, that the rates must be high enough. Perhaps it is time to remind the bureaucrats who administer this program that insurers always think they can defy the odds and find the optimum risks. Insurers sell insurance to the people and organizations least likely to use it - or so they hope. As Tom Lynch likes to say, "insurance companies are prone to eating their young." Nonetheless, a glance across state lines and across the country reveals that Massachusetts is about to cook the golden goose: with the current unabated rate suppression, the assigned risk pool will continue to grow and savvy carriers will scale back their participation in the workers comp market.

Asleep at the Wheel
While Massachusetts's inaction on rates jeopardizes the most successful comp reform program in the country, Connecticut meanders toward economic disaster. As recently as 2008, the state was ranked 20th for overall costs in the invaluable Oregon Rate Study. But in 2010 they rose to 6th, and the state now sits in the number two spot, ahead of such reliably high cost states as New York, California and Florida. The median cost of comp in CT has risen to $2.99, compared to the nation-wide average of $1.88. (MA comes in at a paltry $1.37.) CT suffers from a toxic combination of very high medical costs (doctors love it) and a worker-centric system that is extremely generous with benefits. To add insult to injury, NCCI is requesting an additional 7.1 percent increase in the already bloated rates. Costs are out of control and regulators are asleep at the wheel.

Surely it is time for business advocates in Connecticut to raise the red flag. The cost of comp has reached unacceptable levels. When business owners can move their operations to New York to lower the cost of workers comp, you are in deep, deep trouble.

Across the Rate Divide
MA and CT provide compelling examples of enigma variations: in the perpetual search for comp rates that are fair to both carriers and businesses alike, these states have drifted too far from the middle ground. How they reached this point may be an enigma, but what they need to do is clear: take immediate steps to extricate themselves from rate cycles that simply are not working. It will take leadership, vision, and courage to confront these reverse-image crises.

In MA, regulators must stop playing political games - no easy task in a hyper-political state - and allow rates to begin a long overdue, moderated rise.
In CT, regulators must confront entrenched stake holders and begin to exert control over runaway costs.

With rates either much too low or much too high, state leaders and regulators are mired in swamps of their own making. If the current inertia is allowed to continue, the two states may eventually end up in the same place: with dysfunctional comp systems incapable of serving the needs of injured workers and employers alike.

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September 24, 2012


Cooper Road in Middletown, New Jersey, is rumored to be haunted by strange, ghostly creatures. They jump out from behind trees and startle the drivers of cars traveling down an unpaved portion of the road. There are no street lights and the road has sharp turns, so the appearance of these apparitions is both sudden and alarming. Based upon the numerous oddities in New Jersey's workers comp law, these ghostly beings might well be carrying sign boards that read "Ruined by balanced billing."

From the perspective of virtually any other state jurisdiction, New Jersey's approach to the reimbursement of medical providers in the workers comp system is demon-ridden and rather strange. To begin with, there is no fee schedule. Providers are entitled to their "usual and customary" fees. By leaving fees to the providers, the state creates an unusual level of tension between these providers and the insurance carriers and self-insured employers who pay the bills.

The tensions are not limited to the payers, however. When a payer refuses to cover all or part of the "usual and customary" bill, the provider has the option of billing the injured worker for the balance. The euphemism is "balanced billing" but in both concept and practice this is as unbalanced as a comp system can get.

The Broken Premise
The fundamental premise of workers comp is that the medical costs and lost wages of workers injured on the job will be covered by their employers. In return, workers have given up the right to sue their employers for work-related injuries and illnesses. In most states, the protective barrier between injured workers and the costs of treatment is absolute: there are no copays, no deductibles and no fees whatsoever for injured workers. Comp even covers the cost of travel to and from treatment. "Out of pocket" is a concept that simply has no place in workers comp.

Medical coverage under workers compensation is, in the words of my colleague Tom Lynch, "the best coverage plan in the world": it pays for everything and includes indemnity payments for lost wages, too. The only catch - and it's a big one - is that to qualify you must be injured "in the course and scope" of employment, with an injury "arising out of" employment.

Balanced billing is patently unfair to workers. Routine disputes between medical providers and payers spill over to injured workers. Unpaid portions of medical bills are sent to the workers, who are in no position to pay them. When workers routinely refuse to pay these bills, they may find themselves harassed by collection agencies. Not exactly what the doctor ordered when you are trying to recover from your injury and return to work.

Senate 2022 to the Rescue?
Senate Bill 2022 is wending its way through the New Jersey legislature. The bill recognizes the inherent unfairness of balanced billing and would put an end to the practice. Any disputes about payment would revert to the workers comp bureaucracy, but under no circumstances would the disputed portion of any medical bill become the responsibility of the injured worker.

It's interesting to note that the bill explicitly avoids the issue of a fee schedule. Medical providers will continue to bill for their "usual and customary" fees, which, in turn, will keep the cost of medical treatment relatively high. But at least the injured workers will be exempt from the dispute. That's the least the Garden State can do in its belated effort to restore fairness and equity to the comp system.

Here's hoping that S 2022, in one form or another, finds its way to the Governor's desk in time for Halloween. That would soothe the ghosts on Cooper Road and allow them to revise their signs to address some other glaring inequity in our imperfect world.

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September 6, 2012


The Insider has come across an intriguing but ultimately frustrating study concerning the under-reporting of workers comp claims in New Hampshire. Under the auspices of the NH Department of Health and Human Services, the Behavioral Risk Factor Surveillance System survey (with the unfortunate acronym of BRFSS) conducted phone interviews with nearly 7,000 adults who were employed during 2008. About 340 people - close to 5 percent - reported that they had been injured at work sometime during the prior year - injured, that is, seriously enough to require "medical advice or treatment." (Sigh, when you include "medical advice," you might be including the first-aid-only incidents that should be excluded from the study.)

Here is the interesting - if somewhat compromised - nugget from the study. Among those who were injured, only 54 percent reported that their treatment was paid ("all or in part") by workers compensation. The remaining 46% reported their treatment was paid for by private or government insurance (25%) or by other means (21%). Unfortunately, by the time you get down to the 150 people in the non-comp segment, the combination of small numbers and ambiguous questions seriously reduces our ability to draw any meaningful conclusions. The study may indicate substantial under-reporting, but to know for sure, the researchers are going to have to ask some more questions.

Focus on Comp
Because the survey is conducted by the Department of Health and Human Services, the focus on workers comp is, pardon the expression, almost accidental. In fact, the 2008 survey was the first time they included questions about workplace injuries and payment for related treatment. While I applaud their interest in comp, I hope they would consider adding just a few questions to make the survey more effective. Assuming the survey guarantees anonymity, the questions might include:
- For those reporting that they are self-employed, ask whether they carry workers comp insurance (it is optional in NH).
- For those reporting that they were injured, the follow-up questions should be limited to those who secured outside medical treatment (and not those seeking only "advice").
- If comp paid just "part" of the treatment cost, who paid the remainder?
- For any worker whose treatment was not covered 100% by workers comp, ask whether they paid anything out of pocket (which would be a violation of comp law).
- If treatment was covered by a non-comp insurer, ask whether workers were instructed by their employer to report the injury as "non-work related" (employers giving this instruction and employees following it are committing insurance fraud).
- For any workers reporting injuries, ask whether they lost time from work due to the injury and whether they were paid for the time they missed. (Some employers are so determined to avoid the comp system, they pay wages for employees missing time due to injury, even beyond the state's three day waiting period.)

Lurking in the shadows of this study is the distinct possibility that under-reporting is real and possibly instigated by employers trying to game the experience rating system; they are shifting costs onto forms of insurance that are less loss sensitive. In addition, Injured workers may fear retaliation for reporting legitimate injuries: they may face disciplinary action, may be fired, may be denied overtime or may even ruin the "days without accident" program that dangles the promise of a pizza lunch and drawing for a TV if a certain number of days are free from (reported) injuries.

The BRFSS study provides just enough data to tease us: there may be a serious issue here, but then again, there may be no problem at all. To the good folks in New Hampshire, let this be a word of encouragement. Your study, to put it rather harshly, may be kind of useless in its current form, but with a little tweaking, it might lead to genuine insight into the way injuries are managed in - and possibly diverted from - the state's workers comp system.

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June 19, 2012


We live in the digital age, with all its conveniences and consequences. It would be hard to imagine a law requiring that all telephone calls be routed through live operators, or limiting maps to those that can be purchased at your neighborhood gas station. But each technological innovation creates a few new jobs and, seemingly, the loss of many others. Which brings us to the continued - and mandated - use of stenographers in virtually every workers comp claim filed in New York.

Senator Diane Savino (D-Staten Island) has filed S. 4112, which would certainly help the employment prospects of stenographers in the Empire state. Following an aborted effort by the NY workers comp board to test the use of digital recording in a few of the 300,000 or so annual workers comp hearings, Savino wants to ban digital recording from any comp hearing and require stenographic reports as the sole recognized form of documentation. Her bill, currently under consideration, would make stenographers a permanent fixture in workers comp for years to come.

Stenographers and their allies will argue that their presence improves the accuracy of court reporting. There are fewer "inaudibles" in their transcripts. But such accuracy comes at a substantial cost. The wages of a stenographer are in the $50-60K range, plus benefits. The cost of installing digital recording equipment in a courtroom runs less than $20,000, and once installed, the cost of maintenance is minimal. The trade off becomes even more reasonable when you consider that the New York system requires an unprecedented number of hearings for each and every workers comp claim.

In contrast to virtually every other non-monopolistic jurisdiction, New York insurers and TPAs are not allowed to make routine, unilateral changes in the status of any claim. A change in claim status requires a hearing, in front of a judge, complete with legal representation on both sides and a stenographer. This is enormously redundant and, in a word, non-sensical. It is also the root of New York's highest-in-the-country, soon-to-go- higher administrative costs. On a per capita basis, New York has more judges, more bureaucrats, more hearings, more paper flow - and more stenographers - than any other competitive state.

No Easy Answers
The fundamental goals of reasonable reform in New York can be easily stated: improve benefits for injured workers and lower the exorbitant cost of insurance for employers. It is not difficult to imagine how this can be done: simply look at the way most other competitive states manage workers comp claims. New York would have to streamline its entire system: instead of operating like a monopolistic state, micro-managing every claim, New York could empower insurers and TPAs to manage claims as skillfully and independently as they do in other states; by doing away with unnecessary hearings and hugely redundant reviews of literally millions of forms, New York could substantially reduce staffing levels at the Workers Comp Board.

But efficiency comes at a cost. One person's cost savings is another's job loss. These needed reforms would eliminate many, many jobs - and in doing so, would throw hundreds of loyal workers into the already burgeoning unemployment lines. In this one small example, the elimination of stenographers from hearings would lower administrative costs, even as it would increase the unemployment of people with potentially obsolete skills. This is not an easy trade off, but a necessary one.

At some point, New York has to look at the big picture: workers comp is way too expensive, even though the benefits, for the most part, are mediocre. Every adjustment to the current statute, every administrative decision, should pass through a single filter: does this improve the benefits to injured workers and does it reduce the cost to employers? When you run Senator Savino's S. 4112 through this filter, it's not part of the solution, but just another clog in an already overloaded drain.

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May 22, 2012


When you're looking for ethically-challenged business practices, Florida is usually a good place to begin. The latest kerfluffle involves a toxic combination of very high deductibles for workers comp insurance and employee leasing companies. Oklahoma based Park Avenue Property and Casualty Insurance sold policies with deductibles as high as $1 million to PEOs. Think about that for a moment: a million dollar deductible is virtually self-insurance, as very few claims break that formidable barrier. Park Avenue, along with its successor companies, sold these policies to employee leasing companies, who in turn passed the coverage through to their client companies. With such a huge deductible, the coverage must have been relatively inexpensive compared to standard market rates.

Under large deductible programs, the insurance company pays all the bills and then seeks reimbursement from the client company, up to the deductible amount. It's not hard to figure out the flaw in this business model: client companies will welcome the discounted premiums, but when it comes time to pay back the insurer for paid losses, they will be unable to cut the checks. Given the complete absence of regulatory-mandated collateralization for the claims liability, there is no way the insurer will be reimbursed for large loss claims.

That's where the three-card Monte comes in: the insurer wrote these policies knowing full well that the deductibles would never be paid. That's why Park Avenue morphed into Pegasus Insurance, which morphed into Southern Eagle Insurance, which flies off into the pastel sunset of bankruptcy.

Gaming Risk Transfer
The cards have been moved around at blinding speed, but who ends up paying? Once again, those who played by the rules will have to pay for those who didn't. (For a more egregious example of punishing the innocent, see our blogs on the New York Trusts.) Policy holders in Florida will be charged somewhere between 2% and 3.5% of premiums to cover the $100 million plus of losses.

In the WorkComp Central article by Jim Sams (subscription required), Paul Hughes, CEO of Risk Transfer Company, which markets insurance to PEOs, complains that singling out the PEO industry is unfair. The state should never have allowed Park Avenue and its winged successors to write insurance, as they were clearly incapable of assuming the risk. True enough, but even Hughes would have to admit that the PEO industry offered a ripe venue for the scam: individually, PEO clients would never have qualified for high deductible coverage, but somehow, under the collective umbrella of a PEO, they did.

Meanwhile, PEOs are being sued for failing to reimburse the claims payments of Park Avenue and its successors. After the PEOs lose these cases, they will seek payment from their clients, who are unlikely to have the ability to pay anywhere near what is owed. The litigation will go on for a long time, but the bottom line is simple: risk transfer cannot exist where none of the parties can cover the exposure. That isn't risk transfer: it's a shell game, where those who did not play are left holding the bag.

Follow Up - June 7, 2012
After posting this blog, I received a call from Paul Hughes, CEO of Risk Transfer in Florida, who is quoted above. While not contesting the premise that large deductibles are poorly managed in Florida (and elsewhere), he believes that I unfairly singled out PEOs in the blog. The fundamental issue is the failure of the state to adequately regulate and oversee large deductible programs. I agree.

Please take a few moments to read Paul's response, which employs the useful metaphor of a casino for the risk transfer industry:

The core issue to me is the role of the regulator versus the business owner in the management of the "casino" (insurance marketplace). That is one of the parts of Jon's article in Workers Comp Insider that blurs the line a bit on what the PEO's role is within the casino and whose job it is to set the rules. The casino is the State as they certify the dealers to play workers' compensation (Carriers, MGU's, MGA's, Agents and Brokers) and the State also certifies that the players are credible (not convicted of insurance fraud) and can pay/play by the rules of the house. The rules are set by the house and the games all require public filings - ability to write workers' compensation (certificate of authority), ability to offer a large deductible plan (large deductible filings), agent license, agency license, adjusters license and any other deviation from usual business practices (like the allegations that one now defunct insurance carrier illegally charged surplus notes to desperate PEO's in the hardest market the industry has ever seen). The "three-card monte" that Jon alludes to in this article is managed not by the dealers (carriers), but by the house (state). Would a real life casino consider it prudent to allow one of their dealers to expose 20% of their $5m in surplus through high deductibles sold to PEO's with minimal financial underwriting and inadequate collateralization? Would any casino write harder to place (severity-driven) clients to include USL&H, roofers etc with the minimum amount of surplus needed to even operate a carrier...? Of course not. These "big boy" bets would never be allowed in Vegas without the pockets being deep enough to cover the losses.
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May 15, 2012


For those who seek risk conundrums, workers comp is fertile ground. From a micro perspective, the unfortunate Ronald Westerman, a paramedic for a California ambulance company, embodies many of the elements that result in sleepless nights for claims adjusters and actuaries: Westerman had an inordinately long commute (2.5 hours each way!), a sitting job with periodic lifting (inert patients and medical equipment), along with the comorbidities of hypertension, obesity and diabetes. In two years of ambulance work, Westerman gained 70 pounds, thereby compounding the co-morbidity issues.

In March 2009 Westerman returned home from a 36 hour shift and suffered a stroke. His doctor determined that the stroke was work related and that Westerman was permanently and totally disabled. He was 50 years old. While there was some dispute over the cause of the stroke, an independent medical evaluator surmised that it was caused by a blood clot moving through a hole in Westerman's heart to his brain, otherwise known as in-situ thrombosis in his lower extremities - a direct result of too much sitting. (We blogged a compensable fatality from too much sitting here.)

At the appeals level, compensability centered on the performance of a shunt study - an invasive test - that would have determined whether the blood clot caused the stroke. Westerman was willing to undergo the test, but his wife refused to authorize it, due to his fragile health. If there was no hole near the heart, the entire theory of compensability would be disproven; the stroke would not have been work related.

Had the defense attempted to force the test issue, it would have given rise to yet another conundrum: was refusing an invasive test the equivalent of "unreasonable refusal to submit to medical treatment"? Indeed, does a diagnostic test, by itself, meet the definition of "treatment"? Fortunately for Westerman, the defense requested - but did not attempt to require - the shunt test.

Managing Comorbidities
Our esteemed colleague Joe Paduda, who blogs over at Managed Care Matters, provides the macro perspective, one which is unlikely to aid in the sleep patterns for actuaries. He reports on the impact of comorbidities on cost from the recent NCCI conference:

The work done by NCCI was enlightening. 4% of all claims (MO and LT) between 2000 - 09 had treatments, paid for by workers comp, for comorbidities, with hypertension the most common. These claims cost twice as much as those without comorbidities [emphasis added].

It is beyond doubt that comorbidities make work-related injuries more expensive. But what, if anything, can claims managers do about this? In the Westerman case, there is not much to be done, as the stroke resulted in a permanent total disability. But in other cases where there is a path to recovery and even return to work, adjusters should flag these claims for early, intensive intervention, including psychological counseling and support for weight loss and other life style adjustments. To be sure, this would increase the upfront costs, but these steps just might go a long way toward mitigating the ultimate cost of the claims.

As is so often the case in workers comp, it's "pay me now" and "pay me later." To which I can only say to my claims adjuster and actuary friends, "sweet dreams!"

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May 9, 2012


These are the calm days before the coming storm. For most employers, workers comp falls under the "business as usual" category. If a worker is injured, the standard protocols are followed: secure medical treatment; report the claim; if it's convenient and not too difficult, bring the worker back on temporary modified duty. Sure, you will eventually pay for the losses in the form of higher premiums. But rates have been low for a long time. As for the experience mod, how high could it possibly go?

Pretty high! NCCI's new rating plan will roll across the country throughout 2013, beginning in January in a handful of states and finishing up in Utah at the year's end. Employers who pay attention to these things know that primary losses - the most expensive dollars in every claim - are doubling from the current cap of $5,000 to $10,000 in 2013, and eventually going up to $15,000 by 2015. It sounds a bit ominous, but it's still way off in the future, right?

The future is now. Most employers are currently operating in policy year (PY) 2012, which began sometime between January 1 and today. The losses under this policy will not be included in the experience mod until PY 2014 and they will remain in the calculations through PY 2016. In other words, the increased primary losses in these calculations have already been incurred - not only for PY 12, but going back as far as PY 09. The future rating plan, in other words, is not only with us, it's behind us!

What Should Be Done?
Employers who want to stay on top of their insurance costs need to ratchet up their loss control programs. The best injury is the one that never occurs. And for those moments when a safety program fails, employers need to enhance their post-injury management programs, which should include:
- Employee awareness on hazards and safety
- Supervisor training in immediate post-injury response
- A relationship with a quality occupational medical provider
- Prompt reporting of all injuries to the insurer
- An effective and aggressive temporary modified duty program
- Accident analysis to prevent recurrence

To be sure, these key elements are no different from what was needed under the current rating system. But the situation is about to change dramatically. With primary losses doubling and eventually tripling, the need to manage claims from day one has become much more important. Under the current system, the "heavy losses" end at $5,000. Going forward, the heavy losses push much deeper into each claim and will come back to haunt employers in future experience mods.

Waiting Periods: No Time for Waiting!
For employers in states managed directly by NCCI, there is an opportunity to reduce primary losses substantially. If injured employees can be brought back to work - in regular or modified jobs - before the end of the waiting period, the medical-only costs associated with the claim will be discounted by 70%. Waiting periods vary from state to state, with the shortest running for three days and the longest for seven. Once the waiting period is over, out-of-work employees are eligible for indemnity (lost wage) payments and the discount disappears.

So here is some free - and, if I must say so, extremely valuable - advice: do everything humanly possible to bring injured workers back to work before the end of the waiting period. Even if medical bills run to thousands of dollars, the total amount of these primary losses will be reduced by 70% - if, and only if, return to work occurs before indemnity kicks in.

This may not seem important today, but once the experience rating sheets for PY 2014 and beyond start to hit the your desk, you will see the wisdom of this preventive action. The experience rating changes may still be months away, but you are already operating under the new rules. For those who remain oblivious to what is already happening, the future may be dark and ominous indeed.

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April 25, 2012


We thought we had heard the last of the bizarre Virginia workers comp statute that denied benefits to workers who suffered brain injuries: under the old statute, if a worker survived an accident but was unable to testify about the incident, no benefits were to be paid. We blogged two cases where the injuries were clearly work related, but where the testimony of the worker was not available. The claims were denied.

Last year the legislature revised the statute to read in part:

In any claim for compensation where the employee is physically or mentally unable to testify as confirmed by competent medical evidence and where there is unrebutted prima facie evidence that indicates the injury was work-related, it should be presumed in the absence of a preponderance of evidence to the contrary that the injury was work related.

Reporter Dan Casey of the Roanoke News is on the case again: With the new statute's protections in place, a roofer named Herman Blair fell from a ladder and suffered multiple skull fractures. He filed a claim for indemnity and $350K in medical benefits. When he appeared for his workers comp hearing, he had no memory of the incident, but he was able to state his name and talk about other aspects of his life. On the basis of his ability to talk, Deputy Commissioner Phillip Burchett ruled that the injury was not compensable. Despite testimony from a co-worker, who heard a noise and saw Blair fall, Blair's ability to speak nullified the presumption in the revised statute. Burchett writes:

The only thing we can determine is that the claimant was on the roof some several feet above the ground and he fell; however, that in and of itself does not establish that the fall arose out of the employment.

Commissioner Burchett has set a very high standard, indeed. The man is on a roof installing tile. He gets onto a ladder to descend, and ends up on the ground. What does Burchett think he was doing - texting? surfing the net? In the commissioner's interpretation, if Blair had ended up in a coma, he would have had a compensable claim. But because he was conscious and able to talk, the claim had to be denied. [Burchett's nitpicking ruling can be found at WorkCompCentral, subscription required.]

The Fix is Not Quite In
There was an effort to amend the statute to include a presumption for workers able to testify about some things but not "about the circumstances of the accident," but the usual suspects (business and insurance advocates) pushed back by saying that this might open the door to abuse, with workers deliberately falling silent on the circumstances of their injuries. This, of course, is reminiscent of the original fear that workers would fake brain injuries. Sigh.

At some point Virginia will get this right and Herman Blair, having suffered insult after injury, will eventually collect his benefits. This fiasco illustrates how hard it is to get the language of a statute just right. You fix one problem and another arises. The only thing lacking in all of this is common sense and a little dignity: it should not require a legislative committee to determine that Herman Blair was injured on the job and is entitled to the life-enhancing benefits of the workers comp system.

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April 18, 2012


We have been following the fate of self insurance groups (SIGs) in New York, where the innocent pay for the sins of the guilty and where what is legal is by no means fair. We read in WorkCompCentral (subscription required) that an appeal to over-rule the onerous assessments imposed on the trusts who played by the rules, to cover the liabilities of trusts who did not, has been rejected by the U.S. Supreme Court. [The Insider is quoted at length in the article.] Had employers known just how expansive the risks of SIG participation were, they would likely have chosen to purchase conventional insurance.

The appellate court wrote that "a fair reading of [comp law] within the context of the related provisions and the legislative history, leads to the conclusion that group self insurers were intended to be included among those to be assessed to provide the funds to cover the defaults of all private self-insurers, including groups."

The court went on to say that the liability of individual employers "is proportional to their role as self-insurers within the workers' compensation system."

The New York appellate court has expanded the concept of joint and several liability way beyond the members of a given trust, including not only all those who participate in self insurance groups, but virtually every self insurer in the state. There is no way a company can reasonably assess the scope of this risk. Why would anyone put their trust in trusts?

The Law of Small Numbers
The problem for the dwindling number of employers who participate in New York SIGs is the inverse of the law of large numbers: because their numbers are relatively small (compared to the total number of employers and comp premium in the state), they own a disproportionately large share of the open-ended liabilities generated by the failed trusts. Given the now-established legality of the assessments, and given the impossibility of verifying the viability of every self-insured risk, New York has basically eliminated self insurance as an option. That's too bad, especially in the context of the state's relatively high costs for comp.

Perhaps the state's 800,000 employers could push for fundamental changes in the way workers compensation is managed: they could argue that the system is too complex and too costly for employers, even as the benefits for injured workers are way too low. As a group, they would have the law of large numbers in their favor, which is certainly more than can be said for the hapless remnants of the state's self insurance groups.

NOTE: For access to the Insider's numerous blogs in this issue, enter "New York trusts" in the search box.

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January 31, 2012


An open letter to the press, business community and people of North Dakota:

The authors of this letter are journalists, columnists, bloggers and content publishers for the workers' compensation industry across the United States. We are a politically and professionally diverse group. We do not agree on everything, yet find ourselves of one opinion on a highly critical matter. We are competitors who are now colleagues for a common cause; to bring light to a serious injustice being committed within your state.

The prosecution of Charles (Sandy) Blunt was, in our view, an outrageous and almost farcical event. It is, in the final analysis, a travesty that has damaged the national view of your state, hampered the operation of a State agency, and ruined the life of a good man wholly undeserving of such results.

Sandy Blunt was Director of North Dakota's Workforce Safety & Insurance from May of 2004 until December of 2007. He was, as you are likely aware, prosecuted by state authorities for "misspending government funds". Specifically, he was charged and convicted on two counts:

During his almost 4 year tenure his agency spent approximately $11,000 on employee incentive items, including flowers, trinkets, balloons, decorations and beverages for Workforce Safety and Insurance employee meetings, and on gift certificates and cards in small denominations for restaurants, stores and movie theaters. Blunt personally approved some of these expenditures. Others were made by managers as part of daily operations under his watch. Not a dime went into an employee's pocket, nor did Blunt personally benefit from any expenditure.

His agency paid $8,000 to an employee, David Spencer, for sick pay when he was not apparently sick, and it also failed to collect $7,000 from Spencer when he left prior to the end of his employment agreement. The $7000 was for moving expenses incurred that prosecutors felt Spencer owed the state. Blunt's position was that the agency was not entitled to collect these funds, since Spencer's departure was not voluntary.

All told, the state prosecuted Sandy Blunt, and he is now a convicted felon for "misspending" $26,000 of government money.

No one has ever alleged that Blunt personally benefited from any of these expenditures. Blunt was acting like other capable, ethical North Dakota executives ‐ in the best interest of customers and of the mission of his employer. In our industry it is considered a best practice to provide employees and supervisors with incentives. It is not frivolous, it's necessary, and what every employer should do.

The first of these two charges would be, to many people, laughable if it were not for the damaging consequences associated with them. The notion that buying inexpensive incentive items for your employees could result in a felony conviction is simply stunning. This would not be elevated to a criminal status in most states in the nation. The fact that it is in North Dakota should have a chilling effect on businesses looking to move there.

The second and more serious charge, involving the sick pay and moving expenses of employee Spencer, has been fatally undermined by the revelation that the prosecutor in the matter, Cynthia Feland, withheld critical evidence from the defense - evidence that largely clears Blunt in this area. A disciplinary panel for the North Dakota Supreme Court has found on November 7, 2011 that:

"Cynthia M. Feland did not disclose to Michael Hoffman, defense attorney for Charles Blunt, the Wahl memo, and other documents which were evidence or information known to the prosecutor that tended to negate the guilt of the accused or mitigate the offense."

Withholding of evidence by prosecutors is one of the most serious acts of prosecutorial misconduct in North Dakota and all other states. In recognition of this, the panel recommended Ms Feland's license to practice law be suspended. We urge that you read the entire report of the panel, including the penalties the board recommended be imposed on Ms. Feland. For the report, go here.

Had the prosecutor not withheld evidence, in all likelihood the case would never have come to trial, and the reputation of Blunt and the WSI would be free of taint. The evidence in question shows that WSI's auditor's own findings backed Blunt's position on payments related with Spencer. However, those findings were not made available to the defense, and the prosecutor was found to have allowed testimony to be given at the trial that directly conflicted with information she had. As we indicated, Feland, now a judge in your state, has been recommended for suspension and a fine over these findings.

Yet Sandy Blunt remains a convicted felon. His crime? Buying balloons, trinkets and $5 gift cards - for his employees, not for himself. For that, Blunt, who is married with two children, has had to spend half a decade, and untold thousands of dollars trying to clear his name.

Some of us have known Sandy for quite a while. Some have come to know him while learning of his situation. Others of us have never met Sandy, but recognize the tenuous nature of his treatment. Collectively we speak to thousands within our industry every day. Our opinions have been clear; this situation needs the light of truth shone brightly upon it. The time and resources expended prosecuting a man on such questionable grounds should be more closely examined, by the business community, workers compensation professionals and the media in North Dakota.

Sandy Blunt is a good and decent man. He deserves better. So, it would seem, do the people of North Dakota.

Peter Rousmaniere
Consultant & Writer
Working Immigrants

Robert Wilson
President & CEO

Joseph Paduda
Principal, Health Strategy Assoc, LLC
Managed Care Matters

Rebecca Shafer
Lower Your WC Costs

Julie Ferguson
Consultant & Editor
Workers' Comp Insider

David DePaolo
President & CEO
Work Comp Central

Henry Stern, LUTCF, CBC

Tom Lynch
Founder & President
Lynch, Ryan & Associates, Inc.

Jon Coppelman
Senior Vice President
Lynch, Ryan & Associates, Inc.

Sandy Blunt related articles from these authors:
Blunting Political Vindictiveness
What's wrong with Sandy Blunt
Is justice on the horizon in North Dakota?
Let Me Be Blunt: Sandy Got Screwed in North Dakota
The Square Wheels of Justice in the Peoples Republic of North Dakota

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November 15, 2011


Back in September we blogged NCCI's pending changes in experience rating plans. While initially proposed for this fall, the new implementation schedule (contained in NCCI Circular Letter E-1402) does not even begin until January 2013, at which time 18 states will kick off the program. The other 21 states will follow throughout the year, with Utah being the last, in December. We have more than a year to figure out the implications of raising primary losses from $5,000 first to $10,000 and eventually to $15,000 and even higher. The rules are going to change and, as is so often the case, there will be some winners and some losers.

Rating's Black Box
In the course of retooling the black box that is experience modification, NCCI's actuaries will set the numbers that determine exactly how the new plans will operate. To date, there has been no word on the D ratio - the percentage of total losses that are expected to fall below the primary split. This will be the key factor in analyzing the implications of the new rating plans.

No matter where this number is set, one thing is certain: employers with higher than expected losses will see their experience mods go up higher than under the current system; at the same time, employers with lower than expected losses may see their mods drop even lower than under the current rules. NCCI pledges that the new plans will be revenue neutral: overall premiums will remain the same. [Legislative approval in each state would be required if the new rating plans resulted in increased premiums.]

One important feature of the new system is its dynamic nature: unlike the current rating plan, where the primary loss split point remained at $5,000 for over 20 years, the split point going forward will rise as losses rise.

Educated Consumers
What does all this mean for experience-rated employers? It's important to understand exactly how the new system will work. Sticker shock awaits those who ignore the implications of escalating primary losses. The Insider will do its best to alert employers to the details of the new calculations, along with a user-friendly walk-through of the entire experience rating process. No, it's not our idea of fun, but with billions in insurance premium on the table, it will certainly be worth the effort. Stay tuned.

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November 3, 2011


We all know that people who smoke and/or are obese tend to have more medical problems, of greater duration, compared to people with healthier lifestyles. The higher medical costs associated with smoking and obesity translate into higher cost for insurance. As a result, it is no surprise that there is a strong trend among employers to charge more for the insurance premiums of workers who smoke or who are obese.

The Insurance Journal writes that the use of premium penalties is expected to climb in 2012 to almost 40 percent of large and mid-sized companies, up from 19 percent this year and only 8 percent in 2009. An Aon Hewitt survey released in June found that almost half of employers expect by 2016 to have programs that penalize workers "for not achieving specific health outcomes" such as lowering their weight, up from 10 percent in 2011. The premium surcharges usually come hand-in-hand with incentives to quit smoking and lose weight. Unfortunately, the carrot of incentives, by themselves, have not succeeded in lowering health costs. Hence the big stick.

Taxing the Poor?
As is often the case, lower paid workers bear the brunt of the higher costs. Obesity and smoking often - but not always - accompany lower income lifestyles. Low income workers already pay a larger proportion of their income for health insurance; now they will pay more for the consequences of their smoking (a formidably taxed bad habit) and obesity (the result of poor dietary habits). The working poor often live in neighborhoods with limited fresh foods and nothing much in the way of health clubs - which they can't afford anyway.

There is evidence that the carrot and stick approach actually works. We have written about the Cleveland Clinic, which refuses to hire smokers or obese individuals and which fosters healthy lifestyles among its 40,000 employees. The clinic has seen medical costs grow by only 2 percent this year, far below the national average of 5 to 8 percent.

The Big "But..."
The move to force people into healthy lifestyles does raise a few interesting issues.
1. In cases where obesity or other unhealthy conditions are beyond the control of the individual (genetics, specific diseases, etc.), the higher premiums might be considered discriminatory, although there has been little such litigation to date.
2. Healthy lifestyles (including regular exercise) may well result in higher medical costs for maintaining well-tuned bodies: the ever-growing incidence of knee, hip and shoulder replacements among active people.
2. The goal is to reduce medical expenses, but the leverage exists only with the principal policy holder: there is no way to force other family members to abide by the lifestyle guidelines.
3. The imposition of wellness standards can lead to legitimate privacy issues: for example, holding employees accountable for behavior away from the job (smoking, drinking, eating).

If all goes as planned, medical costs will indeed come down and people will live longer and longer lives. As people with healthy lifestyles live longer, we will have succeeded in transferring costs from private insurers (who cover working people and their families) to social security (which covers retirees). That will require a hike in social security taxes, which the working poor, among others, can ill afford. It seems that every solution carries the seeds of new problems, just as every problem gives rise to new solutions. It is a privilege, of course, just to watch the entire process as it unfolds before us.

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October 24, 2011


When the category 5 hurricane hit Joplin, Missouri on May 22 this year, Mark Lindquist was perched on a mattress which covered his clients, three mentally disabled adults. Lindquist, a social worker for Community Support Services, was following the tornado protocol in a town where basements are virtually non-existent. Unfortunately, the protocol proved utterly ineffective in the wake of 200 mile per hour winds. Lindquist was plucked from his perch and hurled a block away. He was impaled on debris, with every rib broken, his shoulder destroyed and most of his teeth knocked out. He was put into a coma for about two months, nearly dying from Zyomycosis, a rare fungal infection that killed 5 other victims. And to top things off, his three clients perished in the storm.

Lindquist's survival is well beyond the expectations of his doctors. His right arm remains in a sling, but he has use of the hand. An eye that was temporarily blinded has full sight. He moves slowly and has short-term memory loss, but is able to speak clearly.

A Hole in the Safety Net?
Lindquist assumed that workers comp insurance would cover his medical costs (a whopping $2.5 million), pay for his 12 daily meds and provide indemnity for his lost wages. (As a low wage worker, Linquist could not afford health insurance.) His assumption of coverage has proved naive. He certainly was "in the course and scope of employment." However, under Missouri law, Acts of God are only covered by workers comp if work exposes the individual to unusual risk. If, on the other hand, there was no greater risk for Lindquist than that facing the general public at the time of the tornado, the injury is not compensable. Lindquist was working - heroically - but the work itself did not cause the injuries. His claim has been denied.

End of story? Not quite. Certainly a case can and will be made that by lying on top of a mattress, in that particular location, Lindquist was more exposed to harm than the general public. He will be able to show that had he not been working, he might have been able to drive his van out of harm's way. Given the high profile of his claim, he is likely to prevail at some point in the process.

It's worth noting that of 132 comp claims filed in the tornado's aftermath, only 8 have been denied. It may have been an Act of God, but somewhere along the line there will be an act of mercy to help a courageous worker rebuild his shattered life from the ground up.

Thanks to Mark Walls and his Workers Comp Analysis Group for the heads up on this story.

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October 17, 2011


For over a decade, workers comp insurers have watched profit margins erode, as rates in many states continue their precipitous fall. The mismatch between premiums collected and losses paid out has reached alarming levels, with a projected combined ratio of 121.5 percent for the current year. Even in the best of times for investments, making up 21 percent against losses would be daunting, and these are hardly the best times for money to make money.

The ever-reliable Roberto Ceniceros writes in Business Insurance that the long-awaited upward trend in rates for comp insurance appears to be underway. Among the 38 states directly administered by NCCI, there are requests for modest rate increases in 19; given that the insurance cycle runs from July to June, we can expect to see more states with rate increase requests over the next 9 months. The increases are by no means dramatic (and, some would argue, hardly adequate when measured against insurer losses). The rate increases proposed by NCCI all fall within single digits.

There are a number of reasons for higher insurance losses:
- payrolls are down due to the recession, resulting in lower premiums
- frequency is up - an ominous sign, given that frequency had been declining year after year
- severity continues to increase, as injured workers stay out of work longer and access more exotic treatments
- returning injured employees to their jobs is increasingly difficult in an economy where jobs are disappearing

Insurers Behaving Badly
When contemplating the problems of insurance companies, we must never lose sight of the tendency, as my colleague Tom Lynch puts it, of "insurers eating their young" - in other words, despite the losses, insurance companies persist in offering steep premium discounts, leading state regulators to conclude that they don't really need rate reductions. Insurers continue to hope that their underwriters have a magic touch in finding the good risks and avoiding the bad. With margins as tight as they are, finding a profitable book of business becomes increasingly unlikely, no matter how skilled the underwriting.

A.M. Best projects the short term prospects for comp carriers to be "grim." That is no overstatement. State regulators tend to be slow to respond to requests for higher comp rates. Employers are already struggling in a bad economy and regulators will do everything possible to keep comp costs as low as possible. While the long-term trend of lower rates may finally be nearing an end, the upturn is likely to fall short of what is needed. These are tough times for comp carriers, with no significant relief in sight.

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September 26, 2011


It's been over 20 years since NCCI changed the rules relating to the calculation of the experience modification factor. Given that experience modification determines the cost of insurance for all but self-insured employers, these changes require careful scrutiny. While some of the details have not yet been announced, one thing is clear: employers with higher-than-expected losses are likely to pay more for insurance. [NOTE: the Insider apologizes in advance for what is inevitably a rather technical discussion. For readers who would like additional background, check out our 2004 primer here.]

Under the current system, claim dollars - what's been paid and what's been set aside for future payment on each claim - fall into one of three categories:
- Primary losses: the first $5,000 of each claim. These losses carry the most weight and drive up the experience mod much quicker than the losses above $5,000.
- Excess losses: the losses above $5,000 within each claim. These are discounted in the calculation, with as little as 10 percent of the total included in the calculation (depending upon the size of the premium)
- State Rating Point: the cap on individual claim dollars beyond which the losses are excluded from the calculation; this varies from state to state, generally falling between $125,000 and $200,000.

NCCI is expanding primary losses from the current level of $5,000 up to 15,000. This change will take place over a three year period, with the ceiling rising to $10,000 in the first year, $13,500 in the second year and $15,000 in the third year.

Why does this matter? Primary losses are the major cost driver in experience rating. Primary losses are not discounted: they go into the formula dollar for dollar. As a result, employers with moderately large claims (between $5,000 and $25,000) are likely to see an increase in their experience mod.

Expected Losses
Employers who have analyzed their premiums carefully understand that experience rating is essentially a comparison: the individual employer's losses are compared to the losses for other employers performing similar work. The actual comparison is contained in the rates paid for insurance.

For example, in your state the rate for carpenters might be $10.00 per $100.00 of payroll. The total expected losses within this rate might be $5.00 per $100 of payroll. The expected primary losses (called the D Ratio) might be 20 percent of total losses: in this case, $1.00 per $100 of payroll.

As NCCI increases the ceiling for primary losses from $5,000 to $15,000, they must also increase expected primary losses. Unfortunately, they have thus far provided no information on how much expected primary losses (the D ratio) will increase. This number will determine just how much more employers with higher-than-expected losses will pay for insurance. Conversely, the revised D ratio will also determine how much of a discount will be given to employers with lower-than-expected losses. As with our changing climate, the fluctuations under the new system will be greater than in the past.

Given the trend toward very large (catastrophic) claims, it would not be surprising to see the state rating points also increase: for example, instead of capping individual claims at $200,000, the limit might be closer to $300,000. (To date, NCCI has been silent on this matter.)

Winners and Losers
NCCI actuaries are working under the requirement that total premiums within a state remain the same under the new system. In other words, when they apply the new rules, experience mods will go up or down for individual employers, but the total premium in the state will stay the same.

On an individual insured level, there will be winners and losers. Here is our advice to any employers with debit mods (above 1.0) in states managed by NCCI: follow these new NCCI developments carefully. [The easiest way to do this, of course, is to keep reading the Insider.] Primary losses remain the biggest cost driver in the workers comp system and primary losses within individual claims are about to double and soon triple. The strategies for experience mod management that were effective with the primary loss ceiling at $5,000 may no longer apply. As the rules of the game change, savvy managers will change with them.

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September 12, 2011


First responders and oral histories
We are mindful that the 9-11 story was one that largely affected ordinary people who were going about their workdays. When the planes hit, thousands of first responders jumped into action and their courage and quick actions helped to save untold thousands. Among the many remembrances and stories in the10-year commemorative events, we found the 60 Minutes story on the experiences of first responders to be particularly powerful. It focused on 911 Responders Remember, an oral history project initiated by Dr. Benjamin Luft, director of the Long Island World Trade Center Program (the SUNY-Stony Brook arm of the WTC Medical Monitoring and Treatment Program consortium). This Center of Excellence provides service and monitoring to approximately 5,000 WTC responders across Long Island. These men and women are law enforcement officers, construction workers, electricians, emergency medical personnel, firefighters, iron workers, plumbers, dog handlers, doctors, and many others.

In addition to cancer, respiratory and pulmonary disorders and other physical problems, many workers still suffer from varying levels of emotional or psychological distress, including PTSD. This project is a national historical record, a public health document, and for many participants, a therapeutic exercise which allows them to open up to tell about events or things that they witnessed that they may not previously been able to talked about.

See more testimonies.

Related: A decade later, the list of Sept. 11 victims continues to grow
Related: Fight Over Compensation for 9/11 Responders Shifts to Cancer Victims.

Hitting close to home
September 11 took an extremely heavy toll on the insurance industry. The terrible events claimed the lives of 295 employees of Marsh & McLennan and 176 employees at Aon Corporation. Dave Lenckus of Business Insurance offers recollections from insurance executives who were connected with or escaped from the WTC in his article Terror of September 11 lives in memory. Also see the company tribute pages: Remember: September 11, 2001 - a site to remember and celebrate the lives of those Aon employees lost on September 11, 2001, and Marsh & McLennan 9/11 Memorial - both a website and a physical memorial.

Tribute song & Firefighter Foundation
After 9/11, our own Tom Lynch recorded a 9/11 Tribute Song with Peter Clemente at Mechanics Hall in Worcester, MA. Actor and comedian Denis Leary used the song to raise money for the New York fallen firefighters. Leary is very devoted to firefighters and runs the Leary Firefighters Foundation. The Foundation was established in 2000 in response to a tragic fire in Worcester, Massachusetts that claimed the lives of Leary's cousin, a childhood friend, and four other firefighters. The Leary Firefighters Foundation's mission is to provide funding and resources for Fire Departments to obtain the best available equipment, technology and training. Inadequate equipment - particularly faulty tracking and radio equipment - contributed to deaths in both events.

Insurance media coverage
PropertyCasualty360: 9/11: 10 Years Later, Execs & Risk Managers Weigh In on How Industry Has Changed

Insurance Journal: 9/11 and Terrorism Risk 10 Years Later and Why 9-11 Changed Everything

Risk & Insurance: Selling Carriers on Rebuilding Ground Zero

Risk Management Monitor: Ten Years After

Occupational Health & Safety: NFPA Cites Safety Improvements Rising from 9/11

CNNTech: How 9/11 inspired a new era of robotics 9/11 Tribute

Other resources
Understanding 9-11: A Television News Archive - a library of news coverage of the events of 9/11/2001 and their aftermath as presented by U.S. and international broadcasters. A resource for scholars, journalists, and the public, it presents one week of news broadcasts for study, research and analysis.

The Encyclopedia of 9/11 - from New York Magazine

The September 11 Digital Archive

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August 23, 2011


In this summer of weather extremes, workers comp is celebrating its 100th birthday in America. The weather forecast - along with the prognosis for workers comp - probably sound familiar: periodic storms, heavy rain, damaging winds. The National Council on Compensation Insurance (NCCI) has issued its "state of the line" report for workers comp: 2010 was a tough year and the outlook for 2011 carries a severe weather warning.

The key indicator for insurance health is the combined ratio: add up the accumulated losses and the expenses, subtract investment income and hope you end up somewhere around 1.0. The combined ratio for 2010 went up to 1.15, five points above the previous year. Despite improved returns on investment (otherwise known as the "jobless" recovery), pretax losses for the industry averaged one percent - the first such loss since 2001.

Insurers are suffering from a convergence of negative factors: poor underwriting results, a drop in premiums (due to reduced payrolls), and an increase in claims frequency, which is perhaps the most alarming trend of all. For a number of years the increase in severity (the average size of claims) has been balanced by a decrease in frequency. If frequency continues to trend upward, the warning flags for severe trouble will be flapping in a very stiff breeze.

Politics as Usual
Further complicating matters for insurers, state level politicians are single minded in their effort to keep the costs of comp insurance as low as possible. As part of their relentless struggle to stay competitive, state regulators are reluctant to increase rates. NCCI has applied for rate increases in 14 of the states which they directly manage, up from eight in the previous cycle. Any move toward higher rates may signal at least the beginning of the long-awaited end of the soft market that has endured for over a decade.

Finally, there has been a lot of turnover among the state officials who regulate workers comp: there are 24 new insurance commissioners across the country. As NCCI puts it:

The number of newly elected and appointed officials means that the industry will face a challenge in terms of education and information for next few months at least.

Time to polish up the Gucci's? The insurance industry hardly needs to crank up the lobbying apparatus - it's always operating full tilt.

Candles in the Wind
As workers comp turns 100, we note that longevity itself is not cause for celebration. Just as it's no fun to grow old, it's not much fun trying to make money in workers comp these days. Despite a decade of tightened eligibility requirements and cuts (some draconian) in benefits, we have seen a continued deterioration in the financial health of comp carriers. Perhaps it's my imagination, but I seem to detect a tone of anxiety as stakeholders gather to sing "Happy Birthday" to Workers Comp in America. The flames of the candles falter in the midst of a raging storm.

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May 23, 2011


With yesterday's catastrophic tornadoes in Joplin, Missouri, the most recent in a long line of 2011 disasters, the cost of re-insurance is going up. Prior to yesterday, the reinsurance bill for 2011 stood in the vicinity of $50 billion, leaving virtually no room for additional losses through the end of the year. Alas, we now have Missouri, and the year is not even half over, with hurricane season yet to begin.

Risk & Insurance magazine highlights the problems facing reinsurers:

Yvette Essen, an analyst for A.M. Best, said that the catastrophic first quarter means that many reinsurers will struggle to record any full-year underwriting profit for 2011.

"The industry faces further challenges in achieving profitability as the hurricane season approaches and investment yields remain low," she commented.

"While reinsurers continue to maintain sound capital positions, the excess capacity that existed at the prior year-end has clearly been diminished," he said.

Richard Ward, CEO Of Lloyd's of London, warns that the relatively inexpensive cost of insurance is really an illusion: "Prices are dangerously low at present," he told an industry conference. "Clients may think they are getting a bargain. But the fact is that they are buying security. The insurers who write unprofitable business are inevitably the first to collapse when disaster strikes."

Beyond Risk Transfer
It appears we are entering a period of steadily increasing instability in nature. Ferocious storms and floods in the US, the Japan earthquake and tsunami, the volcano in Iceland, the fires in Australia - all flitter across our computer screens and raise the specter of inconceivable loss. Insurance - where it's available - merely provides capital for rebuilding. Much of what is lost cannot be insured and even where there is insurance, what is lost on a personal, family-to-family level cannot be replaced. Yet we see selfless efforts to help survivors, most of whom will demonstrate a remarkable ability to endure. So much of what is precious to these people has been lost, but they will move on. That's human nature at its best.

Meanwhile, the reinsurance market, long in the soft-market doldrums, will finally begin to harden. We will all pay a little more for insurance - and we will complain about it. That, too, is human nature, not at its best, perhaps, but a reflection of these tumultuous times.

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May 12, 2011


A couple of days ago my colleague Julie Ferguson blogged OSHA's new focus on farm safety. We all share the concern for the safety of farm workers. But OSHA is upping the ante in a way that requires the immediate attention of both insurance companies and their clients. As part of their investigation into the deaths of two teenage workers in a silo operated by Haasbach LLC, OSHA issued subpoenas for documents from Haasbach's insurer, Grinnell Mutual Reinsurance Co. OSHA wanted to review safety inspection reports and any follow up documentation from Haasbach. The insurer refused, arguing that the subpoena would discourage businesses from allowing insurers to conduct safety inspections if the material contained in the inspection reports can be used against a business during later litigation or OSHA enforcement proceedings.

The U.S. district court has ordered that the records be given to OSHA.OSHA Assistant Secretary Dr. David Michaels praised the decision. "The court affirmed OSHA's authority to obtain relevant information from an employer's workers' compensation insurance company. This is not surprising legally, but it does illustrate that workers' compensation and OSHA are not separate worlds divorced from each other," he said. "Workers' compensation loss control activities overlap with OSHA's efforts to bring about safe and healthful workplaces, and in order to achieve a safe and healthful working environment for all Americans, all efforts of business, insurance, labor and government must move forward together."

The court ruled that OSHA has jurisdiction to investigate the workplace fatalities, and further has the authority to require the production of relevant evidence and the ability to issue a subpoena to obtain that evidence. The requested documents, which included copies of site safety inspections, applications for insurance coverage for the site, and correspondence between Grinnell and Haasbach concerning the site, were found to "reasonably relate to the investigation of the incident and the question of OSHA jurisdiction," according to the decision.

A Tighter Safety Net
The court's ruling has important implications for both insurers and their clients.

Insurers are required to provide safety services, including site inspections with the findings documented in written reports. Usually, the safety inspector asks for a written response within a set time period. With OSHA potentially accessing these reports, there is liability for insurers: did they identify safety problems? Did they follow up to ensure that the problems were fixed within a reasonable period of time? It's another version of the great liability question: what did you know and when did you know it?

Similarly, the documents put insureds at risk. Safety issues have been identified. How did the business respond? Did they fix the problem? Did they perform the necessary training? Did they document their activities to show good faith in correcting identified concerns?

In all of this activity, candor is essential. The last thing anyone wants - and that anyone certainly includes OSHA - is for this court's ruling to have a chilling effect on the routine inspections performed by insurance companies. The concern is that inspectors, sensing OSHA reading over their shoulders, might hedge the findings just a bit - enough, perhaps, to create an ambiguity in the finding that results in an ineffective and unfocused response by the insured, which, in turn, perpetuates the hazard and leads, perhaps, to a serious injury or even death. That would be an unintended consequence of tragic dimension.

Focus on Safety
As always when OSHA becomes involved, there is a lot of money on the table. Following the fatalities, Haasbach was issued 25 citations with a penalty of $555,000. This was in response to the situation where three (untrained) workers became entrapped in corn more than 30 feet deep. At the time of the incident, the workers were "walking down the corn" to make it flow while machinery used for evacuating the grain was running: all in a day's work on the farm, and extremely hazardous.

It is certainly not in the best interests of insurance companies and their clients to build defenses against potential OSHA involvement. If we all share a commitment to safety - and we must - then an open and candid dialogue is essential. To be sure, both insurers and their clients are "on the hook" once problems have been identified. But surely it is in their combined interests to fix those problems as quickly as possible. Insurers and their clients must keep the focus where it belongs: not on OSHA, but on the moment-to-moment, day-to-day safety of workers on farms, in factories and in every American workplace.

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May 9, 2011


NCCI has released two reports that are essential reading for risk managers and anyone else who enjoys the Big - albeit somewhat gloomy - Picture.

The first report is a summary of workers comp performance through 2010: while many indicators are positive or at least neutral, the major concern is overall performance. The combined ratio for insurers (losses plus expense) is creeping steadily upward: 101 percent in 2008, 110 percent in 2009, 115 percent in 2010. In other words, in 2010 carriers spent 15 percent more than they earned through premiums. Even with improved returns on investments, insurers are caught in the zone where many are losing money, especially those whose combined ratios have drifted above the average.

The troubled economy has complicated matters: as payrolls go down, premiums go down with them. Comp premium peaked in 2005 at $47.8B; in 2010, premium totaled $33.8B. To be sure, fewer people are working, but that often results in increased stresses - and risks - for those who still have jobs.

Finally, there is the highly politicized issue of rates for comp insurance. No state wants to be the first raise the rates, as this increases the cost of doing business and makes the state less competitive in attracting new business. So states hold the line or even force reductions, making all businesses - except insurance related - happy.

The Really Big Picture
For those of you who seek perspectives beyond comp, into the broadest possible, world-wide view of risk transfer, Robert Hartwig of the Insurance Information Institute offers slides that are compelling viewing. He examines the dual specters of terrorism and natural catastrophe. Bin Laden's unlamented death may increase the risk of attack in the coming months, resulting in open-ended exposures for workers comp and property insurance. As for natural disasters, with the spate of earthquakes, tsunamis, and tornadoes, any actuary who is paying attention is having trouble sleeping these days.

Japan's earthquake, tsunami and nuclear plant meltdown appears to be the most expensive natural disaster in history. The total losses are expected to run between $100-300B, of which only a relatively small portion ($45B) is insured. (Government will bear the brunt.)

Tornadoes tearing through mid-America thus far have avoided major population areas, but the recent event at the St. Louis airport raises the specter of urban disaster.

Who Pays?
When calamity strikes, the impact is greatest on reinsurance, which kicks in when limits are reached in-front line policies. With the unprecedented scale of recent events, the cost of reinsurance must go up, and as it does, the cost of insurance for the consumer (business and personal) goes up with it. We live in risky times and the increasing costs of risk transfer reflect our darkening world.

One final note: Hartwig reveals that the 9/11 attacks added 1.9 percent to the combined ratio for 2001, which totaled a robust 121.7 percent. That's a sobering thought for this beautiful spring morning. My advice? Slap on some sunscreen and get out for a stroll. There's no better cure for gloomy data than a walk in the sunshine.

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April 18, 2011


The NCCI Annual Issues Report is out and it is available as an online flipbook, you can download each article in PDF, or you can request a hard copy.

Most who work in the industry realize the significance of these reports but for employers, a brief side note is in order. NCCI stands for the National Council on Compensation Insurance, Inc., a rating and data collection bureau specializing in workers' compensation. because NCCI manages the nation's largest database of workers compensation insurance information, it is in authoritative position to analyze industry trends and upcoming legislation, to offer insurance rate recommendations, and to provide a variety of services and tools to a variety of constituencies, including state insurance bureaus, insurers, insureds, the media and others with an interest in workers comp.

The Issues Report provides an industry snapshot of where we've been, along with some trending and analysis that point to where we are likely heading. While all the articles have merit, for industry financial trending we point you to these three cornerstone documents:

While the property casualty market is generally positive and has performed better than most other sectors during the economic downturn, the same cannot be said for the segment of the market that is workers compensation.

The workers compensation combined ratio continues in an upward direction. This is never good. The combined ratio is a barometer of an insurer's profitability. It indicates how much an insurer pays out for each dollar it takes in (incurred losses + expenses ÷ earned premium). For most businesses, it's a problem if you pay out more than you have coming in, but for insurers, investment income on reserves (money held for claims costs) is also a significant component in overall profitability. So an insurer can still realize a profit even if it pays out more in losses than it takes in when investment income is factored in.

Hartwig says that in 2010, the combined ratio is approaching 115. To put this in some historical perspective, the combined ratio at the peak of the crisis in 2001 was 122% percent, and the historic low in recent years was 93% in 2005. In 2009, we saw about 110%, the the worst combined ratio since 2003.

Other significant issues:

  • Investment gains associated with workers compensation have seen some improvements, but are still on the low side.
  • Workers comp written premium eroded significantly as jobs were shed, and although the employment situation is leveling off, it is hardly booming. It's expected that employment may be fairly flat through 2011.
  • Medical inflation has slowed but medical costs are still on the increase.
  • Uncertainty abounds: about the economy, about the direction of healthcare, about bank & housing market, about financial reform. Plus, there is a broader regulatory environment with OSHA and DOL, and there is policy uncertainty given the volatile political environment.

The pressure is on and the challenge for insurers is clear: the only way to make money under current conditions is through rigorous underwriting and tight expense control. Employers with marginal records may have limited options come renewal time. It's always a good idea for employers to control losses, but never as important as in a tight underwriting climate.

Hartwig offers some positives about the employment scenario:

" Last year's stubbornly high unemployment gives the misimpression that no progress has been made in reducing joblessness. In reality, as shown in Exhibit 2, private sector jobs were created every month in 2010, for a total of 1.3 million net new jobs. While job creation so far is at a pace too slow to bring down the overall jobless rate, it remains an extraordinary reversal from the hemorrhaging of jobs and associated payrolls in the two prior years. At the height of the crisis in early 2009, private employers were shedding more than 700,000 jobs per month. Private employers eliminated a staggering 4.7 million jobs in 2009 and 3.8 million in 2007. The unemployment rate remains high today in part because workers, sensing improving labor market conditions, are streaming back into the labor force."

And on payrolls, the basis for premium:

"... The latest data indicates that aggregate wage and salary disbursements have recouped about half of what was lost during the recession. It is quite likely that those losses will be fully recouped by the second half of 2011."

He also offers some perspective on other factors beyond payroll that are eroding written premium:

"The economy will clearly exert a major influence on workers compensation insurers' growth opportunities in 2011 and beyond.Exhibit 3 suggests that other factors are playing an important, if not dominant, role when it comes to explaining the precipitous 29% drop in premium written over the past several years. Workers compensation premium began to fall in early 2006, long before the start of the Great Recession in December 2007. Aggressive pricing, along with the increased popularity of large deductible programs, captives, and self-insurance alternatives have all taken their toll, as have a surge in return premium. The loss of exposure due to the economy was actually one of the more recent contributors to the fall. On net, pricing is likely responsible for about half the decline."

All in all, the NCCI reports reflect negatives that many of us have been seeing or living through, and while the patient is still in guarded condition, there are reasons for cautious optimism.

And don't skip the other articles in the Issues Report just because we did not address them here - there is always good information in these reports!

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April 6, 2011


Nearly a year ago we blogged the issue of a medical fee schedule in Maine. The legislature mandated the creation of a fee schedule way back in 1991. Twenty years later, there have been a few reports, a few changes in the membership of the committee trying to establish the fee schedule and, to date, no fee schedule. We now wonder whether neighboring New Hampshire will follow Maine's example, climbing a slippery mountain trail into a deep fog.

New Hampshire, like Maine, has a two tiered system: in the first tier are managed care networks, which negotiate fees with doctors and hospitals. Everyone in the second tier - those outside the networks, the self-insured, smaller carriers, etc. - are stuck with paying the "usual and customary fees." Medical costs account for 71% of total costs - a truly staggering number when compared to the national average of 58%.

Dr. Gary Woods, an orthopedic surgeon and chair of the NH Workers Comp Advisory Council, thinks that the high percentage of medicals is the result of good medical care, combined with a strong return-to-work focus: in other words, indemnity is relatively low because workers are not out of work very long. Well, doc, show me the numbers. I expect that New Hampshire - ranked 14th highest among states for comp costs - is spending too much on indemnity and way too much on medical services. It's no bargain for anyone.

The Fix is (Not Quite)) In
The New Hampshire legislature is contemplating SB 71, which would impose a fee schedule on medical services. The bill proposes that hospitals be reimbursed at a uniform conversion rate of up to 150% of Medicare rates. While somewhat on the high side for such linked payments, it would probably bring down the overall costs of medical services in the state.

SB 71 is going nowhere, at least for the moment. The bill will remain in committee while the lawmakers appoint a study group to review the proposal and make further recommendations.

Ultimately, the details of the fee schedule will be in the hands of the comp advisory council, of which Dr. Woods is the chair. Hmm. This brings to mind the stalemate in Maine, where Dr. Paul Dionne was for a long time chair of the committee responsible for implementing the fee schedule. The group just couldn't come up with a number that would satisfy the doctors. (How would a doctor define a fair fee schedule? "Usual and customary." ) Last June, facing allegations of a conflict of interest, Dr. Dionne finally stepped aside.

Perhaps the good folks in New Hampshire could speed up the fee schedule project by asking Dr. Woods to step aside. No doctor is going to embrace a cut in reimbursement rates. Dr. Woods would have a choice: he could sit on the sidelines and watch the committee hash out the details, or, with his health and well-being in mind, he could put on his hiking boots and climb one of the Presidentials. I recommend the latter, even if the peak is momentarily obscured by the fog.

Thanks to Work Comp Central for the heads up on this issue (subscription required).

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December 6, 2010


You may recall the New York saga of Compensation Risk Managers (CRM), who single-handedly brought down the entire workers comp self-insurance group (SIG) industry in the empire state. Well, CRM is back in the news, this time in California, where their dubious business practices have collapsed a self-insurance group for the construction industry. The name of the failed SIG is "Contractors Access Program - get it? "CAP." As in, "your exposure is capped; you have nothing to worry about." To paraphrase a legendary President, "we have nothing to fear except fear itself" - to which we must add, unfortunately, the legitimate fear of predatory insurance administrators.

New York regulators took a very hard line in their response to the insolvency of a dozen SIGs operated by CRM. Someone had to make up the deficit created by CRM's mismanagement, so they decided to penalize all the SIGs operating by the rules. This harsh and rather expansive definition of "joint and several liability" led the well-managed SIGs to abandon the state.

At this point, it's not clear how California is going to pursue the $38 million shortfall. They will probably go after the actual participants in CAP, but it's highly unlikely they will find anywhere near the cash to cover the insurance deficit. Meanwhile, eleven of the SIG members are suing CRM, the agent who sold the product and the SIG's board of directors (some of whom are SIG members). If you total up the premiums paid by those filing the lawsuit, you only come up with $5.2 million. So the scale of the losses - $38 million - appears large enough to put every one of the SIG members out of business.

Promises, Promises
One of the interesting aspects of the lawsuit is the way the plaintiffs have quoted the marketing spiel right back at the defendents. They were promised "superior underwriting, claims oversight, loss control and administration." The "rigorous underwriting" would provide savings "while preserving the integrity of the program." Potential clients were assured that their exposure was limited to the premiums paid (a complete misrepresentation of the nature of SIGs) and that reinsurance kicked in on any claim above $500,000. (In reality, there was no reinsurance.) The agent who sold this dubious product promised to function as "much more than a broker." They brought "particular expertise" to the program and would serve as the clients's "partners in risk management functions." Some partner!

What apparently was not disclosed to members and prospects was the fact that the SIG was losing money almost from the very beginning. CRM had a fall out with the original broker, which resulted in $6 million of SIG funds being used to pay him off.

The CRM website is still up, where you can read about "the CRM advantage." They have an advantage, all right: they take advantage of naive and trusting companies seeking a little edge in the competitive comp market. It's a killer edge, to be sure.

Thanks to Work Comp Central (subscription required) for the heads up on this case.

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November 30, 2010


On a recent drive through rural Ohio, I was startled by an unusual image: a horse and buggy crossing over the interstate on a bridge. Later, at a rest stop, a long line of Amish folks, dressed as if from central casting, stood patiently in line at the Burger King. When they departed, I went up to the counter and asked what they had ordered. "Burgers and biscuits, mostly." The Amish get biscuits from Burger King?

This memory came to mind when reading at of a clash involving roofers in the western suburbs of Philadelphia. It seems that the Amish have an unfair advantage when bidding for roofing jobs against non-Amish contractors. The latter must factor in the costs of social security and workers compensation when bidding for work - and as comp practitioners know, the cost of comp for roofers is, well, through the roof. Under federal law, the Amish are exempt from social security; their religion rejects any form of insurance other than Divine. Under Pennsylvania law, they may opt out of workers compensation as well (though some Amish contractors do not). When you factor the costs of these coverages into the work, it's no surprise that Amish bids are routinely 30% or more lower than non-exempt contractors.

In the good times (remember those?), these differences did not matter much, as there was plenty of work for everyone. Today, however, there is a hard-scrabble search for work. Non-Amish contractors complain that the Amish have an unfair competitive advantage.

Lifestyles of the Not-So-Rich and Famous
The Amish also have a lifestyle advantage. They reject many aspects of modern culture. Many, though not all, refuse to operate machinery. Most do not use electricity. They do not have to worry about flat screened TVs, cable, iPods, iPads, cell phones, etc. They cling to a simple lifestyle that explicitly turns its back on what most people think is essential and necessary.

This brings to mind one more image during my brief encounter with the Amish in Ohio. As I was entering the rest stop, an Amish family was exiting. The father, with his wife a few steps behind, led his six children (their families tend to be large). One of the daughters held the hand of the youngest, a sweet blond 4 year old, who was blind. Bringing up the rear came another daughter, about 16, in a long, plain cotton dress that covered her from neck to ankles, over which she wore big, clunky work boots, laced half way up. Her gaze was indefinite, as if she were oblivious to the prosaic surroundings. She was strikingly beautiful.

I could not help but wonder whether she would remain with the culture that nurtured her, or whether she would yield as most of us do to the temptations of the beckoning world, a world full of greed and gadgets, where insurance is an absolutely necessity ...and by no means divine.

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November 22, 2010


The GAO has issued an interesting report on the implications for increasing the retirement age. As the American workforce ages (the Insider is all over that one), and as the pressures on retirement funding increase, the various payers are all looking for ways to shift the costs to someone else. Who are the payers? Social Security, SSDI, the states, private insurers and self-insured employers. As the feds tinker with the retirement age, they are very much in the solve one problem, create another mode.

At first glance, it seems pretty simple: to reduce pressure on the social security retirement system, make people work longer. But it's one thing for a white-collar bureaucrat (or consultant!) to work into his or her late 60s, it's something else altogether for modestly educated workers with physically demanding jobs. As the feds slam the door on social security, the door on SSDI flies open. The GAO notes that about 2/3 of those who work report having a job that is physically demanding. In addition, disability rates increase with age, with the result that workers who postpone retirement face the increasing likelihood of becoming disabled. Thus the ever-aging workforce, unable to perform the physically demanding work, may be forced to apply for disability retirement - which, after all, pays better than ordinary social security.

The State of the States
This federal-level debate is taking place parallel to what is happening at the state level, where workers comp systems designed to accommodate retirement at 65 or sooner are confronted with older and older workers. How should workers comp estimate the working life of an older worker? To the degree that state systems curtail benefits of these aging workers, the pressure will build on the federal social security and SSDI systems.

One thing is certain: every payer sits in an isolated silo, doing their best to make someone else cut the checks. Every successful shift in cost creates pressure somewhere else. And at the center of this developing storm sit the aging workers themselves: not necessarily wanting to work, not necessarily wanting to qualify for disability, but suffering the slings and arrows of time, with nothing much saved for retirement and an increasingly ominous future close at hand.

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September 29, 2010


In November the voters in the Evergreen state have the opportunity to end one of the few remaining monopolistic systems for workers compensation (the three others are North Dakota, Ohio and Wyoming). As you might expect, there is much fulminating and little rational discourse evident in the pre-election build up on Initiative 1082.

Opponents of privitization project visions of greedy insurers denying claims (Hank Greenberg with an ax?), while proponents lampoon the arrogance and incompetence of a bloated state bureaucracy. (If you want to see what passes for humor in the great northwest, check out this rather lame rap video in support of the initiative.)

It's hardly surprising that opponents of the measure view insurers as a greedy, heartless enemy. On the other hand, it's pretty clear that most monopolies tend to evolve (or is it devolve?) into behemoths slow to respond and slow to innovate. Both visions suffer from inaccuracy and distortion.

Who Pays?
In most states, employers bear the full cost of workers comp: employees pay nothing for the premiums and nothing for the treatments. In Washington, there are three funds supported by comp premiums: an indemnity fund; a medical fund; and a supplemental pension fund. Employees contribute through payroll deduction to the latter two funds. The current deduction is 0.1543 percent of earnings, with no caps. If I've done the math right - a big if, unfortunately! - that's about $76 per year for the average worker. Not a lot of money, but the principle is interesting - employees have a little "skin" in the game. Total employee contribution of premiums does reach the substantial level of about 22 percent.

While you would expect small businesses to embrace competition, some oppose 1082 for the simple fact that it will eliminate the employee contribution to premiums and shift the entire burden onto employers. Costs might go up. On the other hand, competition might bring costs down.

Decision Makers
Currently, costs for workers comp in Washington are modest: they rank 38th for cost in the 2008 Oregon survey, with an average rate of $1.98 per $100 of payroll. If the costs were higher, the pressure for change would probably be much more intense. As it is, voters will go the polls as they often do, with a lot of inflammatory rhetoric (and perhaps an annoying rap song) ringing in their ears. Then they will fill out their ballots. The fate of Washington's comp system is in their hands.

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July 12, 2010


Today we examine one of the great conundrums in workers comp claims: the old injury that may or may not be defined as a new injury.

In 2006 David Poulton worked for Martec Industries in Rochester, New York, as a laborer. Poulton had a bad back, having already filed workers comp claims in 1998 and 2000. When he visited his treating physician in June 2006, he had the same old complaint: his back hurt, as it had virtually every day since his first injury in 1998. He told his doctor that he re-injured his back at work the prior day while lifting materials. At this appointment, a discouraged Poulton told his doctor he wanted to quit working.

In consideration of Poulton's long-established problem, apparently compounded by the prior day's incident, the doctor disabled him from work. He cited "old injuries and his continued decline." He characterized the situation as involving "episodic increases in pain" that had troubled Poulton for several years. The doctor, in fact, had been encouraging Poulton to stop working prior to this particular visit.

An independent medical exam determined that Poulton suffered from degenerative disc disease and that his disability was caused primarily by preexisting problems.

So is this a new injury, as reported by Poulton, or simply the recurrence of an old one?

Who Pays?
An administrative law judge found in Poulton's favor, determining that the lifting incident at Martec aggravated the pre-existing condition. However, this ruling was reversed by the appelate division of the NY supreme court, which found no evidence of a new injury and remanded the case for further consideration.

Poulton may yet succeed in re-establishing his workers comp claim, but it will draw upon the resources of the carrier for his prior employer, not the carrier for Martec. As is usually the case in workers comp, the narrative is driven by the evidence. In this case, the history of pain and suffering is so unrelenting and consistent, the "new injury" theory goes up in smoke. With his working days apparently at an end, Poulton probably does not care who pays for his troubles. He has suffered for a long time.The remaining question, of course, is who pays and how much.

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June 23, 2010


We return to the beautiful state of Maine, where moose wander the woods looking for whatever interests a moose and where employers self-insured for workers comp look for a fee schedule. The moose are a lot happier than the self-insureds. As we have pointed out in prior blogs, the legislature mandated the creation of a fee schedule for medical services nearly 20 years ago. There is still no fee schedule. So while insurance carriers are free to negotiate with hospitals to determine rates, self-insureds - Bath Iron Works (BIW) the most notable and vocal - are stuck paying the exorbitant "usual and customary" fees.

BIW has sued a number of times to move this process to a conclusion. Most recently, they sued to remove Paul Dionne, chairman of the workers comp board, from heading up the fee schedule committee. Dionne is also board chairman of Central Maine Healthcare Corp., which includes Central Maine Medical Center in Lewiston. While he claims objectivity, Dionne is in an untenable situation: you do not ask a medical provider how much they want to cut their own revenues.

In deference to the "appearance" of a conflict of interest, and perhaps in an acknowledgement that after 20 years, enough is enough, Dionne has recused himself from any further involvement in the fee schedule process.

"It's a hard decision because this is a very important issue for the workers' compensation system," he said. "But I've got a lot of confidence in the board members."

So from here on Dionne will follow the debate from the sidelines: no conflict, but plenty of interest. His confidence in the other board members might give rise to anxiety for BIW. Regardless, this is surely a step in the right direction.

When it comes to the long-mandated, long-absent fee schedule, patience is wearing a bit thin in Maine. The moose may wander where they choose, but self-insureds are caught in a very expensive trap. Too bad they don't sell fee schedules at L.L. Bean.

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June 18, 2010


The saga of the New York self insurance trusts continues. We reported in April that justice had been served by Judge Kimberly O'Connell, who ruled that requiring solvent trusts to pay for the sins of insolvent trusts was unconstitutional. Now, according to Work Comp Central (subscription required), O'Connell herself has been overruled by a four judge panel, which has reinstated the assessments on the solvent trusts. While the justices are undoubtedly correct in their literal interpretation of the law, the ruling comes under the heading of "let no good deed go unpunished." It may be legal, but it is in no way just.

Here's the (rotten) deal: 15 self-insurance trusts are shut down by the state. They ran out of money because they under-priced their premiums, under-reserved claims and sold insurance like a ponzi scheme. Oh, they also paid themselves handsomely for their fine work as administrators. These defunct trusts are in the hole to the tune of $500-$600 million. State oversight? There wasn't any.

Who Pays?
The WCB decides to assess the remaining, solvent trusts to make up the deficit. In other words, the "joint and several liability" within a trust group now expands to include liability for all trust groups. To be sure, the enabling legislation allows the WCB to do this. After all, someone has to pay and this is New York, so deal with it. In this case, the trusts that operated by the rules, fairly pricing and fairly reserving claims, are penalized for the sins of the clowns who are no longer in business.

As we pointed out in yesterday's post, a task force has recommended that New York get out of the self insured trust business. We concur. Any state that loads the dice of "joint and several liability" to this absurd point makes a mockery of the concept. Self-insurance is based upon the ability to limit risk and contain exposures. Given New York's operating rules for self-insured trusts, conventional management tools are rendered useless. The liabilities of operating a group trust are uncontrollable and virtually infinite. Why would any company choose this path for managing risk?

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June 17, 2010


Two years ago, New York Governor Patterson convened a task force to examine the status of self-insured trusts for workers comp. He was forced to take action when a number of trusts failed, most notably those administered by Compensation Risk Managers (CRM). The insolvent trusts left behind a deficit of $500 million. (See our prior blogs here and here.) The task force recently presented its findings to the governor. In 189 pages of closely reasoned text, the commission recommends that New York abandon this particular model for insurance. The risks, in their view, outweigh the benefits and perhaps most important, the state lacks the resources to adequately monitor how these groups operate from day to day. You cannot trust the trusts.

The commission zeroed in on what it considers to be the (fatal) flaws in the group trust model:
: Joint and several liability, where prudent employers are held accountable for the actions of the weakest members
NOTE: it's one thing to have "joint and several" liability; as the commission points out, it's quite another to actually collect on these obligations: less than 15% of what is owed by participants in the failed trusts has been collected to date.
: potential conflicts of interest involving group administrators and TPAs, who seek to grow the business by keeping rates artificially low and by understating losses
: inability of trustees to understand what is really going on
: inability of the state to monitor and assess the true status of each operating trust

Death Spiral
Self insurance groups currently operate successfully in 18 states, but not in New York. As we pointed out in a prior blog, the NY comp board tried to assess all trust members - not just those in the insolvent trusts - to make up the $500 million deficit. The solvent trusts sued and for the moment, have prevailed. (The Held decision can be read in the appendix of the task force report).

There is a certain logic to assessing all members for the failings of a few, but this only works when you are dealing with very large numbers, so the individual assessments are relatively small. This was not the case back in 2008, when there were about 18,000 employers participating in NY trusts. After all hell broke lose, the number dwindled to 4,000.

The crippling assessments issued by the comp board to cover the trust deficit created a death spiral, with solvent trusts folding their tents and moving out of the state. Even though those assessments have been retracted by the courts, that action comes too late to save the viable trusts. New York probably has no choice but to abandon the group trust model.

Rotten Apples
The New York narrative, as written by the governor's commission, attributes the trust failures to fatal flaws in the business model. But where New York sees an insurance approach that cannot work, other states see vulnerabilities that can be addressed through prudent management. Self-insured groups still operate profitably and effectively in many states. What happened in New York was the result of rogue and perhaps felonious trust management combined with inadequate state oversight. The state failed to see the true status of the troubled trusts in a timely manner and then took exactly the wrong action to correct it. That's not a problem with trusts themselves, but with the people entrusted to run them.

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June 15, 2010


There are five towns in Massachusetts that do not carry workers comp insurance for their employees. Four of them - Dana, Prescott, Enfield and Greenwich - are under 412 billion gallons of water: they were submerged during the 1930s in the making of the Quabbin Reservoir, which supplies drinking water to Boston and a number of suburban cities and towns. The fifth, Tewksbury, voted to join the workers comp system way back in 1914, but a clerical error recorded the positive vote as negative, resulting in nearly 100 years of a go-it-alone, pay-as-you-go, hope-for-the-best approach to comp among the residents of the town, now nearing 30,000 people.

To date, Tewksbury has been pretty lucky. The town has paid out between $100,000 and $189,000 per year for claims in recent years. That's not bad, considering that one failed back can run upwards of $500,000. But just because Tewksbury has been lucky does not mean they are going to stay lucky. The liability to the town's tax payers is precariously open-ended. In these challenging times of reduced budgets for all municipal services, the specter of an unanticipated claim could put Tewksbury on the verge of bankruptcy. Because the town did not participate in the comp system, injured workers had the option of suing for damages unavailable in the comp system.

As we read in Insurance News Net, last month the town meeting voted to adopt workers comp coverage. (Presumably, the vote was properly recorded this time.) It will take a few years to develop an experience rating, based upon actual losses and statutory benefits. Overall the cost of insurance will run a bit higher than an average loss year, but that's price you pay for transferring the risk to a third party.Comp will finally become a set cost in the town budget. A workers comp policy comes with a comfort factor that cannot be measured simply in premium dollars: any claims, large or small, any catastrophic losses involving multiple town employees, will now be covered by insurance. That should help town residents and officials sleep a little better at night.

As for the surviving citizens of Dana, Prescott, Enfield and Greenwich, displaced long ago by the state's appetite for water, comp is not a likely component in their dreams. I imagine they welcome a nocturnal glimpse of the communities where they once lived and waken with sense of sadness and of loss.

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May 24, 2010


Joe Cassano, the man who brought insurance giant AIG - and the world economy - to their knees, has dodged the proverbial bullet: he will not be indicted for his actions in the collapse of AIG's Financial Products unit, which he ran until his resignation in 2008. Federal prosecutors searched diligently for evidence of wrong doing. What they found, however, was evidence of cluelessness. Joe Cassano was no crook: he was just a manager in way over his head. He apparently believed that underwriting credit default swaps was relatively risk free. Oh, well, it seemed like a good idea at the time.

If no good deed goes unpunished, incompetence on a cosmic level is not without its rewards: Cassano made about $280 million in eight years of running the FP unit, in addition to receiving a performance bonus of $35 million in his final year with the company. That last payment truly boggles the mind. Cassano was paid for high volume sales of a product that destroyed his company.

Joe Warin and Jim Walden, Cassano's (presumably high paid) attorneys were delighted with the outcome of the investigation:

Although a two-year, intense investigation is tough for anyone, the results are wholly appropriate in light of our client's factual innocence. This result was the product of two things: an innocent client and fair prosecutors and agents. The system worked.

It would be more accurate to say that the system was worked. As was evident in a prior blog, Cassano was not a nice guy who happened to make a mistake. He was a thug dressed up in a fancy suit. Perhaps on some level it's reassuring that his actions were not criminal, that he acted in the expectation that his company would make money. Cassano certainly made an obscene amount of money, but AIG rank and file, the shareholders and the tax payers have to foot the bill for the mistakes of one greedy goon.

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May 18, 2010


Arizona has been getting a lot of criticism lately. Frustrated by the federal government's inability to confront the undocumented worker problem, they took matters into their own hands and passed their own law. Now police are required to stop anyone who "looks illegal" and ask for papers. I'm not sure that illegal immigrants from Ireland have much to worry about, but Hispanics - who make up one third of the state's population - had better be careful. The Arizona legislature missed an opportunity by not requiring Hispanics to wear their documents in a packet around their necks. Perhaps they can amend the law.

I have been on board with the need to deal with illegal immigration. Back in 2006 I strongly endorsed the congressional initiative to build a wall at the Mexican border. This new version of the "Great Wall" offered an tremendous opportunity to ineffectively seal the border, build a tourist attraction/theme park and temporarily employ thousands of undocumented workers until the project was finished, at which point we would escort the workers through the wall back to Mexico.

Some people feel that Arizona has created a law that penalizes people simply for looking Hispanic. Others believe that only the federal government has the power to deal with immigration issues. As we await the legal challenges that may or may not resolve the issue, we need to shift gears and recognize an area where the maligned state has actually gotten it right.

Public Versus Private
I am referring, of course, to the decision to privatize the state fund for workers comp insurance. Arizona has provided insurance since 1925 through the State Compensation Fund (SCF). With 40 thousand employers and $191.8 million in premiums, SCF is the largest workers' compensation carrier operating in the state, with a 31.5 percent market share.

One of its subsidiaries, SCF Premier Insurance Co., is the second-largest, with $34.1 million in 2009 direct premiums written. Another subsidiary, SCF Western Insurance Co., is the 10th-largest, with $10.7 million in 2009 direct premiums written. In other words, SCF is by far the dominant player in the insurance market for comp.

Under the recently signed law, SCF will become a mutual fund in 2013. This move should open the door for more carriers to do business in Arizona, which will join the vast majority of states in operating a private insurance system for workers comp. I find it encouraging that in this area, at least, the goal is not to make the rest of us "Arizonians," but to have Arizona join the mainstream of American culture. Bienvenida, las damas y caballeros!

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May 12, 2010


Massachusetts has the lowest workers comp rates among the major industrial states and just about the lowest rates in the nation. The cost of comp in the other New England states is roughly double that in the Bay state. So you would think that the rates in MA would at best stay the same from year to year, or increase slightly. Well, think again. Martha Coakley (yes, that Martha Coakley), the current and future Attorney General, has brokered a deal for yet another rate reduction: an average of 2.4 percent across all classifications. The insurance industry had argued for an increase of 4.5 percent. I guess they did not exactly convince Martha.

The AG thinks that the insurers are overstating future losses. In my experience with carriers operating in MA, they are actually understating losses, but that's a matter for the actuaries. If, as the AG argues, rates are too high in MA, what can you possibly make of rates in the other New England states and across the country? Are MA employers really that much better at preventing injuries and at getting injured workers back to their jobs? If you buy that argument, I have a nice bridge spanning the Mystic River that you might be interested in owning.

The trends in MA are no different from those across the country: while frequency is down, severity is rising at an alarming rate. In MA, severity is spiraling out of control. The state's generous wage benefit structure, combined with a first rate (and pricy) medical system and a judiciary that tilts strongly toward the injured worker, are making six figure reserves all too common. It's truly puzzling that the AG can look at the performance numbers for the insurance industry and conclude that rates are too high. They are way too low.

Politics: Local and Loco
It's not hard to fathom why an elected official chooses to drive deflated rates even lower. It's politically popular; any rate increase - even the marginal bump proposed by the industry - would be met with howls of outrage from small businesses, who are already under seige in a struggling economy. Strange to say, the depressed cost of comp is subsidizing the otherwise high cost of doing business in MA.

The AG is not finished with her rate scalpel: she thinks a few more points can be carved out next year. It will be fascinating to see how the carriers respond. Not too many folks think there is much money to be made in MA comp. And that rapidly dwindling club is about to get a lot smaller.

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May 10, 2010


At its annual conference in Orlando, the National Commission on Compensation Insurance (NCCI) recently presented an overview of the state of workers compensation insurance across the country . Dennis Mealy, NCCI's chief actuary, presented to a standing-room only crowd, which is notable in itself, as the normal crowd for an actuary would fit in the proverbial phone booth.

Anyone with an interest in workers comp should take a peak at Mealy's presentation. As is often the case, viewers will pull out different nuggets, depending upon their points of view. Here's what jumped out at me:

  • From 2008 to 2009 workers comp premiums dropped by 11.8%. No surprise, as premiums are tied to payrolls and the latter have tanked along with the economy. In addition, average premium rates have declined steadily since 2003, as no politician wants to approve a rate hike.
  • Net written premium from 2007 to 2009 is down 23%.
  • The payroll for manufacturing has been on a steady decline over the past two decades.
  • The payrolls for manufacturing and contracting comprise 20% of comp payroll nationwide, but generate 40% of the premium. Again, no surprise, as the manual rates in these areas are higher then the rates in other occupations.
  • Investment gain - the crucial money made off the float of premium dollars - dropped to 7.1% in 2008, after averaging nearly 15% in prior years.
  • The combined ratio for workers comp is running around 110 - in other words, for every dollar insurers collect in premium, they are spending $1.10.
  • Insurers continue to offer premium discounts in order to secure new business or retain existing business (what my colleague Tom Lynch refers to as "eating their young").
  • Frequency of injuries continues to trend downward.
  • The average cost of indemnity per lost-time claim and the average medical cost per claim continue to rise.
There you have it: premium dollars are down, investment returns are down, and losses are up. These days it's not easy making money in workers comp. On the other hand, the economy seems to be recovering; the prospect of virtually universal health coverage could well have a positive impact on comp; and despite all the problems, residual markets remain small.

As is usually the case, insurers are betting that they can beat the odds of a tough market: by writing only the best businesses, by preventing injuries through loss control, by managing claims aggressively and by investing prudently.

There's Always Tomorrow
What you see from the bridge depends upon what you are looking for: where the despairing see reasons for jumping, the optimist simply enjoys the view. The risk transfer business requires optimism (for everyone, that is, except the actuaries). The great insurance wager never really changes: carriers are betting that premium dollars collected will ultimately exceed what they have to pay out in losses. The negative results of the last few years are viewed as an aberation. Just wait 'til Tomorrow:

The sun'll come out
So ya gotta hang on
'Til tomorrow
Come what may
Tomorrow! Tomorrow!
I love ya Tomorrow!
You're always
A day
A way!

For insurers, that "tomorrow" hopefully includes more favorable rates, improved return on investment, employers truly committed to safer workplaces, employees who really pay attention, and, while we're making a wish list, selfless attorneys. You gotta love tomorrow!

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May 7, 2010


We recently blogged the collapse of the self-insurance trust market in New York. When CRM Holdings, a Bermuda based operator of self insurance groups (SIGs), folded like a house of cards, the New York comp board went after the healthy SIGs to cover CRM's liabilities. They hit these innocent folks with a whopping $11 million assessment. As a result, a number of SIGs abandoned the New York market, only to learn two years later that the comp board's assessments were illegal. Oh, well. It seemed like a good idea at the time.

Now we move a few miles to the east and find a similar situation brewing in Connecticut. Municipal Interlocal Risk Management Agency (MIRMA) has been writing comp policies for municipalities since 2002. The great thing about comp is that it's so easy: offer coverage at rates lower than competitors, collect the premiums and pay the claims as they come in. Unfortunately, the premiums MIRMA has been collecting are not covering the claims generated by the insured municipalities. So MIRMA is in the uncomfortable position of trying to collect additional funds from cash-strapped municipalities. For example, North Branford owes $600,000, Westbrook owes $158,000; and Killingworth owes $71,188. In these trying times, that's not exactly chump change.

The legislature passed a bill to give the municipalities more time to come up with the money. The bill would have amended the amount MIRMA was required to keep in its reserves, and thereby allow the towns to pay the amounts they owe, interest free, over four years. Governor Jodi Rell is not buying that approach; she vetoed the bill. The governor issued a statement:

MIRMA has been undercapitalized since its creation. Although it has been given several years to remedy its financial situation, it has failed to do so. Now, providers are not being paid and injured workers are at risk of not being treated. MIRMA can no longer exist in its current state of outright capital inadequacy.

The governor went on to state that MIRMA stopped paying workers' compensation claims simply because it does not have the money to pay, which is "wholly unacceptable." She wrote that MIRMA's deficit has grown by more than 300 percent in the last six years, and is predicted to reach well over $15 million by 2013. That might seem small by CRM standards - their deficit was upwards of $50 million - but then again, Connecticut is a lot smaller than New York.

Untrustworthy Trusts
The governor has ordered a complete review of MIRMA's finances. I could write the report without even looking at the books. In their effort to build market share, MIRMA underpriced their policies. They probably spent a lot on marketing and frills. To balance the books, they under-reserved claims, hoping to cover the cash short-fall by building market share. It worked until it didn't. Now they have run out of money, so they cannot pay the claims. If the auditors have a sense of history, they will conclude that MIRMA operates like a subsidiary of CRM.
NOTE: CRM, still operating in California, appears to be on the ropes.

Connecticut's short term solution - requiring the insured municipalities to come up with the money - is fair, if hardly feasible. At least Connecticut is not going to penalize the municipalities who declined to participate in what appears to be MIRMA's modified Ponzi scheme. That's good. But it remains to be seen how cash-strapped municipalities - already facing substantial budget cuts - are going to come up with these substantial sums of money.

When it comes to self-insurance trusts in the Empire and Nutmeg states, it's time to put away the beer kegs and cancel the golf outing: the party is over.

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April 26, 2010


We have been following the implosion of self insurance groups (SIGs) in New York. Back in June 2008, SIGs operated by Compensation Risk Management (CRM) collapsed. CRM had grown their business by offering comp coverage at very low rates. For a long time, they were able to maintain an illusion of profitability by under-reserving losses. Eventually, it all caught up with them.

When the CRM SIGs went belly up, the state worker's comp board looked around for some free cash to pay for the $450 million in unfunded liabilities incurred by CRM. They decided to penalize all the SIGs that had been operating in the black. In a move stunning for its arrogance (facilitated by legislation passed in 2008), they decided to raise assessments on these SIGs from the modest annual total of $104,000 to a whopping $11.1 million.

In other words, the insurance groups operating prudently - charging adequate premiums, controlling losses and turning a modest profit - were forced to make up the losses incurred by a company operating like a ponzi scheme. Well, as they like to say in New York: "You gotta problem with that?"

Acting state Supreme Court Justice Kimberly O'Connor had a problem with it. She ruled on April 14 that the 2008 laws that empowered the comp board to assess the SIGs were unconstitutional, as were the assessments issued by the board.

Justice Too Late
Unfortunately, judicial relief comes long after the once-profitable SIGs have folded their tents. First Cardinal once operated 13 SIGs in New York, with $166 million in premium. When hit with the exponential increase in assessments, First Cardinal decided to move its business out of the state (in itself a sure sign of management that was paying attention). They stopped writing in New York and laid off the 57 (innocent) workers who were doing a good job of managing the New York business.

You may recall the old saying: "The wheels of justice grind slow but they grind exceeding fine." In this case, justice - and fairness - were eventually served. But the pace of the process seems to have crushed the parties harmed by an unjust law.

Of course, the comp board believes that the assessments are legal and is planning to appeal. That should add a few more months to this ridiculous situation.

"You gotta problem with that?" Indeed, I do.

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April 20, 2010


Because of their rarity, volcanic eruptions are a pretty interesting insurance topic, so on the "thigh bone's connected to the hip bone" principle, we thought we'd stray a bit afield today. Mother nature has reminded us who's boss in a truly spectacular display of muscle flexing that's brought travel and commerce to an unprecedented standstill for a huge part of the globe.

As an insurance event, it may not prove to be as costly as one might think, given the havoc that it is wreaking on business and travel - estimated at $2 billion and counting. Most airlines will be absorbing the cost of the delays since there is not actual physical damage to the fleet, and a volcano would be considered an 'act of God.' This prompts Vladimir Guevarra of the Wall St, Journal to ask if we might see volcano-related insurance as a new product for the airline industry.

European insurers don't expect a big hit, largely because business interruption claims are considered unlikely - claims would need to be triggered by actual physical damage. The property and casualty damage from volcanic ash is not expected to be extensive.

For at least one segment of the industry, this is being deemed a significant claims event: Insurance companies that provide trip coverage are being inundated with calls, and they expect to pay out millions in trip claims. For travelers who were insured before April 13, coverage is likely, depending on exclusions, but after April 13, travelers should not expect ash coverage.

Future scenarios
In the great scheme of things, as far as volcanic eruptions go, this is a modest affair. However, there are two scenarios that could raise the stakes. The first is what the effects would be if volcano disruption lasts weeks, months - many are speculating about how the European crisis could play out

The second rather troubling scenario would be if this is a dress rehearsal, which it could well be if history is any guide.

"Eyjafjallajokull has blown three times in the past thousand years," Dr McGarvie told The Times, "in 920AD, in 1612 and between 1821 and 1823. Each time it set off Katla." The likelihood of Katla blowing could become clear "in a few weeks or a few months", he said.

The 1783 eruption was devastating and had a global impact:

A quarter of the island's population died in the resulting famine and it transformed the world, creating Britain's notorious "sand summer", casting a toxic cloud over Prague, playing havoc with harvests in France -- sometimes seen as a contributory factor in the French Revolution -- and changing the climate so dramatically that New Jersey recorded its largest snowfall and Egypt one of its most enduring droughts.
Despite that sobering thought, Iceland's glaciers do not pose the most serious risk, according to the Willis Research Network. According to their research, an eruption of Mt. Vesuvias could be devastating, with 21,000 casualties and an economic toll of $24 billion. For some interesting risk-related reading, check out the Willis Research Network report on Insurance Risks from Volcanic Eruptions in Europe.

More volcano resources
Lists of the most deadly and the most costly eruptions
Volcano World
Aerial photo gallery of the Iceland volcano
Another gallery of stunning images
How to pronounce Eyjafjallajokull (video)

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April 14, 2010


Alan Schwarz of the New York Times has written a fascinating series on workers comp in California: specifically, a cottage industry that has sprung up securing comp benefits for retired National Football League (NFL) players. The interesting part is that the claims are not limited to players from teams based in California. In its effort to protect transient workers (e.g., truckers, flight attendants), California offers recourse to anyone who temporarily passes through the state. Thus, professional athletes on any teams that compete in California can file for benefits, even if years have past and even if it was just a single game. Needless to add, the carriers for these out-of-state teams are trying to get the California system ruled off-side.

There are currently about 700 former NFL players pursuing benefits. Most of the injuries are orthopedic - bad backs, shoulders, knees, ankles. (We will deal with a claim for dementia in a future blog.) Two points should be made about these orthopedic injuries: many are cumulative in nature, so there need not be an acute injury specific to the sporting event in California; and virtually anyone who played professional football is likely to have one or more injuries directly related to the game.

Attorneys Take the Field
Behind every loophole lurks an attorney. In this situation, two former NFL players, now attorneys, are leading the charge: Ron Mix, a lineman for the San Diego Chargers in the 1960s, and Mel Owens, a linebacker for the Los Angeles Rams in the 1980s. Mix and Owens help former players from teams across the country to file claims in California. There is some question, however, about the quality of help that they offer.

Once deemed eligible for benefits under California law, players could opt to receive lifetime medical benefits for any medical expenses related to their football years. Think about it. That might include shoulder and back surgeries, hip and knee replacements, not to mention treatment for dementia related to on-field concussions.

Would it surprise you to learn that over 90 percent of the players entering the California comp system decline the lifetime medical coverage and instead, settle for a lump sum payment? Most players have accepted an extra $60,000 to $100,000 to settle their claim for future medical coverage. That amount would pay for one, maybe two surgeries.

Why settle out the medicals? Settling avoids the necessity of a trial (in these instances, not by jury but by administrative law judge). It puts a significant amount of money in the players's pockets sooner rather than later. And, of course, it puts money in the pockets of the attorneys, which lifetime medical benefits do not.

Faulty Judgment?
Judge Norman Delaterre, who sits in Santa Ana, notes that judges must consider whether proposed settlements are fair. "These players are represented by experienced, competent attorneys - the players themselves, they're adults. Presumably they've discussed the ramifications of the various types of settlements with their attorneys and they've come to a decision to accept the lump sum. Even though the judge in the back of his mind is thinking, you know, if it were me, maybe I wouldn't do this."

Hey, it's all just a game, right? The players took their chances on the field. Now they roll the dice in the corridors of comp system. If they end up doing what's in the best interests of their attorneys, what harm is there in that? They get some cash, the attorney gets a nice fee, the insurer gets a settled claim with no future exposure. One door opens, another one closes. When and if the future medical issues arise or the dementia sets in, well, someone else will be on the hook for that.

There are a lot of people unhappy with California's wide open door, above all, team owners and insurance carriers outside of California. They are going to do their best to shut the Golden State's door - the only such door, we should add, that is available to the walking wounded veterans of the NFL wars. We will keep readers posted on any developments.

But enough with the old folks who can no longer play and whose names we barely remember. The NFL draft is just weeks away. Hope springs eternal for every team, even the Detroit Lions. I can't wait to see what happens.

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April 13, 2010


Just how much of a toll has the poor economy taken on the workers comp system? Robert Hartwig looks back and looks ahead in his article for this year's NCCI Issues Report, The Great Recession and Workers Compensation: Assessing the Damage and the Road to Recovery (PDF). He notes that while the property casualty industry fared better than many industries - not a single property casualty insurer folded due to the economy vs the 170 banks that did - the industry still took some serious body blows. And of the damage to the industry, the workers comp line was hardest hit. With 7.1 million job losses, declining payrolls, and a continuing soft market, net written premium fell by a whopping $8.5 billion in 2008, with another steep decline anticipate for 2009.

With such a grim backdrop, what's in the cards for recovery? Hartwig notes that recovery will be largely contingent on job and wage growth over the next several years, and on that front, he is not overly optimistic. If job growth proceeds at a pace consistent with that of the most recent expansion suggests a painfully long recovery period, job losses won't be recouped until late 2016. That doesn't leave insurers a lot of room to move:

With a limited ability to grow exposures and greatly diminished investment earnings across all lines of insurance, especially especially longer-tailed lines such as workers compensation, the focus -- at least for the first half of the 2010s -- must be on underwriting profitability. Generating consistent underwriting profits is the only way to earn risk-appropriate rates of return in the current slow growth, low investment yield environment.

What's in the card for employers? Look for the potential of price hardening and greater selectivity on the part of insurers. Tight underwriting means that options may be limited for employers with poor experience. While it's always important to control losses, this environment ups the ante. In particular, employers need to be taking steps to control losses as hiring ramps up: new and untrained workers experience more injuries than veteran employees. A recent article in Industry Week suggests that employers should make safety part of the hiring process: Hiring for Safety: Risk Takers Need Not Apply. In addition, employers should put a heavy emphasis on safety training for all new hires.

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March 22, 2010


Last August we blogged the case of Adam Childers, a morbidly obese pizza maker in Indiana who suffered a back injury. Childers's weight was in itself a substantial obstacle to his getting better, so the court ordered the comp carrier to pay for gastric by-pass surgery. Now we find a similar case in New York, where the state supreme court requires the state fund to pay for by-pass surgery.

Salvatore Laezzo, an employee of the state Turnpike Authority, slipped and fell at work back in 2002. He suffered injuries to his head, neck, back and knees. While we might assume that Laezzo had some weight issues at the time of the injury, in the subsequent years of relative inactivity his weight increased dramatically. There was substantial evidence that Laezzo's weight gain was caused by his work injury. In effect, the New York court has set a somewhat narrower standard for compensability than the court in Indiana: had Laezzo been morbidly obese prior to the injury, the court might have ruled for the carrier.

Seeds of Compensability
New York has some interesting and rather expansive notions of compensability in workers comp. The current ruling cites a precedent involving Stephen Spyhalsky, a construction worker [Spyhalsky v. Cross Construction N.Y.S.2d 212). The court ordered the comp carrier to pay for artificial insemination of Spyhalsky's wife, after back surgery compromised the route taken by his sperm. This unusual definition of compensability leads directly to another intriguing issue: had Spyhalsky been permanently disabled, would the comp carrier be required to pay dependency benefits for the resulting child? In all likelihood, yes.
NOTE: We blogged a somewhat similar situation in Arkansas, where the wife of a deceased claimant was artificially inseminated with his frozen sperm. After a rather complex deliberation, the court rejected her claim for additional dependency benefits.)

When in Doubt, Leave Them Out?
While the logic for including gastric by-pass surgery under workers comp is certainly understandable, there is a strong potential for unintended consequences: obese job applicants, who already face myriad problems in finding employment, may encounter even more discrimination. These well-publicized court rulings place the burden of gastric by-pass surgery directly on comp insurers and employers. The latter may shy away from hiring qualified obese applicants. After all, the obese are at greater risk for injury and, once injured, their weight becomes a substantial obstacle to returning to productive employment.

It would be nice to think that the pending expansion of healthcare benefits to nearly all Americans might make this cost-shifting problem go away. Alas, the game of "pin the tail on the payer" has only just begun.

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February 8, 2010


In Greek mythology, Daedalus built the Labyrinth for King Minos of Knossos to contain the awful half bull/half man Minotaur. Theseus eventually killed the Minotaur, but only found his way out of the Labyrinth because Ariadne had given him a magic thread to mark his way in and out of the maze. I'm beginning to think that American health care makes the Labyrinth look like an easy walk across Boston Common on a sunny day. And, so far at least, no one seems to have found the magic thread.

Workers' compensation medical care is now getting whipsawed by two powerful and unstoppable forces: the Medicare Secondary Payer Statute (MSP) and the inexorable aging of the baby boomer generation.

We've written about these two looming catastrophes in the past. Seventy-eight million baby boomers are hard to ignore, and the MSP issue is starting to remind me of the 1958 horror movie, The Blob , wherein a gelatinous creature grew gargantuan by eating everything in its path. Two things have already occurred in the new year that bode well for continued growth of the MSP Blob.

The insurance industry goes a-begging
Last week the American Insurance Association, the National Association of Mutual Insurance Companies and the Self-Insurance Institute of America wrote to the Department of Health and Human Services Secretary Kathleen Sibelius asking her to delay the 1 April 2010 implementation of MSP mandatory reporting requirements. You can find the reporting requirements here.

The new regs lay a heavy burden on the comp insurance industry, referred to in the regs as Responsible Reporting Entities (RREs). (Such unfortunate acronyms bring me back, alas, to my days in the military.) RREs must report to the Centers for Medicare and Medicaid Services (CMS) any workers' compensation claims that involve ongoing medical payments, with the exception of most medical only claims. In their letter, the organizations list five reasons they believe an implementation delay is necessary. The first items are all about process: security protection, a lack of guidance from the CMS and an insufficient period for testing the proposed reporting procedures. The fifth reason, which is really the first reason, is the economic big stick which, when deadlines are missed, will slap fines of up to $1,000 per day per claim upside the heads of RREs. Ouch!

There's a lot more to it, and we'll be writing more about it in the coming months, but for now it's enough to know that the insurance industry is on its collective knees asking for a delay in the implementation of reporting requirements that have already been delayed and extended once.

Inedible Maryland Crabcake?
The second thing affecting MSP that happened in the new year may or may not turn out to be a big deal. On 4 January 2010, the Maryland Workers' Compensation Commission issued emergency regulations that require CMS approval for all workers' compensation settlements, not just the ones that meet the review thresholds in the CMS User Guide, version 2.0. The commission is requiring CMS review of virtually every claim up for settlement.

The new procedures require that every settlement pass through CMS before the Commission will approve it. Here is an excerpt from Maryland's emergency regulations:

A settlement that falls within the Medicare thresholds must be approved by CMS before it will be approved by the Commission.
A settlement the falls outside the Medicare thresholds may be approved by the Commission provided that the settlement agreement:
1. Contains a statement confirming that the interests of Medicare have been considered in reaching the settlement; and
2. Identifies the amount of the proposed settlement:
a. Apportioned to future medical expenses;or
b. Set-aside for future medical expenses through a formal set-aside allocation
3. The apportionment of the amount of the settlement associated with future medical expenses shall be supported by medical evidence such as a medical opinion or evaluation.

While it remains to be seen if the Commission's action will significantly delay settlements or increase costs in Maryland, it's reasonable to assume that it will. As any workers' compensation professional knows, the longer a claim stays open, the more it costs. As a result, the Maryland approach to Medicare set asides is not a good candidate for replication in other states.

A Magic Thread
As I write this, I'm about to leave for San Antonio for the 2010 Health and Productivity Forum, sponsored by the Integrated Benefits Institute and the National Business Coalition on Health. I'll be participating in a panel discussion organized and led by Broadspire's Gary Anderberg, one of the smartest people I know. Our panel will be addressing workers' compensation medical care and costs and the effect health care reform may have on both. I sure hope that Gary has brought a few spools of Ariadne's thread. We're going to need some magic to guide us through this formidable labyrinth.

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December 14, 2009


Back in June we blogged the failure of several self-insurance groups (SIGs) in New York, all run by Compensation Risk Managers (CRM). There was bad news all around: participants in CRM SIGs were suddenly without coverage; and participants in other (non-CRM) SIGs were hit with a huge surcharge to make up the deficits created by CRM's deficient management. Now the proverbial "other shoe" (presumably a Gucci) has dropped, directly on the heads of CRM managers: the company has been indicted by Attorney General Andrew Cuomo for fraud and sued by the state comp board. CRM is having what appears to be a well deserved, terrible, horrible, no good, very bad week.

In their own defense, CRM asserts that problems are industry wide:

According to the WCB's website, of the 65 self insurance workers compensation trusts authorized by the WCB and subject to its oversight and regulation, as of November 2009, 32 were either insolvent, being terminated or were underfunded, 13 had been voluntarily terminated and only 20 were operating with no fiscal issues and no regulatory restriction. Compensation Risk Managers managed 8 of these 65 trusts. The Company believes that an industry-wide problem exists and that the WCB has unfairly singled the Company out. The Company intends to defend the WCB litigation vigorously and prove that the WCB's unsubstantiated allegations are utterly without merit.

In other words: don't hold us accountable for something everyone is doing.

Well, maybe other SIGs are in bad shape, but CRM is under fire for operating the insurance equivalent of a Ponzi scheme: the indictment charges that they deliberately under-reserved claims, leading to under-stated losses. The resulting "healthy" loss ratios became the basis for under-pricing the rest of the market, which led to increased membership in their self-insurance groups. The new premiums helped CRM keep up with increasing payments. It all came crashing down when insufficient reserves ran out and payments exceeded available cash. Heck, the experts at Madoff Consulting guaranteed that it would work... right up until the moment it didn't.

Joint and Several Liability
Most people buy insurance with stand-alone policies. Each company is the master of its own fate. If the company performs well, they benefit from lower premiums. If losses are high, the experience rating process leads to higher premiums. As long as the carrier remains solvent (not a given these days), there are no big problems.

Self-insurance groups are different. They involve a much higher level of trust (and risk): not only are you accountable for your own losses; you are on the hook for the losses of other group members. A SIG is only as strong as its weakest member. Indeed, SIG participants in New York discovered that they were on the hook for losses in other SIGs, through a painful surcharge imposed by the comp board.

This brings to mind the response of the immortal Groucho Marx to an invitation to join an exclusive club: "I don't want to belong to any club that will accept me as a member." That's just the kind of thinking that might have helped the unfortunate companies who find themselves swinging in the wind at the end of CRM's tattered rope.

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November 23, 2009


My blog post of last Thursday (19 November 2009) addressing why workers' compensation costs in Massachusetts are the lowest in the nation, while benefits are among the highest drew a mild pushback from Mark Walls, who manages the excellent LinkedIn Workers' Compensation Forum. Mark wrote:

"Working for an excess carrier, I would never have expected Massachusetts to be considered a "low cost" state. In Massachusetts you cannot settle medical, and there are COLA's on the lifetime benefits. In my world, it's a high cost state.

I guess it's all about your perspective."

And he's right- it is all about perspective. Mark also wrote, "I'm a claims guy," and the blog post in question was all about premium rates. Sometimes, what appears logical when looking at claims can appear illogical when viewed through the prism of premium rates.

I can certainly understand why claims professionals in Massachusetts might be a bit frustrated, because not being able to settle the medical portion of a claim, along with having to contend with annual Cost of Living Adjustments, tends to obliterate predictability.

The perspective Mark mentions changes, however, when one considers a workers' compensation program unique to the Massachusetts voluntary market, a program that substantially increases premium collected in the state while not driving up premium rates: the All Risk Adjustment Program, or, as it's better known, the ARAP Surcharge.

In all 38 NCCI states, the ARAP, a sort of second experience modification that penalizes severity more than frequency, exists as the Assigned Risk Adjustment Program and is found in the Residual, but not in the Voluntary, market. This is supposed to provide even more of an incentive for employers in the Pool to do the right things to get themselves into the voluntary market. It's a debit mod only. In Massachusetts, however, the ARAP can be found in both the Residual and Voluntary markets. If an employer in the Voluntary market has a high experience modification, it will also most likely find itself with an ARAP surcharge, anywhere from 1% to 25%, which is applied to the standard modified premium.

For example, say a company in the Voluntary market has a manual premium of $100,000, an experience modification of 1.5 and an ARAP of 1.2. The resultant total premium will be $180,000. Think of the $30,000 ARAP charge as compound interest. This means that Massachusetts premiums are more sensitive to losses than premiums in other states, even "loss cost" states.

And why shouldn't an employer with high claim severity pay more for workers' compensation? Why should employers with low claim severity subsidize those with high claim severity? Although many in industry abhor the idea of the Voluntary market ARAP, it seems to me that Massachusetts is doing the fair and reasonable thing.

In 2007, ARAP surcharges in Massachusetts brought in additional premium of $60 million, or about 7% of total premium in the state. However, this should decline fairly significantly in 2008 and going forward for two reasons:

• First, until 2008, the maximum ARAP surcharge was 49%; in 2008, the maximum was lowered to 25%;
• Second, Massachusetts has been hard hit by the recession, causing payrolls to decrease substantially; lower payrolls result in lower premiums.

The Massachusetts Workers' Compensation Rating and Inspection Bureau is now engaged in the monumental task of putting together a rate filing to be submitted in 2010. It will be interesting, indeed, to see to what extent lowering the maximum ARAP surcharge from 49% to 25% impacts the filing.

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October 6, 2009


I'm guessing that you never thought of domestic violence as a pre-existing condition. Well, you haven't tried to file a claim in one of the seven states that permit health insurers to deny coverage for the battered. The seven are Idaho, Mississippi, North Dakota, Oklahoma, South Carolina, South Dakota and Wyoming, plus the District of Columbia.

The aptly named Ryan Grim at the Huffington Post has developed a thorough chronology on this bone rattling demonstration of insurance logic. This is simply one example among many that when it comes to determining what qualifies for coverage, private insurers should definitely not be left on their own. The phantom "death panels" be damned: we already have health care rationing and premature deaths due to carrier rescissions of coverage, routine denials of (expensive) treatment, and exorbitant tier 4 drug charges.

To be sure, there is a logic at work in the insurance thinking: "We do not have to cover pre-existing conditions. You were beaten up before coverage began. You were beaten after coverage went into effect. Therefore, we deny your claim." I wonder if the subsequent beating involves a new beater, does that create a new - as opposed to pre-existing - condition? Using the same logic, if I fell down and broke my arm prior to my current coverage and broke the same arm again in another fall, would that be a pre-existing condition?

State Farm used to be among the carriers that at least considered denying claims from battered women (and men, for that matter). Spokesperson K. C. Eynatten put it this way:

State Farm no longer rates or denies life or health insurance to battered women, even if there's a history of domestic violence.
We realized our position was based on gut feelings, not hard numbers. And we became aware that we were part of the reason a woman and her children might not leave an abuser. They were afraid they'd lose their insurance. And we wanted no part of that.

It's great that State Farm changed the policy, but you have to wonder how their "gut feelings" led them to deny coverage in the first place. Victims of domestic violence need prompt medical treatment, counseling (yes, adjusters, pay for the counseling!) and a little chat with the police. One would hope that insurance companies would figure this out for themselves. They don't really need new state and federal laws compelling them to do the right thing, do they?

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September 29, 2009


AIG may have lost a bit of its swagger - that's what happens when your stock tanks and the government has to bail you out to the tune of $150 billion, give or take a few billion. But tough guys don't dance, they fight back. AIG is suing NCCI and a host of major workers comp carriers (Travelers, The Hartford, Liberty Mutual, etc.) for under-reporting comp premiums and conspiring to harm AIG. That's right. All those bullies have been picking on AIG.

AIG's lawsuit is in direct response to an eerily similar suit filed by NCCI against AIG, accusing the staggering behemoth of under-reporting its share of premiums in nationwide assigned risk pools. This suit, filed in U. S. District Court, was dismissed by Judge Robert Gettlemen, who found that NCCI lacked legal standing to file it. The fallen banner has been quickly retrieved by Liberty Mutual, among others, who intend to refile the complaint. After all, it is AIG's direct competitors who would have been harmed if, indeed, AIG under-reported premiums.

Badda Bing, Badda Boom
Which leads us to the not-so-lovely, two-can-tango result of AIG counter-suing, alleging a conspiracy to shift costs to AIG. "AIG's complaint asserts that a number of its competitors under-reported their workers compensation premiums over many years and formed an illegal conspiracy to conceal that fact and to harm AIG," said company spokesman Mark Herr.

It's a shame that this colorful gang war has to play out in sedate courtrooms, with immaculately dressed lawyers mouthing lines better suited for Brando, Pacino and Cagney. After all, these are suits filed under anti-racketeering laws. It's doubtful that the original crafters of the RICO legislation had insurance giants in mind when they fashioned this weapon to attack organized crime.

AIG stock is trading near $46, which sounds pretty good when compared to the under-a-dollar price of just a few weeks back. But appearances can be deceptive. To avoid the humiliation of trading as a penny stock, AIG did a reverse 20 for 1, carving each share into 20 pieces. For long-term shareholders, that $46 is really just two bucks and change. (Go ahead, shareholders, celebrate with a bottle of two buck chuck!)

"You gotta problem with that?" No, sir, no problem at all. I'm just walking down the street with my hands in my pockets, minding my own business. I'm not looking for trouble. What you folks do with all those premium dollars, all that TARP money, all those securitized loans, that's your business. I wish you the best, I really do. And by the way, that's a swell suit you're wearing. A really nice fit. Would you mind my asking how much it cost...?

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September 14, 2009


The Insider just returned from a speaking engagement in Stillwater, Oklahoma. The occasion was the annual workers comp conference sponsored by the judiciary that manages comp in the state. I was invited by fellow blogger Judge Tom Leonard, whose blog provides valuable information to comp practitioners in the state.

As a relatively high-cost state, Oklahoma is experiencing rumblings in the state legislature to switch to an administrative - as opposed to judicial - system. In theory, this makes sense, as a formal judiciary with its due process rules can slow down the resolution of claims. But this is no simple problem, with no simple solutions. The first event at the conference featured a panel of legislators who were involved in crafting the systemic fix: in general, republicans were pushing for change, while democrats cautioned that the interests of injured workers may be compromised.

While the Insider does not take a formal position on the controversy, we did caution all parties to "beware the law of unintended consequences." Every "fix" contains the seeds of both success and failure. The prudent legislator would do well to examine the problem from all sides and fashion a dispassionate solution - much as the talented and compassionate judges currently operating the Oklahoma system approach every claim.

Six Humongous Problems
The insider was invited to provide a national perspective on workers comp to the conference's 400 participants. We focused on six looming crises facing comp across America. Here is a brief summary of our concerns:

1. The Original workers comp model is obsolete: Comp is nearing its 100th anniversary (New York 1911). The workplace at the beginning of the 20th century was very different from what confronts us today. Legislatures struggle to modify the initial legislation to keep pace with change.

2. The economic collapse is a game changer: The comfortable assumptions of financial planners (stocks rise inexorably over time) have disintegrated in the world-wide collapse that began just over a year ago. This collapse has implications for workers comp, with employment shakier than ever and the retirement plans of millions in tatters. Which leads to:

3. The Aging American workforce is going to get older: With baby boomers approaching retirement age, the workforce is already at its oldest. As retirement accounts sink with the economy, more and more workers are finding themselves in a bind. They do not have enough money to retire. These older workers bring skill and experience to the workplace, but their aging bodies are breaking down. The comp system is not built to handle workers in their late 60s and 70s who plan to keep on working. Will comp become the retirement plan of choice for workers with no other choices?

4. Undocumented workers are half in and half out: most states cover the medical costs and indemnity for injured, undocumented workers, but draw the line at vocational rehabilitation. By definition, these folks are not "available for work." Will Congress create some form of amnesty, thereby opening the door to complete workers comp coverage for foreign workers?

5. Insurers are in big trouble: There may be low hanging fruit in the insurance world, but not in workers comp. There is a nation-wide suppression of rates, which is compounded, of course, by the idiocy of carriers who drop steep discounts on top of inadequate rates. Carriers may dream of a hardening market, but it never seems to arrive. Meanwhile, the bottom line continues to erode.

6. The federal government might mess everything up: The Medicare Secondary Payer program has invaded the settlement process for comp claims, creating chaos and uncertainty and increasing the costs. [Check out Judge Leonard's blog for some excellent materials on the Secondary Payer program.] Now we have national health insurance on the immediate horizon. No, it's not "death panels" or alleged coverage for undocumented workers that concern us. It's the more basic issue of who will choose doctors, under what circumstances, and what impact this might have on workers comp.

We have covered all of these crises in the Insider and will continue to do so in the coming months. I'm not sure that the good folks in Oklahoma found much solace in the fact that their own little comp crisis is dwarfed by issues that transcend state lines. Meanwhile, I did learn a thing or two about Oklahoma. It all comes down to this: Sooners versus Cowboys. No, I'm not going to explain. You have to be there to really understand.

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July 8, 2009


Serious workplace injuries often turn spouses into caregivers. So the question becomes, are their services compensable under workers comp? As is so often the case, it depends upon where you live.

The Supreme Court of Arizona recently decided a case in the spouse's favor (Sabino Carbajal v.Industrial Commission of Arizona). In 1999, Sabino, working for Phelps Dodge, suffered a serious injury, resulting in cognitive problems and partial paralysis on his right side. He required full-time supervision and intermittent attendant assistance. The carrier paid for nursing aides during daylight hours. At all other times, Sabino's wife took charge of his care: this included giving him his medication in the morning; specially preparing his food; cleaning him when he was returned from day care soiled; and moving him between his wheelchair and his bed, the toilet, or his recliner.

In their deliberations, the Arizona Supremes examined practices in two other states. They looked first at Virginia, where the courts have denied reimbursement to spouses for home health care services (Warren Trucking v. Chandler, 277 S.E.2d 488). In Warren, the claimant's wife helped him bathe, shave, and put on braces, and she prepared his meals, drove the car, and maintained the household. When the claimant lost consciousness, his wife revived him.

The Virginia court concluded that under the statute, to qualify as compensable "medical attention," the spouse's care must, among other requirements, be "performed under the direction and control of a physician" and be "the type [of care] usually rendered only by trained attendants and beyond the scope of normal household duties." The court rejected the spouse's claim because the care rendered by the wife was not prescribed by a doctor and was not "of the type usually rendered only by trained attendants." I suppose that when the wife revived her husband, she was just acting as a good samaritan.

NOTE: Workers in Virginia may well wonder whom the comp statute is designed to protect. We recently blogged an absurd provision of the law which precludes payment to brain injured employees who have the misfortune of surviving catastrophic injuries. Virginia seems to go out of its way to construct "rigid frameworks" that preclude compensation for the families of seriously injured workers.

Empathy in Action
Arizona justices also looked at case law in Vermont, where a similar set of circumstances led to a very different conclusion. In Close v. Superior Excavating Co. (693 A.2d 729), the claimant received a severe head injury and required 24-hour supervision. The claimant's wife cared for him at home, including "administer[ing] and monitor[ing] his medications[,] . . . alter[ing] the doses [of medication,] . . . log[ging] . . . her husband's behavior[, and] monitoring her husband's seizure activity and responding appropriately."

In concluding that the wife's services were compensable, the Vermont court rejected the "rigid framework" of Warren, noting that "it "would . . . conflict with [its] longstanding practice of construing the workers' compensation statute liberally."

The Arizona court restated the aim of workers comp: rather than pushing the notion of spousal duty deep into the area of custodial care, the court "places the burden of injury and death upon industry." The Arizona court overturned rulings at the commission and Appeals court levels. They found that Mrs. Carbajal routinely performed work that others were paid to perform and that these duties were necessitated by workplace injury. Therefore, she is entitled to reimbursement. It will be interesting to see how the comp commission comes up with a dollar value for her services: will she be reimbursed for "time on task" or is she "on call" and working whenever other paid help is not available?

When workers suffer catastrophic injuries, their families suffer loss beyond measure. The quality of life changes for everyone, not just the injured worker. If the question is "to pay or not to pay" for the onerous burdens placed on spouses, the answer, in Arizona and Vermont at least, is to pay.

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June 22, 2009


The Defense Base Act (DBA) was enacted in 1941, to cover the injuries to civilian employees - primarily a few hundred engineers - during the second world war. The act might have worked then, but it certainly is not working now, nearly 70 years later. As we have blogged in the past, the DBA is a boondoggle, generating huge profits for a small number of insurance carriers and routinely devastating both the civilian workers wounded or killed in war zones and their families. There are over 10,000 claims filed each year: the medical only claims are usually paid; the indemnity claims are dissected, inspected, detected, and ultimately, rejected. A handful of insurers (AIG, CNA among others) are making big bucks at the expense of the wounded and the dead.
NOTE: As bad as the situation is for U.S. citizens wounded and killed in Iraq, it is far worse for foreign nationals.

The Domestic Policy Subcommittee of the House Oversight and Government Reform Committee held a hearing last week on the DBA. The title of the hearing betrays an (understandable) prejudice: "After Injury, the Battle Begins: Evaluating Workers' Compensation for Civilian Contractors in War Zones." The hearing focused on the handling of workers' compensation insurance for federal contractors working overseas, specifically on the inordinate delays in compensation running parallel to the enormous profits for insurers. Among those testifying were Deputy Labor Secretary Seth Harris; Timothy Newman, Kevin Smith and John Woodson, former civilian contractors in Iraq; Kristian Moor, president of AIU Holdings, Inc., a division of AIG; George Fay, executive vice president for Worldwide P&C Claims, CNA Financial; and Gary Pitts of Pitts and Mills Attorneys at-Law.

Kristian Moore defended AIG's decisions and motives, pointing the finger at a lack of Labor Department oversight and a system overtaxed with cases. "We are doing everything we can do," suggested Charles Schader, senior vice president and chief claims officer for AIU Holdings. Yeah, everything you can do to make money.

At the conclusion of the hearing, Dennis Kucinich (D-Ohio) warned AIG executives that he plans to demand copies of internal memos and documents that will link claims denials to the company's profits. Most of us do not get terribly excited by the prospect of reading claim files, but these will undoubtedly provide some compelling reading. While I doubt that the subcommittee will find a direct, written link between denials and profits, the rationale for the individual claim denials - in the face of compelling evidence of compensability - should prove riveting. Was it incompetence or was it greed? Something cruel, heartless and cynical took place in the back rooms of carriers with responsibility for civilian claims. If you like Edgar Alan Poe, you'll love the claims files of AIG and CNA.

Risky Job, Risky Work
Seth Harris, the new deputy secretary at the U.S. Department of Labor, is in charge of this mess for the government. He's been on the job for 3½ weeks. Congratulations on the new job, Seth! (You might want to keep your resume circulating.) Seth has been working less than a month, but he has already figured out that the system is in need of fundamental change.

The work of insurers usually involves risk transfer. Under the perverse incentives of the DBA, the risk is absorbed by taxpayers, the pain falls on civilian workers and their families, and the profits - running from 37 to 50 percent of premiums - are pocketed by the carriers. Risk without transfer. It's amazing that AIG can generate this level of profit in one division and still only trade at $1.40 a share. I guess that they have been looking for risk in all the wrong places.

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June 9, 2009


If health care reform is the proverbial 800 pound gorilla, then the medical portion of workers comp is a 15 pound Maine Coon cat: it might big for a cat, but compared to a giant gorilla, it is barely noticeable. Nonetheless, this cat is blessed with a very strong notion of what it needs. As the nation moves closer to universal health care, the implications for workers comp are both profound and troubling. Comp medical services comprise a mere 2% of total medical expenditures, so policy makers in Washington will be inclined to ignore its special needs. That could create profound problems for the employers, insurers, and state administrators who deal with comp issues.

There are a number of key reasons why reform of health care may undermine the ability of states to deliver a quality workers comp system. (We previously blogged these issues here, here and here.) In order to provide some focus for the pending debates, here is a brief summary of how comp fits into the overall medical universe:

The focus is similar but not identical
The general health care system focuses on the prevention of what can be prevented and the treatment of that which can be treated, up to limits of coveraged defined in specific health plans. The overall goal is to preserve the life and health of individuals and families. This system provides treatment from conception up to the moment of death.
The comp system has a much narrower focus: comp provides treatment only to workers who are in the course and scope of employment. Comp treats work-related injury and illness, with the specific goal of returning injured/ill workers to productive employment.

Eligibility is Radically Different
The general health system provides defined services to individuals and families. Virtually any illness or injury is covered, including many forms of mental illness.
Comp covers only what occurs during work and is proven to be work-related, with an almost phobic disregard for mental impairments.

The cost structures are very different
In general healthcare, the premiums for coverage are paid by individuals and their employers. Depending upon the plan, individuals and their family members assume at least some of the cost of treatment, through premiums, co-pays and deductibles. The trend has been to shift more and more of the costs onto the consumer (which, in turn, becomes an incentive to reduce utilization).
In comp, employees never pay comp premiums and are never charged co-pays or deductibles. Injured workers are covered from the first dollar. Thus, only the employer, self-insured or who purchases mandatory coverage, and the insurer have the incentive to control costs. No such incentive exists for injured workers.

There are Perverse Incentives in the Comp System
Under comp, injured workers are paid not to work (indemnity). They may not like their jobs. They may malinger, seeking treatment more often than medically necessary (no co-pays to discourage them), thus prolonging disability in order to avoid work. The incentives for returning injured/ill employees to work lie primarily with the employer (who pays the premiums or is self insured) and the carrier (who pays the bills, which may exceed the premiums collected).

For employees with minimal job skills and perhaps no job to return to, the incentive for remaining on comp as long as possible is powerful.

Comp is a State-Based Program
The new mandates for health insurance coverage will come from the federal government. Comp, by contrast, is strictly a state by state program. The new federal mandates (eg., employee choice of doctor) may well conflict with long-established systems.

Policy makers are trying to create a new paradigm for medical coverage in the twenty first century: truly, a daunting task. Ultimately, the new direction for health care will be driven by cost and coverage. Whether the providers are public, private or both, health care cost controls and rationing will lurk in the shadows: will there be a cap on total expenditures for any given individual and any given conditions? Will there be limits on end-of-life services? How much of the costs will be shifted to consumers? What incentives will be created to reduce utilization?

In stark contrast, comp is and will remain an early 20th century system, based upon an industrial world that no longer exists. It already provides virtually universal coverage for people who work. The costs belong exclusively to employers and carriers; there is no cost-shifting onto injured workers and there are no incentives for these workers to limit expenditures. The over-arching goals are returning injured workers to productive employment and providing lifetime benefits for the totally disabled.

So it all comes down to this: When and if the 800 pound gorilla that is universal health care actually sits down, will it be beside - or on top of - the comp coon cat? Will the federal mandates take into account the unique and idiosyncratic needs of the comp model, or will the new mandates inadvertently crush the system, state by state by state?

There are often unintended consequences when well-intentioned humans try to solve gargantuan problems. Let's hope that the comp system does not fall victim to this fundamental law of human endeavor.

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May 27, 2009


Take 78 million Baby Boomers and their retirement plans, mix with a woebegone social security system and the global economic meltdown of 2008/2009. Add in rising health care costs and the insurance industry's natural propensity to avoid troubling issues, and you have a recipe for a looming catastrophe of the first order. That's the premise that Lynch Ryan CEO Tom Lynch puts forth in his article in the current issue of the IAIABC Journal, Aging America: The Iceberg Dead Ahead, which IAIABC has given us permission to make available to our readers.

Tom describes the massive problems that the aging workforce presents to workers compensation systems - problems that are compounded by funding problems with other social insurance programs. He makes the case that neither states, the federal government, or insurers are prepared for the claims and cost problems that will develop over the next decade, and offers recommendations to address these problems, including the creation of a special federal commission.

Admittedly, we are partial to the author, but we think the article is worth a read.

In addition to putting in a plug for the article, we'd like to call your attention to the publication that it appears in. The IAIABC Journal is published two times per year by the International Association of Industrial Accident Boards and Commissions (IAIABC), an association of government agencies that administer and regulate their jurisdiction's workers' compensation acts. It's a peer-reviewed Journal, and one of a few remaining venues that publishes original research papers and in-depth treatment of workers compensation issues and opinions. Issues are substantial - the current issue weighs in at 158 pages. It is edited by Robert Aurbach. For a sampling of content, we've taken the liberty of printing this issue's article abstracts to give you a flavor - click to continue.

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January 13, 2009


Part two of a three-part guest post series on bankruptcy and workers compensation by Robert Aurbach, CEO of Uncommon Approach.

The last posting introduced Joe, the injured employee of a self-insured employer, and discussed the ways the workers' compensation system failed him when the employer filed for Federal Bankruptcy protection. It's important to understand the reasons why this happens to understand the current proposal for fixing the problem.

How the Law Victimizes Joe
First, it's important to understand that Federal Bankruptcy law pre-empts any state law that conflicts with it. This makes the power of state regulators attempting to preserve the benefits of injured workers under state law extremely limited. In this context, it is necessary to understand that the Bankruptcy Code treats workers' compensation claims as having fully accrued on the date of injury ― that is to say that the claim is treated as being fully defined the day it happens. Several things happen as a result. Workers' compensation claims are then separated into "pre-petition" and "post-petition" claims, and the two groups are handled completely differently. Pre-petition claims are thrown into the bankruptcy proceedings, frozen for an indefinite time and then, when the bankruptcy proceedings are over, completely "discharged" by whatever distribution the Bankruptcy Court approves. Joe's claim accrued before bankruptcy petition was filed and that's why his benefits were frozen, his medical dispute "stayed" and his case delayed while the rest of the complicated bankruptcy case played out in front of a court in a distant city.

On the other hand, workers' compensation claims that arise during the bankruptcy case do not face any of those disabilities. Thus, the date on which two similarly situated coworkers are disabled is critical to the determination of the way the current Bankruptcy Code will treat their claims, despite the fact that the states have promised all workers mandated to participate in the system that they will be treated the same, and the fact that both employees may be left with life-long injuries or illnesses.

Another factor affects Joe's claim. When a Petition for protection is filed in Bankruptcy Court, it issues an "automatic stay" that freezes every other court proceeding, no matter where located, in which the debtor company is involved. This means that Joe can't use state dispute resolution mechanisms, unless and until the Bankruptcy Court issues an order allowing it. This forces him to appear in front of a strange court, often in a distant city, with specialized rules and lawyer admission requirements, in front of a judge who is likely to be unfamiliar with state workers' compensation law.

A Surgical Solution
The solution for this grim, and plausible scenario is simple and causes minimal disruption of the overall bankruptcy scheme. The most important change is to redefine when the workers' compensation claim accrues. By making each wage or medical benefit accrue when it is due and payable in the normal course of workers' compensation claims administration, the claimant will only have those benefits that are already delinquent at the time the bankruptcy petition is filed be caught up in the bankruptcy system. As new medical and indemnity benefits become due, they will arise "post-petition" and avoid both the court's freeze and the wiping out of debts at the end of the case (assuming the debtor successfully reorganizes), because they will have the status of "new" debts, as they are accrued. This treatment is also consistent with the current treatment of medical and disability plan payments for ill, injured and disabled workers that were not hurt on the job.

In addition, explicit treatment of workers' compensation benefits accruing postpetition as "administrative" expenses of the debtor during bankruptcy will ensure that they are paid during the case.

Finally, adjudication of determinations relating to such benefits should be exempted from the "automatic stay" so that they can be adjudicated as usual, avoiding the economic burden for the employee to appear in the bankruptcy court, while allowing for the agency and court with the specialized expertise under applicable state law to do its job.

By these small, surgical changes, the harsh and inequitable effects of bankruptcy on these involuntary workers' compensation debtors can be avoided, and the need for more intrusive and burdensome regulatory oversight and security requirements to offset or forestall the effects of bankruptcy can be lessened.

The Effect of the Proposed Changes
Under the new proposed law, any of Joe's unpaid benefits at the time the bankruptcy is filed will be thrown into the bankruptcy proceedings. But as soon as the bankruptcy is filed, his benefits can start again. The local administrative authority will decide the medical dispute in his claim, and he will not need a lawyer admitted to bankruptcy court to get the treatment he needs to return to work. Assuming that the company successfully reorganizes, any long-term medical benefit eligibility that he may get from permanent injury will be preserved. The state's promise to Joe is fulfilled ― and the Company doesn't have the option of walking away from its injured workers as if they were standard commercial debts.

The final chapter: Security deposits, guaranty funds and what the proposed solution doesn't fix.

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January 12, 2009


With the difficult economy, the issue of "what happens to a workers' comp claim in the event of a bankruptcy" is on the minds of many of our readers. We’ve addressed the issue of bankruptcy in the past. Today, we are pleased to introduce a more detailed three-part guest post series on bankruptcy and workers compensation by Robert Aurbach, CEO of Uncommon Approach. Robert is former General Counsel for the N.M. Workers’ Compensation Administration and personally been involved in the evaluation and redesign of five separate workers' compensation programs. He has served as editor of the International Association of Industrial Accident Boards and Commissions (IAIABC) Journal since 2003. He is an expert on various issues that involve the intersection of workers' compensation and other programs, such as bankruptcy, tribal sovereignty and PEO-leasing arrangements.

Joe worked for Chryslord Moters, a large manufacturing concern with billions in assets and locations in many states. He never concerned himself with workers' compensation, and was unaware that his Company was self insured for workers' compensation in the state where he lived and worked. When he was injured on the assembly line, he set about the job of getting better and getting back to work, as his family could ill-afford the loss of his income in the midst of a full blown recession. When the Company sought Chapter 11 bankruptcy protection, Joe still wasn't particularly concerned, due to the assurances that had been provided to the active employees. But then the Company cut off his benefit payments, so he had no wage replacement income, and his minor dispute over the reasonableness and necessity of a medical treatment proposed by his doctor was taken off the administrative agency's hearing docket due to an "automatic stay" issued by the Bankruptcy Court. When he called to try to resolve these issues, he was told that he needed to file a claim in a Bankruptcy Court half way across the country, in front of a judge that had no idea what the law of workers' compensation was in his state. When he asked how long it would take to resolve the problems, he was told that it would likely be at least a year. Upon checking with a lawyer, he also was told that his claim would be paid only if there was money left after paying all the vendors, suppliers, utilities and others who had voluntarily entered into business relations with the company. If there was no money left, or only enough to pay pennies on the dollar, he had no other recourse against his employer. Moreover, his lawyer informed him, his claim would be considered resolved by the bankruptcy proceedings, and that no medical expenses after the bankruptcy case was done would be paid by the Company.

What About Recourse to a Guaranty Fund?
There are various forms of security used to prevent injury to employees of self-insured employers from being uncompensated. The state administrative agency usually demands a security deposit from the self-insurer, based on the size of the liability exposure. Unfortunately, these deposits are often inadequate, due to understated reserves, and may be tied up in court proceedings on their own, depending on the form of the security. State property/casualty insurance guaranty funds do not apply to the debts of self-insurers, but some states have separate guaranty funds for the self-insured employers. Unfortunately, those funds usually contain a small fraction of the total potential liability, and could be easily drained by prior calls on those resources. The promise of the workers' compensation system to Joe ― medical care and indemnity benefits to allow him to heal and return to work ― is more wishful thinking than a guaranty when his employer seeks bankruptcy protection.

Systems in Conflict
Bankruptcy is a system designed to give a "fresh start" to businesses and individuals who are in debt and cannot survive economically without intervention. Debts are collected and assets are divided and distributed at the end of the process in what is intended to be an equitable manner. The law freezes all claims during this process, to allow the presiding court an opportunity to get control and a global picture of the debtor's situation. At the end of the court administration period (which is of indefinite length), either the debtor ceases to exist, and its assets are distributed, or the emerging debtor, after negotiated resolution of past debts, is permanently absolved of all debts that arose before the process. The principals of equitable distribution are based on a commercial model where (presumably equally sophisticated) creditors have chosen to do business with the debtor before the bankruptcy and either have or have not availed themselves of certain legal protections for their transactions.

Workers' Compensation is based on an entirely different set of premises. The state demands that businesses and workers participate in the system, and in return guaranties that the worker will get certain benefits, and guaranties the employer that there will be no other kind of recovery against it for the injury.

Why Isn't the Worker Protected?
As demonstrated above, the interplay between the two systems can seriously compound the workers' injury. When the employer has a commercial insurance policy for workers' compensation, the policy pays independent of the policyholder's economic condition. But when the employer is illegally uninsured, or legally self-insured, the effect of bankruptcy can be devastating and unavoidable under current law. Medical treatment necessary for recovery is often withheld when the health care provider becomes informed that they will not be paid at all or will only be paid as a general unsecured creditor in a bankruptcy proceeding. Wage replacement for the worker during the period in which he or she is unable to work is cut off by automatic order of the bankruptcy court, causing immediate and substantial economic hardship. The delay in benefit provision can be years in length and can be adjudicated in a court in a remote state, where the worker is effectively cut off from representation by the very economic hardship that the court proceeding created. Moreover, when the bankruptcy court finally adjudicates the worker's claim, the distribution scheme places the injured worker in the lowest priority level for distribution of assets.

Joe never volunteered to be a creditor to the Company and he is the least able to protect himself in the process, yet the current Bankruptcy Code treats him as the least "worthy" creditor.

Next time: what can be done to fix this conflict between systems.

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December 8, 2008


With the Big 3 automakers discussing potential fallout if the federal government doesn't come through with a bailout package, there is one aspect of the fallout that would likely be a mere footnote in the wake of such a massive failure, but that would be of interest to thousands of workers: the issue of what happens to workers compensation claims.

Maryland officials are considering and planning for such a scenario now in the case of GM. The state's Workers' Compensation Commission (WCC) is closely monitoring GM and other distressed, self-insured firms with operations in Maryland. Officials note that GM has 200 employees statewide that are covered for workers compensation under the company's self-insured plan. They note that even in the case of a bankruptcy (which GM states it is not considering), the funding for claims would not automatically be wiped out. R. Karl Aumann, chairman of WCC, said it's rare for a company to default on its workers' compensation program. The last time this happened, he said, was with Bethlehem Steel Corp., which declared bankruptcy in October 2001.

In the case of property and casualty insurer insolvencies, every state has a safety net for policyholders, usually in the form of a Guaranty Fund. However, these funds do not necessarily cover self-insured employers, according to an overview of the insolvency process and guaranty fund laws by the The National Conference of Insurance Guaranty Funds:

Q: Am I covered by a state property and casualty guaranty association if I purchased my policy from an unlicensed carrier or a managed care plan?
A: No. Guaranty associations cover only licensed insurers. Companies not licensed in the state, surplus lines carriers, managed care plans, preferred provider organizations (PPOs), Health Maintenance Organizations (HMOs) and self insured plans are not covered under the property and casualty guaranty association statutes. If you purchased coverage from one of these entities, and the company is now insolvent, you may file a claim with the Liquidator. There may also be other guaranty associations that may provide coverage for policies issued by these types of organizations. Your state Department of Insurance can provide you additional information.
Q: How can find out if my company was licensed in my state?
A: Check with your state Department of Insurance. They should have a listing of all admitted companies.

However, many states have some type of guaranty mechanism established that covers self-insured entities. Here are some resources to learn more about the protections that your state affords:
State Insurance Departments
Self-Insurance Guaranty Funds of America
State Guaranty Fund websites
State Guaranty Fund Directory (PDF)

In the case of bankruptcies, workers comp claims payments are often considered a priority - see this discussion of a recent court ruling in Pennsylvania. However, insurers may be out of luck when it comes to payment for workers comp premium in the case of bankruptcy. In the 2006 case of Delivery Service, Inc., et al v. Zurich American Insurance Co., The U.S. Supreme Court ruled that a workers compensation insurer does not have a priority claim against a bankrupt business for unpaid premiums under bankruptcy law.

For more information on State Guaranty Funds and insurer insolvencies, see the Bob Hartwig's excellent overview for the Insurance Information Institute, which includes a chart about the top 10 largest insurer insolvencies:

Year / Insolvent company / Payments / Recoveries / Net cost
- 2001 Reliance Insurance Co / $2,265,845,612 / $1,415,385,230 / $850,460,383
- 2002 Legion Insurance Co / 1,272,694,066 / 227,503,349 / 1,045,190,717
- 2000 California Compensation Insurance Co / 1,049,745,420 / 327,756,089 / 721,989,331
- 2000 Fremont Indemnity Insurance Co / 843,405,746 / 643,377,434 / 200,028,312
- 2001 PHICO Insurance Co / 699,420,144 / 205,770,569 / 493,649,574
- 1985 Transit Casualty Insurance Co / 566,549,902 / 379,499,906 / 187,049,996
- 2000 Superior National Insurance Co / 555,797,035 / 174,168,193 / 381,628,842
- 1988 American Mutual Liability Insurance Co / 543,085,140 / 238,199,539 / 304,885,602
- 1986 Midland Insurance Co / 531,641,477 / 50,648,348 / 480,993,129
- 2006 Southern Family Insurance Co / 516,844,804 / 246,101,399 / 270,743,405

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November 10, 2008


Because AIG has been at the epicenter of the economic earthquake, many non-industry observers point to insurance as one of the villains and the industry is getting a black eye that may not be warranted. AIG's problems did not surface in its insurance operations, which remained sound, but with their dubious investment portfolio which rocked the entire organization.

Not that insurance companies mightn't have gotten in more trouble if left to their own devices, but the nature of the beast is that the industry operates in a highly regulated environment, both a blessing and a curse. In this case, more of the former.

In a recent gathering of its agency members, our partner and client Renaissance Alliance featured Robert Hartwig as a speaker. For those who don't know Bob, as president of the Insurance Information Institute, he is the foremost public spokesperson for our industry. In his detailed presentation, he outlined 6 reasons why property-casualty insurers are better risk managers than banks and should therefore better weather the storm - reasons that I paraphrase here:

  • Risk management is based on underwriting discipline, pricing accuracy, and management of loss exposure
  • Low leverage - insurers don't rely on borrowed money
  • Conservative investment philosophy
  • Strong relationship between underwriting and risk bearing
  • Strict regulation by state and federal authorities - more so than banks
  • More transparency to regulators and the public

That being said, just as a rising tide raises all boats, a lowering tide will affect all boats, too. One of the anticipated after-effects of the financial crisis will be an increase in regulation. Another is that the current economic downturn likely signals the bottom of a soft market. Buyers can expect a hardening of prices. Insurers depend on investment income. Currently, investment returns are going down as claim costs are going up due to inflationary pressure - that leaves only one place for prices to go.

Despite the fact that many brokers report that they see no end in sight to the current soft market, many industry insiders are predicting the onset of a hard market in the not-too-distant future. Here are a few opinions on the matter:

Market Scout: "The financial markets have experienced a meltdown, several major insurers are in serious trouble, underwriting results are slipping and investment income is anemic at best. As a result, the soft market is winding down." - see the accompanying charts.

Joe Paduda notes that although workers comp rates are still dropping, there are two major factors that presage a hardening: First: "Medical trend in the group world is approaching double digits. Historically the work comp medical trend rate has been somewhat higher than group trend." Second: "The investment market has imploded, likely driving down the value of the funds held for reserves and surplus. While most investments are in what used to be thought were 'safe' instruments, it may well be that regulators and rating agencies, newly sensitized to the potential problems with even 'safe' vehicles, will require carriers to take down the value of funds held in reserve."

During recent earnings conference calls, Evan Greenberg, chairman and CEO of ACE Limited and AXIS CEO John Charman both agreed that a hard market is in the making.

Reinsurers are predicting rising prices: "The world's No. 1 and No. 4 reinsurers, Munich Reinsurance Co. and Hannover Re Group, on Monday predicted some business lines would see price increases of 10% or more in talks over the coming weeks to renew reinsurance contracts for 2009."

Ken A. Crerar, Council of Insurance Agents & Brokers president: "We won't know until January 2008 renewals what toll the economic crisis has taken on the industry in general ... What we do know is that investment income is down dramatically, carrier profitability is being eroded, net underwriting losses are higher and combined ratios are inching up over 100. How long carriers can maintain price cuts without damage to their financial health is anybody's guess. These are very uncertain times."

OK, what can a buyer do when faced with likely price increases? Some of the same things that a homeowner does in anticipation of foul weather: Tighten things up and go back to the basics. Be aggressive about preventing all workplace injuries and about managing any injuries that do occur. Strengthen your provider relationships. Tighten up your return-to-work programs. It's our experience that when rates are low, workers comp can slip as a priority and get moved to the back burner. If it isn't there already, it's time to move workers comp back to the front burner.

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October 28, 2008


Last month we blogged the emerging scandal involving the Long Island Railroad, where over 90 percent of employees (management included) retire on disability. Walt Bodanich and Duff Wilson of the New York Times have a follow up article that goes into some of the deails. It's not surprising to find that workers were coached in the best way to apply for disability, including a select list of doctors and paying for their disability exams in cash.

One detail of the new report caught the Insider's eye. Two private sector insurers wrote coverage for railroad workers: Transamerica and Aflac. Transamerica has walked away from the (unprofitable) business. Aflac, on the other hand, has approached the scandal in a rather circumspect and casual manner.

Wlliam Capps, manager of Aflac's special investigations unit, testified at a hearing convened by New York AG Andrew Cuomo that since 2003 his company had paid out $4.1 million to LIRR employees holding short-term disability policies. He says that Aflac did not realize anything was amiss until this year. (Perhaps they read about it in the papers while enjoying their morning commute?).

Capps's investigation focused on three areas: the close proximity betweeen retirement and the submission of claims; the similarity of ailments; and the use of the same three doctors by most of the employees. Under questioning, Capps said that about a quarter of LIRR policyholders had cashed in on the coverage.

Twenty five percent! In this era of data mining and performance management, you would think that such a high level of disability claims would raise a few red flags. Private insurers are accountable for results on a quarterly/annual basis. There is no way they could make money on a disability program with such a high percentage of those covered drawing down benefits. You have to wonder whether the Aflac sales department ever gets feedback from claims, or whether anyone actual reads the performance data.

I can just see Aflac's ubiquitous duck in a new ad campaign: the duck is strapped across a railroad tie, with the LIRR commuter train heading straight for it. The duck quacks in alarm and scatters feathers in a desparate effort to escape. That's more than can be said for Aflac itself, which lay down on the tracks, closed its eyes and took a nap, while the 5:02 hurtled down the track on its scheduled rounds.

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July 28, 2008


When it comes to fraud in workers comp, we usually look to employers, doctors and lawyers. They go after the big bucks. While there are opportunities for ordinary workers to exploit the system, most decline to do it. Today we examine two claims, both involving real injuries and both involving fraud. Coincidentally, it's a bi-coastal story.

Let's begin in the east, in Gardner, Massachusetts, where Erik Teong managed a Shell Station. On October 28, 2006, Teong reported to Gardner police that he had been assaulted and robbed while taking cash receipts to the bank. He sported a bruised face and injured eye.

The police did not buy his story. He eventually confessed to stealing the $7,000 deposit. In February 2007 he was charged with larceny and making a false report of a crime. In April, he pled guilty to both charges and was sentenced to one year of probation. He also must pay the insurance company $7,900 (to repay the "stolen" payroll).

The injury to his eye? Teong told police that he had a friend give him a hard punch to the face, to make his story more credible. The hapless Teong has permanently damaged his vision. And because the injury appeared to occur in the course of employment, Teong filed a comp claim. AIG, the comp insurer (with a few problems of their own!), paid his $16,000 medical fees and $3,000 indemnity. Now AIG wants its money back. They referred the matter to the fraud bureau, which led to Teong's indictment by a Worcester County grand jury.

So Teong has earned himself a place in the Hall of Fame for Incompetent Criminals. He botched the fake robbery. His friend all-too-convincingly smashed him in the face. He has to repay the medical expenses and ill-gotten indemnity. And to top it off, given his permanently impaired vision, he may have trouble reading the charges against him.

California Scheming
Now let's hop across the continent to the Lake Tahoe, where Nicholas Jason Beaver resides. Nick worked for the Sierra-at-Tahoe resort, but busy as a Beaver he was not: the resort told him they would not rehire him for the following season. One night, after a few beers with his buddies, Nick decided to get even. He decided get himself injured on the job.

On April 9, 2004 Nick jumped up and down on a snow bridge that covered the top of percolation test hole. After three or four jumps, he broke through the bridge and fell into the 5 foot deep hole, injuring his knee. He collected comp (the injured knee required surgery) and then decided to sue the resort: he wanted to pierce comp's "exclusive remedy" shield due to the resort's "extreme negligence" in allowing an "unprotected" hole to exist on their grounds. (Nick's story belongs in the burgeoning archives defining the word "chutzpah.") The resort spent $40,000 defending itself and over $42,000 in medical bills on Nick's injured knee. They offered Nick $110,000 to make the case go away.

Nick refused to accept the chump change. He apparently told his buddies that he wanted really big bucks. At that point, one of the (disgusted) friends who witnessed the incident dropped a dime on him. His friends were given immunity from prosecution; while technically co-conspirators, they did not benefit financially from the fraud. Nick was convicted of stealing more than $65,000 and now faces up to four years in prison.

Benefit of the Doubt?
Erik and Nick were both injured on the job, but their injuries were part of a conscious effort to defraud the employer and insurer. Their stories demonstrate how the comp system defaults toward accepting a reported claim: Erik and Nick both were successful in accessing comp benefits for their injuries. The wheels of justice in these cases ground a bit slowly, but they did grind exceedingly fine. The pain of the actual injuries, with the exception of Erik's impaired vision, has already faded. But the pain of lives ruined by impulsive greed will linger for a long, long time.

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June 17, 2008


Yesterday we blogged the New York Workers Comp Board's unusual solution to a cash flow problem: when a dozen trust funds collapsed, the Board decided to hit up the remaining, solvent funds with an assessment: they raised assessments from the routine total of $500,000 to a staggering $12 million. The Board is using the logic of notorious bank robber Willie Sutton, who famously said that he robbed banks because "that's where the money is." In this case, the Board is hammering the people who paid their full premiums and whose administrators abided by the rules, simply because they have the money. The board has transformed the "several liability" of independent trusts into a gerry-built "joint liability." While their motives are good - benefits to injured workers must be paid - their method is patently unfair.

In their press release, the Board pats itself on the back for forcing the third party administrator, CRM, out of business in New York. Here are the terms of the settlement:
- CRM surrenders its TPA license no later than September 8, 2008, and ceases representing self-insured employers and carriers before the Board;
- CRM transfers to the Board all claims, as well as the responsibility for the administration of all such claims, for all of the group self-insured trusts that it still administers; and
- CRM assists in the well-ordered and timely transfer to the Board of all claim files, documents, information, and funds associated with the trusts.

"The Board sought to revoke CRM's license and today's agreement accomplishes just that," said New York State Workers' Compensation Board Chair Zachary Weiss. "This result speaks volumes about both the strength and validity of the charges the Board brought against CRM. It also sends the strong message that we will vigorously safeguard the well-being of honest business and injured workers."

The results may speak volumes, but not necessarily in the manner Weiss intends: yes, the charges obviously had merit; yes, it's important to shut down CRM's operation. But what about accountability? According to an unidentified spokesman, CRM has admitted no violations and paid no fines or penalties. Despite the apparent deliberate misrepresentation of actual losses, despite paying their own executives inflated salaries, despite creating this entire mess, CRM just walks away. For the moment at least, they are off the hook, while the solvent trusts who played by the rules are required to dig deep into their own pockets.

Eventually, when the forensic audits have been completed, members of the failed trusts will probably receive retroactive bills for underpaid premiums. Then it will be their turn to howl. When and if that happens, the Board has promised to refund the humongous assessments placed (unfairly) on the solvent trusts. That is not very reassuring to innocent bystanders facing immediate bills for someone else's problem. My guess is that the Board will run up against the same problem as Willie Sutton: the money might be there (in the trusts), but that does not make it right to take it. Through attorney Richard Honen, the solvent trusts have filed suit to end this ill-conceived bailout. In the interests of fair play, here's hoping they find a sympathetic judge.

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June 16, 2008


Compensation Risk Management (CRM) is a third party administrator for eight workers comp trusts in New York. These trusts offer comp coverage to affinity groups in the areas of health care, wholesale/retail and transportation. As we read in the New York Times in an article by Steven Greenhouse, there is good news and bad news about CRM: the good news is that CRM offered low cost premiums to members and high rates of reimbursement to its own executives. The bad news is that the reserves in the the trusts were woefully inadequate. In one of the trusts, reserves fell from 90 percent to 40 percent of liabilities in just a few months.

Trusts have long offered a major alternative to (expensive) conventional insurance for New York employers. About 35 percent of the state's businesses are self insured for comp, with one fifth of those participating in trusts. The really bad news in CRM's collapse is that other, healthy trusts may have to pick up at least part of the tab for CRM's poor management. The workers comp board has ordered that the state's 50 healthy trusts pay emergency assessments totaling tens of millions of dollars. As you might imagine, they are not thrilled to be doing this. In fact, they have sued the board, saying that it has no right to force them to contribute. At this point, they have been granted injunctive relief.

State officials believe that a $200 million emergency fund will be needed to finance the statutory benefits of thousands of injured workers covered by 12 failing trusts. So ultimately, the taxpayers will have to make up for CRM's management deficiencies.

The Company Line
Eric Egeland, a CRM VP, said that the problems were caused by an unexpected increase in workers comp liabilities and fast-rising medical costs. (Gee, Eric, that's why you have actuaries!) He said the eight trusts could not increase reserves fast enough in response to their increased liabilities because of recent state-ordered cuts in comp premiums. (I don't think so, Eric. If you set reserves properly, a cut in rates will not present any unusual problems.)

If you peruse the long list of executives at the company website, you begin with the CEO, Daniel Hickey, who is described this way: "At age 22, he attended the Aetna Institute, the nation’s top property and casualty training program, and received the coveted Gold Ribbon for excellence in sales presentation." Note that the gold ribbon is for sales. He might have been better off shooting for a gold ribbon in management.

CRM's management of their comp business is now under intense scrutiny. Too little, too late. The artificially low premiums pleased their participants, but these deflated premiums simply masked inadequate reserves. The risk managers took far too many risks. Now, as usual, those who played by the rules will have to pick up the tab.

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May 14, 2008


Are we in or headed to a recession? Each of us might have our own opinions based on the industry we work in, the number of times we have to fill our gas tank during the week, and the area of the country where we live. According to the economic cognoscenti, the jury is still out - some industry insiders say yes while others disagree. At least some industries say they are in a recession and in a recent survey, nearly 80% of affluent Americans believe a recession has already hit the U.S.

What would a recession mean for workers compensation? A few weeks ago, Insurance Journal looked at the issue of recession and its impact on insurance as viewed by independent agents in various sections of the country, who offer commentary on both actual and anticipated effects. Some note that it is somewhat unusual to have a recession occurring in conjunction with a soft market. There isn't much mention in the way of workers comp, except in terms of noting that declining payrolls lead to lower workers comp premiums. Some agents note that significant business curtailment has been in evidence in the housing and construction industry.

The past may be the best predictor of the the future. The Minnesota Department of Labor & Industry compiled a 2002 report on the effects of recession on workers comp as evidenced by various state studies.

Conventional wisdom points to a preliminary spike in claim frequency as employers reduce ranks - there is some anecdotal discussion about an increase in fraud, although most data doesn't support that. Overall, during a recession the number of claims tends to decline - there are fewer workers, and those workers may be more timorous about filing claims, fearing job loss.

While frequency drops, severity tends to increase. Researchers in MA suggested this might be because businesses find it more difficult to provide light-duty work; also, due to the fact that because more experienced workers are retained, the average injury will be more severe. A California study also noted that recessions may add to claim severity by increasing the time it takes for a worker to find a job.

In a six-state study, researchers noted that "...recessions increase back-end cost drivers (i.e., increase the cost per claim) to a greater extent than they increase front-end cost drivers (i.e., increase the number of claims). They state that recessions are 'characterized by increased use of the system, longer duration claims, and more frequent and larger lump-sum settlements.'"

Minnesota also reported in some detail on their own state's experience with a workers comp during a recession, a report which our colleague Joe Paduda discussed at some length.

During a recession, employers should be doing what they should always be doing: preventing injuries from occurring, tightly managing any injuries that do occur, and helping injured workers to recover and return to work as expeditiously as possible. While there is always cause to keep an eye on things during any sudden shift in employment, the stories about an increase in fraud may be overblown. As the researchers in the Minnesota report note, boom times pose a greater risk for a rise in frequency as organizations experience a sudden influx of inexperienced workers.

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May 12, 2008


Bill Thorness has written an interesting article for NCCI on the relationship of wellness programs to workers comp costs. In some respects, it involves a "duh" thesis: wellness programs can significantly lower comp costs, because healthy workers are less prone to injury and, once injured, recover more quickly than their out-of-shape co-workers. Conversely, obese and out-of-shape workers are more at risk for strains and sprains, because the additional weight they carry compounds the impact of day-to-day workplace functioning.

There is even an overlap between wellness and one of the Insider's favorite topics, the aging workforce. Older workers are more at risk for serious (and expensive) injuries such as rotator cuff tears. A relatively healthy, well conditioned, non-smoking older worker is more likely to avoid these injuries and again, once injured, more likely to shorten the normally extended recovery time.

With all of the compelling logic underscoring the benefits of a healthy workforce, it might be natural to assume that workers comp would jump at the opportunity to provide incentives for wellness programs - dare we say, even pay for them. Perhaps we could find examples among the national carriers, where workers comp safety programs include wellness training. Unfortunately, for the most part wellness remains an afterthought in the comp system. Aside from conventional safety programs, which focus on injury prevention, comp coverage tends to sleep like a hibernating bear, roaring into action only after injuries occur. Even then, wellness is a marginal issue: if, for example, obesity hinders recovery, carriers are unlikely to pick up the cost of a weight-reduction program, because the obesity is not work related.

Who Owns It?
The ultimate cost of most injuries is directly related to the health and conditioning of the injured worker. Logic says comp carriers should embrace wellness programs in both injury prevention and post-injury treatment. But as is often the case, it comes down to a question of who owns it, who benefits and who pays. Wellness is a proven concept, but comp carriers are unwilling to own it and very reluctant to pay. They are, nonetheless, more than happy to reap the substantial benefits.

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April 25, 2008


A labor group in our neighbor to the North, New Brunswick, Canada, is seeking an end to the three day waiting period for workers comp benefits. "We really believe it is unfair," said Michel Boudreau, president of the New Brunswick Federation of Labour.

The federation has pitched the idea of scrapping the three-day waiting period, during which employees receive no benefits, to the independent panel commissioned by the government to review the Workplace Health, Safety and Compensation Commission.

Boudreau said the waiting period, which was first introduced in 1993 to stem financial losses within the system, violates the principles upon which workers compensation in New Brunswick was founded.

Labour, he said, entered into the system with industry and government with the understanding that it would provide for them if they were injured. In exchange for that insurance, workers agreed not to sue employers when they are hurt on the job.

The waiting period is universal among the state workers comp systems, ranging anywhere from three to seven days. There is usually a retroactive period, after which coverage reverts back to day one. In Massachusetts, for example, there is a five day waiting period, retroactive to day one after three weeks.

Why Wait?
Does the waiting period serve any purpose? Or is it an undue hardship for injured workers?

While a case can be made that indemnity benefits should begin immediately after an injury, such a "quick trigger" would likely create more problems than it would solve. It is difficult enough to manage a three day waiting period (the shortest duration available among the states); it would create formidable logistical problems for insurers to begin indemnity immediately following lost time from an injury. It's worth pointing out that many employees can use accrued sick time to fill in the gap between the first day lost due to injury and the beginning of indemnity benefits. A case can be made that the anxiety of not being paid is a positive incentive for an injured worker to return to full or modified duty as quickly as possible. Immediate indemnity removes that sense of urgency.

The waiting period may also serve a psychological function. The transition from wage earning to receipt of indemnity involves a major shift: one moment you are an employee, a worker, and the next you are "disabled." For most people, this shift is inconsequential, but for some, it involves crossing a profound border from which there may be no return. The moment you become eligible for indemnity, you are being paid not to work. If you are ambivalent about your job, or if the future of the job is uncertain, the comfort of indemnity can be very powerful. Some injured workers convince themselves that the injury and the pain are worse than they really are, because there is a financial incentive to do so. This is rarely a conscious choice. Rather, it involves a "perverse incentive": it's financially advantageous not to get better, not to go back to my (unsatisfactory) job.

The Insider recommends that New Brunswick leave the waiting period right where it is, at three days (the generous end of the waiting period spectrum). The gap in payments is not great enough to cause tremendous harm; conversely, the potential hazard of instantaneous benefits would not just increase costs of the system, it could also harm otherwise motivated employees.

Comp is never the best of all possible worlds. It is tempting to tinker with every aspect and every benefit. While I understand where labour is coming from, in this situation the advice of my late mother-in-law might be best: just leave well enough alone.

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April 22, 2008


In conventional medicine, people are generally free to choose their care, up to the limits of their coverage. They can opt for certain procedures or decide to forego them. For the most part, adults are independent players in the medical system, acting in accord with their own wishes. In the final analysis, our health is an individual concern, factoring in, of course, the concerns of family members and "generally accepted" medical practices.

Workers comp is somewhat different. In addition to the preferences of the injured worker, his/her family and the treating physician, you have to take into account the interests of the employer, who is paying the bills (no co-pays or deductibles for the patient). Unhealthy behaviors or refusing treatment might be acceptable in conventional health care, but they raise compelling issues in workers comp. The case can and should be made that under comp, the injured worker has an obligation to get better.

Let's look at two cases: one involves an invasive diagnostic procedure, the other medically imprudent behavior.

Uncomfortable Diagnostics
Sewell Chan writes in the New York Times about Brian Persaud, a 33 year old construction worker. He was working at a Brooklyn construction project when he sustained a head injury. He was driven to New York Presbyterian hospital, where he received eight stitches for a head wound. As part of standard medical procedure, doctors wanted to perform a rectal exam, in order to rule out spinal injury. Persaud objected, a physical struggle ensued. While it's not clear whether the invasive procedure even took place, Persaud filed a civil suit, claiming that the exam comprised assault and battery at the hands of hospital workers.

Persaud’s lawyers turned to two experts, a neurologist-psychiatrist and a forensic psychologist, who testified that Persaud suffered from anxiety, depression and post-traumatic stress disorder as a result of the episode. The hospital put forward a doctor who testified that a rectal examination is an important part of advanced life support for trauma patients.

The case took eleven days to present, but the jury rejected Persaud's claim in less than an hour. In this case, the invasive procedure was deemed necessary to rule out more serious injuries. In general, patients may decline medical treatment if they are informed of the consequences of doing so and capable of making such a decision. But doctors have more leeway to perform a procedure if a patient has sustained a potentially life-threatening injury and if the doctor doubts the patient’s capacity to make informed decisions.

While the employer's interests were not directly represented in this confrontation, they were part of the mix: the employer would want to ensure that Persaud received a complete diagnostic work up, so that liability for this particular claim would be limited to the incident that occurred at work. Persaud's refusal of a necessary diagnostic test might lead directly to expensive medical complications.

Which leads us to our second example (from Lynch Ryan case files).

Incomplete Treatment
Maria M. worked as a maid for a home cleaning service. While approaching a job site, she slipped and fell on an icy sidewalk and broke her ankle. (It had recently snowed, so there was no negligence on the part of homeowner.) No question about compensability here. In order to repair the break, a temporary pin was inserted. Unfortunately, Maria was doctor-phobic. She refused to have the pin removed. As months went by, her condition worsened. She walked with a pronounced limp. The employer tried to accommodate her on light duty, but eventually they ran out of tasks. Maria was only getting worse. She was terminated due to her inability to perform the work.

The insurer was caught in the middle of a difficult situation. The injury was clearly compensable, but Maria's refusal to cooperate in her treatment involved "wilful intent" - a refusal to get better. The carrier had an opportunity to deny the claim within the six month "pay without prejudice" period, but they failed to do so. The claim dragged on. Even after an independent medical exam favorable to the employer, the carrier continued paying the claim. Eventually, the case settled for about $35,000, for the indemnity and loss of function exposures. Given the severity of Maria's condition, this is not a huge settlement. (The carrier feared an exposure of twice that amount.) However, the employer expressed frustration at the increase in his comp premiums. Maria's disability was the result of her own refusal to cooperate with recommended treatment, not the work-related incident itself.

Inconclusive Conclusions
All of which leads us to an inconclusive conclusion: do injured employees have an obligation to get better? Must they submit to medically necessary diagnostics? Are they required to do everything possible to return to productive employment? Is it necessary to take the employer's interests into account when determining diagnostic and treatment options? Well, maybe yes and maybe no. It all depends...

In the world of comp, the interests of employee, employer and medicine itself strive for an elusive balance. In the case by case, state by state approach, results vary dramatically. It's hard to find a consistent pattern. In the ideal world, injured workers do everything possible to get better and their employers do everything possible to facilitate a return to work. But in case you haven't noticed, we live in a world that falls way short of the ideal.

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April 16, 2008


Gina Kolata writes in the New York Times that health insurance companies are adopting a new pricing system for some of the most expensive drugs, pushing more of the cost onto consumers. It goes by the innocent sounding name of "Tier 4." It might as well be called "bankruptcy for the seriously ill."

All insurers require a co-pay on prescriptions, generally running from $10 to $35 dollars, with incentives for choosing generics over brand names. Despite the fact that some drugs cost hundreds, even thousands of dollars per month, the total exposure for the consumer has been the co-pay ceiling. Not any more. Under Tier 4, insurers are charging patients a percentage of the cost of certain high-priced drugs, anywhere from 20 to 33 percent. For the most part, Tier 4 covers exotic new medications for serious illnesses, medications where there are no cheaper alternatives. Patients are in a box - and if they cannot come up with hundreds or even thousands of dollars per month, they may literally end up in a box.

Tier 4 drugs include those for treating multiple sclerosis, rheumatoid arthritis, hemophilia, hepatitis C and some cancers. Tier 4 targets "high cost drugs used to treat a relatively small number of people who suffer from complex conditions." Heck, if you don't have the common sense to avoid getting sick, we'll add to your misery by making you pay through the nose.

Take the case of Julie Bass, a 52 year old Florida resident suffering from metastatic breast cancer. She is disabled and covered by a Medicare HMO. Her doctor has prescribed Tykerb, which her insurer has designated as a Tier 4 drug. The monthly cost is $3,480 for 150 tablets - a 21 day supply. Given Bass's very limited financial resources, there is no way she can afford the co-pay. Tier 4 for her may be the equivalent of a death sentence.

As Dan Mendelson of Avalere Health notes, "This is an erosion of the traditional concept of insurance. Those beneficiaries who bear the burden of illness are also bearing the burden of cost."

Insurers are quick to point out that they are saving healthy people money: by pushing the cost of the drugs directly onto the patients, premiums for everyone else will remain (theoretically) lower. To which I say: no one is seeing lower premiums. At best, you have lowered the rate of the annual increase.

Rules of the Game
As Tom Lynch pointed out in the Insider's instructive five part series on health care in America, the administrative bureaucracy in American medicine runs over 30 percent of total costs (no other country exceeds 10 percent). Some portion of the boated admin is eaten up by the good folks who dream up things like Tier 4. This is clearly a situation where the affluent will be able to survive certain illnesses and the poor will not.

Call it what you will, Tier 4 is health care rationing and the American public is not going to embrace it. (It may even increase the momentum for a single payer system.) The talented bureaucrats who designed Tier 4 had best start working on a clever marketing scheme, to help the public swallow this bitter pill. For starters, they could bring back Smoky Robinson and the Miracles to sing "Tracks of my Tiers."

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March 17, 2008


In Part One of this series, we began looking at some of the many cost disparities between group health and workers' compensation.

In Part Two, we compared US health care costs with costs in the other 29 member-countries of the Organization for Economic Cooperation and Development (OECD). OECD countries, all democracies, are considered the most economically advanced in the world. We saw that health care spending in the US is a breathtaking 250% greater than the average for all of these developed democracies. Moreover, as measured by Gross Domestic Product (GDP), health care made up 15.3% of the US economy in 2004 - up from 5.1% in 1960 - nearly double the rest of the OECD.

Today, it's time to examine what we're getting for all that money. It seems fair to ask a few questions relative to the other OECD countries:

1. Do we live longer?
2. Are we healthier?
3. What other factors could affect how the health of US citizens compares with OECD citizens?

Do we live longer than people in other OECD countries?
Simply put, we spend a lot more on healthcare than all other OECD countries, but don’t live any longer for the money. In fact, we live shorter lives than most.

As of 2004, average life expectancy at birth in the US was 77.5 years, which ranks 22nd out of the 30 OECD countries. While this is slightly below the OECD average, it is four and a half years less than top-ranked Japan. Also, it may surprise readers to learn that life expectancy is two and a half years longer among the people of our neighbor to the north, Canada. And, despite all the editorial bashing of the UK's National Health System, its citizens outlast us by a full year, while people in Spain, France, and Italy live, on average, more than two years longer than we do.

Are we healthier?
For all the money we spend on healthcare one would think we enjoy Olympian health, but this does not appear to be the case. Although it pains me to write this, I can find no peer-reviewed studies that conclude that we are a healthier people than our OECD neighbors.

The OECD provides specific disease incidence data in two areas: cancer (malignant neoplasms) and acquired immunodeficiency syndrome (AIDS). In both cases, the US has the highest rates in the OECD. The incidence of cancer in the United States is 34% higher than the average within the OECD (358 cases per 100,000 people versus 266). With respect to AIDS, the US incidence is an astonishing 675% higher than the rest of the OECD (147 cases per 100,000 people versus 19 in the OECD). Our mortality rate due to AIDS ranks second in the OECD (4.2 deaths per 100,000 people, well behind the staggering rate of 8.6 in Portugal). Yet our mortality rate for cancer ranks only 14th among OECD countries.

What about obesity, reputed by many to be epidemic in the US? With the exception of the UK and the US, which get their obesity statistics by actually measuring people, OECD countries get their results from surveys, so the only fair comparison is the US versus the UK. In 2004, while the UK's overweight population was 14% higher than that in the US, our obese population was 39% greater.

On the other hand, the US rate of alcohol consumption and incidence of daily smoking were both lower than the average for OECD countries (daily smoking in the US is the third lowest (17%) of all OECD members).

Unfortunately, obesity has been shown to be a greater driver of health care and health care spending than alcohol consumption or smoking – "the effects of obesity are similar to 20 years of aging (PDF)." According to Thorpe, et al, (The Impact of Obesity on Rising Medical Spending (PDF), Health Affairs, 20 October 2004), 27% of the per capita increase in US health care spending between 1987 and 2001 was attributable to obesity. There is a direct correlation between obesity and Type 2 diabetes and obesity and hypertension. Is it any wonder that in the last thirty years Type 2 diabetes and hypertension have seen explosive growth in the US?

What other factors could affect how the health of US citizens compares with OECD citizens?
There are many other factors that have been identified as influencing how the health of Americans compares with the rest of the OECD. Some of these are:

1. The age of our population – While this will be a concern in the immediate future as baby boomers grow older, currently 12% of the US population is older than 65, which is below the OECD average of 14%.

2. Income and insurance – The US is unique in the OECD, because it does not have a national insurance program. About 60% of us are covered by some form of employer-provided insurance. Another 26% are covered by Medicare or Medicaid. That leaves 14% who are uninsured in any way. Among this group, most of whom are poor and many of whom are sick, healthcare often goes a-begging, with harmful results. For example, hypertension is less controlled in this group, “sufficiently so that the annual likelihood of death in that group rose approximately 10%." (Newhouse et al, Free for All? Lessons from the RAND Health Insurance Experiment, Harvard University Press, 1993).

Twenty-two OECD countries provide more than 98% of their citizens with public health insurance covering at least hospital and in-patient care. Despite this, Americans spend less out-of-pocket than the people of most other OECD countries – 13.2%. The OECD average is nearly 20%. Studies have shown that when a people pay less out-of-pocket for healthcare, total spending rises.

3. Sophisticated medical procedures – In the movie Pat and Mike, Spencer Tracy famously said of Katherine Hepburn, "There's not much meat on her, but what there is is choice." The same can be said for hospitalizations in the US. Although hospital stays are fewer and shorter, a lot of high-powered activity goes on.

For example, the US ranks in the top five OECD countries for the rate of caesarean section childbirths as well as all forms of organ transplants with the exception of lung transplants. Moreover, we're in the top five for all four of the heart procedures on which the OECD collects data. We perform coronary bypass surgery and angioplasties at more than double the rate of the OECD average. Finally, we perform far more coronary revascularization procedures than any other OECD country. Despite performing substantially more invasive heart procedures than all other OECD countries, death rates for heart disease in the US are the 17th worst in the entire group.

4. Advertising – Between 1996 and 2003, pharmaceutical advertising quadrupled. Turn on the nightly news and count the ads for prescription drugs. Only two countries in the world allow this, the US and New Zealand. I find it amazing that more than 75% of the brands advertised had ROIs of more than 50%. Clearly, Americans respond to direct-to- consumer drug advertising, which is one reason why we spend double the OECD average on prescription drugs.

How does this all relate to workers’ compensation?
We've seen that, despite spending more on healthcare than any other country in the world, Americans don’t live longer or enjoy better health than citizens of any other OECD country. But every day, medicine practiced within workers' compensation depends entirely on the US healthcare "system," if we want to go so far as to call it that. It's certainly systemic, but perhaps systemic in a lot of the wrong ways.

Prior entries in this series:
Part Two - What does it cost?
Part One: The best Health Care Plan in America

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March 13, 2008


In 1992 I became a Trustee of a major, tertiary care, teaching hospital in Massachusetts. For Trustee indoctrination, new Trustees spent a week in a classroom learning about every facet of hospital life. One morning we were briefed by the hospital's CFO. I was astonished to learn that the hospital had 27 different billing systems, one for each insurer and HMO with which it did business. To me, this was Kafkaesque. I mention it now, because in the intervening years, the situation has become worse, much worse.

At 31% of total US health care expenditures, the administrative costs of healthcare providers are double those in Canada (Woolhandler et al, New England Journal of Medicine, August 21, 2003, page 768), and, with the exception of tiny Luxembourg (population 425,000), America's health administration and insurance costs are the highest of any of the world's developed democracies.

We spend more, far more, than any other country in the world on health care. Do we get what we pay for? In Parts Two and Three of this series on health care, we examine that question. In Parts Four and Five we relate it all to workers' compensation, at 3% to 4%, a tiny room in the American health care house that Jack built.

The US compared with other developed countries: The cost explosion.

The United States has been a member of the Organization for Economic Cooperation and Development since the OECD's founding in 1961 (the forerunner of the OECD was the Organization for European Economic Cooperation, set up under the Marshall Plan in 1947). There are 30 member-countries of the OECD, all democracies, most of which are thought to be the most economically advanced nations in the world.

In September, 2007, the US Congressional Research Service, the best research group you've never heard of, published a report for Congress titled, "U.S. Health Care Spending: Comparison with Other OECD Countries." (Abstract , including downloadable full report in PDF.) This 60-page, well sourced report paints a grim, if occasionally confusing picture.

Until 1980, US spending on health care, as measured as a percentage of gross domestic product (GDP) ranked at the high end of OECD countries, but not excessively so. In 1980, US spending as a share of GDP was 8.8%, which compared favorably to Sweden's 9.0%, Denmark's 8.9%, Ireland's 8.3% and the Netherlands 7.2%. True, spending in the United Kingdom, at 5.6%, France and Norway, at 7.0%, each, and Canada, at 7.1%, was lower, but no one could claim that the US spending was out of control.

Then something happened. By 1990, our spending as a share of GDP had grown to 11.9%, while the rest of the OECD countries remained fairly static – Sweden's and Denmark's declined to 8.3%, the UK's rose to 6.0%, and so on. And by 2003, the US share had ballooned to 15.3%, nearly three percentage points higher than Switzerland, at the time our closest competitor. In fact, in 2004, the OECD average spending as a percentage share of GDP, excluding the US, was 8.6%, just over half of the US share.

In the average OECD country nearly 74% of healthcare costs are publicly financed; in the US, less than 45 %. Moreover, per capita health care spending in OECD countries, excluding the US is $2,438; in the US, per capita spending is 250% higher, at $6,102.

When analyzing why the US spends so much more on health care, one hardly knows where to begin, because in nearly every category we dwarf the field.

Take prescription drugs, for example. Average per capita spending on pharmaceuticals among all OECD countries, including the US is $383, but in the US it is $752, which is $153 dollars per person more than the second largest spender, France. Despite this, because the US spends so much on all of health care, pharmaceuticals account for only 12.3% of total spending, which is near the bottom of the pack among all OECD countries where average spending on pharmaceuticals is 17.8%.

One would think, perhaps, that spending is so much higher in the US because we have more hospitalization, or doctor visits per capita, but one would be wrong. Hospital discharges per 1,000 people in the US are 25% lower than the average for all OECD countries, and doctor visits are 42% lower.

Well, maybe people have significantly more intense and aggressive service while they are hospitalized in the US? One indicator of intensity is the average length of acute care hospital stay. In the US, the length of acute hospital stay is 5.6 days, which is less than all but eight of the other 29 OECD countries. But shorter stays could mean higher efficiency. A better way to look at it is to look at specific causes for hospital stays, like heart attacks, for instance. The US average hospital stay following acute myocardial infarction is 5.5 days, the lowest in the OECD.

Consider childbirth. Here the US has the third-lowest rate of stay, 1.9 days – much shorter than the OECD average of 3.6 days.

Another reason for high costs in the US is our aggressive testing. Only Japan has more CT scanners and MRI units per million people.

And, although doctors will roll their eyes when they read this, still another reason for our higher costs is physician compensation. At an average of $230,000 and $161,000 for specialist and general practitioner pay, respectively, each of these groups earns more than double their OECD counterparts.

Clearly then, there is no denying that, for whatever reasons, the US outspends its OECD partners by a long shot. The question that has to be asked is: Are we getting what we are paying for? All of us, taxpayers, employers, employees and individuals – the collective “we.”

That will be the subject of Part Three in this series.

Prior posts in this series:
Part 1: The best health care plan in America

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March 11, 2008


In 1986, US workers' compensation medical costs were 44% of total incurred loss dollars. Ten years later, the percentage had grown to 48%. By 2006, medical costs amounted to 58% of total loss costs. And today, nearly a third of the way through 2008, they hover around 60%. The annual workers' comp medical cost rate of growth is nearly double the painfully steep rate of growth in the Group Health arena, and it has been so since 1996 (Source: NCCI and Insurance Information Institute).

And why not? Workers' compensation health care is the best health care plan in America, maybe even the world. Injured employees pay no premiums, co-pays, or deductibles. Prescription drugs are free, and tax-free indemnity payments cover most lost wages. No wonder acute and traumatic injuries cost nearly 50% more than similar injuries in the group health world, according to an NCCI Research Brief (Workers Compensation vs. Group Health: A Comparison of Utilization.)

No wonder chronic, soft tissue, musculoskeletal injuries cost more than double similar injuries in the group health world. And the disparity is probably even more than that, because NCCI could only examine and compare cost data for the first three months following injuries. Why? Because workers' compensation tracks injuries by claim numbers, but group health does not. Therefore, in group health, the further one gets from the date of injury, the harder it is to tie rendered medical services to a particular injury.

It's no secret that over-utilization is the biggest reason that workers' comp medical costs are so much higher than costs in group health. True, on the whole and with some notable exceptions, workers' comp medical fee schedules have caused prices for individual medical services to be only slightly higher than individual services in group health, but in nearly every part of the country workers' comp utilization dwarfs that of group health. Makes you wonder what the workers' comp case management and utilization review companies are actually doing, doesn't it?

The difference here is stark. The group health plans put systemic fences around utilization. Workers' comp does not. If you twist your knee mowing the lawn out in the back forty on a Saturday morning and require arthroscopic knee surgery, your health plan will approve a certain number of visits to a rehab facility after surgery, normally six or seven. After that, you'll need approval for any more. Of course, you can always choose to self-pay. But in the world of workers' compensation, that's one decision you don't have to make.

Because health care utilization and costs have become such large issues in workers' compensation, as well as group health, and because in this frenzied Presidential election season that seems to never end health care has become quite the political football, over the coming days I'm going to examine specific parts of it further. Next up - a bit of analysis of the current mantra all current presidential candidates seem to agree on (some might call it a "lie," but I couldn't possibly go that far), namely, that here in America "we have the best health care in the world."

If only that were true.

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March 5, 2008


Paul Lees-Haley, PhD, is a psychologist who has come up with a 43 question test to separate the truly disabled from malingerers. Lees-Haley is either a genius or a pompous fraud right out of Mark Twain. Read on and decide for yourself. (This posting is based upon an article by David Armstrong in the Wall Street Journal, which limits access to subscribers.)

Lees-Haley studied the Minnesota Multiphasic Personality Inventory (MMPI), a standard tool for determining personality characteristics. He isolated 43 questions that he believes, taken together, clearly separate the truly disabled from malingerers and frauds. Lees-Haley's brainchild, dubbed the "Fake Bad Scale" test, was developed in 1991 and is finding its way into courtrooms around the country. Lees-Haley is available to testify in person on behalf of insurance companies as an expert witness. He charges $3,500 to evaluate a claimant and $600 per hour for depositions and testimony. Worth every penny, I'm sure, if his testimony results in the denial of benefits to a claimant.

Testing the Test
Below you will find a sample of questions from the test, requiring a "True" or False" response. A "T" before the question indicates a "true" response is indicative of malingering. Likewise for "false."
F My sex life is satisfactory.
T I have nightmares every few nights.
F I have very few headaches.
F I have few or no pains.
T I have more trouble concentrating than others seem to have.
T I feel tired a good deal of the time.
F I am not feeling much pressure or stress these days.

You don't need a PhD in psychology to identify the ambiguity and unfairness in these questions, which are typical of the test as a whole. In the aftermath of an injury, someone might well feel stressed out, have difficulty concentrating, be tired much of the time and have frequent headaches. These responses do not necessarily indicate malingering. They can just as easily be valid indicators of post-traumatic response to injury. The "Fake Bad Scale" fails to account for anything that might have happened in the real world. Using this corrupt measure, every survivor of the 9/11 attacks would be deemed a "malingerer."

Fortunately, the validity of the test has come under fire. A number of courts have thrown it out. That's the good news. The bad news is that untold numbers of people who have answered these questions honestly have ended up being labeled (and libeled) as "malingerers." Shame on the attorneys who rely on this phony science, and shame on the insurance carriers who retain them. And double shame to the originators of the MMPI, who have formally given their stamp of approval to this inept tool. To be sure, we all know that there are malingerers out there: but the "Fake Bad Scale" is no help whatsoever in singling them out.

Revised March 10, 2008.

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February 27, 2008


A few days ago we blogged insurance crime for amateurs: the saga of Regency Insurance, which was an insurance operation in name only. Today we deal with three big Kahunas: Marsh & McClennan, AIG and GenRe. When it comes to insurance crime, it just doesn't get any bigger than these folks.

Before we get to the particulars of the Marsh situation, we need to acknowledge the ambiguity that lies at the heart of the agent's role. In recommending the best insurance product for their clients, agents face a "perverse incentive." The lower the premiums for the client, the lower the agent's commission. The agent has a financial incentive to place the business either with a more expensive carrier, or with a carrier who pays higher commissions. The interests of the agent and the client are not always aligned.

Which leads us to the clever solution fashioned by some folks at Marsh. Bill Gilman and Ed McNemmy, former Marsh executives, solicited inflated bids from some (cooperating) carriers, so that the carrier they preferred would appear to be the lowest bidder. That's illegal, of course. Bill and Ed have been convicted of one count of bid rigging and face up to four years in prison.

Gilman's attorney, Robert Cleary, has not given up the fight. "Bill Gilman was really the client's best friend and the insurance carrier's worst enemy," he says. "We look at this as merely round one." That's an interesting statement, which goes right to the heart of the matter. Gilman was many things, but given his cosy relationship with the carriers who participated in the scheme, he certainly was not "an insurance carrier's worst enemy."

Big Names, Really Big Mistake
The second criminal act involved two insurance behemoths: AIG and GenRe. AIG has a justly deserved reputation for insuring anything that moves (and some things that don't), the bigger the better. Nothing wrong with a hearty underwriting appetite, but in embracing some pretty exotic risks, the company is vulnerable to big losses. So Christian Milton, AIG's VP for reinsurance, cooked up a deal with GenRe to hide half a billion in losses: GenRe wrote a policy to "cover" the losses, when in fact AIG was still on the hook for payment. In other words, this was risk transfer (insurance) without the risk or the transfer.

Why bother? By cooking the books, AIG artificially inflated its profitability - and the value of its stock. High losses magically disappeared from the books. Ingenious, yes, but illegal. By participating in this fraud, GenRe executives are facing serious fines and jail time. We're talking about people at the very top of the insurance food chain: Ron Ferguson, 63, former CEO of Gen Re, was found guilty on charges of conspiracy, securities fraud, false statements to the SEC, and mail fraud; Elizabeth Monrad, 51, CFO of Gen Re, was found guilty on charges of conspiracy, securities fraud, false statements to the SEC and mail fraud; Robert Graham, 58, SVP and assistant general counsel, was found guilty on charges of conspiracy, securities fraud, false statements to the SEC and mail fraud.

These former executives were mostly "boomers" - nearing undoubtedly lucrative retirements. The one exception is Liz Monrad, whose financial skills helped her break through the glass ceiling for women - only to crash back through it by her willing participation in fraud. These highly trained professionals are facing substantial jail time and fines for their cozy deal with AIG - a deal that ironically held no risk for GenRe. Ultimately, there was plenty of risk, just not the type they included in their calculations.

Why did these very well paid executives stake their careers on these ill-advised schemes? The motivation is not much different from that of the losers who concocted the Regency Insurance scam: sheer greed. There was (and is) a heck of a lot of money on the table. They did it because they could, and because they assumed with the customary arrogance of the truly powerful that they would get away with it. Which serves as a reminder to the rest of us that we all participate in ethical risk assumption and risk transfer, every day of our lives. Let's hope we do a better job of it than these (former) captains of the industry.

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February 20, 2008


Insurance companies handle a lot of cash: a lot of money flows in (insurance premiums); a lot of money flows out (insured losses, administrative expenses, the cost of reinsurance). For legitimate carriers, a good year results when the premium dollars collected exceed total losses combined with total expenses. By prudently investing premium dollars, you can even make money when total costs slightly exceed the premium income.

What if you could eliminate, or at least severely limit, the dollars flowing out? What if you set up a scheme where you collect premium dollars, but you eliminate the step of purchasing insurance? Perhaps you pay some small claims, to keep up appearances. But when the catastrophic losses hit, you ignore them.

As far as criminal schemes go, this one is pretty stupid. There is an inevitable - and I do mean inevitable - day of reckoning, when the unpaid claims finally catch up with you.

All of which serves as an introduction to Donald Touche, Richard Standridge and Robert Jennings, operators of a diverse group of Third Party Administrators: Don ran Stat-Care out of California; Rich ran Global Healthcare and EOSHealth out of Arizona; and Bob operated Interstate Administrative and TPAOne out of Illinois. Their primary clients were professional employer organizations (PEOs). For three years - 2000 to 2003 - they sold insurance through non-existent companies: Regency Insurance of the West Indies and TransPacific International Insurance. On February 13, 2008 the house of cards came tumbling down, when all three were convicted of mail fraud, wire fraud and money laundering by a federal jury in Jacksonville, Florida.

The boys are facing some pretty serious jail time: 100 years each plus millions of dollars in fines. Gosh, it seemed like a good idea at the time...

The owners of several PEOs testified for the government. They admitted to knowing that the insurance was fraudulant. They are also going to jail, but unlike Don, Rich, and Bob, they have a chance of getting out to enjoy their retirement years.

The most damning testimony was provided by workers with catastrophic injuries. One man had lost both legs, but was unable to obtain prosthetics. Many severely injured workers had not collected any workers comp benefits. Insurance fraud of this type is not a victimless crime.

This sorry saga comes to a formal end in May, when the sentences are handed down. We are unlikely to see these three entrepreneurs on the street ever again. Their money laundering days are over, but it's nice to imagine that their steamy days in the prison laundry have only just begun.

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February 14, 2008


Chad Hennings spent nine years as a lineman for the Dallas Cowboys. He accounted for 28 sacks, 6 fumble recoveries, 4 return yards and 1 touchdown in 107 games before retiring after the 2000 season. He also suffered permanent damage to his back. The question is whether or not his work-related back injury is compensable under the Texas workers comp system.

The Texas workers' comp law treats pro athletes as a special class. Under Texas Labor Code §406.095(a), a pro athlete "employed under a contract for hire or a collective bargaining agreement who is entitled to benefits for medical care and weekly benefits that are equal to or greater than the benefits provided" by workers' comp must make an election between the two types of benefits. At first glance, it's a no-brainer. Henning's benefit package as a player dwarfs benefits under the comp system: he earned $1.4 million in salary and benefits in his final season with the Cowboys, including $225,000 under an "injury-protection clause," $38,921.98 from the Cowboys to cover his medical costs and $87,500 in severance pay.

Reversing Field
At first, the court system threw Hennings for a loss. The 10th Court's original July 23, 2007, opinion deemed Hennings' overall contractual package of salary and medical benefits during his pro football career to be higher than benefits available under workers' comp, thus rendering Hennings ineligible for such benefits under Texas law. But in its Jan. 30 opinion, the court reversed itself and upheld a jury finding that, in Hennings' case, workers' comp was a better deal for him because of its longer duration. After re-consideration, the court separated the indemnity benefit (where comp was insignificant) from the medical (where taken over a lifetime, comp might well exceed the deal offered by the Cowboys). In other words, Hennings's medical benefit of $38,921 might well prove less than the lifetime medical charges for treating his back problems. Heck, he could blow through that in a single surgery.

Based upon the Court's ruling, a Texas-size door has been opened for all professional athletes in the state to access the robust medical benefits of the workers comp system.

The decision may not help many retired pro athletes, because it may be too late for them to seek workers' compensation; the statute of limitations may have run on their potential claims. (Most states require that claims be filed within 2 years or less of the occurrence.) Going forward, I would not be surprised to see players routinely file comp claims immediately after injuries, knowing that they will not qualify for benefits in the short run, but protecting their interests once they quit the game.

Rate Setting Dilemma
If professional athletes are increasingly successful in their efforts to win workers comp benefits, insurance carriers and regulators will face an interesting dilemma: determining an actuarially defensible rate for coverage. Right now, the Scopes classification manual offers just two classes for professional athletes:

Class code 9178 Athletic Team or Park: Non-Contact sports. Applies to players, coaches, managers or umpires and includes all players on the salary list of the insured, whether regularly played or not. Non-contact sports include baseball and basketball.

NOTE: Authors of the Manual obviously did not see the Detroit Piston "bad boys" in their prime!
Class code 9179 Athletic Team or Park: Contact Sports. Applies to players, coaches, managers or umpires...Contact sports include football, hockey and roller derbies.

As a point of reference, the current rate for class 9178 in Massachusetts is $23.11. Oddly enough, the rate for 9179 (contact sports) is slightly lower at $22.55. That is well below the rates for roofers and steel erectors.

NCCI might want to consider some serious revisions to the Scopes Manual. To begin with, separate classes are needed for coaches (relatively modest exposures) and players (huge exposures). They might even want to approach it in a manner similar to the construction industry, where the payroll is broken out by activity: field goal kickers, for example, are lower risks than lineman. Running backs are always at risk for knee injuries. And after the most recent SuperBowl, it appears that quarterbacks take their lives in their hands with every snap of the ball.

A Parallel Universe?
Professional athletes and workers comp are an odd mix. Where comp offers a combinatin of indemnity and medical benefits, for athletes the only issue is medical. With their enormous salaries, athletes will rarely have a need for indemnity benefits, which top out around $50,000 a year in even the more generous states. Medical benefits are a different matter entirely. When it comes to work-related injuries, comp provides lifetime coverage, with no co-pays, no deductibles and no time limits. Comp offers the best medical coverage of any kind, anywhere in the world. Just what a disabled athlete needs...

The permanent partial and permanent total exposures for football players are humongous: concussions, back injuries, blown out knees, torn rotator cuffs, torn biceps, nerve damage. Feed the injury data from pro football and pro baseball to an actuary and you'll generate a rate that exceeds the current top ticket professions of structural steel erectors and lumberjacks. The rate would soar well above $100 per one hundred dollars of payroll.

The optimum solution lies outside of the comp system. Workers comp indemnity is simply not crafted to protect the interests of (wildly overpaid) athletes. The players associations of the various professional sports need to sit down with management and craft a parallel universe: not the conventional workers comp system, but a combination of income protection and lifetime medical benefits that contemplate the real risks inherent in professional sports.

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January 17, 2008


The Tennessee Restaurant Association (TRA), as you might expect, is a lobbying group for restaurants. One of the benefits of membership is access to special insurance programs. Around 500 members participated in a workers comp program run since its 1993 inception by the TRA's charismatic director, Ronnie Hart. Unfortunately, as we read in the Tennessean, Mr. Hart had no experience in insurance - he was a lobbyist by trade. So he learned "on the job" for the first few years and then hired a company called Hospitality Management Plus to administer the program. The "plus" was apparently the routine doubling of management fees and unauthorized dipping into the reserves. The minus, alas, is that neither Hart nor Hospitality Management knew how to run an insurance operation. Both are now bankrupt.

The state's Department of Commerce & Insurance took over the fund in 2005. They originally estimated the shortfall at $1.5 million. The revised number is $4.8 million, which has upset the stomachs - and wallets - of the 500 or so members on the hook for payment.

Randy Rayburn, owner of the renowned Sunset Grill and Midtown Cafe, is very angry. He is also a bit circumspect: "In hindsight, what does a lobbyist know about running an insurance company?"

Frank Grisanti, a restaurant owner and trustee of the fund, says he knew that Hart was making a profit running the trust, but he did not see it as a conflict at the time. "I guess it turns out that it was poor judgment..." Grisanti is facing a $60,000 assessment as his part of the trust's liability. That's a lot of surf and turf.

I'm sure the restaurant owners now appreciate the need for a little due diligence in the insurance area. Just as they would not hire a plumber to be a lead chef, they might think twice about asking a lobbyist to run an insurance company. It looks simple enough, but on-the-job training is not the way to go. Now the owners are stuck with the bill. They'll need more than extra strength Tums for this severe case of "Hart-burn" in Tennessee.

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January 7, 2008


The Insider has often speculated about the thought process of medical providers, so we are very interested in case of Dr. Patrick Chan, a neurosurgeon working out of Searcy, Arkansas. The Canadian trained doctor has pleaded guilty to charges of demanding and accepting kickbacks from surgical implant maker Blackstone Medical of Springfield MA, a subsidiary of Orthofix International. Dr. Chan used the (expensive) devices in back surgeries. He was a very busy fellow, billing about $200,000 a month. He has amassed a $10 million nest egg (minus the court-assessed penalty of $1.5 million plus substantial legal fees).

The kickback scheme initiated by the doctor raises two compelling issues: one involves how a doctor determines which medical device to use. Dr. Chan reduced that decision tree to its barest branches. "I use the device that pays me the most money."

The second dimension of Dr. Chan's thought process involves utilization: when should a specific device be used? Apparently, Dr. Chan went out of his way to find opportunities to use his preferred surgical implants. His work is being reviewed to determine whether the surgical procedures were in fact needed. One suit, filed in Arizona, alleges that in 2005 Dr. Chan told his patient, a young trucker, that if he did not agree to implantation of a spinal device, he was at risk of becoming a quadriplegic. After the surgery, a worker's compensation evaluation of the MRI done prior to the procedure showed that it was medically unnecessary. [NOTE to insurer: Speed up the utilization review process!]

Breakthroughs, Innovations...and Scams
Blackstone Medical touts itself as the home of "Breakthrough Thinking." Parent company Orthofix is "always innovating." Unfortunately, high level thinking and innovation, along with overly ambitious marketing goals, have led the companies into an ethical morass.

Dr. Chan is currently under house arrest and awaiting sentencing. He faces up to five years in prison. We can assume that he is under considerable pressure to testify against his former suppliers. It's ironic, of course, that Dr. Chan and the people at Blackstone began with the same goal in mind: helping people in pain. They intended no harm, but, alas, much harm has apparently been done.

Thanks to fellow blogger Joe Paduda at Managed Care Matters for the heads up on this interesting story.

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November 20, 2007


My favorite retailer is in the news again. (The source is an article in the Wall Street Journal by Vanessa Fuhrmans, so you need a paid subscription to read it, at least until Rupert Murdoch decides otherwise.) The story concerns Deborah Shank, a 52 year old woman who stocked shelves in the Cape Girardieu, Missouri store. She worked the night shift, so she could be home during the day with her three sons. Seven years ago, she was perusing yard sales with a friend when a tractor trailer plowed into her van. She was left with permanent brain damage. Walmart paid about $470,000 in medical expenses. The Shanks sued the trucking company and collected about $1 million, the limit of liability under the company's policy.

Jim Shank, Deborah's husband, used his portion of the settlement to buy an accessible home for his disabled wife. After paying legal fees, his wife was left with $417,000 to help supplement her care. End of sad story? Not quite.

When she signed onto the Walmart health plan, Deborah agreed that her employer would be first in line for payment out of any subrogation. [This type of language in employer health insurance policies is becoming increasingly popular.] Walmart sued Deborah for $470,000 plus legal expenses - in other words, they are suing for more than the balance of her settlement funds. They rejected the Shank's offer to settle for a portion of their costs. And of course, Walmart being Walmart, they have won the suit.

Life Isn't Fair
Our many readers in the insurance industry certainly understand the logic of Walmart's position. Administrators of the company plan have a "fiduciary obligation" to be impartial. In the interests of the group itself, they must pursue every available dollar, regardless of the consequences for one isolated (and devastated) family. The courts may feel some sympathy for Deborah Shank and her long-suffering husband, but the language of the policy is clear and unambiguous. The settlement dollars - and then some - belong to Walmart.

Less than a week after the Shanks lost their appeal, their son Jeremy was killed in Iraq. At that point, Jim Shank wanted to give up, but his lawyer wants to continue with the appeal (which heads for the Supreme Court, if the Court deigns to accept the case. I have no idea why the Shank's lawyer expects a different result at that level.)

In the meantime, Jim Shank has, on the advice of consultants, divorced his wife, to make her eligible for public aid as a single and totally disabled person. Deborah has not been informed of the divorce, but even if she were, she might not understand what it means. After attending her son's funeral, she still could not figure out why he was missing from the family circle.

There is, of course, nothing wrong with this story. The language of an insurance policy has been enforced. The fiduciary obligation of Walmart's health plan administrator has been fulfilled. One family is ruined, but that's just bad luck on their part. Surely they do not expect Walmart to show any compassion!

I hope Jim Shank can put together a nice turkey dinner on Thursday for his two remaining sons. Despite his many losses, he has much to be thankful for. It might just take a few extra moments to put those thoughts into words. When he does finally bow his head to say grace, there is at least one word that will not cross his lips: Walmart.

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November 14, 2007


There is a bill pending in the US Congress to require parity between mental and physical health benefits. The bill is a follow up to similar legislation passed in 1996, which was severely limited in scope: Employers did not have to provide any mental-health benefits. Copays and deductibles could be higher for mental-health expenses. Visits could be limited. And small businesses and self-insured employers which cover healthcare costs directly were entirely exempt. Not exactly my understanding of the word "parity."

Full Parity for Mental Illnesses expands the Mental Health Parity Act of 1996 (MHPA) to prohibit a group health plan from imposing treatment limitations or financial requirements on the coverage of mental health benefits unless comparable limitations are imposed on medical and surgical benefits.

Here is a summary of the pending bill prepared by the National Alliance for the Mentally Ill:
[The proposed legislation] provides full parity for all categories of mental disorders, including schizophrenia, bipolar disorder, major depression, obsessive-compulsive disorder, and severe anxiety disorders. Coverage is also contingent on the mental illness being included in an authorized treatment plan, the treatment plan is in accordance with standard protocols and the treatment plan meets medical necessity determination criteria.
Defines "treatment limitations" as limits on the frequency of treatment, the number of visits, the number of covered hospital days, or other limits on the scope and duration of treatment and defines "financial requirements" to include deductibles, coinsurance, co-payments, and catastrophic maximums.
Eliminates the September30, 2001 sunset provision in the MHPA. Like the MHPA, the bill does not require plans to provide coverage for benefits relating to alcohol and drug abuse. There is a small business exemption for companies with 25 or fewer employees.

No Parity in Comp
Parity is an important concept, but one that simply does not exist in the workers comp system. Comp carriers habitually reject any claims for benefits based upon work-related mental disability (post traumatic stress syndrome, stress in general, depression, etc.). The insurer strategy is usually "Deny, Deny, Deny" until a judge orders otherwise.

There are a number of reasons for this virtually universal aversion to accepting mental disability claims:
: The standards for eligibility in most states are very high: work must be the predominant cause of the disability. Most of us have plenty of stress in our lives away from work.
NOTE: Long gone are the days when in order for a claim to be compensable under comp, California required a mere 10 percent of the stress to be work related!
: Comp benefits tend to be very open ended. Once the carrier accepts a (mental health-based) claim, they are likely to own it forever. As a result, they usually start by rejecting the claim.
: Unlike physical injuries, where objective criteria for treatment and recovery are often (but not always) straight-forward, the end-point for a mental disability can be very elusive.
: managed care can limit treatment for open-ended physical problems (requiring, for example, limited physical therapy, chiropractic visits, etc). Similar limits on mental health treatment (up to and including hospitalization) are more difficult - but not necessarily impossible - to impose.

It's unfortunate that comp turns its back on the mental aspects of injury. Over the years we have seen many claims where a little counseling after the injury could significantly speed recovery. Well-structured groups could provide support to workers recovering from injuries at a very modest cost. As a culture, we have no problem treating physical disabilities, but when it comes to issues of mental health, we balk. Ironically, as often as not the mental barriers to recovery trump the physical. Out-of-work employees often succomb to depression - and once that happens, full recovery and return to productive employment are much less likely to occur.

Ultimately, it's a matter of who pays, how much and when. The enormous cost of losing a productive worker is seldom factored into the equation. While Congress is about to force the parity issue on employers and insurers for conventional health coverage, no such pressure is pending - or is even foreseeable - for the workers comp system.

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October 30, 2007


Jordan's Furniture is a legendary Boston area retailer of furniture. They generate a carnival atmosphere in their theme-based stores. One involves a replication of Bourbon Street in New Orleans, complete with piped in Jazz. They will do anything - anything! - to get you to buy furniture.

Back in March, they tantalized Red Sox fans with a unique proposition: buy furniture between March 7 and April 16, and if the Red Sox win the World Series, you get all your money back. Well, there are thousands of fans in the Boston area with two reasons to celebrate the recent success of the Sox.

Eliot Tatelman, co-founder of the company with his brother Barry, will not disclose the amount of money being refunded to customers. He teases us with averages: there were about 30,000 purchases made during the promotion period. If they averaged $1,000 each, the total is somewhere around $30 million. Heck, that's enough to pay one year of Yankee third baseman Alex Rodriguez's salary!

Tatelman, shrewd businessman that he is, has insurance to cover the losses. I would love to see that policy. I wonder how the underwriters calculated the premium. Knowing Tatelman, he chose a carrier with a New York based underwriting team, full of Yankee fans. They undoubtedly scoffed at the notion that any payouts would be needed. Tatelman probably secured very favorable terms.

Oh well, it was a great marketing ploy. It's still not clear whether the rebates will be taxable (they likely will be) or whether the entire scheme was an illegal lottery. Meanwhile, Tatelman might have to shop around a little harder if he wants to repeat the gimick next year. I suspect that the underwriters - Yankee fans or not - might not be inclined to bet against the Sox again.

Sox rule! (And tomorrow the Insider will return to its customary objectivity.)

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September 20, 2007


We have a fight brewing over the Terrorism Risk Insurance Revision and Extension Act (TRIEA), which the House just voted to extend for 15 years. We live in unusual times when the white knight for the insurance industry is Barney Frank and the opponent is George Bush.

The House measure not only extended the bill, but also strengthened it:

"It would add group life insurance to the lines of insurance covered by the program, and it would cover terrorist attacks by Americans as well as by foreigners. It would also require commercial property and casualty insurance policies to cover losses from terrorist attacks involving nuclear, biological, chemical or radiological attacks. Typically such policies now exclude that coverage."

According to other news reports, it would also kick in at $50 million, rather than the current $100 million.

Many in the insurance industry think that such a measure is vital to ensure industry solvency in the event of large-scale terror, particularly in workers comp. In other lines of insurance, carriers can price for the coverage or can simply refuse to extend coverage, but because workers compensation is statutory, these mechanisms aren't available.

This is likely to produce pushback from the White House - it's anticipated that the president will veto the measure, viewing it as an unacceptable expansion to a program that was intended as temporary. The White House issued a statement saying that the most efficient method for providing terrorism coverage will come from the private sector. In response, bill sponsor Barney Frank said, "There are in our midst people who believe in the free market so firmly that they believe in it the way other people believe in unicorns."

Get out the popcorn, this could be an interesting contest. It may be a nail-biter, too, since the current law is set to expire at the end of the year and workers comp is heading into its heavy renewal season.

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September 19, 2007


When you have a problem, you pass a law to fix it. That's the theory, anyway. Sometimes, the legislative solution creates big, new problems. Take New York - please! In trying to solve the very real issue of rampant under-insurance and premium avoidance in the construction industry, the state has crafted an innovative solution. But the solution creates very big problems, indeed.

Under the revised comp statute, all out of state employers doing work in New York are required to carry a full, statutory NY state workers comp policy. New York must be listed specifically on the information page of the policy. The standard "other states" coverage (item C) is not considered adequate proof of coverage.

This may sound innocuous, but it's not. First, consider the problem in defining what "working in New York" means. The term is not defined by statute, but has evolved under case law. Coverage may be required for anyone coming into the state while "in the course and scope" of employment: this would include sales and delivery people, construction workers in for a day or a week, possibly even business travelers attending a trade show.

Once you figure out who's working, you're stuck with the issue of proving coverage. For carriers licensed to write insurance in New York, it's a bureaucratic nightmare, but feasible. You re-issue the policy, naming New York on the information page. But when do you do this? When is the proof of coverage required? Do you have to document coverage even when the New York exposure is miniscule or can you retrofit coverage after an injury occurs?

And what about insurance carriers who are not licensed in New York? These carriers cannot list New York on the information page, because they cannot write policies in the Empire state. So they are either forced to secure a license (how long will it take and how much will it cost?) or decline covering out-of-state employees working in New York. If they forego the licensing process, they may have to cut a check to the NY State Fund to cover payrolls for work performed in New York, at the current NY rates. Yikes! (Given the fear and uncertainty that this new requirement has already raised, there are agents for NY licensed carriers visiting neighboring states, trying to poach business from agents who lack a NY licensed carrier.)

By now you're probably thinking that NY will work out the kinks before the new law goes into effect. Technically, the law already is in effect - it began on September 9, 2007. Of course, no one can figure out how to go about implementing it. Last week the Workers Comp Board held a conference call for interested parties. Boy, where there ever interested parties - from as far away as California. Unlicensed carriers raised the specter of a lengthy and expensive licensing process in NY. Agents asked about their own exposure in trying to keep insureds informed of their obligations under the new law. To all the many valid questions, the Board responded with a resounding "We have no idea what to tell you...We have to work it out with the governor's staff and the Division of Insurance."

According to the Independent Insurance Agents of NY (IIABNY), the Board is "reviewing" the requirements. Implementation of the new law is "on hold." The Insider humbly suggests that the Board and the Governor kick this one back to the legislature. The new requirements are fatally flawed and no amount of tinkering can fix the situation. The problem of premium avoidance in construction is legitimate. This particular remedy, however, creates chaos within the insurance industry. After all, you don't cure a headache with Actiq or Oxycontin, do you? (Then again, this is workers comp ...)

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September 12, 2007


As we approach the fourth anniversary of the Workers Comp Insider (September 17, 2003), it's a good time to step back and ask a fundamental question: Why are we doing this? Four years ago Tom, Julie and I observed that there were a lot of bloggers tackling a lot of issues, but they mostly involved isolated individuals pursuing a particular passion. Businesses in general seemed disinterested and our particular focus, the insurance industry, was totally missing in action from the blogsphere.

As a company specializing in designing and fine tuning loss control and risk management programs for employers and insurers, Lynch Ryan saw an opportunity. With its infinite, instantaneous reach, the web offered a virtual forum for exploring the many ramifications of workers comp. As consultants, we wanted to create a meaningful and objective means of communicating issues related to the key comp constituencies:
- helping employers minimize the cost of risk, while still managing their injured employees
- supporting insurance companies in risk selection and in the education of policy holders
- guiding injured employees back to gainful employment
- facilitating medical provider interaction with injured employees, their employers and insurers (and helping them survive increasingly stingy payment schemes)
- guiding states through the complex task of legislative reform, where they must balance the needs of injured employees, employers, insurers and medical providers, without allowing the cost of insurance to drive business out of state
- alerting workers' comp professionals and risk managers to issues of compelling interest which they might not otherwise encounter

Fertile Ground
Over our four years as bloggers, we have examined managed care, coverage for independent contractors, the practices (good, bad and indifferent) of insurance carriers, the impact of designer drugs on the cost of insurance. We have discussed fraud in Ohio, legislative reform in dozens of states, the use (and abuse) of temporary modified duty, myriad safety issues - cell phone use while driving, heat in the summer, cold in the winter. We have highlighted the aging American workforce and the implications for workers comp in the years ahead. We have explored the profound implications for the comp system of the millions of workers lacking health insurance, along with the nation's dilemma dealing with 12 million undocumented workers. And that's just a hint of the fertile ground we have plowed, up to five times a week, for over 200 weeks. Dull it isn't!

We also have created and refined a website that makes accessing web resources as easy as possible, linking our readers to business, risk management and health-related resources. In addition, you can use our robust search engine to explore nearly 800 blog entries by content area. All modesty aside, we think that the Insider has become the best workers comp reference library on the net.

How are We Doing?
We think it's working pretty well. We have as many as 20,000 hits a month, with several thousands of loyal readers and hundreds of casual visitors seeking inforation on a specific issue. Readership has increased steadily from month to month. We are approaching our goal of becoming the "go to" site for workers comp issues.

And, although Google and others call several times a month, we don't allow advertising, except for a small banner that links to LynchRyan, our parent company.

All of which leads to a very fundamental question for any business: is it worth the effort? Is this free service in any way profitable? That's not an easy question to answer - and in some respects, it's the wrong question. But in the interests of full disclosure and the candor to which we are committed, yes, we have established long term and meaningful relationships with a number of insurance companies and employers who found us through the blog. The considerable effort easily pays for itself.

But even if the blog were a "loss leader" we would probably continue the effort. We are filling a definite need on the web, providing a balanced and objective view of risk management and risk transfer issues, with a special focus on workers comp. Our goal is to provide our readers with a reliable, well written and entertaining news source that reflects our abiding passion and our many years in the field. And whatever you think of the Insider, you'll have to agree on one thing: the price is right.

Your comments are always welcome.

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September 11, 2007


That reverberant thud we hear coming out of Albany, NY, is the sound of the other shoe landing. And it's dropped straight on top of the New York Compensation Insurance Rating Board (CIRB).

In early March of this year, New York Governor Eliot Spitzer signed into law a major and much needed workers' compensation legislative reform. In February we had discussed New York's urgent need for reform, and, immediately following the Governor's signing, we analyzed New York's reform measure.

There's no need to rehash the reform here, except to say that the Insider was generally quite supportive of it. We were happy that a number of our suggestions wound up in the reform. However, two sections of the new law carried huge implications and consequences for the Property and Casualty (P & C) insurance industry in New York, and each took dead aim at the future of the CIRB. A reading of these sections suggested that the CIRB's future may actually be behind it.

The first of the two sections required that the Superintendent of Insurance report on the performance of the CIRB to the Governor, the Speaker of the Assembly and the Majority Leader of the Senate by 1 September 2007.

"Such report shall address, among other matters the Superintendent may deem relevant to the compensation insurance rating board including: (1) the manner in which the insurance compensation rating board has performed those tasks delegated to it by statute or regulation; (2) whether any of those tasks would more appropriately be performed by any other entity, including any governmental agency; and (3) the rate-making process for workers' compensation."

Then Section 2313, subparagraph S, contained these two gems:
"The workers' compensation rating board of New York... shall mean the compensation insurance rating board until February first, 2008, and thereafter such entity as is designated by law."

" rate service organization may file rates, rating plans or other statistical information for workers' compensation insurance after February first, 2008."

Well, here we are in September and Superintendent Eric Dinallo has issued a whomping, 56-page report (PDF) that, while not killing the CIRB, certainly eviscerates it.

The Current System - Nearly Everywhere
In 39 states, the National Council on Compensation Insurance (NCCI) gathers loss and premium data, calculates experience modifications, and files rate proposals on behalf of the P & C industry. A few states, such as Massachusetts, Michigan, Pennsylvania and New York, have independent Bureaus that do the same thing. These Bureaus are funded by the insurance carriers doing business in the states and are governed by committees elected by those insurers. The Bureaus gather and analyze loss data, both current and historic, and file rate proposals with their respective insurance commissioners. Actuaries from both sides testify at public hearings, after which insurance commissioners render decisions about the appropriateness of what the insurers want and establish new rates, which can be higher, lower or, occasionally, exactly what was proposed. Theoretically, this is a system with built in checks and balances where math and science should rule, and it is the way New York's workers' compensation system operated until the recent reform.

The Dinallo Report
Superintendent Dinallo proposes scrapping this concept in New York in two ways, one of which we think is fine, the other we find fraught with danger.

First, the Superintendent proposes, quite rightly, we believe, to move to a loss cost system, where insurers, based on their own experience, would file loss cost multipliers that would be applied to the classification rates established by the Superintendent. This would introduce a competitive system already in place in all NCCI states. He proposes that the CIRB continue to gather loss data and calculate mods, because, first, it's been doing it for more than 90 years and he thinks by now they have the hang of it; and, second, because between now and the sunset date of February 1, 2008 (just a little more than 4 months), there isn't enough time to bring a new Rate Service Organization (RSO) on line. In short, Dinallo says New York's stuck with the CIRB at least, in his words, "for the short term."

Second, Superintendent Dinallo wants to take over the CIRB's governing committee. This, in my view, is the biggie. Dinallo recommends that the governing committee be reconstituted to include representatives from labor, employers, the State Insurance Fund, and the Insurance Department. Yes, insurers would be on the committee, too, but they would be in the minority. Further, the Superintendent would require that the carriers continue to fund the CIRB, even though they would have little or no control over it. Sort of like the Russian model of requiring the condemned man to pay for the bullets.

Potential Adverse Consequences
This second proposal would eliminate the checks and balances from the system. Further, it could also eliminate actuarial science. New York could wind up with rates being determined by committee, and a politically charged one, at that. Finally, one last elimination might occur: insurers, themselves, who, after attending (in small numbers) that first committee meeting may decide to hop the next train out of town. After all, what member of the reconstituted committee, except for insurers, would ever want to see a rate increase?

In this affair the CIRB has not covered itself with glory. It has shown itself to be politically deficient, and its public relations efforts have been woeful. It has allowed itself and, by extension, the insurance industry, to be maneuvered into playing the role of the villain in this melodrama, and it is now squarely in the cross hairs. Nonetheless, even Superintendent Dinallo grudgingly admits that his every-three-year reviews show that the Board is performing satisfactorily. We believe that the prudent course is for New York to let insurers govern their own Board and to require the Superintendent of Insurance to continue to oversee performance.

We urge that Governor Spitzer and Superintendent Dinallo assure that the New York workers' compensation playing field remains level and the goalposts where they are.

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September 4, 2007


What better way to herald the end of summer by returning to the issue that just won't go away: workers comp coverage for sole proprietors and independent contractors. Massachusetts has just taken an extraordinary step that provides a strong incentive for sole proprietors to "opt in" to the comp system.

Under the old rules, any sole proprietor seeking comp coverage was assumed to make the state average weekly wage (SAWW). In MA, that is a whopping $52,000 per year. While MA enjoys some of the lowest rates for comp coverage in the nation, that high wage base drives up the cost of comp:
- for a $5.00 rate, the annual premium would be $2,600
- for a $10.00 rate, the annual premium would be $5,200

Those can be tough numbers for a lone craftsman trying to operate his/her own business. Especially when you consider that the weighted average median wage of all sole proprietors in the state is only $35,843. The result, of course, was that most sole proprietors gave up the notion of participating in the comp system. The coverage was way too expensive. They opted out in droves.

Recognizing the powerful disincentives to select coverage, the MA Workers Compensation Rating and Inspection Bureau decided to make the coverage more affordable. They have dropped the wage base by 30 per cent, to 70 per cent of the state AWW, effective August 1, 2007. Now, when a sole proprietor chooses to be covered, the premium is based upon an annual wage of just $36,400. This means that the cost of coverage is suddenly pretty reasonable:
- for a $5.00 rate, the comp coverage costs $1,820
- for a $10.00 rate, the coverage costs $3,640

A Comp Bargain
For marginal sole proprietors, with annual billings below the $36,400 level, there is still a strong incentive to opt out of the system. However, for the many skilled tradesmen who routinely bill well above the $36,400 level, workers comp has suddenly become a bargain. A skilled mason or carpenter might bill upwards of $75,000 or more per year. Nonetheless, the cost of comp coverage will be based upon a much lower wage level. In effect, well established sole proprietors now enjoy comp rates that might be 50 per cent or more lower than the rate for competitors with employees working in the same trade.

Which leads to one more very important consideration for general contractors in MA: in the construction field, sole proprietors are a common sight. We have blogged about the MA crack down to push coverage deep into the subcontractor and sub-subcontractor levels. (See just a couple of our prior blogs here & here.) At premium audit, if a GC shows a certificate of insurance from a sole proprietor sub who has "opted out" of coverage, the cost of that coverage is added to the GC's payroll for premium calculation. Now GCs have a very compelling argument to encourage their sole proprietor contractors to opt in for coverage: "Don't wait for me to charge back the cost of comp. Take advantage of the suppressed rates and choose coverage on your own. You benefit from a lower rate and you have the advantage of knowing the cost of coverage up front." For sole proprietors who routinely have billings above the $36,400 level, this is truly a no brainer.

It will be interesting to see if other states follow the MA lead in this important policy area. Surrounding states use a very high wage standard for calculating sole proprietor premiums: in Connecticut, $56,200. In New Hampshire, $58,100. When you factor in the very high rates for comp in these states, the cost of insurance for sole proprietors is truly prohibitive. That's no welcome mat. It's a kick in the butt toward the door.

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August 27, 2007


Jay Fishman, CEO of The Travelers, offers an interesting perspective on the current state of hurricane risk. (As the piece appears in the Wall Street Journal, availability is limited to subscribers.) The article is entitled, "Before the Next "Big One" Hits." That's ironic, of course, because nothing meaningful will be done until well after the next big one hits. Nonetheless, Fishman's perspective is worth examining.

Fishman looks at the current chaos governing state regulated coastal property insurance from Maine to Texas. Not surprisingly, he sees a lot of problems. With over half the American population living within 50 miles of the coast, with coastal development continuing at an alarming pace, and with the prospect of bigger and more powerful storms developing in our oceans, many carriers are running for higher ground. Fishman believes that they might be more inclined to stay if the rules governing property insurance had some federal oversight. That's an unusual perspective, coming from a CEO.

Bring in the Feds
Fishman would like to see a federally regulated "Coastal Hurricane Zone" running from Texas to Maine. The feds would regulate and oversee wind underwriting by private insurers, including pricing. A federal role would increase consistency from state to state and offer a more stable set of rules - rules that might provide insurers with the confidence to make long-term commitments and investments of capital. Premiums would be subject to regulation: if they exceed the payouts over a period of time, property owners would receive a rebate. If the rates prove inadequate, they would be allowed to rise. A federal presence might pre-empt the current absurd situation in Florida, where tax payers enjoy depressed rates for coastal coverage, with the prospect of mortgaging the future when the next big storm hits (see our "Risk Management for Dummies" posting here). A federal role would benefit consumers by providing more transparent pricing and standardized "rights and responsibilities."

Fishman recognizes that some coastal risks exceed reasonable rate making. In these situations, he recommends temporary, transitional subsidies, extending 10 or 15 years. Here, those unable to pay the rates associated with the risk would receive a tax credit; on the other hand, those able to pay might face a surcharge to help balance the books. This is Robin Hood in a rain slicker, perhaps, but it's an idea worth further scrutiny.

Wind and Water
Risk mitigation under global warming's unprecedented and poorly understood circumstances must go beyond the pricing and wording of insurance policies. Fishman would like to see a proactive approach with some serious traction in two key areas:
- establishment and enforcement of credible building codes
- improved land management, with the preservation of coastal wetlands a major priority

Fishman is careful to call all of this "wind underwriting." He clearly is not contemplating an expansion of standard policies to include water damage. (Did someone say Dickie Scruggs?) From his CEO perspective, risk transfer must be both reasonable and profitable. The fact that he welcomes a federal role in developing the rules is a clear indication that the current situation is untenable. The free market for coastal property insurance is floundering on the rocks. Fishman is not alone in looking to the federal government to build the needed lighthouse.

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August 21, 2007


For unadulterated audacity and out and out gall, Michael Joyce, a Pennsylvania Superior Court Judge, may currently hold the lead in this year's gold medal competition.

Scanning Insurance Journal Online today, we learned that last Wednesday, federal prosecutors indicted Judge Joyce for mail fraud and money laundering, claiming that he cheated the Erie Insurance Group and State Farm Insurance out of $440,000, a charge the judge denies as he protests his innocence.

Judge Joyce came to our attention not for what he is accused of doing, but for how he is alleged to have done it. According to the indictment, Judge Joyce, while parked in his Mercedes-Benz sedan in 2001, was rear-ended by an SUV traveling about 5 mph. That's right, five miles per hour – I’ve crested middle age and I still can run that fast.

Following this horrendoma of a crash, no police or medics were called to the scene, yet the Judge asserted that the impact rendered him unable to exercise or play golf for more than a year. He was paid $390,000 by his insurer, the Erie Group, and $50,000 by State Farm, which insured the poor SUV driver.

Unfortunately for Judge Joyce, the indictment alleges that, not only was he playing 18- hole rounds of golf shortly after the "accident," but he was doing it on vacation in Jamaica. It also claims that he was scuba diving, inline skating (I’ve never gotten the hang of that) and working out in his local Gym. The man must be a medical and physical marvel.

At any rate, Judge Joyce has announced that, infirmities and indictments notwithstanding, he will continue his run for a second ten-year term in this fall's coming election.

The state's Supreme Court last Friday suspended Judge Joyce, with pay, "to protect and preserve the integrity of the Unified Judicial System, etc…"

And what, you may ask, did Judge Joyce do with his new-found wealth? Well, according to the indictment, he used it to buy a motorcycle and make down payments on a house and an airplane, which, of course, he intended to fly. We know that, because on the application for his pilot's license he asserted that he had no injuries or physical problems that would preclude his flying up, up and away, which he then did about 50 times.

There is terrible injustice here. We’ll let the courts decide whether it has been done to the Judge, or by him.

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May 29, 2007


Felicia Dunn-Jones was a civil rights lawyer who worked one block away from the World Trade Center. She fled the office on 9/11, inhaling dust from the falling towers. She was covered with ash laced with asbestos and other hazardous material as she ran for safety. Now, nearly six years later, over five years after her death, New York City Medical Examiner Dr. Charles Hirsch has determined that Dunn-Jones's death was related to the 9/11 attack. In the days and months following the attact, Dunn-Jones developed a serious cough and had trouble breathing. She died five months later.

Dr. Hirsch has amended Dunn-Jones's death certificate to indicate that exposure to trade center dust "was contributory to her death." The manner of death thus changes from natural causes to homicide.

The medical examiner still has some doubts as to whether the trade center dust caused the sarcoidosis that killed Ms. Dunn-Jones. He suspects it was a pre-existing condition, nonetheless clearly and significantly aggravated by the exposure on 9/11.

Who Pays?
The issue for Dunn-Jones's family is not one of payment. They have already received $2.6 million from the Victim Compensation Fund. But it does raise an interesting question relative to workers compensation: was Dunn-Jones's illness work-related?

In the moments following the attack, Dunn-Jones fled her office. Technically, once she reached the streets, she was no longer at work...She was commuting, heading away from work. She eventually made her way home to Staten Island.

An administrative law judge could reasonably conclude that this is not a work-related illness. Dunn-Jones happened to be at work, which happened to be near the World Trade Center, which happened to be attacked. Once she fled the building, she was a commuter (a commuter suffering from terror, but a commuter nonetheless). On the other hand, an equally reasonable judge might lean toward compensability, based upon the fact that Dunn-Jones was at work when the attack took place - and it was physically impossible for her to remain there. She was not engaged in an ordinary commute, but a horrific flight from immanent danger.

Perhaps these are morbid distinctions that most of us would prefer to ignore. But the center attack is certainly not the last incident of its kind. Millions of employers are paying for workers comp policies, under the assumption that employees are covered for work-related injury and illness. If and when the next attack comes, the issue of compensability will quickly become paramount. It is no exaggeration to state that the future of the insurance industry as a whole might be at stake.

In the meantime, we would do well to return to the Book of Common Prayer for consolation. Sure, we are inclined in this country to translate tragedy into dollars. Someone must pay for all the pain, suffering and loss. But beyond the issue of jackpot settlements lies the simple fact of our mortality. "Earth to earth, ashes to ashes, dust to dust."

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May 22, 2007


NCCI has recently released its its annual State of the Line workers compensation market analysis which is really what all the numbers geeks in our industry wait for with some anticipation. You can read the summary in the press release - NCCI Reiterates “Optimistic but Cautious” Outlook for Workers Compensation Insurance Market - or read the full report (PDF). There's also a PDF of the PowerPoint and a video version of the presentation if you you're a true insurance nerd.

Here's the long and the short of things: the market looks good, better than it has in a number of years. Thirty years, to be exact.

At 96.5%, the combined ratio, which is one of the industry's primary barometers for assessing market health, is the lowest that it has been in three decades and incredible drop since its 2001 peak of 122%. The combined ratio reflects an insurer's loss experience plus expenses. In non-jargony terms, the combined ratio essentially reflects how much an insurer pays out for each dollar it takes in. In most business scenarios, the cost of goods or services would tally under 100% with the remainder being the profit margin. Insurance presents an unusual scenario because investment income allows carriers to realize a profit up to about the 110% range, or even higher. So anything under 100 is quite good.

There are other positives, too. The frequency of injuries continues to drop, reserves have been strengthened significantly, and the residual market (or "markets of last resort") continue to shrink.

But put away the champagne, confetti. and noise makers because there are a few mitigating factors. One is that California's improved scenario is responsible for about 10 percentage points in those results, so if you take that away, things aren't quite so rosy. Throw in pallid investment returns, and while still a good year, you essentially have what the actuaries have termed "cautious optimism." Whee.

See - you can never really relax when you work in a business with actuaries because they are always raining on today's parade by warning you about the future. Here are a few things that could bedevil us going forward, according to the the experts:

  • Medical costs continue to escalate. The medical portion of the claims dollar is now topping 59%. Fifteen years ago when I got in this business, it was about 48%, with more than half going to wage replacement. That's a seismic shift, and it doesn't look like there are any brakes on escalating medical costs in the future.
  • The market may have crested. Workers comp premiums are decreasing and in competitive or buyer's markets, insurers have historically been their own worst enemies by being too aggressive in discounting price to gain market share. So far so good, but we may be at a point where the rubber meets the road. Joe Paduda has more on the dynamics of pricing and hard and soft markets.
  • The Terrorism Risk Insurance Extension Act - the federal backstop - is scheduled to expire at the end of the year and it's uncertain if it will be renewed. While some other lines of insurance can exclude coverage or price to include the risk, the regulatory nature of workers comp precludes this, leaving insurers rather exposed.
  • Bad things in other lines could have a spillover impact. Again, I turn to my colleague Joe Paduda for his view of scary things that could affect the property casualty industry performance as a whole.
  • The work force is getting older and fatter. And it isn't just the older people who are getting fatter, diabetes is reaching what some health care observers have characterized as epidemic. Both these factors - age and weight - increase the risk for new injuries and could add to the severity (read: medical costs) of any injuries that occur.
Here are some other discussions on the work comp numbers:
Joe Paduda - Work Comp Financials
Workers Comp Executive - California Buoys National Workers' Comp Results
Business Insurance - Comp underwriting results improved in 2006: NCCI
Insurance Journal - NCCI Reiterates "Optimistic but Cautious" Outlook for Workers Comp

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April 6, 2007


When you talk to insurers doing business in New York, they are quick to point to New York Labor Law as a very big problem. The law, going back to 1885, holds employers absolutely and completely liable for any injuries resulting from a fall. This liability is over and above workers compensation. Injured workers can (and often do) sue for damages that go far beyond the wage replacement and medical bills paid by comp. I imagine that the building of skyscrapers was a big factor in the law's original passing. But it applies to every form of building, from Trump's glitziest tower to a strip mall in Poughkeepsie.

Any law that's been around for 120 years has an extraordinary pedigree, and this one is no exception. Attorney Andrew Siracuse - a proponent of the statute - has made a lot of useful history and case law available here. The original statute (S.18) required proof that the owner "knowingly and negligently" caused the injury by fall. That was was soon amended (in 1897) to remove any mitigating circumstances for employers. In other words, the law does not take into account prior safety training, the availability of personal protective equipment or other attempts to reduce job site risk. Nor does the law care if the employee acted negligently, was stoned, or failed to use available safety equipment. Employee falls, employer pays. Employers are absolutely liable. It's that simple.

The law holds employers to perhaps the highest standard for safety in the world. Here's the language of an amendment from 1921:

A person employing or directing another to perform labor of any kind in the erection, repairing, altering, painting, cleaning or pointing of a building or structure shall furnish or erect, or cause to be furnished or erected for the performance of such labor, scaffolding, hoists, stays, ladders, slings, hangers, blocks, pulleys, braces, irons, ropes and other mechanical contrivances which shall be so constructed, placed and operated as to give proper protection to a person so employed or directed.

Any fall is presumed to be the result of a failure on the part of the general contractor/employer. In New York, there is no such thing as a free fall.

Impact of Workers Comp Reforms
The arguments, pro and con, continue to this day. Attempts to modify the law have repeatedly failed. To be sure, the law provides an important safety net for seriously injured construction workers. (It also pays the painter, standing on a bucket in a closet, who injures himself in a fall totalling 24 inches.) Given the historically paltry benefits available under the state's workers comp law (see our prior blog here), some form of additional benefits was probably necessary. Try living in New York on $400 a week indemnity. The new reforms up the maximum indemnity to $600, but that will still not support a well-paid construction worker and his/her family. If New York really wants to make the Labor Law obsolete, they need to mirror Massachusetts in offering a maximum weekly benefit of $1,000+.

There is one part of this situation that puzzles me. Every state builds tall buildings. Every construction project involves the risk of falling. But only New York has chosen to move beyond comp's "exclusive remedy" benefits to offer tort liability to workers in construction. Only New York has held contractors to the highest possible standard - and has done so for 120 years. Has this unique standard actually reduced the number of falls in New York? Has New York succeeded in creating safer workplaces, by hammering employers and their insurers with higher costs? I doubt it.

On the other hand, there are times when I am happy that workers carry the extra protection. One only need glance at a recent fatal fall in Buffalo, involving Jonathan Fundalinski, a 24 year old worker. We read in the Insurance Journal that the construction crew began erecting a safety railing minutes after Fundalinski plunged 30 feet to his death. According to police, the crew ignored repeated orders to stop as paramedics battled to revive the victim. The irony is that even if the crew was able to convince authorities that the railing had been in place before the fall, it wouldn't make any difference. It might support their case in some other state, but not in New York. Railing or no railing, the contractor is liable for the fatal fall of a young worker. They are going to pay, big time. And in this particular case, that's a good thing.

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April 3, 2007


Restless modern minds have developed some new approaches to risk. These examples of thinking "out of the box" will eventually end up back in the box - as case studies in business schools across the country: "Risk Management For Dummies - and we really mean dummies!"

NINJA Mortgages
Let's begin at the micro level: the collapse of the sub-prime home lending businesses, one bad mortgage at a time. This once hot market gave rise to some interesting schemes, none more absurd than what Steve Pearlstein of the Washington Post dubs "the NINJA mortgage" - no income verification; no job verification; no asset verification. You walk in with empty pockets, you walk out with a mortgage. Why didn't I think of that?

Of course, the mortgage starts out at a very low rate, one that even the NINJA householder can handle. After a year or two, however, the rates go up - way up. The homeowner (and I use that term advisedly) defaults, so the bank kicks them out and takes over the loan. Unfortunately, the value of the mortgage (issued at the peak of the market) exceeds the value of the house. As any good accountant will tell you, these numbers simply don't work. The once proud homeowner is forced to become a tenant; and the once proud lender (did someone say "New Century"?) skips the first ten chapters of the morbid story and heads straight for Chapter 11.

Florida's Insurance Shingle
Which brings us to some foolish thinking on a much larger scale, a scale as big as the state of Florida. Water views - the state's greatest asset - have become, with global warming, something of a liability. We are less than two years removed from the worst hurricane season in history, with three of the most destructive storms on record hammering the state's extensive coastline. Property insurers have gotten skittish. They want more premium for the risk of writing coastal property. But higher premiums make homeowners and politicians unhappy. While there's not much a homeowner can do, politicians could do a lot: they could tighten coastal zoning regulations. They could severely limit coastal development. They could establish barriers between the open ocean and development. They could raise construction standards. They could, but of course, they won't.

No. The first thing the politicians did was roll back the insurance rates. They put a couple of hundred bucks in the pockets of voters -- oops, I mean homeowners. Take that, Property Casualty Insurers! Then in its infinite wisdom, the legislature jumped head first into the property risk business. With a mere $1.9 trillion in coastal property exposure, the state has decided, essentially, to self-insure. That is, the state is underwriting future losses through future bonds. If another big one hits, the state will finance recovery by borrowing. How will they pay for the loan? Simple: by adding a surcharge to every business, auto and homeowner policy written in the state. It might cost the average homeowner $14,000 or more over the life of the bond, but at least they have a couple hundred in their pockets right now.

Unlike conventional insurers, who try to set aside adequate reserves to cover future losses, Florida has entered the gray zone of post-event funding. I suppose it might even work for a modest storm. But what about another major hit like Katrina - or, dare we think, two or three major hits? (I know. I'm a Nervous Nelly. With this country's pro-active, can-do approach to global warming, these hypothetical risks will remain...hypothetical!)

If you're interested in exploring the implications of Florida's Brave New Risk Retention program, Towers Perrin has a nice study here. They are careful to avoid any value judgments. They call their paper "a study of recent legislative changes to Florida property insurance mechanisms." I'm inclined to give it another title: Blowin' In the Wind: Florida Stakes its Future on Loaded Dice.

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April 2, 2007


Employers and insurers in NY take note: if you have claims with potential for second injury fund reimbursement, your window of opportunity for recouping recovery dollars has narrowed significantly. New York just passed legislation which includes provisions to phase out their fund. Also in the works, South Carolina legislators are discussing a schedule to close their fund as well, bringing a plan that has been under discussion for years one giant step closer to enactment.

New York Special Disability Fund - phasing out by 2010
The New York workers compensation reform bill, which was recently signed into law by Governor Eliot Spitzer, lays out a schedule for shutting the Special Disability Fund (aka Second Injury Fund) to new claims on or after July 1 of this year, and closing the fund down for all new reimbursement claims by July 1, 2010, regardless of date of injury. These are the major legislative provisions, but as the saying goes, the devil is in the details, which the folks at Insurance Recovery Group have explained in greater detail: NY Workers' Compensation Reform Impact on Second Injury Fund.

South Carolina Second Injury Fund - next up?
After years of debate around workers compensation reforms, the South Carolina Senate and executives of the Second Injury Fund are looking at possible schedules for closing the fund. Some proposals under discussion have this happening by 2013.

More information: For a primer on second injury funds, see our April 2005 post Maximizing recovery: Second injury funds.

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March 12, 2007


Well, that didn't take long. Only 19 days ago we wrote about the profound need for top to bottom reform of New York's worker' compensation statute, arguing that the election of Governor Eliot Spitzer provided the best opportunity in more than a decade to accomplish meaningful reform in the state that needed it the most.

Lo and behold, if a legislative bullet train didn't roar through Albany almost immediately. On March 6, the New York Assembly and Senate unanimously passed identical bills, whisked them through conference, beamed them up through first, second and third readings, and delivered them to Governor Spitzer for signature on March 8. If anyone can tell me of a piece of serious legislation that moved faster and with a better result through a legislature anywhere in America, I’d love to hear of it. It's as if the Governor waved some Harry Potter wand and dragons died and mountains moved. We should credit Speaker of the Assembly Sheldon Silver and Senate Majority Leader Joseph Bruno for bringing News York's Business Council and AFL-CIO to the table for a lesson in the fine art of political compromise.

The reform is broad-based and deep. It ratchets up the penalties for employer premium fraud, an allegedly humongous problem, the scope of which has only recently been exposed, and with which the insurance industry takes great issue. (PDF) For the first time, it establishes medical, as well as pharmaceutical, fee schedules that should be very helpful in the future.

What the reform adds to New York's workers' compensation statute is worthy and needed, but even more impressive is what the reform kicks to the side of the road.

Gone is New York's "till the day you die" permanent partial disability, replaced by a disability ranking system that, depending on the level of disability, can last up to ten years. However, there's a section that allows for conversion to "total industrial disability" in "extreme hardship" when an injured worker is more than 80% disabled. Not exactly what labor and claimants' attorneys wanted, but certainly as good as they were going to get.

Gone is the paltry maximum weekly temporary total disability payment of $400, replaced by a maximum rate to be phased in over three years, which will equal two-thirds of the average weekly wage in the state, indexed annually. This is still relatively low; I would have argued for the maximum rate to be exactly equal to the average weekly wage in the state. The result achieved, nonetheless, demonstrates the power of the compromise.

Gone is the Special Disability Fund (which, everywhere else in America is called the second injury fund), as of July 1, 2007, just three and a half months from now. Workers may not submit claims for injuries that happen after that date and cannot submit claims for any injuries that happened prior to that date after July 1, 2010. These funds are considered anachronisms by many policy makers, having come into being to assist wounded World War II veterans whose wounds might have made them prone to re-injury when they returned to the work force. Subsequently, they were viewed as employer incentives to hire previously injured workers.

Gone also, if I read the legislation correctly, appears to be the New York Compensation Insurance Rating Board (NYCIRB). Acting as Bureaus do in other states, such as Michigan, Pennsylvania, Massachusetts, etc., the NYCIRB is the insurer-funded organization that collects data, files for rate changes, and represents the insurance industry in workers' compensation matters in New York. Someone very powerful seems to have it in for Monty Almer, president of the board, and his actuaries and data collectors. The legislation mentions the NYCIRB in two key places, among others. First, the new law gives this charge to the Superintendent of Insurance:

"The Superintendent shall report to the governor, the speaker of the assembly and the majority leader of the senate on or before September first, 2007, on the compensation insurance rating board on matters related to the compensation insurance rating board. Such report shall address, among other matters the Superintendent may deem relevant to the compensation insurance rating board including: (1) the manner in which the insurance compensation rating board has performed those tasks delegated to it by statute or regulation; (2) whether any of those tasks would more appropriately be performed by any other entity, including any governmental agency; and (3) the rate-making process for workers' compensation."

Second, in Section 2313, a new subparagraph(s) is added, a poison pill if ever there was one. Apparently regardless of whatever the Superintendent's "report" says, the new subparagraph(s) clearly states that the NYCIRB can no longer file rates after February 1, 2008, five months after what can only be considered its performance report is delivered:

"The workers’ compensation rating board of New York… shall mean the compensation insurance rating board until February first, 2008, and thereafter such entity as is designated by law."
"…no rate service organization may file rates, rating plans or other statistical information for workers’ compensation insurance after February first, 2008."

Ouch! When these passages first appeared in the draft legislation on March 2, 2007, Mr. Almer and the NYCIRB issued a "bulletin" (PDF) reminding insurers, legislators and anyone else who might be listening that the NYCIRB is "a non-profit, unincorporated association of insurance carriers" funded by those carriers to represent their interests in the rate-making process. Neither Mr. Almer nor his bulletin appears to have had the necessary mojo to persuade the legislators to remove the offending passages. One has to wonder how New York's P&C industry is going to file its rates with the Superintendent of Insurance if the new law says it's illegal for it to do so. Just who does the governor and legislature think is going to represent the insurance industry? Some "governmental agency," as is hinted by the legislation?

We should congratulate the groups that came together so quickly to create and put in place this reform legislation. In most cases, it seems an admirable compromise. Folks at the NYCIRB might be excused for thinking otherwise, of course, but you have to hand it to New York politicians. When they take out the long knives, they're not afraid to use them.

This all bears continued scrutiny.

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March 5, 2007


In what continues to be perhaps the nation's biggest workers' compensation turnaround success story, the Massachusetts Workers' Compensation Rating and Inspection Bureau (WCRIB) on Friday filed a proposed average rate decrease of 13.4% to become effective 1 September 2007. If the state's newly appointed insurance Commissioner, former Superior Court Justice Nonnie Burns, approves the filing, rates in Massachusetts would be 64% lower than they were in 1991, when the Massachusetts workers' comp law was reformed, and nearly 70% lower than the high water mark of 1994.

Many other states have reformed their laws and achieved lower rates, but what is remarkable about Massachusetts is that while it has become one of the lowest cost states in America for employers, it continues to rank among the top 5 in terms of benefits awarded to injured workers. A very neat trick, indeed. (See our prior discussion of the rankings).

There are a number of reasons for this success; four stand out.

  • The 1991 reform lowered the temporary total disability payout from 66 2/3% of the injured worker’s wage to 60%. Concomitantly, the law tied the maximum weekly payment to the annual inflationary growth rate of wages in the state. Now, in 2007, that maximum is more than $1 thousand. This was a monumental compromise by business and labor.
  • The reform law established a medical fee schedule that was the lowest in the nation. Initially tied to Medicaid rates, the schedule now is about 80% of what Medicare reimburses, which many health care providers claim is ridiculously low. While surgeons and other Massachusetts medical specialists no longer accept these rates and will only ply their trades after negotiating higher payments with insurers and employers, primary care, as well as emergency care, physicians continue to work under the depressed rates. While this has been profitable for employers and insurers, it is a pressure cooker on the workers’ compensation stove, and the pressure is building.
  • The reform law significantly updated the state's antediluvian Department of Industrial Accidents (DIA). Process was streamlined, the administrative law judge corps expanded, attorney involvement and fees reduced, staff professionalism augmented and a fraud unit created. It has taken time, and many still complain that things take too long to get done, but it seems indisputable that the DIA's performance is considerably improved.
  • Employers got religion. At the time of reform and on a per capita basis, Massachusetts had the largest assigned risk pool in the nation. Fully 65% of all premium and 85% of all employers were pool-bound. The state's premium was just about $2 billion. In a leap of faith, the WCRIB, on behalf of the insurance industry and with the approval of the Commissioner of Insurance, created the Qualified Loss Management Program. The QLMP functioned as a kind of tuition reimbursement program for employers by which they received premium credits of up to 15% in return for engaging qualified consultants to help them prevent, minimize and manage worker injuries. The program was a Lynch Ryan proposal and, if you'll pardon an immodest moment, a huge success. Loss ratios declined precipitously, the pool drained, employers saw steep declines in rates and the P&C industry became profitable once again in Massachusetts.

A few dark clouds looming
Despite all the good news, the outlook isn’t totally bright. There are two dark clouds on the Massachusetts workers’ compensation horizon.

First, there is the little matter of AIG, which, at 30% market share, is the state's largest workers' compensation insurer. That would be fine if only AIG's statistical data were reliable. But it wasn't in the 2005 rate filing and, consequently had to be excluded from the filing. Now, history repeats itself and, once again, AIG's data has been deemed unreliable and is excluded from the present filing. This is a large embarrassment for the WCRIB. Bureau leadership would have much preferred to delay the filing to devote more time to the AIG problem, but by law there must be a filing every two years. But I know for a fact that the Bureau did all in its power to work with AIG to get reliable data. It didn’t happen, and more's the pity, because this opens the door to disputes in the rate hearing process. One would be pardoned for asking at this point, "What in the world’s going on with AIG?"

As if that weren't enough, during the rate filing of 2003, Massachusetts Attorney General, Tom Reilly, decided to enter the fray. At that time, the WCRIB filed for an increase in rates of 8.6%, the Division of Insurance's State Rating Bureau countered by filing for a decrease of nearly 10%. For Reilly, that wasn’t good enough. His office filed for a decrease of a whopping 21.4% (see my analysis of that rate dispute). Now, AIG's exclusion provides the springboard for similar dueling filings. We shall wait to see if Massachusetts' newly elected AG, Martha Coakley, is more temperate than her predecessor.

Notwithstanding the clouds, the workers' compensation picture in the bay state is pretty rosy. As we enter the rate hearing process, it will be interesting to see if it stays that way.

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January 24, 2007


We read in the New York Times that State Farm has suddenly agreed to accept liability for many of the claims it had previously denied in Katrina-ravaged Mississippi. The giant insurer has set aside a minimum of $80 million to settle 640 lawsuits. They have also agreed to re-open 35,000 denied claims. In most cases, home owners will collect half of the policy value. In a few cases, they will cash out at full value.

This is a dramatic turnaround from the insurer's prior position: they based their initial denials on the premise that most, if not all, the damage from Katrina was caused by storm surge (flooding is not covered by conventional homeowner's insurance) and not by wind (wind damage would be compensable). In the final analysis, I doubt that they are backing away from the scientific premise of their denials. They still probably believe that they are on solid legal ground for denying the claims. No, in the end, State Farm has agreed to pay claims it really feels are not compensable for one simple reason. They are still in the insurance business. They still want to sell policies. And the negative fallout from their routine denial of Katrina claims threatened their core reputation, the brand name they have so carefully cultivated over the years.

The Times article quotes Randy Maniloff, a lawyer at White & Williams in Philadelphia who represents insurance companies. He said yesterday that it was clear that the bad publicity had been a big factor in State Farm’s decision to settle. “They spent 80 years building up a brand,” he said, “and the adverse publicity from these lawsuits has been clearly doing damage to the brand. It just flies in the face of their portrayal of themselves as good neighbors.”

When we first blogged this issue, we raised the irony of State Farm's "good neighbor" tag line. Real neighbors help out regardless of the circumstances. In contrast, corporate "good neighbors" might well use the small print of an insurance policy to serve stock holders and maximize profits. If that means boarding up entire communities, so be it. There is at least some legitimacy to State Farm's original position. The case can be made that this capitulation is wrong and sets a dangerous precedent for the industry. Other carriers now have to scramble to recalculate their earnings statements. In addition, all purveyers of home owners insurance are revising policies to clearly and explicitly exclude storm surges from future coverage. But they are all going to help pay for Katrina.

Business and The Public Good
The scale of this disaster was so great, it transcends the insurance industry itself. While insurers are extremely reluctant to compromise the sacred language of the policy, they are involved here in something much greater than corporate bottom lines. Entire communities have been wiped out. The scale of displacement caused by Katrina is unprecedented in American history. State Farm's settlement is a small part of a great public good. As a result of this agreement, desperately needed cash will begin flowing at long last into the devastated communities. The rebuilding will finally gather some momentum. At the same time, State Farm can credibly tout itself again as a "good neighbor." Not the most willing, perhaps, and not entirely convinced they want to be doing it. Nonetheless, for the people of Mississippi, State Farm, like a good neighbor, is finally there.

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January 17, 2007


In his recent article, Contractors in Iraq are a taxpayers' nightmare, Joseph Neff of The (Raleigh) News Observer presents the most detailed accounting of workers compensation as it relates to Iraqi contractors as I've managed to find. We've discussed the issue of Iraq contractors and their workers compensation coverage before, but Neff's investigative journalism kicks things up to the next level.

Everyone knows that private contractors are being employed in Iraq - any who were ignorant of that fact certainly became aware when the grisly details of the deaths of four contractors in Fallujah became public. Private contractors aren't anything new. The military has relied on contractors to provide support and logistics services in prior wars. But in Iraq, the difference is that contractors are being employed in unprecedented numbers. According to Neff, there are currently 100,000 contractors in Iraq, a number that many might find surprising. As a point of reference, in the 1991 Gulf War, 9,200 contractors were employed to support approximately 1.2 million ground troops.

Because the contracting firms are private, public reckonings can be hard to come by. I would doubt that most Americans are aware that at least 646 private contractors have been killed in Iraq - I certainly wasn't, despite occasionally searching for this information. Details about fatalities, injuries, rates, and costs have been scarce. Neff's article explains why - essentially, there is no oversight.

"It is impossible to say how much the insurance costs. No agency regulates the premiums, and no one tracks the overall costs."

Going to work every day in war zone is pretty risky business and insurers would be loath to provide insurance in such dicey circumstances. The federal government recognized this, and since WW II, has provided a federal backstop in the Defense Based Act (DBA). All military contractors are insured under the provisions of this act, but the insurance is supplied by private insurance firms. The insurer is on the hook for everyday work-related injuries and illnesses, but when an injury or death is war-related, tax dollars pick up the tab.

As Neff notes, when the DBA was enacted, nobody ever contemplated that the number of private contractors might rival the number of deployed forces. That's one problem. Another problem is this pesky business of oversight.

"These insurance policies differ from conventional workers’ comp in one major way: Domestic workers’ comp is heavily regulated and analyzed, but the contractors’ insurance is not. The U.S. Department of Labor monitors the number of claims and resolves disputes over benefits, but it has no authority over pricing or availability."
"We are not an insurance commission operation," said Shelby Hallmark, director of the department’s Office of Workers Compensation. "We are not in the business of controlling or even monitoring prices."
"The Government Accountability Office, Congress’ watchdog agency, examined contractors’ insurance in 2005 and could not calculate its cost to taxpayers. The auditors couldn’t estimate what impact the insurance costs had on reconstruction activities in Iraq. The GAO found that Department of Defense contractors were being charged premiums between $10 and $21 for every $100 of salary."
That means taxpayers were paying up to $21,000 a year to insure a worker with an annual salary of $100,000, which is not unusual pay for a private contractor."

So this is mandated insurance, but there is no regulatory body keeping an eye on things? OK, do this math: $21,000 x 100,000 contractors. That would certainly seem substantial enough for someone somewhere to be paying attention, particularly when tax dollars figure into the equation.

Neff points to at least one official in the Army Corps of Engineers who is paying attention and who has cut some rates by as much as half through a competitive bid process.

"The Corps is only a part of the Defense Department contracting budget, Greenhouse said. Huge savings could be gained in the Army’s huge logistical supply contract, she said.
Houston-based Halliburton holds that contract, which is managed by the U.S. Army Material Command. Since 2003, the Army says, it has spent at least $284 million on contractors’ insurance under the Halliburton contract.
The insurance industry opposes putting the insurance contracts up for bid."
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December 21, 2006


We recently blogged the beginning of a national dialogue on universal healthcare. Because we focus our attention on the workers comp perspective, we pointed out that any national health plan will come up against - and in some ways run contrary to - the long-established, state-based workers compensation systems.

The National Council on Compensation Insurance (NCCI) recently published a study (PDF) that compares the costs of similar injuries under conventional health insurance and workers comp. Not surprisingly, the costs under comp are higher: higher not just for some injuries, but in literally each of the dozen injury-types examined. The study compares data only for the first three months after the injury. We can assume that the further out you go from the date of the injury, the greater the differential between the two systems. If anything, the three month time frame of this study significantly understates the higher costs of health care in the comp system.

NCCI studied a number of "chronic and complex" injuries (herniated disc, carpal tunnel, bursitis) and "acute and trauma-related" injuries (fractures and cuts). The cost differentials tended to be much higher in the "chronic and complex" injuries, with one exception: the cost of treating broken ankles was 50% higher in the comp system, comparable to the higher costs for the chronic and complex injuries. The costs of treating bursitis, carpal tunnel and herniated discs under workers comp were more than double those of conventional health plans.

Why The Difference?
While details can be found in the full study, we can boil down the higher costs of comp to a few fundamental issues:
: people treated under the comp system go to doctors and physical therapists much more often than those injured away from work.
: People treated under the comp system have many more diagnostic tests run - at higher cost - than those in the general health system
: The prices paid for medical services under comp tend to be higher than those paid under general health insurance (except in states where there are effective fee schedules)

Why do people treat more often in the comp system? Here we move beyond the limited scope of NCCI's study and draw upon our 20+ years in the comp business. When dealing with comp, you need to Keep in mind the underlying condundrum: people injured and out of work are being paid (indemnity) for not working. To be sure, injured workers all want to get better and most look forward to a speedy return to work.

The road back to work may be paved with good intentions, but, alas, it's also full of potholes. If you are at all ambivalent about your job (and many people are), if your injury gives rise to second thoughts about your safety at work, if being inactive while out of work leads to depression (it often does), you might find yourself focusing on the pain and the things you no longer can do. You might succomb to a "disability syndrome," where you no longer think of yourself as a worker, but as a person with a disability. Thinking of yourself as "disabled" is usually not a conscious decision, but more of a sublimal thought process. Perhaps equally important, you might have an employer who sends mixed messages about your returning to the job. Maybe underneath it all, they blame the you for the injury and they don't want you back.

Work-related and Non Work-related Treatment
Here are the key cost drivers that make medical care in the comp system more expensive:
: People out of work have lots of free time to visit doctors and have tests run.
: Because there are never any co-pays or deductibles in the comp system, there are no disincentives for seeking additional treatment. (Even a $15 co-pay begins to hurt after the 5th or 10th visit)
: Physical therapy feels good, so the end point keeps receding into the future. Where health plans arbitrarily cap the number of visits allowed per body part, comp has a harder time imposing any such limits.

Co-pays in the conventional health system serve as a brake on over-utilization. In addition, unless people with non-work-related injuries have disability insurance, they are not being paid during their recovery. They have a lot of incentive for getting back to work as quickly as possible. The incentives in the comp system are not so readily aligned with return to work. Injured workers can "root in" on comp benefits. It can be addicting to keep going back to your doctor and your physical therapist. Especially in "chronic and complex" injuries, the search for permanent solutions can be endless.

Thus comp involves a convergance of potentially contradictory forces: virtually unlimited medical care for your injury with no disincentives to the worker for seeking additional treatment; and the paradoxical position of being paid not to work, which may discourage a quick return to productive employment.

Forever Different
There is a way to align indemnity benefits for workers comp and non-work-related injuries: implement 24 hour coverage. Under this approach, every worker is covered by a disability policy that mirrors the benefits under comp. Lynch Ryan experimented with programs of this type in the mid-1990s. We aligned the indemnity benefits of the disability insurance with those of a given state's workers comp benefits. It was a great concept, but employers were reluctant to buy it. Comp, after all, is a statutory requirement, while disability coverage is optional. And even under a 24 hour program, the co-pays and treatment limits under conventional health insurance will always be less attractive to the consumer than the more open-ended benefits under comp.

Because comp is such a small part of the overall health system (about 3%), planners trying to craft a national health program are unlikely to take into account the comp system's idiosyncrasies. If we as a nation ever figure out how to provide universal health coverage, we might well end up solving one problem and creating a myriad of new problems in the comp system. That would be bad news for employers (and perhaps good news for the consultants who serve them).

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November 29, 2006


Judge Stanwood R. Duval Jr of the Federal District Court in New Orleans has opened the door to payments for homeowners whose homes were destroyed by Katrina. Or has he? We read in the New York Times that some insurers must pay for damage because the flooding in New Orleans was due to human error - specifically, the failure of man-made levees to hold back the water. Because most insurance policies do not specifically exclude "man-made" flood disasters, the judge has determined that the insurers must pay. On the other hand, he says that State Farm and the Hartford are off the hook because their policies do not provide coverage for flooding "regardless of cause."

While lawyers for the homeowners are calling this a major breakthrough, defense lawyers see it as a temporary set back. They are confident that the judge's parsing of the policy language will be overturned at the appeals court level.

"The judge reached the wrong conclusion," said Robert Hartwig, chief economist at the Insurance Information Institute. "The policies clearly exclude flood-related damage under any and all circumstances. We do not believe the decision will be upheld."

With over 200,000 homes and thousands of businesses damaged or destroyed by the flooding in New Orleans, there are billions at stake. Beyond that, the future of the city itself is uncertain, as billions in promised federal aid has failed to reach the people who need it.

Comp is Really Different
All of this litigation, the months and years of uncertainty for all parties involved, stand in stark contrast to the workers comp system. For those of us who deal with comp every day, we are reminded that comp is a no fault system that operates with generous parameters of compensability. If you are "in the course and scope of employment," if you are in fact someone's employee, your injury is likely to be compensable. Once a claim is reported to the carrier, the insurer usually has just a couple of weeks to determine compensability and start making payments. This standard can be difficult to meet and creates headaches for claims adjusters. But the great benefit is that it takes uncertainty off the table for injured workers and their families. They don't have to scrounge for food and shelter while their case wends its way through the courts.

We will follow the fate of New Orleans property owners with great interest. It will be fascinating to see if Judge Duval's ruling opens the floodgates to significant payments to home owners or just ends up being another judicial "distinction without a difference." The future of a city - and possibly that of the insurance industry - may well hang in the balance.

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November 28, 2006


Peter Gosselin, a staff writer for the LA Times, has written a provocative piece on the future of insurance. It's a must read for anyone interested in risk.

We all know that insurers want to sell insurance to people who are not likely to use it. In the rapidly disappearing "old days" of risk transfer, insurer actions were premised on the law of large numbers: if you sell relatively similar insurance policies to a large enough pool of insureds, the losses will be spread out. In effect, those less likely to file claims subsidize those more likely. Because rates up until recently have been pretty much the same for all, the coastal homeowner pays relatively less for insurance; the secure inland homeowner, less at risk, pays a relatively higher rate for insurance.

This is no longer the case. Insurers are backing away from coastal exposures. The price of insuring coastal homes goes up and up, limited only by the intervention of state regulators. Often, the state itself has to create a risk-bearing mechanism so that coastal homeowners can be covered. Meanwhile, property insurers, having identified what their actuaries have determined to be low risk prospects, go into their death spiral of cutting rates (and paying higher commissions to agents) to secure the business. They're no longer interested in big pools. They want to limit their writings to prime risks only. In effect, they are easing their way out of the risk transfer business.

The Hazards of Mining
We are already deep into the brave new world of data mining. Insurers can develop a much more specific and detailed profile of each risk. Armed with geographic, climactic, economic/credit history, education and other data, they isolate the factors that might indicate a direction toward filing a claim (bad risk) or never filing a claim (good risk). In the predatory world of insurance, this translates, of course, into highly favorable (discounted) rates for the good risks; and higher and higher costs for those identified as bad risks. State regulators look upon the increasingly sophisticated pricing models with alarm, because they know that lower and middle income people often bear the brunt of higher costs.

Not-So-Fine Print
Katrina opened the eyes of its victims to the fine print in insurance policies: water damage simply wasn't covered. Now property owners whose homes have been totally destroyed by any cause (fire, tornado, etc.) are confronting not-so-subtle changes in the wording of their insurance policies. No longer providing "guaranteed replacement cost" - ie., rebuilding the home as it was - insurers now offer "extended replacement cost" - which limits payments to a specific dollar amount. Homeowners who built in the 80's and 90's might assume that there is a built-in escalater clause to cover the higher cost of rebuilding in 2006. They are dead wrong. And I'd be very surprised if anyone has bothered to tell them about the changes.

The End of Insurance?
We may be seeing a fundamental change in the nature of insurance. Insurers have always been risk averse, but now they have the tools to limit their risks dramatically. As the concept of pooling evaporates, as insurers begin to slice and dice prospects into dozens, even hundreds, of categories, the number of losers is likely to exceed the winners. For one reason or another, a very large number of people who have been identified as "bad risks" will be faced with exponential hikes in the cost of insurance. (If health insurers try to base their pricing on genetics and family history, all hell will break lose!) Meanwhile, those identified as good risks will be able to choose among highly discounted products. Brand loyalty will disappear in the proverbial New York minute.

Peter Bernstein, author of the highly readable and entertaining Against the Gods: The Remarkable Story of Risk, thinks the new insurance strategies are doomed: "Insurers who look at each risk individually at the expense of broadly diversified pools are going to end up in the soup. Diversification, not flyspecking one risk at a time, is the insurers' optimal form of risk management."

We'll see. The insurance industry is undergoing a paradigm shift of enormous importance. The new model will probably generate some hefty profits, but the party may not last very long. There will be howls of protest from the millions who, for one reason or another, have been deemed to be "bad risks." Then the rhetoric will explode: "Bad risks of the world, Unite! You have nothing to lose but your (coverage) chains!"

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November 6, 2006


Here’s a question for you: If you were to ask any employer in America how his or her workers’ compensation costs compare to similar employers in other states, what do you think the answer would be? Well, I’ve been doing that with employers I meet for a long time, and I have yet to meet one who thinks his or her costs are lower than those of employers in other states.

Moreover, if you expand the question to inquire about employee benefits, most employers will venture that indemnity benefits paid in other states are most likely lower than what’s doled out in theirs.

It’s the old, “The grass is always greener” thing. But is it really, and how would you know? And here’s one last question: Suppose those employers really wanted to know the comparative cost and benefit data for their state and decided to ask a room full of insurance professionals about it. What do you think the insurance professionals would say?

For many years, we at Lynch Ryan have tracked research reports from three highly credible organizations that produce state rankings of workers’ compensation costs and benefits, one a private actuarial firm, another an Oregonian governmental entity and the third a non-profit, Washington, DC, foundation.

Actuarial & Technical Solutions, Inc, an actuarial consulting firm located in Ronkonkoma, NY, has been publishing state cost and benefit data annually since 1992. Its 2006 report, Workers’ Compensation State Rankings – Manufacturing Industry Costs and Statutory Benefit Provisions, has been released within the last month.

The Oregon Department of Consumer & Business Services publishes comparative cost data every two even-numbered years. Oregon’s 2006 Workers’ Compensation Premium Rate Ranking Summary Report was released this past Friday, 4 November 2006 (the complete report won’t be published for another two to three months).

And the National Foundation for Unemployment Compensation and Workers’ Compensation (UWC), headquartered in Washington, DC, has, since 1984, published annual, and class specific, comparative state data in a report titled, Fiscal Data for State Workers’ Compensation Systems. In this report. you’ll find annual data and total indemnity and medical benefit payments over the last 12 years.

The UWC has also published a Research Bulletin called, State Workers’ Compensation Legislation and Related Changes Adopted in 2005. Perusing that somewhat eye-glazing, 77 page report offers up such tidbits as Maryland’s House Bill 461, which “Applies workers’ compensation occupational disease presumptions to Montgomery County correctional officers who suffer from heart disease or hypertension (my italics) resulting in partial or total disability or death,” effective 1 October 2005. Wow!

The Oregon reports are free; Actuarial & Technical Solutions charges $105 for a single report, and the UWC reports costs $25 for those who are not members of the Foundation ($20 for those who are).

The first thing you need to know about the three comparative cost reports is that, while they use different methodologies, they all pretty much arrive at the same place. For the most part their rankings are in general agreement. One state may be ranked #5 in one report and #7 in another. Personally, that’s close enough for me.

All three reports contain some rankings that appear predictable, but there are surprises and paradoxes, too. For example, notwithstanding changes to its law, most workers’ compensation professionals would expect California to be at or near the top of the cost rankings, and they’d be right. But who knew that my home state, Massachusetts, which so many of my conservative friends continue to call Taxachusetts, would rank way down at the bottom, either 43rd or 47th, depending on whose report you read? That’s a surprise, and here’s a paradox: Despite ranking as the least costly of the major industrial states in which to buy workers’ compensation, Massachusetts provides higher benefits than any other state except Nevada, which ranks in the middle of the pack in terms of cost.

We have found the data mined from these reports, as well as others, invaluable as we consult to employers and insurers around America. Searching out and understanding this research, and doing our own, as well, allows us to put costs and benefits in perspective and is very helpful in designing reasonable and achievable cost reduction targets for our clients.

I urge the workers’ compensation professionals among our readers to get and read the reports. It’s time well spent. If you’d rather not do that, but have some questions about them, you can email us at communicationsATworkerscompinsiderDOTcom (insert the @ and "." where indicated - we avoid spelling it out to foil the spam bots). Or, if you’d prefer, call anyone at Lynch Ryan (my direct line is 781-431-0458, Ext 1). We’d love to hear from you.

By the way, if you do get in touch, let us know what you think of the Insider and if there’s anything you‘d like to see us do to make it even better.

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October 23, 2006


Judge L. T. Senter Jr. of the Federal District Court in Gulfport has ruled on the first of thousands of claims by Gulf Coast homeowners against their insurers. The judge addressed several issues related to the catastrophe: did the home owner's policy cover flooding? He ruled it did not. Did the policy cover a combination of wind and water damage? He ruled that it might. And of interest to our many insurance agent readers, was the agent liable for failing to recommend federal flood coverage to the Leonards? The judge ruled that the agent was in the clear. (What's that I hear - a collective sigh of relief, like air rushing from a punctured tire?)

Judge Senter said Nationwide’s home insurance policy was clear in its refusal to cover flood damage. (This type of exclusion is found in virtually all homeowner policies.) But he said the section of the policy that asserted that Nationwide had no liability for either wind or water damage when they occurred in combination or within a few hours of each other was ambiguous. The judge opened the door to claimants who could prove that the damage was both wind and water driven. (Given the nature of hurricanes, the ruling opened a very large number of doors, indeed.)

The judge said that the wind damage was covered “even if the wind damage occurred concurrently or in sequence with the excluded water damage.” He determined that most of the damage to the Leonards’ home in Pascagoula was the result of flooding, and thus Nationwide was not required to pay the full amount the Leonards were demanding.

Nationwide had paid the Leonards $1,661.17 for wind damage. Judge Senter said that, because of what he determined to be additional wind damage, they were entitled to another $1,228.16. Whoopdeedo for the Leonards. The extra bucks will buy them a couple of appliances (assuming, of course, that have a home to put them in).

Famed attorney Dickie Scruggs was disappointed, but he was able to find a silver lining in the ruling: “We didn’t bring home the full measure of damages for the Leonard family,” he said. “But they cleared a big path for all the other homeowners on the Gulf Coast.”

By the way, Dickie Scrugg's brother in law, Trent Lott (R- MISS), lost a $600K manse in the storm and is more than a little upset with State Farm for denying his claim. He's taking on the entire industry in a personal, and potentially far-reaching vendetta.

Agent of Destruction?
Jay Fletcher was Nationwide’s agent in the case. He had been selling insurance to the Leonards since 1989. The Leonards contended that Fletcher misled them by implying that their home-owners policy would cover water damage caused by storm surge. Paul Leonard claimed he got that impression during a conversation with Fletcher in 1999. The two met to discuss various matters, and the conversation got around to flood insurance. Leonard said the topic was on his mind because of public discussions concerning the lack of such coverage in homeowners policies, following Hurricane Georges in 1998.

The judge examined the nature of the agent's advice: "Fletcher sometimes discouraged his clients from purchasing flood insurance policies. That much is clear from the testimony of a variety of witnesses …. There was enough evidence on this point to warrant the conclusion that Fletcher, as a matter of habit and routine, expressed his opinion, when asked, that customers should not purchase flood insurance unless they lived in a flood-prone area (Flood Zone A) …. But between 2001 and the time of Hurricane Katrina, Fletcher sold approximately 187 flood insurance policies in the Pascagoula area. Fletcher sold 12 policies in the neighborhood in which the Leonards lived."

The agent's inconsistency puzzled the judge, who couldn’t figure out why Fletcher discouraged some clients from buying flood insurance but went ahead and sold it to others—some quite near to the Leonards. But inconsistency is not necessarily negligence.

"There was no discussion of the reason Fletcher did not believe Leonard needed to buy a flood insurance policy. Leonard apparently inferred that Fletcher’s reason for advising him that he did not need a flood policy was that his home-owners policy would cover any and all water damage that might occur during a hurricane," Judge Senter wrote. "This was an erroneous inference, and one that might have been avoided had either party to the conversation been more articulate in his inquiry or in his reply."
NOTE to homeowners: push your agent for clarity. Write down the response.
NOTE to agents: Be as clear as possible with your clients. If you're not sure what to recommend, be clear in your uncertainty.

Standard of Care
While Fletcher could have said more and could have been more explicit in his reasoning, Judge Senter did not find that he was legally obligated to do so: "This is no evidence in the record to establish the standard of care applicable to an insurance agent who is asked about the advisability of purchasing flood insurance. Absent proof of this standard of care, there is insufficient evidence to support a finding that Fletcher’s statements to Paul Leonard indicating that he … did not need to purchase a flood insurance policy breached a standard of care that governed Fletcher’s conduct as an insurance agent in these particular circumstances. Fletcher’s statement was advisory in nature, and the statement was made in circumstances in which it was reasonably foreseeable that Leonard would rely on it. But there is no evidence to support the conclusion that this statement was made negligently."

In the post-Katrina era, we wonder whether the "standard of care" has changed - whether agents must now at least put the flood insurance option on the table, where appropriate.

Advice to Agents
This close call in federal court should serve as a wake up call to agents. No, agents don't need to recommend flood insurance to everyone. But you do need to be clear about what you recommend and why. If coverage is a borderline call, help your clients sort out the options. Throw in a few disclaimers. And unless you are supremely confident in your ability to sort through the ever-widening exposures confronting your clients, you might look into an errors and omissions policy. Consider that some friendly advice from the Insider (with our own disclaimer, of course, that we do not sell insurance, we do not endorse any insurance products and we are not responsible for the advice provided).

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October 17, 2006


The Insider is partial to actuary jokes. Perhaps it's because so much depends upon the actuarial viewpoint. These are the people who drive the insurance bus. Those of us seated in the bus often feel a bit queasy, as the driver has the vehicle pointed backwards and attempts to drive while looking through the rear view mirror. They drive in this hazardous manner, because historical losses are the primary predictor of future losses. Well, sort of.

One joke says that actuaries are accountants who couldn't stand the excitement. But when you look at the big picture in workers comp today, there is plenty of excitement and a lot of uncertainty. You have to admire anyone trying to make sense of current trends by predicting future losses in the comp field. In a word, you have to admire the actuaries. (Check out our links to a number of admirable actuarial blogs.)

Retirement Receding
The comp industry is confronted with many issues relating to an aging workforce - including the fundamental fact that many people are postponing retirement: some won't retire because they like working, while many more plan to keep working because they have to. As people work longer, we will begin to see more claims activity in the higher age groups: people in their 60's, 70's and even 80's will suffer work-related injuries and, despite their ages, will file comp claims. Comp administrators in each state will be confronted with new issues as these claims wend their way through the system.

Here are a few of the condundrums that we assume might lead the actuaries to lose a bit of sleep:
: aging employees with no retirement options (except, perhaps, retiring on comp)
: People in manufacturing and construction in their 50's and 60's, their bodies breaking down, with work a significant contributing factor in the breakdown
: Aging, over-weight and poorly conditioned workers performing physically demanding jobs
: Aging workers whose ability to perform the job safely erodes a little each year
: Older workers returning to work after knee surgery, at risk for further surgeries
: Older workers with little education, broken bodies and no transferable skills
: Illegal immigrant workers, working hard, growing older and suffering from permanent partial disabilities

Casting No Aspersions
I have no idea how actuaries will go about factoring in the new and largely unprecedented risks of an aging workforce into the calculation of premiums. We can only wish them luck - and perhaps, have a little fun at their expense. While the Insider would never cast aspersions toward the work of actuaries, we think it appropriate to let them make fun of themselves. Here's a little sample of their self-deprecating humor, compiled by Jerry Tuttle. Based on these examples, actuaries may be having a better time than the rest of us have been led to believe.

"Old actuaries never die - they just get broken down by age and sex."

How do you get an actuary to laugh on a Thursday? Tell him or her a joke on a Monday.

How do you tell the difference between an actuary and the deceased person at a funeral? The deceased
has a new tie.

Workers compensation fatality benefits are generally payable to the surviving spouse until death or remarriage, so remarriage is the actuarial equivalent of death.

An actuary is someone who expects everyone to be dead on time.

Two actuaries are duck hunting. They see a duck in the air and they both shoot. The first actuary's shot is 20 feet wide to the left. The second actuary's shot is 20 feet wide to the right. The actuaries give each other high fives, because on average they shot the duck.

What does an actuary's wife do when she has insomnia? She rolls over and says, "Tell me again, darling. Just what is it you do for a living?" [NOTE: this works just as well for insurance consultants.]

"I once told an actuary to go to the end of the line. He came back five minutes later and said he couldn't because someone else was already there."

Here's wishing the best of luck (and solid projecting) to the actuaries in their rear-view oriented look toward the future. And good luck to the rest of us, who must live with the consequences of their work!

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September 12, 2006


When it comes to workers comp reform, it's always a good idea to follow the money. Too often, reforms focus on dollars saved, as opposed to measuring the quality of services provided. Too often, reform comes at someone's expense: often conscientious medical providers, and almost always, injured workers. Here are a couple of recent examples:

Ohio: Managing Care or Managing Cash?
As part of the mid-1990 reforms, Ohio requires all employers to sign up with a managed care organization (MCO). This was supposed to privatize the handling of claims and lower costs. They did indeed privatize managed care, but as an article in the Cleveland Plain Dealer makes all too clear, they did not lower the costs. The paper estimates the cost of reform at $1.6 billion. In fact, since the MCO system began, the overall number of claims in Ohio fell 48 percent, but the annual cost to manage the system, including the MCO component, increased by $167 million. Even when you account for inflation, this is an increase of 30 percent. The costs per active claim increased from $442 to $914 in constant dollars.

This being Ohio, land of the infamous Thomas Noe (an Insider Frequent Flyer - just enter his name in the search engine to the right), don't blame us for jumping to certain conclusions: we suspect that the increase in costs have a direct relationship to increases in political contributions. The Ohio Bureau cut a sweetheart deal with CareWorks, the major MCO player in the state. CareWorks was given exclusive access to substantial discounts for inpatient hospital stays - discounts not available to the other MCO players. So CareWorks could squeeze the hospitals, offer discounts to their employer-clients, and still have enough left over to keep the politicians happy. The best of all possible worlds, unless you're a medical provider or an injured worker...

Our colleague Joe Paduda, who blogs at managed care matters, is quoted in the article. In typical Joe fashion, he sums up the Ohio system in one word: "unconscionable."

California Dreaming...or Nightmare?
The land of Arnold underwent some radical reforms a couple of years ago. The preliminary results look good. Costs to employers are down substantially (although nowhere near levels in neighboring states) and insurers are actually making money. Is it party time in tinsel town?

Not quite. We read in the LA Times that reforms have come at the expense of specific benefits. While California was never known for its generous payments to injured workers, the reforms drastically reduced permanent disability benefits. When you have Stanley Zax, President of Zenith National Insurance, the state's biggest private comp carrier, calling for a restoration of the benefits, you know you have a problem.

The article cites the example of a former star athlete who lost a leg in a construction accident. Under the old law, he would have received $122,812. Under the reforms, his benefit is less than $30,000, and the insurer has turned down his request for a prosthetic leg, rehabilitation training and physical therapy (all of which would increase the likelihood of his returning to productive work).

In the days prior to reform, the prime beneficiaries of California's whacked out system were unscrupulous doctors and attorneys. The crack down on their injury mills was long overdue. However, it's neither fair not prudent to make genuinely injured employees bear the brunt of reforms. In this particular case, the reforms appear to meet the Paduda standard: "unconscionable."

Benefits are Not the Problem
Over the past 15 years of comp reform, as you review the changing statutes from one state to the next, there is one common denominator: a reduction in benefits paid to injured workers. In Massachusetts, perhaps the most successful of all the reform projects, the state dropped from being the 3rd most expensive to an overall ranking around 45th. However, the average weekly wage benefit was reduced from two thirds to 60 percent. In retrospect, the reduction seems a bit gratuitous. The reforms would have been just as effective without this indemnity cut.

We're all for reform. But let's not balance the books on the backs of injured workers, who bear little, if any, responsibility for the comp crisis of the late 1980s. The best reforms create a fair and responsive system, with as little "friction" as possible. Reforms need to focus not just on medical rate schedules and insurer protocols, but on employers themselves, because without educated employers, the system cannot work effectively. Employers must respond to the injured employee in a supportive manner, document the incident, secure prompt treatment and speed recovery through the use of temporary modified duty. Employers are in a unique position to manage the recovery process. If they blow it, the tools of managed care, utilization review and good claims adjusting will not achieve the goal of reducing costs.

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August 15, 2006


When the talk turns to workers comp fraud, the default assumption is that the employee is the culprit. In reality, employer fraud is a huge problem, of a scope that many in the industry would say dwarfs claimant fraud. According to Loretta Worters of the Insurance Information Institute in a recent article in the San Antonio Business Journal, premium fraud may cost the insurance industry as much as $30 billion a year.

In the same article, Dennis Jay of the Coalition Against Insurance Fraud suggests that premium fraud might be committed frequently because there is little enforcement. In describing the nature of the fraud, he states:

Workers' compensation rates ... are based primarily on three areas: 1) the amount of payroll; 2) the degree of risk -- construction work is riskier than secretarial work; and 3) the claims experience of the company.

"It's basically done by businesses that fail to disclose the true character of the risk they present," Jay says. "A company can lie about these three areas to try to reduce their overall premium."

Prevalence: an ongoing problem
On any given week, a cursory search of the news turns up multiple instance of employer fraud:

The nature of the beast
Workers compensation is compulsory insurance in every state but Texas. With some few exceptions, all employers are mandated by law to carry workers compensation insurance. Employers commit fraud when they fail to secure or maintain workers compensation coverage for their employees, or try to reduce their obligations by intentionally misclassifying employees or under reporting payroll.

Fraud schemes hurt us all. First and most importantly, injured workers are often left without recourse or forced to bring suit to pay for medical care. Honest employers also pay for the misdeeds of fraudulent employers through higher premiums as insurer costs "trickle down." In some industries, such as general contracting, honest employers may also suffer a competitive disadvantage since fraud perpetrators have a lower cost of doing business and can offer lower prices in competitive or bidding situations.

Spotting employer fraud
Employer fraud often surfaces after an injury occurs when investigations reveal that an employer lacks coverage entirely or lacks coverage for a portion of the work force, such as workers wrongly categorized as independent contractors. One infamous case of this nature involved the owners of the Station nightclub in Rhode Island who faced a million dollar fine for failure to carry workers compensation insurance. This failure was revealed when the families of four deceased employees were left without benefits.

Certain industries – such as businesses that employ a high number of contract, temporary, or seasonal workers - are rife with potential for fraud. In Florida last year, a sweep of construction sites resulted in more than 90 stop work orders. Some potential fraud indicators that companies may be trying to avoid regulatory compliance include businesses that pay people in cash or that have complex organizational structures and multiple business names. For a more comprehensive list of potential indicators, see Ohio's list of red flags for workers compensation.

Is my employer compliant?
If you suspect that your employer doesn't have workers comp coverage, what can you do? Most states have mandatory posting requirements so you can look on bulletin boards to see if these and other employee right-to-know postings and licenses are current. In many states, employees or job candidates can check on whether an employer is insured by calling the state workers compensation authority. Many states also have fraud hot lines where workers can anonymously report suspected fraud. A Google search of workers compensation fraud hot lines turns up many numbers, or you can check with your specific state insurance bureau.

Prior postings on this topic:
Employer Fraud: In Search of a Level Playing Field
Proliferation of premium fraud

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June 30, 2006


Maybe it's because we've seen so little sun this summer, or maybe because Josh, my lawyer friend, was stuck in upstate New York when 100 miles of interstate near Syracuse was closed due to flooding, or more likely it's because I saw Al Gore's compelling lecture/movie "An Inconvenient Truth." But as I prepare with everyone else to celebrate this July 4th, I'm feeling a little pessimistic about the weather. Call it "global warming" or just the usual climate cycles, the consequences for risk managers and property insurers are profound.

For a primer on the insurance aspects of the crisis, check out Doug Simpson's excellent blog, unintended consequences (great title for a blog!). He'll link you to some startling information about coastal property insurance. He also links to the Environmental Protection Agency (EPA), which is one government agency that at least acknowledges the possibility of global warming, rising oceans and changing weather patterns. However, the EPA posts have not been updated since 2000. Perhaps we haven't learned anything new in the past six years.

Actuarial Weatherpeople
These are difficult times for insurance actuaries. Even if you predicted last year's record-breaking hurricane season, how could you have foreseen the amazing rain this spring and summer, inundating the northeast and Atlantic central states. Property damage has been nothing less than astounding. And the Gulf Coast is nowhere near fully recovered from Katrina, last year's "storm of the century."

Ah, there's the rub. Was Katrina truly an outlyer, a once in a lifetime event, or a portent of things to come? How would you price property and business disruption insurance along the gulf coast? I'm not sure whether academic programs are combining actuarial studies with climatology, but that's surely where the action is going to be for the foreseeable future. Wanted: actuarial climatologists. The only problem is that actuaries tend to predict the future by looking backwards and the scale of recent weather events appears unprecedented.

I suspect that the alarming graphs and charts in the Gore movie are still flashing in my head. Or maybe it's just the relentless cloud cover that hangs over the weekend. It brings to mind a quote from Mark Twain: "Climate is what we expect; weather is what we get." With all the recent turmoil in the weather, our expectations for climate are turned inside out. These days, climate and weather are the same: equally unpredictable. We no longer have any idea what to expect.

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June 27, 2006


When is an employee benefit not a benefit? When it's workers comp.

Andrew Simpson, Jr outlines in the Insurance Journal a recent case before the US Supreme Court, which ruled in June that premiums for workers comp insurance, unlike those for health insurance, are not bargained benefits and therefore, comp insurers are out of luck when a company goes bankrupt. While health insurers have priority for payment out of bankruptcy filings, comp insurers do not.

The case is Howard Delivery Service, Inc., et al v. Zurich American Insurance Co. Howard contracted with Zurich to provide workers' compensation coverage for its operations in 10 states. After Howard filed a Chapter 11 bankruptcy petition, Zurich filed an unsecured creditor's claim for some $400,000 in premiums.

The high court reversed the Court of Appeals for the Fourth Circuit, which had held that payments for workers' compensation coverage were "contributions to an employee benefit plan ... arising from services rendered" and thus subject to the bankruptcy priority provision. The high court ruled instead that workers compensation premiums are more like liability premiums than employee benefit costs and as such do not fall under the section of bankruptcy code (11 U.S.C. section 507(a)(5)), which assigns priorities to unsecured creditors' claims for unpaid contributions to an employee benefit plan. In other words, comp is the benefit that is not really a benefit.

The court found it significant that comp is mandatory while other fringe benefits are not. But this distiction itself is changing, with some states moving aggressively toward mandating that employers provide health coverage for their employees (MA recently passed just such a law). I wonder if the court's thinking will change when health insurance is no longer optional.

Strange Bedfellows
Justice Ginsburg was joined in her majority opinion by Chief Justice John Roberts and Justices John Paul Stevens, Antonin Scalia, Clarence Thomas and Stephen Breyer. This has to be one of the more bizarre aggregations of concurring justices in recent court history, bringing together bits and pieces of the left and the far right wings. Similarly, the dissenters are an unlikely grouping of right, left and center, encompassing Justices Anthony Kennedy, David Souter and Samuel Alito.

Unrequited Claims
I hardly need add that the insurance industry is not happy with this ruling. In this particular case, Zurich American must cover all the Howard comp claims, even though they will not collect all the premium. Bruce Wood, an industry spokesman, says: "The court simply got it wrong. The majority's narrow focus on the priority provisions of the bankruptcy code overlooked that workers' compensation coverage is mandatory." [Actually, they didn't overlook the mandatory aspect - they concluded that because comp is mandatory, it's not a bargained benefit.]

"This decision means that an employer trying to reorganize its business will no longer be required to pay its workers' compensation premiums. This result will jeopardize continued coverage, because an insurer now has no legal authority to compel payment of premiums and doubtful incentive to continue coverage." [They may lack incentive to continue coverage, but they will have to provide it anyway.]

Wood also warns that self-insured employers will face similar problems. "Even though a self-insured employer is paying an on-going claim for a past injury, after a bankruptcy filing, ongoing medical treatment and cash benefits may stop because the lack of explicit priority for workers' compensation dumps injured workers into the same category as other unsecured creditors." [I would be surprised if a bankruptcy court allows a self-insured company to stop paying these benefits.]

Change that Law!
This court ruling places comp carriers at the end of the line for payment, not exactly where they are used to standing. The Court's goal is "equal distribution" - they see the need to severely limit the list of priority creditors and they have explicitly dropped comp carriers from this select list. As soon as the ruling hit the streets, the phones of industry lobbyists started ringing, the Gucci shoes were polished and the reservations were made at the finest restaurants in Washington. It will take a change in the bankruptcy law to re-arrange the creditor priorities established by this ruling of the Court. By any reasonable measure, that's a long shot, but I wouldn't underestimate the ability of the insurance lobby to mobilize Congress. The public might not have much sympathy for insurers, but your local Congressman knows a chunk of change when he or she sees it.

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June 7, 2006


New York's workers' compensation system is expensive, adversarial, administratively cumbersome and, in many ways, harmful to the very people it is supposed to serve, employers and injured employees. Now, the Professional Insurance Agents of New York State (PIANY) have authored an insightful, forward-thinking and very intelligent Legislative Position paper that addresses the state's serious workers' compensation problems. It should be widely read and discussed.

To quote from the document:

"The present workers' compensation system acts as a detriment to New York's economic development and fails to function well for the benefit of workers. PIANY supports a comprehensive reform of the workers' compensation system in New York to preserve and enhance worker benefits, prevent work-related disability and reduce inefficiency and fraud."

PIANY's proposals (a pdf can be found here) are refreshing, because not only do they address predictable issues such as fraud and rate setting procedures, but also because they shine a bright light on the state's problematic benefit levels and the way it delivers them, as well as the lack of a fee schedule for prescription drugs and a slowness "to allow and encourage the workers' compensation system to benefit from the application of managed medical care."

Perhaps the most employer-helpful recommendation is the first one the agents make. Straight from the top they focus on workplace safety, pointing out that two major credit programs were approved by the legislature in its reform of the statute in 1996, but never implemented. The agents ask, "Why?" Pretty good question.

The PIANY has issued a clarion call for reform. Good for them.

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May 31, 2006


One of the ironies of modern life is that we can go anywhere in the world, but we often find ourselves immobilized in the process. There are a number of circumstances that render us immobile: long haul air travel - 4 plus hours (on a bad day, that might be just runway time!). Sitting in a traffic jam or driving to a distant destination. Long hours in front of the computer or TV. Any prolonged period of inactivity places us at risk for Deep Vein Thrombosis - a blood clot that can lead to health complications, even death.

The Insider is not sure why people in Great Britain are much more focused on DVT risk than Americans. In England you even can buy specific insurance for DVT. Airlines based in England are contemplating changes in seat design to reduce the risks. The threat of lawsuits might soon result in posted warnings for airline passengers.

Some people are more at risk for DVT than others. Here's a listing of risk factors, a broad net that encompasses most of us. (For more detail on these factors, check out the website).

: age - as people over 40 are at greater risk of DVT
: a past history of DVT
: a family history of DVT
: an inherited condition that makes the blood more likely to clot than usual
: immobility
: obesity
: recent surgery or an injury, especially to the hips or knees
: pregnancy
: having recently had a baby
: having cancer and its treatments
: taking a contraceptive pill that contains oestrogen - but most modern pills contain a low-dose, which increases the risk by an amount that is acceptable for most women
: hormone replacement therapy (HRT) - but for many women, the other benefits outweigh the increase in risk of DVT
: treatment for other circulation or heart problems

Risk Transfer and Risk Mitigation
As with any risk, there are a number of ways to respond. Some people move immediately to risk transfer: get someone else to cover the potential loss. That's where the new insurance policies come in. If you die of DVT within 10 days of air travel, you collect 10,000 pounds. Congratulations!? This insurance is odd for several reasons: the risks are strongest after the 10 day eligibility period ends, so you might succomb from DVT but not collect anything. (Chaulk one up for the insurance actuaries!) In addition, because the insurance only pays for your death, it's really life insurance. Why bother insuring for just one potential source of your demise when a simple life policy covers you under virtually any circumstances? It's hard to imagine that DVT insurance is going to be a hot seller.

A more attractive alternative to insurance, we think, is the practical advice offered to people locked into a sedentary position: just get your blood circulating. On an airline, get up and move around. If you're driving in a car, or if you have a window seat on the plane, you can perform "traffic jam aerobics." If you are adverse to any suggestions of exercise, just make sure you stop and get out of the car for a stretch every two hours. It also helps to drink plenty of water and limit the consumption of alcoholic beverages and caffeine.

Here are some specific exercises, many of which will not be appropriate for the driver, unless the traffic is at a complete standstill:

Downward Foot Press: Press the balls of your feet down hard against the floor and raise your heels to increase the blood flow in your legs. Hold for five seconds and repeat 10 times. (Needless to add, avoid downward pressure on the accelerator!)

Shoulder Rolls: To ease the tension of sitting in one position for too long, lift the shoulders up towards the ears, roll the shoulders backwards and then down in as big a circle as you can manage. This will help to release tension in the upper back and neck, so is especially good if driving for long distances in stressful traffic.

Shoulder Press: Lift the arms to touch the car roof, take the arms outwards and back down, and repeat.

Elbow Circles: Place your fingertips on your shoulders and draw circles in the air with your elbows. Another great move to help release tension in the neck and upper back. (You might also get some interesting responses from other drivers.)

The bottom line is relatively simple. If you find yourself in a situation which severely limits your ability to move around, do something to engage the muscles of your arms and feet. A few simple risk mitigation steps will do the trick. As for the insurance, buy a lottery ticket instead. The likelihood of a payout is about the same.

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May 15, 2006


All major businesses carefully construct a public image. Sometimes reality bumps up against the image with gale force winds. Insurance giant State Farm likes to present itself as a "good neighbor, someone you can count on." For nearly 700 homeowners whose homes were destroyed by hurricane Katrina, the good neighbor is beginning to look a bit like Jack Nicholson in The Shining. Picture a family huddled in the ruins of their home. A hatchet blasts through what's left of the front door and a grinning Nicholson says, "State Farm is here!"

State Farm has categorically denied insurance coverage for hundreds of homeowners in the wake of Katrina. The denials are based upon an engineering report developed by Haag Engineering, a Texas company founded in 1924 that specializes in failure and damage assessments. Famed attorney Dickie Scruggs says that the engineering report produced by Haag is "patently biased" because it concludes that Katrina's storm surge arrived before the wind could do any damage to policy holder homes. Because State Farm policies exclude flood damage, the claims of these 669 homeowners have been denied.

Scruggs has already lost one lawsuit when a court found that State Farm's policy of excluding damage from Katrina's flood waters are "valid and enforceable." So if the storm surge indeed destroyed the homes, these homeowners are simply out of luck. If, on the other hand, they can prove that at least some of the damage was caused by the winds that preceded the storm surge, they may be able to collect something. How much they collect will ultimately be determined by the courts.

Scruggs also claims in the lawsuit that many of the State Farm adjusters who inspected homes in Katrina's immediate aftermath told homeowners that wind damaged their houses hours before any water from the Mississippi Sound surged onto land. But State Farm apparently rejected their findings and fired, transferred or reassigned many of the adjusters. Exit Gregory Peck, enter Jack Nicholson. Depositions from current and former claims adjusters will make for interesting reading.

Good Neighbors versus Good Insurers
A good neighbor helps out, no matter what the circumstances. But that's not the way insurance works. Any help from an insurance company is contingent upon the language of a specific document. For hundreds of Gulf Coast residents, one thing is clear: their homes have been destroyed. Whether they will be reimbursed for their losses depends on whether the destruction came from wind or water. Good neighbors don't give a hoot about such distinctions, but insurers certainly do.

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May 10, 2006


Let's say you run a large insurance company. You sell through your own agents, one of whom has been a marginal performer for many years. You place the employee on probation several times, but he seems to be trying hard, so you continue his employment. This individual suffers from bi-polar disorder. Over the course of a decade, he goes out on FMLA leave a couple of times for treatment of his mental illness. When his doctors release him for full duty with no restrictions, he returns to work, but the poor performance continues. Finally, you give up. In accordance with company policy, you ask him to pack up his personal belongings and you escort him to the door.

He sues. You lose.

An article in the Boston Globe by Diane Lewis provides the details. A federal jury has awarded $1.3 million to a veteran insurance agent with bipolar disorder who alleged he was fired as a result of his disability.

The 11-member jury awarded Kevin W. Tobin, 60, $500,000 in emotional distress damages, $439,315 in lost wages, and $416,664 in lost pension and retirement benefits caused by his termination by Liberty Mutual Insurance Co. in January 2001.

In court papers, the company argued that from 1992 to 2001, Tobin failed to meet minimum standards and was placed on probation several times. The company also claimed that he rarely ''prospected" for new business.

Tobin's attorney, Frank Frisoli, argued during the trial that the insurance company did not adequately accommodate Tobin's disability as required by the Americans with Disability Act. During the trial, Frisoli said, Liberty Mutual argued that Tobin did not have a disability even though it had approved two prior disability leaves and created a reentry program to help the insurance agent improve his job performance.

Frisoli maintained yesterday that his client would have been able to perform the essential functions of his job if he had received the same amount of help as others in his office, including a top performer who was given three assistants. By contrast, Frisoli said, his client received sporadic assistance from a service representative who supervised other representatives and was not always available.

''He had difficulty going from task to task," said Frisoli. ''But he was willing to work long hours and he did it regularly to make up the work."

A Warning for Employers
It's premature to draw extensive conclusions from the limited information in this article, but here's the part that might truly alarm employers: by approving FMLA leave, Liberty appears to have undermined its contention that Tobin did not have a disability. (On the other hand, if they tried to deny his leave to seek treatment, they surely would have violated the ADA.) More important, once an employer approves FMLA leave (for an employee's physical or mental disability), you may be on the hook for a wide range of "reasonable accommodations," even if none are requested and even though eligibility for FMLA leave does not necessarily mean that the employee meets the ADA definition.

Liberty had a marginal employee. While they did try to provide some re-entry support to Tobin when he returned from his disability-related leave, they allocated most of their resources where they had the optimum effect on the bottom line: high achievers got extra administrative support. The low achiever, Mr. Tobin, got little help. Tobin's attorney was apparently able to transform this "business as usual" scenario into a "failure to accommodate." In other words, because of Mr. Tobin's disability, Liberty had an obligation to dedicate additional resources to bring him up to minimal standards. Liberty's lawyers failed to convince the jury that Tobin was simply unable to perform the essential functions of the job.

This case embodies a very tricky human resource issue that could confront almost any employer. From this distance, the jury award appears to blur the line between an employee's ability to perform the essential functions of the job and the employer's obligation to accommodate. It remains to be seen whether this is an important precedent, or something that will disappear in the course of Liberty's appeal. In the meantime, employers might want to begin to make a connection between FMLA leave and the obligation to reasonably accommodate.

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May 5, 2006


It's a sunny, mild Friday and the mind wanders away from work, to the ballpark. The Insider has been thinking about Jeff Bagwell. For Red Sox fans, Bagwell will always be the one who got away, traded in 1990 to the Houston Astros in an ill-advised deal of legendary proportions. The Sox acquired the services of an aging relief pitcher named Larry Anderson for a couple of months. Anderson was gone by the end of the season. Bagwell went on to a stellar career with Houston, ringing up huge numbers with his bat. His lifetime batting average is near .300. He is ranked among the top five first basemen of all time. Now, in the twilight of his career, his skills are diminishing. The question has become, does a man who can barely throw a baseball 35 feet meet the definition of disabled?

Bagwell's disability is the subject of a lawsuit between the Houston Astros, who say he's disabled, and Connecticut General Life Insurance, who says he was not disabled during the period the disability policy was in effect.

To acquire disability coverage, the Astros paid $2,409,343 in premiums. (You have to wonder how underwriters and actuaries determine premiums for this type of risk.) Bagwell makes about $18 million a year. (We are a nation with awesomely aligned priorities, that's for sure!) The terms of the Policy are relatively straightforward. It provides a schedule of benefits payable to the Astros in the event (a) Mr. Bagwell becomes totally disabled and (b) the terms of and conditions of the Policy are met.

$86K a day!
Under the Policy, the Astros are to receive $85,748 for each regular season day that Mr. Bagwell misses due to total disability. (In the world of workers comp, where indemnity is tied to the state average weekly wage, $86K represents the total lifetime settlement figure for a major disability.)

Bagwell, who is currently on the 15-day disabled list with arthritis and bone chips in his right shoulder, was deemed disabled as a professional baseball player by two physicians in January. Based on those reports, the Astros filed their insurance claim on January 27, just four days before the policy ended.

On March 13, Connecticut General sent a denial letter to the Astros, based upon the fact that Bagwell was an active player in last year's world series and then showed up for spring training this year. In other words, he was not disabled in the fall and he was not disabled in the spring. They don't accept the January finding. The Astros counter that Bagwell's being on the series roster was in honor of his years of service to the team, not his very limited capabilities last fall. And even though he tried to play in spring training, his injuries prevented him from doing so.

Modified Duty?
Unfortunately for the carrier, the Astros play in the National League, where there is no provision for a designated hitter. Even though Bagwell's bad shoulder prevents him from throwing the ball well enough to play the field, he might be able to swing a bat. But that "reasonable accommodation" would be an option only in the American League.

So no modified duty for Bagwell. It's full duty or nothing. The amount of money at stake in this situation is mind-boggling. On a common sense level, it's simply absurd. It's enough to make you shut down your computer and head home, where you can set up a portable TV on the patio, pop open your favorite brew and catch the first pitch of the weekend series.

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April 30, 2006


Public sector institutions, created in response to crisis, often outlive their usefulness. A case in point seems to be Beacon Mutual Insurance Company of Rhode Island.

Most Insider readers are probably aware of the currently escalating catastrophe triggered by the audit report delivered April 14th by the committee headed by former Governor Lincoln Almond. Since I’ve observed the saga from the beginning and have intimate knowledge of the politics involved in how it came to be, I’d like to offer a personal perspective.

The saga begins in 1990.

Those who have been in the workers’ compensation arena since at least Ronald Reagan’s last term will recall the national crisis of the late 80s and early 90s. By way of example, in my home state of Massachusetts, 1992 total workers’ compensation insurance premiums were nearly $2 billion; now, premiums total around $800 million. Rates are where they were in 1981. Quite a turnaround.

Starting in the late 1980s, Lynch Ryan had done a lot of consulting business in our neighboring state, Rhode Island, because workers’ compensation problems were no different there. For a tiny state, costs were on a rocket ride to the moon. Of course, for insurers, as in most states, the problem manifested itself in the Residual Market, or assigned risk pool. Not enough premium going in, coupled with ever increasing losses, meant that the pools had insufficient money to pay the incurred value of claims, resulting in huge residual market deficit charges to insurers. Something had to give, and what gave is what usually gives in these situations. Insurers voted with their feet and stopped writing business in many industrial states, including Massachusetts, Rhode Island, Maine, Texas, California…the list is long. All of which caused the already flaming assigned risk pools to blaze even higher, like a bonfire with fresh gas.

Different states, different approaches to the problem
Different states reacted differently. In Massachusetts, a bi-partisan reform of the law, combined with the creation of the Qualified Loss Management Program, slowed, stopped and, by 1994, started to reverse the run-away train. Rhode Island, Maine, Texas and California approached the crisis from other angles.

For example, Texas decided to amend its law to allow employers to “opt out” of the workers’ compensation system altogether (I can remember flying to Texas to be interviewed for the McNeil Lehrer Hour on PBS and opining that “The Texas Legislature should be ashamed of itself.” National TV exposure can get one to spew hyperbole).

In addition to statute reforms, giant California, Down East Maine and little Rhode Island created state funds to take over their assigned risk pools.

California’s difficulties are long-standing and well-documented. Maine hired away from Travelers the exceptionally competent John Leonard. Regardless of whether one liked the idea of the creation of these state funds, which I didn’t, John made the thing work, and work well in Maine (Young and foolish, I can also remember saying in an interview that the states were “sweeping their problems under the carpet so posterity could trip over them.” Sorry, John, one lives and learns).

In any event, by the mid to late 90s, and putting aside some noteworthy state exceptions, the national crisis was becoming a national memory as costs dropped, insurers re-entered the marketplace and management, especially at NCCI, began to breath again. NCCI’s then president, Bill Hager, gave his famous “Back From The Brink” speech at the council’s 1995 annual meeting, during which the attendees heard Bill loudly proclaim, “We’re back from the brink!” 27 times.

I thought then, and still think now, that when the tide turned and costs fell, the great state of Rhode Island, taking a page from its native son, Major General Nathaniel Green, should have declared victory, folded its tents and, with trumpets blaring, left the field in triumph. But that did not happen.

Beacon Mutual, the company created with $5 million of state taxpayer money, the company that, to this day, has never paid taxes or contributed to the Guarantee Fund, got the Rhode Island legislature to approve its writing business in the voluntary market, eventually becoming Beacon Mutual, yet retaining its “special status” as a state fund. And, despite the good work done by many of its employees, Beacon Mutual, precariously straddling the razor-thin fence that sometimes separates the public from the private sector in Rhode Island, inevitably became a candidate for political and economic corruption. Beacon was allowed to set it own rates and could underbid any other insurer that had the temerity to want to write business in the state. It did “most favored nation deals” with certain agents and employers, some of whom, until last week, sat on its Board of Directors. Competition became non-existent. Although 60 carriers are licensed to write workers’ compensation in Rhode Island, Beacon Mutual insures 76% of the state’s premiums ($160 million) and 90% of its employers and wanted more by expanding to other states.

But along the way to becoming Goliath, Beacon Mutual picked a fight with someone armed with more than a sling shot, Governor Don Carcieri, who, given the Almond Report, seems committed to making the company bend to his will.

It will certainly be interesting to see how this whole thing plays out. Sort of like watching Rome burn. But for me, the bottom line is this: states should not set up insurance companies. And if they do, they should get out of the business as soon as is humanly possible.

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March 31, 2006


Last June during the filming of Mission Impossible 3, Steven Scott Wheatley, a Hollywood stuntman, was standing near a Chevy Suburban that was supposed to be blown up by a missile. The device planted in the vehicle detonated prematurely and Wheatley was burned over 60% of his body. He is now suing Paramount Pictures, Tom Cruise's production company (Cruise/Wagner) and the independent contractors responsible for pyrotechnics, alleging that their negligence caused him "severe personal injury."

It's worth taking a few moments to read through the actual text of the lawsuit, filed by his attorneys at Federico C. Sayre. Among other charges, Wheatley alleges that the above parties failed to hold safety meetings and training in the use of pyrotechnics. (How many film crews actually meet that California-OSHA standard?) They failed to inspect unsafe conditions. He points to the parties's "undelegable duties" in performing an "abnormally dangerous activity." He also says that they willfully and knowingly placed a defective device in the vehicle. The law itself dictates the language of his accusations - they are trying to prove negligence. I suspect that in the pressure-packed world of film-making, safety violations are routine and "negligence" is as common as cliches in the dialogue.

Comp Pays First
Wheatley is employed by Entertainment Partners. We can assume that he is collecting workers comp for his injuries: his medical bills are being paid and he is receiving 2/3 of his average weekly wage, up to the CA maximum of $728 - although the maximum probably falls well below what Wheatley usually draws as a stuntman. (The CA maximum wage, while signficantly higher than it used to be, is still among the lowest of the major industrial states.)

Wheatley's own employer was not responsible for the injuries. With so many business entities involved, the door to third party liability is wide open. Unlike workers comp, which narrowly defines available benefits, Wheatley is able to sue for pain and suffering, for his inability to manage his home, to show love and affection to his children, and literally, to make love to his wife. In addition, his wife is able to sue for her own (considerable) mental anguish and damages. While his workers comp claim probably runs in the middle to high six figures, the tort liability will likely be in the multiple millions.

Comp vs. Tort Liability
This case brings into stark relief the differences between workers comp and tort liability. Under comp, no matter how severe the injuries, no matter how long the recovery period, benefits are limited to lost wage recovery (up to the fairly low ceiling in CA), medical bill and pharmacy coverage (100%), and some scarring and disfigurement benefits. Comp literally does not contemplate pain and suffering, nor does it recognize the suffering of the family. It's "no fault." While employer negligence might result in some relatively modest penalties, for the most part, it simply doesn't matter.

In trying to prove negligence, Wheatley's lawyers do not necessarily have a slam dunk. Was the device in fact defective? Did someone know that it was likely to fail? Could anyone have prevented the accident? Did Wheatley in any way contribute to the danger? In the world of comp, these questions are irrelevent. The injury occurred at work and is surely work-related. How much Wheatley ultimately collects will be determined by the skill of his attorneys, matched by the plaintiff's formidable legal team.

I expect that the lawyers will come to some agreement prior to trial, settling the case without any finding of negligence. For lawyers, it's mission possible: coming up with a hefty dollar figure that makes the problem go away. For Wheatley and his family, regardless of the outcome of the lawsuit, it's truly mission impossible: trying to salvage a quality life from the ruins of a single moment on the job.

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February 28, 2006


Today the Insider looks at seemingly divergent issues which converge in a striking manner: federal involvement in mine safety (MSHA enforcement), federal prosecution for workers comp fraud, and the ongoing saga of work in the mines. It's a complex picture, but one which resolves into a single focus: the exploitation of the people who work in mines.

MSHA and the Phantom Miners
We begin with an article by Frank Thomas in USA Today. The recent disaster at the Sago mines killed 12 miners. We were all momentarily saddened by their hastily penned farewell notes to their families, but that was then, and this is now. It turns out that MSHA had found numerous violations in the Sago mine prior to this disaster. But to determine fines, MSHA uses a bizarre math: they multiply the violation by the number of miners exposed to the specific danger. In 90% of Sago's violations in 2004 and 2005, inspectors said one person was endangered. You send a crew into a mine, but MSHA comes up with a count of one! As a result of this peculiar math, the fines prior to the disaster were minimal.

Here are some specific examples cited by Thomas in the article, quoting federal inspectors:

• On Aug. 16, 2005, an inspector found a main escape path "obstructed by concrete blocks." On Nov. 8, 2005, an escapeway was "not being maintained in a safe condition to assure passage of anyone." Sago got six citations for blocking escapeways miners use to flee a fire or explosion. Each citation said one miner was endangered. The mine paid $60 fines for two violations. The amounts of the four other fines are being decided.

• On Aug. 16, 2005, an inspector found "chemical smoke" being blown toward areas where two mining teams were working. A team typically has eight to 10 miners. The citation said one miner was endangered. A fine is being determined.

• Sago was cited for 22 violations from July 2004 to December 2005 for "accumulation of combustible materials" — coal dust and coal chunks that can spread fires and explosions. All 22 violations said one miner was endangered. MSHA fined the mine a total of $1,768 for 17 violations and is deciding fines for the five others.

Thus, on the prevention side, MSHA's enforcement efforts were seriously undercut by an unwillingness to accurately count the miners. MSHA blew an opportunity to put real leverage into enforcement before the disaster occurred.

More Phantom Miners
Now the second story. Meg Fletcher has an interesting article in Business Insurance about a case of workers comp fraud in Tennessee. Once again, undercounting of miners is a key to the situation. Gary Slater ran several leasing companies that provided workers for the mines. He operated companies with deceptively similar names: for example, Carol Dale Contracting Inc and Carol-Dale Inc. He would secure workers comp for one of the entities, but not for the other. He employed over 100 miners, but only about 15 were formally covered by a workers comp policy.

When a worker was injured, Slater would either buy them off or, in the case of a more serious injury, he would move the employee from the payroll of his uninsured company to that of his similarly named insured entity. Then he would file a claim. As a result of his gross understatement of payrolls, he was able to defraud two insurance companies of over $6 million in premiums.

Unfortunately for Slater, his scheme had one fatal flaw: by absorbing the losses for over 100 people, the premium for his insured entity (with a payroll of only 15 people) was vastly understated. So his rate of injury was extremely high (even in the high risk world of mining), and his experience rating went through the roof. As a result, the insurers began to investigate.

Federal Charges
Slater was done in by his own success. As a result of avoiding comp premiums, he generated huge profits that had to be hidden. So he set up an elaborate money laundering scheme involving phony invoices for trucking services. Because his criminal activity involved both the mails (mailing key documents including fraudulant application forms for insurance) and money laundering, the investigation was able to benefit from robust federal resources. After his partners in crime pled guilty and agreed to cooperate, Slater's conviction was a slam dunk. He has been sentenced to nine years in prison and ordered to pay more than $5 million in restitution.

Ghosts of Living Workers
These two story lines converge in the hard-scrabble lives of the miners. The common theme seems to be that miners literally do not count. MSHA cannot see them, so mine owners, instead of being financially motivated to fix safety problems, avoid heavy fines. The owners in some cases don't even hire the workers - they lease them from the likes of Mr. Slater, who in turn hides the workers off the payroll and avoids paying taxes and benefits.

Every day thousands of people put on their gear and go where none of us would go. They live in constant fear. They never see the sun at work. Even if they survive from shift to shift, they face long-term health hazards. These "ghost workers" move among us, as we turn on the lights, crank up the heat, and log onto the internet. We cannot function without them, but we, in turn, are doing a very poor job of making their work safe and of rewarding them for their sacrifices.

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February 22, 2006


Montana courts are examining the issue of whether the state can terminate workers compensation benefits to workers at age 65, and if the court finds in favor of the plaintiff, the Montana State Found could be forced to retroactively pay benefits to those over 65. Grocery store worker Catherine Satterlee (PDF) has challenged the constitutionality of Montana's law on the basis that terminating benefits treats people differently based on age. In December, the Workers Compensation Court found in favor of the state, but the decision is now expected to be appealed to the state's Supreme Court.

This issue is one that demonstrates the 50 state labyrinth that is workers comp. States handle this matter differently, as evidenced by the Department of Labor's chart on benefits for permanent total disability by state statute (PDF). While most states stipulate "duration of disability" or "life" as the maximum benefits, a handful of states do cap benefits by duration, such as North Carolina at 500 weeks and Mississippi at 450 weeks. North Dakota and West Virginia also cap benefits at retirement age when Social Security and Medicare benefits would kick in.

An editorial in The Missoulian lays out some of the issues at play in this case:

"What you see in this statement is the necessary balancing of interests essential to the whole concept of workers' compensation insurance. Workers are entitled to compensation only for lost wages and medical costs. The benefits are limited not because the Legislature is mean, but because unlimited benefits create unlimited risk for employers. Unlimited liability threatens the very existence of businesses, putting everybody's job at risk. We need jobs; we need employers; workers and employers share the need for insurance covering workplace injuries. That's the reality reflected in the Legislature's “Declaration of Public Policy” for worker's compensation.
In explicitly stating that workers' compensation isn't intended to make injured workers “whole,” the Legislature is saying the benefits are for lost wages and certain fringe benefits, not for lost opportunity or quality of life, however tragic those losses sometimes are."

Essentially, this is what most laws and court challenges center around - the economic need to strike a balance between providing benefits for the employee and limiting potentially ruinous liability for the employer. Workers comp was largely intended as a stop-gap rather than a make-whole measure. That being said, Montana's practice varies from the national norm, and it will be interesting to watch the decision of the court.

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January 26, 2006


One plaintive plea we often hear from employers is "help me get out of the pool!" If you're wondering what the heck a pool is and why being in one is viewed as a negative, you aren't alone. Workers comp is rife with nooks and crannies. Unless you're an insurance wonk or you suddenly find yourself in one, pools may be of little interest. But for the employers that are assigned to the residual market or "the pool" - some 13% of insureds in the states administered by NCCI in 2004 - it can be an eye-opening experience, particularly since it is an occurrence that is usually marked by a steep increase in costs.

Most employers are insured for workers comp through the voluntary market. In other words, an insurer affirmatively agrees to write the employer's policy. But there are some organizations that are unable to obtain coverage in the voluntary market. There are many reasons why an employer may be unattractive to insurers: perhaps the company is in a high-risk industry, such as roofing; perhaps the company has a poor loss experience, with a history of frequent or expensive claims; or perhaps it's just because a company is too new or too small to be a good risk.

Because workers comp is a mandatory coverage (for almost all employers in almost every state), some type of market of last resort or "residual market" mechanism must exist to ensure coverage for any employers that aren't able to secure coverage in the open market. The way the residual market is handled can vary from state to state. Some states administer assigned risk pools; in other cases, NCCI administers these pools. Christine Fuge offers a good overview of the different mechanisms in her article Navigating the Workers Compensation Residual Market. (While some details may have changed since 2002 when the article first appeared, the concepts remain largely unchanged.)

Market conditions are a factor
The pool population ebbs and flows with general market conditions. In any given state, when a market is healthy and rates adequate, insurers flock to the state to write business. This creates a competitive environment for employers and the pool is generally at its lowest ebb. When market conditions are troubled due to inadequate rates, scarce reinsurance, or other factors, insurers tighten up their underwriting criteria and become more selective. Availability constricts and the pool fills up.

If the pool gets large enough, the market can be dangerously destabilized. This was the case in Massachusetts in the late 1980s when the residual market burgeoned to $800 million, more than 65% of the entire premium in the Commonwealth, and more than 80% of all employers. Our CEO, Tom Lynch, was instrumental in crafting an innovative credit program, the Qualified Loss Management Program (QLMP), designed to de-populate the pool by offering a credit to employers who learned to control losses. Through the QLMP, thousands of employers improved their loss experience and were able to exit the pool.

All pay, no play
When a buyer is in a competitive market, there is some leverage in terms of price and service. Employers in the residual market enjoy no such advantages. There is one certainty, however - coverage will be costly. Employers that find themselves in the pool may be:

  • subject to costly surcharges and significantly higher rates
  • ineligible for premium discounts or scheduled credits
  • limited in terms of available services
  • facing little or no choice in insurer

Are you a good risk? Getting out of the pool
If you are in the pool and you want to get out, there are no shortcuts - it all comes down to controlling losses. And because all losses are pooled, there may be little in the way of incentives or disincentives for your insurer to help in controlling losses, so it's all up to you. First and foremost, prevent any injuries from occurring; but if injuries do occur, ensure that you have a caring, responsive management system in place to help your employees recover and return to work. Provide excellent, high quality medical care. Communicate with employees frequently throughout the recovery process. Let employees know their rights and responsibilities. Be fair and consistent. Provide early return to work programs.

For more information, see Jon Coppleman's article entitled Are You a Good Risk? (PDF). NCCI also offers some excellent articles about the rights and responsibilites of a residual market policyholder, along with an array of resources for residual market employers, brokers and insurers. It is also important to check your individual state's workers compensation authority for state-specific regulations.

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January 9, 2006


For many years, West Virginia was one of a handful of monopolistic states in which all workers compensation was handled by a state compensation fund. After years of punishing losses, the state legislature moved to privatize the fund. The first phase of this privatization began on January 1 when the state compensation fund passed the baton to BrickStreet Mutual Insurance Co., a newly formed mutual insurance company. On January 2, the Sago mine explosion occurred, resulting in the deaths of 12 workers, and catastrophic injuries to the one survivor.

CNN reports:

“The mutual company -- which is owned by the 42,000 employers in West Virginia -- will be the sole provider of workers' compensation policies to businesses that operate in the state until July 2008, when the market fully opens to other private companies. Businesses in the state are required by law to provide workers' compensation insurance.
"This is a very difficult beginning for the transition," said Robert Hartwig, chief economist at the Insurance Information Institute, an industry group. "But BrickStreet is fully capable of handling this type of event financially."

Benefits available for McLoy, families of deceased

Because the deaths and injuries from this mining disaster were work-related, workers compensation benefits will be available to Robert McLoy, the surviving miner, for medical costs and wage replacement. The families of the deceased miners will also be eligible for benefits. Insurance Journal reports

" ... the families of the miners who died in the accident will receive a workers' compensation benefits of up to $5,000 paid to the funeral home for its services. He said there is a workers' compensation family dependent benefit which would be two-thirds of the average weekly wage of the worker for the proceeding 12 months, up to a maximum of $568.78 per week, and that is for as long as the dependency lasts or until the worker would have reached age 70.
In the case of a dependent spouse Wessels said the benefits would continue until the deceased would have been 70. The benefits for dependents continue until the dependent reaches 18, or if they stay in school, until 25 and there are some provisions about incapacitated independent children. He pointed out that none of the benefits are subject to state or federal income taxes."

It is possible that workers compensation may not be the exclusive remedy in this instance. Business Insurance notes:

"ICG, which began operating the mine in November 2005, may face claims beyond those falling under workers comp, though, especially if survivors of those killed are able to use safety-related issues as a basis for suing the company outside of workers compensation system, observers note.
Several questions already have been raised about the significance of the mine's poorer-than-average safety record, including 208 safety violations in 2005. In addition, miscommunications that occurred while miners' families awaited the outcome of rescue efforts resulted in anger at company officials."

Confined Space offers more information about safety issues related to the Sago events and to coal mining in general in yesterday's post, Sago Mine Disaster: Just the facts, Ma'am.

Additional reports:
Boston Globe: Sago Mine safety declined sharply
USA Today: Latest coal tragedy reveals lax safety enforcement
Charlston Gazette: ’05 Sago safety record worse than most

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October 11, 2005


In yesterday's New York Times (the free section, registration required), we learn that IBM has a Chief Privacy Officer, which tells you something about the current state of affairs in corporate America. We also learn that IBM has issued a policy asserting that it will not use genetic information in hiring or in determining eligibility for health care and other benefits (including, I assume, disability and life insurance policies).

Before you offer a standing ovation to the CPO, remember that IBM has a vested interest in keeping genetic information off the table: as an information technology company with a increasing presence in the medical industry, IBM has a business stake in promoting genetic data gathering and processing.

There are quite a few employers who would be sorely tempted to use genetic information when evaluating job applicants or current employees. Employers who are self-insured for health care would love to screen out people with family histories of expensive illnesses. The EEOC has issued guidelines for federal employees on the use of genetic data, with congress contemplating related legislation to limit the misuse of this information among employers. But questionable use of genetic information can also flow the other way: individuals who learn that they have a genetic predisposition for a disabling illness have a strong incentive to load up on disability policies -- and in doing so, they can be reasonably confident that no insurance carrier can access this information for underwriting purposes!

You might assume that genetic information would have no bearing on workers comp. Think again.

Back in 2002 the Burlington Northern and Santa Fe Railroad was fined $2.2 million by the Equal Employment Opportunity Commission for genetically testing (without permission) 36 employees who had filed carpal tunnel claims. The railroad was apparently trying to determine if the employees had a genetic predisposition for the malady -- and therefore might be ineligible for comp benefits. In agreeing to settle the case, the railroad denied that it violated disability laws (specifically, the ADA), but vowed not to use genetic tests in future medical examinations.

In this particular situation, ethical issues aside, I think the railroad was pumping the side car down a dead-end spur. Even if the tests had proven positive, with some of the employees having a genetic predisposition for developing carpal tunnel, the railroad would still have to pay the claims. It would be impossible for the employer to demonstrate that the repetitive demands of railroad work had nothing whatsoever to do with the eventual malady.

Personnel Practices
In comp we say that you have to take people as they come to you. Virtually all applicants walking through the door have issues that might eventually put them on your workers comp loss runs. Prudent employers will carefully define the essential requirements of each job, specifying exactly what people must do and how they must do it. Employers can ask questions to verify the applicant's experience and ability to perform these essential job functions. They can study prior job histories and references for patterns or problems. Once someone is hired, the employer can and should carefully supervise the work as it is being performed. Best practices focus on behavior and performance, leaving what's hidden in the genes appropriately beyond the scope of the employer-employee relationship. Let's hope that most employers can stay on the ethical track without requiring the services (or expense) of a Chief Privacy Officer.

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October 4, 2005


Garrison Keilor, host of the Prairie Home Companion on Public Radio, recently responded to the debate over teaching evolution in high school by stating that he has seen little evidence of evolution or of intelligent design in the way the affairs of this country are being managed. Which brings us to the convergence of two obliquely related items: the aftermath of hurricanes Katrina and Rita and the pending decision on the renewal of the federal Terrorism Risk Insurance Act (TRIA). (See our previous blogs here and here.)

Our colleague Peter Rousmaniere addresses TRIA's revewal in the current edition of Risk and Insurance. He points out that the issue is not simply a matter extending TRIA. You'll find some people favoring extension, while others are ready for the private market to take over. Peter says this debate misses the point: neither option addresses the magnitude of the risks confronting us. Currently, we lack a viable model for addressing the impact of catastrophes -- whether manmade or the acts of terrorists -- on our country.

If Katrina and the subsequent evacuation of Houston taught us anything, it's that we are woefully incapable of emptying out major urban centers even with a few day's notice. When I saw the long lines of unmoving cars stalled out on the freeways heading out of the city, two things come to mind: "Pack up the BMW and head north" is not an adequate evacuation plan. And a lot of urban Americans don't even own cars in which to sit, unmoving, alongside thousands of their fellow citizens.

Enhancing TRIA
Rousmaniere asks us to consider three critical factors in the TRIA renewal debate:

First, TRIA must hold insurers accountable for their actions. By categorically reinsuring every carrier at a certain level of loss, the Act eliminates incentives for prudent planning and risk mitigation. The incompetent carrier and the carrier which invests in detailed planning are treated the same.

Second, the Act does not address coverage. As a corollary to number one, the Act does not require insurers to take on potential "hot spots" in terrorist attacks. There are high profile "trophy" targets across the country, which somehow must be insured.

Third, TRIA is silent on the issue of risk management. The Act does not require insurers to undertake any prevention or mitigation investments. It's worth mentioning, of course, that carriers oppose any such requirements. It seems that everyone is content to sit back and see what happens. If disaster strikes, we'll load up the Beamer and head out, right?

"Intelligent Design"
If you are curious about the process for really understanding potential catastrophes and the response options, I highly recommend a study done by the Wharton Business School entitled "Tria and Beyond." You won't find a lot of answers here, just a lot of very intelligent questions and a nicely framed discussion. You might even call it "intelligent design" -- something we could use a lot more of as we contemplate the unnerving possibilities of the road ahead.

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September 28, 2005


There are a lot of solutions floating around with all the debris from Katrina and Rita. Here's one: take all the people without flood insurance whose homes were destroyed and offer them retroactive coverage. They pay ten year's worth of retroactive premiums (paid for out of the settlement) and they collect up to the policy maximum of $250,000. They use this money (minus the retro premiums) to rebuild their homes. These homeowners also agree to continue to pay for flood insurance as long as they own the property. (In my cynic's eye, I can see a flurry of sales to third parties, voiding the indefinite commitment to secure flood insurance in the future. After all, hurricanes don't strike twice in the same place, do they?)

This is a pretty strange notion: buying insurance after you already know you need it. I can hear my actuary friends saying, "Hey, wait a minute. You can't do that!" Well, these are special circumstances, so maybe you can. The problem is, someone has to provide the capital, so that communities can rebuild.

AM Best addresses the fallout from the move in Mississippi to require insurance companies to cover flood damage, the language of the homeowner's policies be damned. "Any sort of move in this direction is an affront to the constitution and sets a horrendous precedent," says Bob Hartwig, chief economist with the Insurance Information Institute. "You cannot have a capitalist economy where contracts are ignored."

Louisiana's insurance commissioner, J Robert Woooley, also thinks that the Mississippi approach is a bad idea. If a law compelled coverage where the contract voids it, there would be a rush of "first one to the door" claims. "If you don't get there first, you're going to get nothing..." Because your insurance company might just crumble under the pressure of these unanticipated payouts.

No Sympathy for Insurers
Famed litigant Richard Scruggs (we've met him before, we'll see him again) has no sympathy for the insurers. "If an insurance company or two has to go broke, I'm sorry. I'd rather see an insurance company go broke than the tens of thousands of my friends and neighbors in Mississippi, Alabama and Louisiana go bankrupt." (Perhaps it does not occur to Scruggs that some of his neighbors might work for insurance companies!) The stakes are enormous -- not just in this particular instance, but in any foreseeable circumstance where public need is perceived to supercede the language of a contract.

The aftermath of the two hurricanes is an unprecedented catastrophe. The scale of the damage raises new and largely unresolved questions of liability. And as in so many of our recent blogs, one of the most compelling questions is relatively simple: "Who pays?" A simple question with no clear response. It's likely to be years before we know the answer.

Special thanks to blogger Martin Grace at, who has been tracking this ongoing saga.

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September 26, 2005


The Hill is reporting that insurance lobbyists have been working overtime since Katrina to extend passage of the Terrorism Risk & Insurance Act (TRIA), the federal backstop for insurers that is scheduled to expire on December 31. Many lawmakers think that the voluntary market should be developing alternatives to cover any terrorism risk, but the hard hit that the reinsurance industry is taking post-Katrina may reinvigorate the debate. Renewal is thought to be a particularly significant issue for workers compensation since it is mandatory business insurance. See Doug Simpson's May blog on why TRIA renewal is thought to be vital to the workers comp market.

Free webinar about TRIA renewal
Business Insurance is sponsoring a free hour-long panel - A World Without TRIA: Why A Terrorism Insurance Backstop is Vital - a discussion about what this might mean for your business and for the insurance industry. 1:30 p.m. EDT Oct. 12. You can register here.

The panelists for this event are: Ramani Ayer, chairman and chief executive officer of The Hartford Financial Services Group Inc.; Bradley Wood, senior vp-risk management of Marriott International Inc.; and Joel Wood, senior-vp of government affairs for the Council of Insurance Agents & Brokers. The discussion will be moderated by Business Insurance Senior Editor Mark A. Hofmann.

Prior postings on TRIA:
Terror and risk transfer
Congress considering Terrorism Risk Insurance Act (TRIA) renewal
TRIA set to expire

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September 16, 2005


We've been tracking the saga of who is going to pay for Katrina's havoc. If Jim Hood, the attorney general of Mississippi, has his way, insurance companies will be on the hook for all the homeowner losses, even those caused by flooding -- despite the fact that floods are excluded from homeowner's policies. Hood has filed a lawsuit against five major insurers, alleging that they're cheating Hurricane Katrina survivors. He asks: "Is it right to write in the fine print a provision that takes away the reason for the contract in the first place?...You can't put this stuff in fine print and bankrupt half the coast and say, `Oh well, they should have known.'"

Perhaps insurance companies should use a larger font in homeowner's policies, so they cannot be accused of hiding the details in "fine print."

Hood has been joined in his effort to redefine homeowner's insurance by the ubiquitous Richard Scruggs, who made his reputation suing the tobacco industry. (By the way, Scruggs is the brother-in-law of former Senate Majority Leader Trent Lott, R-Miss.) Scruggs says he will stand up in court for homeowners by arguing that homes were damaged by wind-driven water, not floods. Let me see if I get this straight: a flood is not a flood when it's wind-driven. Perhaps the only way for a true "flood" to occur is during an eerie calm.

Valued Policy Law
Scruggs is going to file thousands of suits in state courts. He said the effort would be aided by a Mississippi statute known as the "valued policy law." (Read more about this legal concept here.) In a controversial decision last year, a Florida appeals court held that a similar state law required full restitution when a house was partly destroyed by hurricane winds, even though flooding did most of the damage.

"The statute provides in these states that if there's any damage at all by wind, they must pay the full amount," Scruggs said.

A spokesman for the Property Casualty Insurers Assn. of America said insurers wouldn't pay for uncovered flood damage and that adjusters were trained to determine when flooding was the main culprit. See you in court, sonny!

Defending the Insurance Industry
It's never easy defending corporate giants, especially in this type of circumstance where the losses are so heartbreaking. Insurers point out that contracts are contracts -- and that floods are specifically excluded from homeowner's policies. That's why we have separate flood-insurance, backed by the federal government -- under a program managed by everybody's favorite "best practice bureaucracy" - FEMA. (Do I hear a "neigh"?)

FEMA officials have acknowledged that 60 percent of the affected property owners in Katrina's zone of destruction may lack federal flood insurance. To rebuild, they would have to take out low-interest government loans -- unless Hood and Scruggs prevail.

"Insurance policies are legal contracts, specific policy terms and conditions that both sides agree to," said Joseph Annotti, spokesman for the Chicago-based Property Casualty Insurers Association of America, which represents most major insurers. "To come in after the fact and arbitrarily rewrite the policy coverage to cover losses that premiums were never collected on and reserves never set aside for, that's an extraordinary legal precedent to set and a very dangerous one." As it is, the insurance industry is now projected to be on the hook for $40 billion to $60 billion in claims, apart from the Mississippi lawsuit.

We'll All Pay
One thing is certain. If Mississippi prevails and is able to force insurers to pay for flood damage, we will all see our homeowner's premiums rise to incorporate the new risk. At the heart of every insurance policy is the esteemed work of the actuaries. They like to know the parameters of the risk ahead of time -- and I imagine they will be really annoyed if the rules suddenly change after the fact. Stay tuned. Despite the inordinate human calamity and suffering, this is going to be a very compelling -- and at least in some respects entertaining -- drama.

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September 15, 2005


Steven Trucinski, an employee of International Paper Co. in Ohio, was injured in a chemical explosion on October 15, 1998. He sustained severe trauma to his left lower extremity, as well as burns over large portions of his chest, back, and right upper extremity. His leg was amputated above the knee.

Under Ohio law, loss of two body parts automatically entitles an injured worker to permanent total disability benefits. Here's the admittedly gruesome qualifying definition in the comp statute: The loss or loss of use of both hands or both arms, or both feet or both legs, or both eyes, or of any two thereof, constitutes total and permanent disability, to be compensated according to this section. Virtually every state has a similar listing.

The court had to confront the issue of just how many body parts Trucinski lost. Does the loss of a limb above the knee involve a single limb or a leg and a foot? In their opinion upholding the claimant, the court cited a definition of a leg in Webster's Third International Dictionary: "[A] limb of an animal used esp[ecially] for supporting the body and for walking: as a: the part of the vertebrate limb between the knee and foot." If the leg is between the knee and the foot, then any loss above the knee involves two body parts, not just one.

Macabre Math
The gruesome details are compounded by what turns out to be a more positive than expected outcome for the claimant. As it happens, Trucinski recovered from his injuries, was fitted with a prosthetic limb and subsequently found employment (but not at International Paper). Despite his ability to work, he continues to collect permanent total disability benefits. So his former employer appealed to the Ohio Supreme Court, arguing that Trucinski's ability to earn a living proved he was not "permanently and totally disabled." The court ruled in Tracinski's favor, citing the language of the statute and their own unwillingness to intervene in a case by overturning preceeding rulings.

What are we to make of this high stakes dispute? On the one hand, employers and insurers, confronted with paying lifetime benefits, argue that employability -- not loss of specific body parts - should be the determining factor for benefits. On the other hand, representatives of labor, unable to secure well-deserved "pain and suffering" benefits under workers comp, point to the extreme injuries and demand justice for the employee. The court, planted squarely in the middle, upholds the benefits as outlined in the statute, despite what appears to be a huge contradiction: the man with a "permanent and total disability" is actually able to work.

A New paradigm?
Workers comp in this country is nearly 100 years old. When the statute wound its way through each of the states, it was a radical and long-overdue idea: a no-fault system which protected employers from lawsuits, while it ensured that lost wages, medical bills and scheduled benefits (scarring, loss of limbs, etc) were paid to injured employees. It's the first and only form of universal disability insurance protecting almost every American worker. As we move into the new century, it's becoming clearer that the industrial model lying at the heart of workers comp no longer reflects the realities of the new working world.

In today's workforce, people change jobs frequently. There are massive layoffs and restructurings in virtually every industry. Yesterday's corporate giant might be out of business today. Workers, caught in the middle of all this turmoil, might have to retrain three or four times during their careers. A person with one set of limited skills is simply unprepared for the challenges of today's workplace.

The comp benefit structure, visible in stark outline in today's case from Ohio, was based upon the old industrial model of employment. Fifty years ago, if a worker lost two body parts, he or she was totally disabled, unable to pursue gainful employment. Modern medicine, combined with high tech applications, create myriad possibilities even for people with severe disabilities.

With all the changes taking place in the workplace, it may well be time to re-invent workers comp. Rather than paying people not to work, let's use our resources to enable people to find gainful employment. Let's focus on skills development rather than disability. It might open the workforce to people who face artificial barriers. And it might help us focus on the real bottom line: the ability of people to earn a living wage in a job worth doing. That would surely involve a paradigm shift from the current state-by-state morass that is the workers comp system in America.

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September 8, 2005


As the water levels finally begin to recede in New Orleans and the astonishing scale of the property damage throughout the region becomes clearer, the question for many people is painfully simple: who is going to pay for the damage? Thousands of homeowners are facing an enormous problem of coverage. If hurricane winds destroyed the house, they are covered. If, on the other hand, the rising flood waters caused the damage, homeowners may not be able to collect, due to a standard policy exclusion for flood damage. The stakes couldn't be higher.

One news article put it this way: falling water is covered by homeowner's insurance, but rising water is covered only if you carry optional federal flood insurance. So if your roof blows off and rain falls in, that's a homeowner's insurance issue. But if the levee breaks and water floods into your home, you need flood insurance.

It's not difficult to imagine the arguments between insurers and homeowners: sure, the wind damaged your house, but the floods destroyed it, so we're only paying for part of the damage. Yikes! The Wall Street Journal, in an article by Theo Francis and others (subscription required) quotes a lawyer, formerly the proud owner of a coastal home in Gulfport with 6,000 square feet of living space: "I know when I file a claim, the insurance company is going to say the house was destroyed by flood...A neighbor down the street saw our roof and furniture flying by his house long before the deluge, so I know it was the wind that knocked the place down." I can hear defense counsel already, cross-examining the neighbor: "How did you know for sure that the sofa flying past at 100 mph belonged to Mr. Woodall?"

Good News May Be Bad News
One of the many ironies in all this: if your house is still standing, relatively intact, you may have a harder time collecting on your homeowner's policy. For homeowners whose houses were totalled, the insurer will have difficulty separating the damage caused by the wind from that caused by the rising water. There is simply no evidence to examine. If the house is still standing (which under ordinary circumstances would be good news), it will be relatively easy to distinguish between wind damage (covered) and flood water damage (denied). So the "lucky" homeowner with less damage (but a home rendered uninhabitable by toxic waste and mold) might be confonted with bad news indeed.

Class Action Litigation
The Journal article notes that famed class action litigator Richard Scruggs has taken the hurricane personally and is contemplating a loss suit against all the insurers. Scrugg's own beachfront house in Mississippi, which carried flood insurance, was partly destroyed by Katrina. Mr. Scruggs said he plans to urge Mississippi Attorney General Jim Hood to try to override flood-exclusion clauses in homeowners' policies in that state in the interest of public policy, a move that could force insurers to pay many billions more toward rebuilding costs. Through a spokesman, Mr. Hood said: "I'm reviewing these contracts to determine if there are unconscionable provisions."

Needless to say, the insurers are not impressed with his argument. Industry officials argue that they can't afford to take on flood risks because they haven't been paid to do so.

"Where does that money come from?" said Allstate Corp. spokesman Mike Trevino. "We didn't collect any premiums that contemplated flood as an exposure that we would have to cover."

I tend to agree with another attorney, Stephen Cozen, whose Philadelphia firm does extensive work for the insurance industry: "This is not a public-policy issue. This is simply an insuring agreement between two parties in plain English where there's plenty of notice." It's a simple and painful matter for thousands of homeowners: read the words in your policy (which you probably never read before) and weep.

Everyone Pays
All we know for sure is that Katrina has caused damage in the vicinity of $100 billion, with around 25% of it covered by conventional insurance. It's also safe to say that one way or the other, we are all going to pay for it. The greatest and least quantifiable cost falls on the homeowners themselves, whose lives have been utterly compromised. For the rest of us, it's a matter of rising costs in fuel, insurance premiums and goods from the regions damaged by the storm. Given the proposed federal expenses beginning at $50 billion, there should be the shared cost of increased taxes, but somehow I think that's just not going to happen -- we'll put it on the deficit tab for future generations to pay. All this is a reminder that despite our presumption that we are in control of our destinies, nature calls the shots. No word-smithing of insurance policies or act of congress is going to change that.

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September 1, 2005


With my mind reeling from images of devastation in the aftermath of Katrina, I try to focus for a moment just on the implications for workers compensation. The hurricane hit on a weekend, so most people were not working. But some were -- working for companies that may have been obliterated: no payroll records, no employment records, nothing left. How would you prove that you were an employee? How can you file a claim when the entire apparatus governing workers compensation has disintegrated?

We tell employees that the first step in managing injuries is to report to your supervisor and then secure appropriate medical treatment. In all this chaos, how can I possibly find my supervisor? How can I secure medical treatment when the hospitals are on the verge of collapse, their generators running out of gas, their harried personnel stretched to the limit? I hope I don't need an ambulance, because there aren't any -- there aren't any roads, for that matter. There is no way for the medical provider to verify insurance coverage or talk to my employer. When I list my home address, does it matter if the building has been lifted off the foundation and collapsed on a lot three blocks north?

Old Cases are History
What happens to the hundreds of cases in litigation prior to the hurricane? From law offices to government offices, the files will be inaccessible for months and may have been destroyed. The people familiar with the details are living in distant cities or have disappeared altogether. Indeed, the claimants themselves may or may not be alive to pursue their day in court. Are the key witnesses still alive and if so, how can we possibly find them? What happens to statutory time limits when the courts are under water?

Unacceptable Risks
We can assume that many of the rescue workers are employed. They may be covered by workers comp. They face ubiquitous and unprecedented exposures: fetid water covering everything; bodies floating along with oil, excrement and chemicals; no running water or toilets; a simmering rage among the desparate people they are trying to help. Toxic mold will be a constant risk in the coming months. If you follow the general duty of clause of OSHA literally -- as we are all supposed to do -- you cannot allow anyone to work, because under these horrendous conditions there is absolutely no way you can provide a safe workplace.

Our World = Third World
It is eerie to watch these third world images of despair and dysfunction rolling out in our own country. It's something we are used to seeing in remote corners of the world, not on our own shores. But this is all too real: the total disintegration of civil society, the uselessness of the usual management "best practices." This is a crisis where the most rudimentary needs -- food, clothing, water and shelter -- cannot be provided. Between the Christmas tsunami and Katrina, two things have become all too clear: when confronted with the full brunt of nature's power, we are defenseless against the blow and pitifully ineffective in response. Let's keep that in mind when we position our species -- and our country -- in the forefront of all things civilized.

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August 9, 2005


Joe Paduda has been doing so much heavy lifting in his diligent tracking of the many investigations into insurance wrongdoing that we are thinking he may need to change his blog name to "Scandal Central." It's almost like one of those whack-a-mole carnival games - new developments seem to keep popping to the surface daily.

Today, Joe reports on a guilty plea filed by an underwriter from a Liberty Mutual subsidiary who was submitting unattractive bids to Marsh McLennan. This enabled the broker to steer clients to insurers with the best commissions.

Yesterday, Joe reported on similar charges being levied against Arthur Gallagher & Co, the offshoot of a probe into practices involving several large public entities, an investigation that Florida's Attorney General says may involve bid rigging. This follows on the heels of other Florida problems that surfaced in Broward County involving Gallagher Bassett and Corvel.*

Last Friday, Joe blogged about 14 insurance execs from Marsh, AIG, and Zurich who pled guilty to various charges in the Spitzer investigations.

He's also recently updated the Ohio coingate developments, a many-headed hydra of scandal that is now ensnaring Governor Taft. Some other problems have been bubbling to the surface with the Ohio Bureau of Workers Compensation, too, in the form of unusual markups paid to servicing hospitals.

A collective black eye
Whether we want to or not, all of us who work in the industry have front row seats to these sorry spectacles since they involve some of the industry "leaders." As an industry, we will be years restoring good faith with clients. And though I have no sympathy for the malefactors, I do feel badly for some of the decent, conscientious workers in the scandal-riddled firms. If things follow the patterns of other recent corporate scandals, a few bigwigs may or may not be called to account, but the real price may well be paid by the hundreds, if not thousands, of honest workers when the inevitable job reductions and reorganizations ensue.

Many of these firms were the trusted vendors that employers turned to as stewards of their loss experience and as watchdogs for fraud. Ironically, while the back door was being guarded by pit-bulls to prevent a few wayward employees from making off with the piggy bank, the front door was wide open so the serious thieves could saunter off with the safe.

The bottom line: caveat emptor
We've long been proponents of the idea that employers need to be active, savvy buyers and managers of their workers comp programs, but never more so than now. For most employers, workers comp is not simply a matter of dollars and cents (although that is reason enough to pay attention), it is also a matter of employee relations and reputation management. When hiring vendors to assist in these matters, we've always encouraged employers to buy for quality, not for price, but the fact that these scandals are tarnishing some of the "quality" names in our industry says that employer scrutiny doesn't reach deep enough. And, for the most part, we aren't talking about the mom and pop employer here - many of the employers who were gouged are large corporations with legions of lawyers and accountants. It sure looks like it's time for buyers to step up due diligence in the "trusted vendor" selection process.

*edited on 8/10. The second news item dealt with Gallagher Bassett, not Arthur Gallager & Co.

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July 12, 2005


If you were to guess where you would find the most demand for roofing services, you might start with Florida. After all, the state was hit by four hurricanes last year and has already suffered from Hurricane Dennis this year. Big winds blow off the roof, right? So you might assume that Florida is great place to be a roofer. Think again.

According to a recent article in the Insurance Journal, fully 60% of the roofers working in Florida fail to carry workers comp insurance for their employees. Since the four hurricanes blasted Florida last year, the cost of replacing a roof there has doubled. But if you follow the money, you won't find a lot of it going into workers comp premiums or into the hands of roofing workers. The state recognizes the problem, but with only 71 inspectors and over half a million job sites, the odds favor the uninsured contractors. (By the way, the comments attached to this article are well worth reading.)

Across the country, roofing remains one of the highest cost classifications for workers comp. In most states, the manual rates run between $38 and $50 per hundred dollars of payroll for comp coverage -- compared to about $15 per hundred for a carpenter. It's not hard to see where the high rates come from. The working conditions are always difficult. It's usually either too hot or too cold. There is a lot of lifting and climbing. You are always working at dangerous heights, often perched at precarious angles. The fall protection is minimal. When roofers get hurt, the injuries tend to be serious. When you combine these high risk factors with the serious premium avoidance prevalent in Florida (and other states), you have a recipe for major underfunding of the exposure. As is too often the case, the good guys end up paying the price: not only are insured contractors at a disadvantage in the bidding process (their costs are higher), they end up subsidizing the uninsured contractors through the higher rates they pay for workers comp.

The only fair solution is to make sure that every contractor carries insurance for his or her employees. For readers who track the Insider's coverage of related issues, we've been here before: in the conundrum of "independent contractors" versus employees. Once again, it's a matter of who pays the benefits, who pays the premiums and who is able to avoid paying for insurance.

Moral Dilemmas
We can only speculate why so many roofers are uninsured in Florida. Let's assume that insurance adjusters include a fair wage and full insurance when calculating the cost of repairing a damaged roof (admittedly, this may prove to be a dubious assumption!). The insurer cuts the homeowner a check for the work. It's then up to the homeowner to find someone to fix the roof. With such great demand due to the widespread damage, it may not be easy to find anyone willing to take on the job, let alone more than one bidder. Again, assume the homeowner is able to find two potential contractors. The one with a fully insured workforce provides a bid that is 35% higher than the uninsured contractor. Even if the higher bid is within the insurance company reimbursement, the homeowner will be sorely tempted to go with the lower (uninsured) bidder and pocket the difference.

As is often the case, the incentives for doing the right thing may be misaligned. The contractor who insures his workers faces substantially higher costs of doing business. On the other hand, the uninsured contractor has a nice margin to play with. As one contractor quoted in the article states, his workers didn't need insurance because they are all illegal aliens anyway! The buck spins around in the eye of the hurricane and the losers, ultimately, are the hard-pressed, underpaid workers who struggle to fix the damage that nature -- and man -- have wrought.

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July 7, 2005


This morning's alarming news about terror attacks in London triggers some melancholy
reflections on the way public policy evolves and the way society tries to cope with the unprecedented risks of the new milennium. At this time it appears that about 40 people have been killed and well over 300 have been injured in coordinated attacks on the London transport system.

The attacks come at a time when this country is reconsidering its own underwriting of terrorist exposures. Following the 9/11 attacks, congress implemented the Terrorism Risk Insurance Act (TRIA) of 2002, a risk sharing approach to terrorism. The legislation came with a sunset provision and is scheduled to expire at the end of this year. It appears that the administration is not inclined to renew the act, at least in its current form. An article in the online Insurance Journal indicates that Treasury Secretary John Snow does not think the insurance in its current form is needed. After today's news of the devastating attacks in London, when the abstract risks are no longer abstract, when all the security measures that appeared to have been working are suddenly shown to be ineffective, the administration might have to reconsider its position.

Secretary Snow says that continuation of the program in its current form is likely "to hinder the further development of the insurance market by crowding out innovation and capacity building." (These are code words, but I'm not sure what the code is!). He goes on to say that "consistent with its original purpose as a temporary program scheduled to end on December 31, 2005, and the need to encourage further development of the private market, the Administration opposes extension of TRIA in its current form." (The private market begs to disagree, as you will see in their position statement here.)

Snow goes on to cite the conditions that should be considered for any type of
anti-terrorism insurance going forward: "Any extension of the program should recognize several key principles, including the temporary nature of the program [Does the Secretary see a pending end of terrorism's threat?], the rapid expansion of private market development (particularly for insurers and reinsurers to grow capacity), [is capacity growing or shrinking? Is the increased cost of reinsurance increasing capacity or simply making current capacity more expensive?] and the need to significantly reduce taxpayer exposure." [To reduce taxpayer exposure, you must increase exposure somewhere else -- in this case, in the private insurance market and its business customers.]

Who's Covered? Who Pays?
In the world of insurance, it ultimately comes down to who is covered and who pays the bills. The administration seems comfortable with transferring risk away from taxpayers and into the private sector. Private insurers, in turn, will ask their actuaries to calculate the potential exposures (no easy task) and will then try to pass the added costs along to their customers. But which customers will be willing to pay? For insureds living in high risk areas, business owners are very likely to opt for terrorism coverage. But what about the machine shop in Leominster MA? Or the Midas Muffler franchise in LaGrange GA? The fact is, the vast majority of businesses are likely to decline coverage, because we all seem to think that most of the risk resides in the big coastal cities. That leaves the burden for coverage on a relatively small number of businesss: their costs will go through the roof, while the costs for everyone else will stay pretty much the same.

James MacDonald, in the John Liner Review, presents a cogent and well written argument for continuation of TRIA here. It's part of a very informative web summary produced by BNA, and which tracks the entire TRIA reauthorization process, available here. The extension of TRIA is about to take center stage in this country's struggle to establish a smoother footing for the economy in the post 9/11 era. As flight attendents tell us when moving toward turbulence, "for your safety and comfort, fasten your seatbelt and remain in your seat." Turbulence ahead, indeed.

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July 1, 2005


High school chemistry teacher Tramesha Lashon Fox, 32, had a problem. Her 2003 Chevrolet Malibu was a bummer to drive, so she went out and bought a 2005 Toyota Corolla. Unfortunately, she still owed $20,000 on the Malibu. So she concocted a plan to get rid of the unwanted car: she recruited two of the worst students in her class (both were failing) to steal the car and burn it. At first they thought she was joking, but she persisted. On May 27, the last day of school, the students took the unlocked 2003 Chevrolet Malibu from a shopping mall, drove it to a wooded area and set it on fire. In return one received a grade of 90 on the final exam and the other 80. (I cannot help but wonder if the latter student complained:"Hey, how come I only got a "B"?)

This appears to be a fairly mind-boggling example of insurance fraud. Not only does a teacher abuse her position by recruiting her own students to perform a criminal act, she rewards them in a way that profoundly comprises her position as a teacher.

Where the Money is
The notorious bank robber Willie Sutton, when asked why he robbed banks, replied "because that's where the money is." Read the FBI's brief but pungent profile of Sutton's life here, and take note that at the end of his life Sutton was released from prison and endorsed a bank! (As they say in America, there's no such thing as bad publicity!)

For some people, insurance is simply "where the money is." The Insider recognizes that fraud exists and that it costs a lot of money. In workers comp, the opportunities for fraud arise in a number areas:
Employee fraud: outright faking of an injury -- which we think is relatively rare, although there are pros who are skilled at exploiting the system. The more significant problem is malingering -- employees with legitimate injuries who stay out of work far longer than the injury requires or for whom disability becomes a way of life.

When you "follow the money," fraud in workers comp is not generally flowing toward employees, but to other key players in the system:
Employer fraud: not securing comp coverage for employees; misclassifying employees; using "independent contractors" instead of employees; under-reporting payrolls; asking employees to file work-related injuries under regular health insurance.
Doctor fraud: billing for unnecessary services, billing for more expensive procedures than were provided or most blatantly, services which were never provided. .
Lawyer fraud: coaching employees in phony or exaggerated symptoms (they keep a supply of neck braces and crutches in the closet). Sending employees to colluding doctors, who perform unnecessary services and share the procedes with the lawyer.
State administrator fraud (did someone say "Ohio"?): misappropriating trust funds to benefit the politically connected.

This is not an exhaustive list. Here's an interesting website devoted to insurance fraud, complete with a year by year "Hall of Shame": you click on the jail cell and read the story of someone who got caught. She's innocent until proven guilty, but I wouldn't be surprised to see Tramesha Fox secure her own little cell in the 2005 archives and her own special place in the history of insurance fraud.

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June 13, 2005


A fascinating article by staff writer T. Christian Miller in today's Los Angeles Times (registration required) focuses on the cost of providing workers comp insurance to non-military employees in Iraq. Under a WW II era program called the Defense Base Act, private insurers charge the government for comp premiums. These private carriers are at risk only for the non-combat related injuries, illnesses and deaths. The government reimburses the carriers for all combat-related incidents, plus a 15% admin fee. Overall, costs for comp in Iraq are somewhere around $ 1 billion, but no one seems to know for sure.

Currently, two carriers dominate the market: AIG and ACE. The Pentagon is talking about awarding all the business to a single carrier, in order to contain the escalating costs. The counter argument seeks a continuation of the "free market approach." I'm not sure how "free" the current market is and as for the rates, they appear to be headed in the wrong direction.

Comp in Iraq
There are about 30,000 Americans and third-country nationals and more than 40,000 Iraqis working on U.S. contracts in Iraq. To date, about 300 contractors have been killed and 2,700 injured. When the program began, insurance rates ran between $4 and $8 per hundred dollars of payroll. Now they are up to $20 per hundred -- a pretty hefty rate by most measures.

Salaries in Iraq, as you would expect, are much higher than those in the states. It's not unusual for workers to pull down $100,000. (The pay is good, but you would have to characterize the working conditions as marginal.) Comp premiums at the $20 rate would average about $20,000 per employee -- a very high rate indeed. Because of the high salaries, death claims are averaging between $1.2 and $1.8 million -- significantly higher than death claims for workers in the states.

How do rates for insurance in Iraq compare to other locations in the world? Here's one striking example cited by Christian: In Colombia, a contractor flying helicopters in support of State Department drug interdiction programs is charged at $3.87 per $100 of payroll -- less than a truck driver in the states. In Iraq, however, a contractor flying helicopters runs $90 per $100, with comp payments almost the equal of payroll (only iron workers above the 6th floor reach anywhere near comparable rates in the states). Keep in mind that if the helicopter pilot dies in a combat-related incident, the carrier is not on for the loss. The carriers respond by saying they have to establish these high rates, because even if they are eventually reimbursed for a combat-related incident, it could take several years to actually get the money and there is no guarantee that the government will accept the liability.

Conventional Cost Control, Unconventional Conditions
Employers in the states have learned the hard way that the best way to control comp costs is to contain losses. Cost containment means committing to good safety programs and setting up a system for immediately responding to injuries. You need to establish a relationship with an occupational medical provider and set up a comprehensive return-to-work program that uses temporary modified duty to speed recovery. That's all well and good stateside, but I have to wonder how well that kind of a system will work in Iraq. Is anyone motivated to implement modified duty? Do employees really want to go back to work, or would they prefer to collect 2/3 of their (inflated) average weekly wage at a safe distance from the turmoil? If you were an Iraqi national, would you risk your life going back to work on temporary modified duty? With U.S. taxpayers ultimately footing the bill, does anyone over there really care if an injured employee goes back to work? When you think about it this way, you wonder why carriers would want any of the risk.

Where's OSHA?
I wonder what OSHA would say about the working conditions in Iraq. (Given the reduced number of inspectors, they probably haven't gotten there yet.) Under the General Duty Clause, employers must provide a workplace free from the risk of injury and illness. How does Iraq stack up? As a spokesman for one of the carriers stated, in response to questions about the high rates, "it's 130 degrees. There is a lot of dust. There is a lack of hospitals." Not to mention the fact that strangers are constantly trying to kidnap or kill you. Stress claim, anyone?

Ubiquitous AIG
It is indeed interesting to find AIG in the middle of this high-risk mess. Just as they were challenged by New York Attorney General Elliot Spitzer for "risk transfer" transactions that apparently involved no risk at all, it appears that here in Iraq they are collecting possibly inflated premiums where, once again, a substantial portion of the risk lies with others (you and me, to be exact).

Ultimately, my sympathies here are with the workers. I can hardly imagine a more difficult place to work. Here in America it's rare to dress for work with a prayer that you will survive another day (rare but certainly not unheard of). In Iraq, every breath in that hot, dusty place is accompanied by just such a prayer. Here's wishing a safe return to our civilians and a lasting peace for the Iraqi people themselves.

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June 5, 2005 points to an amusing survey on Actuarial Outpost about career choices: Machinist or Actuary? Perhaps I should qualify that to say that it's amusing if you work in insurance ;-) It brought to mind an actuarial jokes website that I chanced on some years ago when there was precious little in the way of insurance posted on the web. It's fun to see that not only is this "pioneer" site still up, but that Jerry Tuttle has been nurturing it along since at least 1998 and the site now boasts more than 150 jokes. For a light bit of weekend reading, here's a sample:

  • An actuary, an underwriter, and an insurance salesperson are riding in a car. The salesperson has his foot on the gas, the underwriter has his foot on the brake, and the actuary is looking out the back window telling them where to go.
  • What is the difference between an introverted actuary and an extroverted actuary? An introverted actuary stares at his own feet during a conversation, while an extroverted one stares at the other person's feet.
  • An underwriter takes his two actuaries into a restaurant. The waiter asks the underwriter what he would like to eat, and the underwriter says, "I'll have the steak." Then the waiter asks the underwriter, "And for your vegetables?" The underwriter replies, "They'll have the steak too."

Now it's all well and good to take potshots at the actuaries among us (no doubt they have amusing stories about marketers), but in workers comp, we depend on them for ratemaking, reserve adequacy, and providing models to predict the impact of any legislative changes. For those who would actually like to learn more about the role that an actuary plays and what the job entails, visit the actuarial entry on Wikipedia or the Bureau of Labor Statistics page on actuaries. Also, a few professional associations jointly sponsor the site Be An Actuary, which offers quite a bit in the way of career advice.

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June 2, 2005


We ordinarily focus on the world of commercial insurance, but I cannot help but wonder what property insurers are going to do about the multi-million dollar homes that recently slid down a cliff in Laguna Beach, California. The LA Times has a summary of the event, which links to a compelling set of photographs. Fortunately, no deaths or serious injuries were blamed on the slide, which begain literally with a bang as wooden beams in dozens of homes just snapped. The slide, blamed on recent rains, sheared away part of the face of Laguna's Bluebird Canyon. At last count 17 homes were completely destroyed and 11 seriously damaged.

Here is my question. Let's assume that insurance companies accept the claims -- as opposed to denying at least some of them for lack of "flood" insurance. (A lot of rain does not equal a flood; it surely is "water damage.") Insurers will pay up to policy limits for the homes and their contents. But what about the lots on which the houses stood? The very expensive land on which these homes were built no longer exists. The palatial home perched on a hillside has crumbled into a muddy pit. Indeed, more that one homeowner might have a claim on the same flattened piece of real estate -- assuming, of course, that any rebuilding can take place. Will insurance cover the cost of replacing the lost lots? Or are homeowners on the hook for it? I reviewed conventional insurance offerings in California and found, not surprisingly, that they do not contemplate the risk of a building lot simply disappearing. I suspect that the homeowners may be on their own when it comes to paying for a new place to build their homes.

When in Doubt, Litigate!
Risk transfer is usually a pretty straight-forward business. But in this unusual California situation (rather likely to recur), risk transfer is nothing short of a soggy mess. With the workers comp market in that state finally tightening up, perhaps this is the opportunity that some local attorneys have been waiting for.

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May 24, 2005


Over the weekend, one of our regular readers left a comment in another post asking for information about work injuries that are aggravated by a pre-existing condition. At one time, most state laws had Second or Subsequent Injury Funds (SIFs) that offered some measure of recovery to employers/insurers for injuries that were exacerbated by a pre-existing condition, whether that condition was due to a work-related injury or some other prior illness or condition. In workers comp, an employer's premium rates are based on past loss experience. A second injury can often result in a very expensive claim, so the inclination would be to avoid taking any chances by hiring someone with a pre-existing condition. The purpose of SIFs is to prevent discrimination of disabled employees in hiring. SIFs provide a measure of financial relief for employers, either by reimbursing insurers/employers directly, or by taking over benefit payments for the injured worker.

Since the 1990 enactment of the Americans with Disabilities Act (ADA), many feel these funds have outlived their purpose since the ADA affords job applicants protection from discrimination on the basis of health or disability issues. Because of this, many states have eliminated funds in recent years, but funds are still operational in about 20 states - check with your insurer, your agent, or your state workers comp authority to find out if your state has such a fund.

The way that funds operate varies from state to state. In most states that still have funds, an employer must be able to demonstrate that they knew about the pre-existing injury or condition prior to the second injury. That's the tricky part. ADA prohibits an employer from exploring past medical history in the hiring process, so any knowledge about pre-existing conditions must be gained after an employment offer and before a work injury. Sometimes, this can be done in post-hire medical exams or through conditional job offers contingent on medical exams, but this is another tricky area. The law firm of Wildman Harald offers an employer guidelines for complying with the ADA in the hiring process.

For more information, Mark Nevils of Insurance Recovery Group has an excellent primer on Second Injury Funds (pdf) that's worth a read for more details. And California employers take note - he also has an article on the new amendment to the California Workers Compensation Law (SB 899) dealing with apportionment of permanent disabilities (pdf). This amendment offers some loss mitigation opportunities for employers in the event of pre-existing conditions.

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May 17, 2005


New York is famous for being a high cost state for workers compensation. By any reasonable measure, New York falls within the top four states for high comp cost, sharing the dubious spotlight with California, Texas and Florida. With its unique paternalistic approach, the state requires multiple hearings during the course of a routine claim. While attorneys in most states earn their fees by negotiating lump sum settlements, in New York they just have to show up. And show up. And show up.

Trending Up
New York is a tough state for writing workers comp. They are in the midst of a struggle to establish new rates -- and unlike many states, this is not a question of how deep to cut current rates, but rather how steeply to raise them. The initial request from the New York Compensation Insurance Rating Board was designed to get everyone's attention: a whopping 29%. As that most quotable of New Yorkers, Yogi Berra, might say, "It's deja vue all over again." It's been over a decade since most states have seen a rate increase request of that magnitude. But that extravagent request was subsequently withdrawn by the board and replaced by a more modest -- but hardly less aggravating -- 9%. Wait a few days and it changes again. The most recent request on the table is for 16.1%.

Bouncing Ball
It's hard to follow the bouncing ball, but one thing is clear. Rates are likely to go up, because costs are out of control. New York's system, one of the first in the nation, still embodies the deeply adversarial divides of labor and management. It's a system full of friction and conflict. When the ball bounces in New York, it lands squarely on the heads of New York's employers, who pay the price for a dysfunctional system. Overall, New York ranks pretty low (45th) in general friendliness to small business. It will take political will and courage to turn this situation around. That's not exactly what we see on the immediate horizon. So for the time being, when it comes to rates for comp in New York, it's like the architecture in Manhattan: how high will they go and how fast?

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April 25, 2005


I spent last week at the annual Risk & Insurance Management Society annual meeting in Philadelphia last week. This is one of the single largest events in the property and casualty industry, attracting thousands of attendees and exhibitors. A quick snapshot of the show reflects an industry in turmoil. When I reflect the first RIMS I attended in Orlando more than a decade ago, the changes are boggling. Industry giants from those days have disappeared, victims of consolidations or outright insolvencies; new, less-familiar players have emerged. It's a challenging environment for risk managers. This year, in the wake of the Spitzer investigations shaking the broker world, the buzzword at the show was transparency and all the talk was about ethics and open customer communications. RIMS leadership called for members to take responsibility in the issue of disclosure.

The Terrorism Risk and Insurance Act was also of some concern. TRIA renewal was much on the minds of attendees and the subject of several sessions.

Rising workers comp severity trends and high medical costs were another issue of great concern. While frequency is down, the cost of claims keep increasing, largely driven by skyrocketing medical expenses. This concern was in evidence by the plethora of medical specialty services that dominated the exhibitor hall. Our friend and fellow blogger Joe Paduda reports on the trend to medical risk management, with particular observations on Pharmacy Benefit Managers (PBMs).

The annual benchmark survey of risk managers produced for the Risk and Insurance Management Society by Advisen was just released, and shows that the property casualty market softened in 2004, although the high cost of WC and professional liability kept overall risk cost 3% higher than the prior year. For more information, read Michael Bradford's report of the survey in Business Insurance.

Congratulations are in order. We were very pleased to open our mailbox last week to see that James D. Hinton of HCA, Inc. was gracing the front cover of the pre-RIMS Business Insurance issue. Jim was named 2005 risk manager of the year in the publication's annual award. Some of us at Lynch Ryan remember working with Jim in the early 90s when he was implementing workers comp programs at Humana - he was very progressive and ahead of the curve back then, so we are pleased to see him getting some well-deserved recognition.

And more kudos - Susan Meltzer, assistant vice president, risk management for Sun Life Financial in Toronto won the Goodell Award, the highest award that RIMS bestows. Congratulations are also in order for Ellen Vinck, vice president of risk management, benefits and safety for CA-based U.S. Marine Repair Inc. who begins her tenure as new President of RIMS. On a personal note, it was nice to see so many prominent women rising in the ranks of an industry that has been largely male-dominated until the last decade go, women in insurance!

People are looking to next years show in Hawaii with mixed reactions. While most people love the location in theory, some larger exhibitors are concerned about both the travel expense and the increased travel time that the event will require. Its anyones guess whether the allure of the location or tight purse strings will rule. You can get a 10 percent discount over and above the earlybird discount by registering before May 1, 2005.

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April 20, 2005


"Exclusive remedy" lies at the heart of workers compensation. In exchange for the protection of workers compensation benefits, employees give up their right to any other remedy for workplace injury. This generally works out pretty well for both parties, but as with so many issues, the action at the margins is intense.

There are two areas where challenges to exclusive remedy tend to emerge: where injuries are deemed to be intentional - especially where the employer ignored explicit warnings or even crossed over into criminal negligence; and where workers compensation appears to be an inadequate remedy. In an article posted by NCCI and authored by attorney Charles Tenser (Acrobat Reader required), the exclusive remedy concept is shown to have bent, but it has not broken.

"Intentional Injuries" and Substantial Certainty
Tenser points out that many states allow employees to sue employers when the injuries are determined to be intentional. Of course, it's usually pretty difficult to prove intention. No matter how egregious or careless an employer might be, it's not easy to reach a standard that looks for proof of intention. As a result, attorneys are looking at the concept of "substantial certainty." In other words, while the employer might not have intended to cause the injury, under the specific circumstances there was a substantial certainty that an injury would occur.

Tenser cites a Louisiana case, Reeves v. Structural Preservation Systems, in which an employee was asked to move, by hand, an extremely heavy sandblasting pot. This despite the fact that the pot bore an OSHA sticker that it should not be moved by hand. The court concluded that "believing someone may, or even probably will, eventually get hurt if a workplace practice is continued does not rise to the level of an intentional act, but instead falls within the range of negligent acts that are covered by workers compensation."

In New Jersey, in at least one instance the courts have gone the other way. In Laidlow v. Hariton Machinery, the employer removed a safety guard from a machine, knowing that it was likely to result in injuries. In addition, the employer deliberately and systematically deceived safety inspectors into believing that the guard was in place. The subsequent injury to an employee was the result of an "intentional wrong" which superceded the "exclusive remedy" provision of the workers compensation statute. (Indeed, based on this brief summary of the facts, the employer should be subject to tort liability.)

It's interesting to note that the door in New Jersey does not appear to be wide open to exclusive remedy exceptions. In Fisher v. Sears Roebuck, the court dismissed a suit brought on behalf of a security guard who was killed during a robbery in a parking lot while transporting cash receipts. The court held that the dangers faced by security guards did not amount to a "substantial certainty" that injury would occur. The dangers, in other words, are simply inherent in the job.

Adequate Remedy
While courts have generally resisted the temptation to undermine "exclusive remedy," they are at times receptive to the idea that if workplace injuries do not fall under workers compensation, some other remedy must be available. Tenser cites a case in Oregon, where the court held that the exclusive remedy provision of the workers comp law violated the state's constitutional guarantee of a remedy where it required a claimant to show that his employment was a "major contributing cause" of his occupational disease rather than simply a "contributing cause." In other words, in falling short of the standard for comp, the employee had no recourse of any kind, which the courts found in violation of the state's constitution. The Oregon legislature subsequently established procedures for allowing a negligence action against employers after potential comp remedies have been exhausted.

Balancing Act
When employers act egregiously and without regard for the safety of their workers, it is indeed tempting to open the doors to tort liability. In the New Jersey case discussed above, the door opened, just as it should have. But for the most part, the exclusive remedy provisions of comp statutes have proven their worth over time. In the great trade off at the heart of comp, employees give up their right to sue employers, in exchange for the relative certainty of indemnity and medical benefits. It is by no means a perfect system. There are employees who take advantage of it, just as there are too many employers who ignore safety standards, putting their employees at risk. For the most part the system accomplishes what it is supposed to do: helping injured workers provide for their families as they recover from work-related injuries. We should think long and hard before changing the rules to encourage a fault-driven system governing disability in the workplace.

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April 15, 2005


One of the nooks and crannies of workers comp that often gets short shrift is the issue of recovery. Many employers and insurers can recoup claim expenditures through second injury funds or subrogation, for example. Since this is a large area, today we'll briefly discuss second injury funds, and return to subrogation at another juncture.

Second injury funds were designed to encourage employers to hire employees with disabilities and pre-existing conditions by offering a mechanism for cost relief should the employee experience an injury that aggravates the existing condition. In recent years, many states have eliminated these funds, but they still exist in about half the states. In most instances, these funds are financed by assessments on insurers and employers.

For a primer on second injury funds see Second Injury Funds: Still a Valuable Cost Containment Tool (PDF) by Mark Nevils of Insurance Recovery Group (IRG). This article describes the various types of state funds, and the way they work.

IRG makes the case that there is as much as $1 billion in untapped potential, and that failure to recognize and pursue these opportunities can be costly since qualified claims are usually longterm in nature, often over $100,000.

"Each year, an estimated $800 million is paid out on second-injury-fund claims, with an estimated $100 million added annually in new claims. In addition, we estimate that there is a "clean up" potential of $1 billion nationally, most of which resides in key jurisdictions such as Alaska, Georgia, Louisiana, Massachusetts, Nevada, New Hampshire, New York, South Carolina, and Washington D.C."

To learn more about this untapped potential, see IRGs articles Second Injury Funds: Maximizing Your Recovery Results (PDF) by Fred Uehlein and Dorothy Linsner and Closing the Recovery Gap (PDF) by David Jollin and Fred Uehlein.

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April 6, 2005


Every spring, NCCI publishes a series of reports that paint a portrait of the workers compensation industry's health. These include an annual "Issues Report," followed later by a "State of the Line" report. For those of us who work in the industry, these reports offer a quick look of where we've been and provide a cookie trail for where we are likely headed. They are mandatory reading for industry insiders, but they are not just for insurance wonks. If there's one drum we continually like to beat here at Workers Comp Insider, it's that the more employers understand about the insurance industry, the better prepared they can be to weather any market vagaries.

The 2005 Issues Report has been released, and in his Annual Snapshot (PDF), executive director Stephen Klingel paints a good news/bad news scenario of a market in transition. Some of his observations include:

Insurer reserve deficiencies were reduced by approximately $5 billion dollars. Although improved, reserve deficiencies are still a problem. In workers comp, losses have the famous "long tail" - that is, they play out over years. Insurers set aside reserves for the estimated cost of the claim. If they don't set aside adequate reserves, when it's time to pay the piper, insurer insolvencies occur and havoc ensues. Insurer insolvencies still loom as a potential problem.

Medical costs - particularly prescription drug costs - are still galloping away. Wage replacement was always the largest share of lost time claim cost, but now medical costs represent 55% of the cost, on average. In some states - AL, AZ, IN, KY, TX, and WI - the cost approaches 70%.

Frequency continues to decline. That's good news. It means that employers are doing a better job in the area of safety. NCCI reports "significant declines occurred in fatal, permanent total, and permanent partial claim frequency." But on the flip side of the coin, severity is increasing. That means that the medical costs and/or the duration of claims are rising. Not so good.

Terrorism Risk Insurance Act (TRIA) uncertainty looms. The uncertainty about whether Congress will extend TRIA casts a pall over the industry. The clock is ticking, it is due to expire at the end of the year. TRIA provides a federal backstop or safety net for insurers in the event of any catastrophic events. Because workers comp is mandatory coverage, it is a line of insurance that is particularly exposed - insurers can't exclude terrorism coverage when issuing policies.

The residual market is stabilizing. The residual market is sometimes called the assigned risk pool, or more familiarly, "the pool" or "the market of last resort," while the rest of the market is known as the voluntary market. If you are an employer, you might get thrown in the pool for any of a number of reasons: your loss experience may be terrible or you may simply be in a high-risk industry. For one reason or another, no one wants to write your policy. NCCI reports that the residual market now represents about 13% of the total premiums, up from about 10.7% in 2003. However, the rate of growth for the residual market appears to be appears to be slowing.

NCCIs State of the Line Report should be released soon. Like the tulips, it usually surfaces sometime around early May at the NCCI annual meeting. We'll keep you posted.

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March 8, 2005


Some employers in Colorado and New York are learning that the so-called long tail of workers comp has more than one meaning. In the wake of a multitude of insurer insolvencies in recent years, many state guaranty funds are buckling under the burden, and turning to employers to help pick up the pieces.

Like many other states, Colorado has been suffering the ill effects of insurer insolvencies. In recent years, at least 14 insurers have gone out of business. The 1971 demise of Reliance is the most prominent and most notorious example. The Colorado Insurance Guaranty Association has been paying claims for injured workers of the insolvent insurers, but the Association now faces more than $40 million in unfunded liabilities. To shore up the troubled fund and continue paying claimants, the Association has taken to a new tactic: billing 26 of Colorado's larger employers more than $2 million.

... recently, employers have been surprised by letters announcing, in some cases, that they owe the association hundreds of thousands of dollars for claims that were paid. The association has had the power to recover money from large employers for more than 10 years, experts say, but few policyholders knew about it.

It has only been recently -- within the last 18 months -- the association has sought payment.

This comes as an unwelcome surprise to the employers who are being assessed. Employers are already contributing to the guaranty fund by way of a 2% surcharge on their premium.

This is a scenario that may soon be playing out in New York as well in the form of increased employer assessments. We recently posted an item about the dire straights of the Workers' Compensation Security Fund. The Fund was scheduled for complete exhaustion as of the end of February leaving 7.500 injured workers in the lurch, but a deus ex machina in the form of an unexpected sum of cash from another state fund and from the liquidators of Home Insurance Co. bought a few weeks.

Among the proposals to shore up the Fund:

A doubling of assessments on some employers is part of the Pataki administration's recommended solution to the impending bankruptcy of the Workers' Compensation Security Fund, along with borrowing $50 million from another state insurance fund. Both are subject to approval by the state Legislature.

Colorado and New York aren't alone, simply the two states that are in the headlines this week. Obviously these short-term fixes are band-aids at best, and injured workers and employers alike deserve more security and more protection from our industry.

For those of you interested in a more in-depth treatment of the issue of insurer insolvencies, here are two policy-orientated papers of note:

Managing the Cost of Property-Casualty Insurer Insolvencies in the U.S. (PDF) from the Center for Risk Management and Insurance Research, Georgia State University, December 2002. Note that one of the authors of this report is a fellow blogger, Martin Grace of RiskProf.

Managing Insurer Insolvency 2003 (PDF) prepared for the Foundation for Agency Management Excellence by Stewart Economics, Inc., September 2003.

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March 4, 2005


We have been following the aftermath of the tragic Station night club fire that took place just over a year ago in Rhode Island. The Providence Journal (registration required) has done a terrific job of tracking the many legal cases emerging from the fire. One hundred people died, including a number of nightclub employees. There are many unresolved liability issues stemming from the fire: is the town liable for negligent fire inspection? who sold the fire-prone tiles to the club? who installed the tiles? how much liability rests with the band, Great White, who started the fire with their pyrotechnics? While these issues are still unresolved, the workers comp situation is starkly clear: Judge Bruce Q. Morin has determined that the nightclub's owners, brothers Michael and Jeffrey Derderian, and their company, Derco LLC, are "jointly and individually" liable for the workers' compensation benefits of at least four employees who died in the fire.

At this point, the employees's families are owed death and dependency benefits totaling over $200,000. The Derderians, lacking insurance, are liable for the benefits themselves. Of course, they plan to appeal, just as they have appealed the $1 million dollar fine slapped on them by a comp judge last year.

In the world of business, insurance is often viewed as an "expense." And when your profit margins are tight, the temptation to cut expenses can be great. But in the nearly 100 years of coverage in America (beginning in 1910 in New York), workers comp has become a fundamental benefit of employment. You can argue whether the system is working as well as it should and we can all point to abuses on both sides (employer and employee), but few would argue that the program itself is not needed. Indeed, the Derderian brothers have become an object lesson in bad management: while catastrophe may be highly unlikely, that does not mean it cannot happen. And unless you have the nearly infinite resources to absorb the risk, you'd best secure the modestly priced insurance that provides a safety net for your employees.

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March 2, 2005


A reader put our "google-fu' to a serious test with this question: "I am very interested to know if there is a free website or publication that will show a side-by-side cost comparison showing all 50 states' workers' comp insurance rates for the employer. I want to see which states have less expensive rates."

After some searching, we found a 2004 Workers Compensation Premium Rate Ranking Summary (PDF) put out by Oregon's Department of Consumer and Business Services. Apparently, this snapshot is issued every two years. It includes a color-coded map and a chart that offers more detailed information, such as the 2002 rates so that you can learn if a state is trending up or down. California, Alaska, and Florida have the dubious distinctions of having the highest rates; they are the only three jurisdictions that exceed $4.00 per $100 of payroll. There are 9 states with premium rates less than $2.00 per $100 in premium. Ranked from lowest to highest, these include North Dakota, Indiana, Arizona, Arkansas, Virginia, Utah, Massachusetts, Kansas, and Iowa.

We invite readers who know of other free resources comparing the 50 states to post them in the comments.

Credit where credit is due: we came by this link from another Northwest source - the Washington State Labor Council, AFL-CIO issues a daily news headline aggregator for local, state, and national news of interest to organized labor. It's a good resource for tracking employment-related issues.

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March 1, 2005


The Conference Board, a New York-based business research group, recently issued the findings of a job satisfaction survey of American workers. The findings were picked up in newspapers around the country, including the Boston Globe. The results should be of interest -- and concern -- to workers compensation and disability carriers alike.

The survey of 5,000 households found that only half of all workers are really happy with their jobs, down from nearly 59 percent in 1995. Of those who are happy, about 14 percent say they are very satisfied, on par with the group's last survey in 2003 and down from 18.4 percent in 1995.

The long-term drop in job satisfaction has been driven by rapid changes in technology, employers' push for productivity, and shifting expectations among workers, said Lynn Franco, director of the group's Consumer Research Center.

''As large numbers of baby boomers prepare to leave the workforce, they will be increasingly replaced by younger workers, who tend to be as dissatisfied with their jobs but have different attitudes and expectations about the role of work in their lives," Franco said. ''This transition will present a new challenge for employers." And, I would add, insurers.

To be sure, the drop in job satisfaction varies by age and income. The biggest decline in on-the-job happiness was among workers earning $25,000 to $35,000 and among workers between the ages of 35 to 44. It's not surprising that job dissatisfaction follows low wages and skimpy benefits.

Implications for Insurers
One line in the press release really hit me: "This information reveals that approximately one-quarter of the American workforce is simply showing up to collect a paycheck." I can't help but reflect on this whopping 25% of workers who apparently hate their jobs. What would happen if they were injured on the job and started collecting indemnity payments -- in other words, they start being paid for not working. At the same time, even though they lack health benefits in their low paying jobs, workers compensation now covers all of their work-related treatments, with no co-pays and no deductibles. Assuming the employer is educated enough to want these low wage earners back, how would they get them back to productive employment? If I truly hate my job, I'd probably prefer getting paid for not doing it!

As consultants to employers and insurers, LynchRyan emphasizes the need to build a positive work culture. Unhappy workers are less productive, less motivated and at higher risk for prolonged disability. The quality of their performance suffers along with their attitudes. A positive work culture recognizes individual contribution and makes it worthwhile for the individual employee to show up and perform the job. When workers are reduced to just showing up for the paycheck, the magnitude of the risks for employers and insurers can hardly be overstated.

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February 28, 2005


One of the most problematic areas of workers compensation coverage involves independent contractors. It is indeed ironic that tradesmen in high risk occupations (construction, landscaping, mechanical trades, trucking) often find themselves without workers compensation coverage because of their independence. In many (but not all) states, independent contractors are precluded from securing workers comp insurance. When these people are seriously injured, often their only recourse to indemnity and health benefits is to claim an employment relationship with the general contractor operating the site where they got hurt. The GC will state that, no, this is not my employee; I don't control the work. The independent contractor, content with his or her status until the injury, now tries to claim that the GC controls the work and hence, there is an employer-employee relationship -- and the workers comp coverage that comes with it.

Many states offer guidance on this perplexing issue. To cite just a few: the state fund in Oregon provides guidance on the criteria for independence, pretty much following the IRS standards. In Rhode Island, independent contractors have to self-certify that they are indeed independent, thus building a firewall between themselves and their GCs -- to the GC's advantage. (In Rhode Island, independent contractors cannot secure workers comp coverage for themselves.) Across the border in Massachusetts, the attorney general has put GCs on notice that they are responsible for workers comp coverage for "independent contractors" and "sole proprietors."

In July of 2004 the MA AG issued new requirements for independent contractors (M.G.L.c.149 sec.148). The new regulations contain strong, unambiguous language creating a default assumption that "independent contractors" are in fact employees, unless three explicit criteria are met. In other words, the burden of proof is now clearly on employers/GCs to prove the independence of subcontractors. In the absence of such proof, the subcontractor is assumed to be an employee. As a result, insurance carriers will routinely add the 1099 numbers from undocumented "independent contractors" to the GC's payroll for calculating workers' compensation premiums.

The new standards are more stringent than the standards promulgated by the IRS, the Fair Labor Standards Act (FLSA) and even MA common law.

Three Criteria
The new law creates a presumption that any working arrangement involving "independent contractors" and sole proprietors is in fact an employer-employee relationship unless you establish that all three of the following factors are present:
1. The worker is free from the presumed employer's control and direction in performing the service. This standard is similar to those of the IRS and FLSA. Activities must be carried out with autonomy and independence. Contractors provide their own tools and materials and use their own approach without instruction or supervision. They determine their own hours.
2. The service provided by the worker must be outside the employer's usual course of business. In other words, if the "independent" contractor is in the same trade as the employer's own workers, there can be no determination of independence! Hence, overflow crews are not independent unless you can document that they carry their own insurance.
3. The worker must be customarily engaged in an independent trade, occupation, profession or business of the same type. The contractor must be in an independent business enterprise, working for others, truly working on his own.

There is an additional and, to my mind, rather scary dimension to the new regs in MA. In addition to the unambiguous wording creating a presumed employer-employee relationship, the regulations open the door for lawsuits. Once it has been determined that the "independent contractor" is in fact an "employee," the employee you did not know you had can sue you for violation of any number of worker rights you mistakenly thought did not apply.

Here is brief list of some of the laws under which your new-found "employees" can sue you:

  • Wage and hour laws
  • Minimum wage law
  • State overtime law
  • Law on keeping payroll records
  • Withholding taxes and payment of social security benefits
  • Wilful understatement of payrolls for workers compensation insurance
  • Violation of laws on discrimination.

As I read it, it would almost be impossible not to be in violation of one or more of these statutes. Why would you track presumably "independent" contractors to this level of detail?

The independent contractor law provides for substantial civil and criminal penalties with fines up to $50,000 and even prison terms! In addition, firms can be debarred from public works projects for 6 months (for the first unintended offense) up to 5 years (for a willful first offence). (This is in addition to any penalties under the long list of employee benefit rights listed above.)

Protecting your Interests
The managing of independent contractors and sole proprietors has become a very high stakes game -- not just in Massachusetts. So how can you protect yourself?

Ideally, all of your subcontractors should be incorporated and should carry a full line of insurance coverage, including workers comp (where available). GCs should require that subs and independent contractors provide certificates of insurance with specified levels of coverage. For contractors operating in MA, all subs, including independent contractors, should be required to carry their own workers comp insurance.

Certificates of insurance should be carefully tracked. Secure original certificates (not copies) and make sure the coverage is up-to-date and maintained from year-to-year. If your subs and independent contractors cannot provide this documentation of insurance, or if the certificates have expired, do not allow the subcontractors on the job site. If they begin working without insurance documentation, you are at immediate risk for assuming liability as their employer! At first, you may find resistance to these new and tougher standards, but once established, they will simply become a routine of the business day.

On the other side of the equation, people working as independent contractors and sole proprietors should secure their own disability coverage, either through workers comp (if available) or through conventional disability insurance. You need to protect your livelihood!

This is a complex issue well beyond the scope of a single blog. When I "Googled" "workers compensation + independent contractors" I had nearly 2 million responses! We will certainly revisit this issue in the months ahead.

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February 23, 2005


In case you haven't noticed, the Insider cannot resist conundrums. We like to explore the ragged edges where conflicting views of reality play out their destinies. Which leads today to the interesting topic of volunteers. Are volunteers ever considered employees for the purposes of workers compensation? Are employers liable for the actions of their volunteers, just as they are for the actions of employees?

This blog was triggered by a recent case in Wisconsin, where a volunteer for Christ King church was delivering a statue of the Virgin Mary to a parishioner. In her haste to do the good deed, she ran a redlight and crashed into the vehicle of one Hjalmar Heikkinen, an 82 year old barber. Heikkinen suffered permanent paralysis. In the perennial search for justice (and deep pockets), his attorneys included the church in his suit, under the theory that the volunteer driver was actually their "employee." It's basically the same legal principle that says a private delivery business can be held liable for one of its employees who causes a crash while driving for work.

Plaintiff attorneys zeroed in on several lines in the church's insurance policy, which indicated that volunteers doing church work are explicitly covered. Church attorneys noted the Legion of Mary meets and conducts its business without church guidance, but the other sides' filings said the Legion of Mary was chartered at Christ King in 1968 with the help of a parish priest and noted the group was listed in several church publications.

At this point, the jury has awarded Heikkinin $17 million. How much personal liability coverage do you suppose the volunteer had under her auto insurance? Is it any wonder that the plaintiff attorneys sought to call in a higher authority?

Volunteers under Workers Compensation
Some states recognize the rights to workers compensation for volunteers, especially when it comes to volunteer firefighters. Some states, such as California, give employers a choice of whether or not to include volunteers. The University of California at Northridge has opted to cover volunteers for work related injury, even though they are not required to do so. I think it's the right choice, given that it probably doesn't cost them anything to do it. Because comp premiums are based upon payroll, and because the volunteer payroll by definition is zero, adding the volunteers does not cost them anything. In addition, it creates the same "exclusive remedy" path for volunteers that exists for regular employees, so injured volunteers cannot bring suit against the university for work-related injuries.

Even though volunteers do not make any money, if they suffer serious injuries in the "course and scope" of their volunteer efforts, they may try to assign a dollar value to the services, in order to come up with an indemnity payment. This is an issue that many hospitals -- with their huge cadres of volunteers -- must face from time to time.

Liability for the Actions of Volunteers
Our Wisconsin saga does not involve comp coverage for the volunteer (although she may opt to file a comp stress claim, after all she has gone through!). What's at stake is liability for the actions of a volunteer. In this case, the insurance policies appear to explicitly include volunteers. In any event, I would surmise that the same issues arise here as with independent contractors: who controls the work? If the employer controls how the volunteer work is carried out, I expect that liability will follow. In the case of the Wisconsin church, you could argue that they have an obligation to check the driving records of any volunteer who drives as part of their donated work. This is a can of worms, indeed!

One of the best summaries of the issues for churches can be found at a United Church of Christ website. In the meantime, institutions relying on the services of volunteers to carry out their work should keep in mind the first law of capitalism: there is no such thing as a free lunch.

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February 18, 2005


You know that workers comp is a problem when the so-called mainstream media begin to take note. Normally, workers comp is a topic relegated to the trade journals or the deepest nooks and crannies of the business pages in the daily news. Contrast this with the early 1990s, when headlines screamed about runaway costs and story after story included tales of employers closing shop or moving operations from one state to another due to the burdens of workers compensation.

This month, Forbes features a story about current workers comp woes, and it is interesting to note that this story entitled Workers Con deals primarily with the proliferation of premium fraud.

The story cites a number of examples: a FL PEO that pocketed $600 million in premium leaving employers and their employees uncovered; a California janitorial firm that underreported the number of employees by several hundred; a Texas janitorial firm that played a shell game by switching employees between a number of companies; an Illinois temp service that misclassified warehouse workers as clerical workers, and a California PEO that hid more than a million dollars in wages by calling them "partnership distributions."

Is employer fraud actually more widespread in reaction to rising costs, or are state regulators just taking a harder look now that reforms have wrung the fat out of other aspects of the system? Hard to say for sure since fraud statistics - both on the employer and the employee side - are often difficult to quantify and generally rather squishy at best. The Forbes article says yes, if the rising number of suits filed by state and private insurers is an indicator.

One thing is for sure - fraud schemes hurt us all: the injured employee is often left without recourse or forced to bring suit to pay for medical care; the honest employer pays higher premiums as insurer costs "trickle down." In addition, fradulent employers often enjoy an unfair competitive edge. By illegally evafing a cost of business tht can be substantial, fraud perpetrators can offer lower prices in competitve or bidding situations.

Employers that hire contract workers through a third party, such as through a temp agency, or a leasing company, and employers who purchase workers comp packaged in a bundle of other services, such as in a PEO, need to be particularly alert to the issue of coverage lest they find themselves holding the bag. The California Department of Industrial Relations offers an employer tip sheet on ensuring the legitimacy of workers comp coverage. It is worth kicking the tires before cementing any arrangements: check business licenses and verify coverage with a local insurance authority.

Florida uninsured employer jailed for fraud after two deaths

West Virginia is cracking down on deadbeat employers

Ohio getting tough on premium compliance

Insurer insolvencies, guaranty funds, and joint and several liabilities between temp staffing agencies & contracting employers

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February 16, 2005


Well, not really. But have you ever really examined how your company is viewed by an insurance underwriter? Conventional underwriting is primarily a look in the rearview mirror: the assumption is that companies with low historical losses will have low losses going forward. I don't think it's quite that simple.

In an article written for the Journal of Workers Compensation, I take a look at underwriting from two perspectives: the conventional approach, and a decidedly "out of the box" look at the best indicators of danger ahead.

Here are a couple of examples of conventional and unconventional underwriting:

A masonry contractor with a relatively clean loss runs and a low experience mod appears to be a great risk. However, the business is so successful they double the workforce in less than two years. It turns out that they have trouble finding good people. They hire strangers who transform the work culture. Their losses go through the roof and their insurer is left holding the bag. Conventional underwriting was unable to detect the problems ahead.

A small manufacturing company has a clean loss history, but the average age of their workers is in the mid-50's. Many of the workers have over 15 years with the company. Is it a good risk? I would be concerned about the lack of transferable skills among the workers, along with the propensity for older bodies to break down. Show me a production line worker with 15 year's experience and I'll show you an MRI full of red flags. I would want to know details of the work culture, the proposed hiring and the ergonomics of this workplace before I made any final underwriting decisions.

What matters most in determining relative risk certainly includes but is by no means limited to past performance. I like to know what's ahead. Any company planning to expand or reduce their workforce might be a marginal risk. In the article I explore some of the factors that seem to be the best prognosticators for success. Your feedback -- indeed, the feedback of our readers who are directly involved in underwriting -- is most welcome.

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February 14, 2005


There's been a lot of publicity lately about private disability insurance. Most of it's negative, stories about insurance companies denying coverage or making claimants wait a long time to collect benefits. A typical article recently appeared in the New York Times (available by subscription only). As I think about it, writing disability insurance -- especially "own occupation" policies which cover people who can no longer perform their current jobs -- is risky business indeed.

Workers compensation is disability coverage for work-related injury and illness. In virtually all states, you are covered if you cannot work. If you can return to any productive employment -- whether or not you can return to your original occupation -- your indemnity benefits are reduced or eliminated. Indeed, in some states, if you have an "earnings capacity," your indemnity benefits can be reduced -- even if you are out of work. If you need training in order to find work within your permanent, work-related restrictions, you participate (sometimes involuntarily) in your state's vocational rehabilitation program.

"Own Occ" Coverage
Some private disability policies have a much narrower focus: you collect benefits if you can no longer perform your original job. In other words, being employable is not the issue. You have to be able to perform your current job. In the above article, a dental hygenist suffered carpal tunnel and other ailments that prevented her from returning to her preferred profession. Under workers' comp, she would be expected to train for some other profession. Under "own occ" disability coverage, which she purchased at her employer's urging, she may be able to collect 60% of her average weekly wage up until retirement age. The policy pays if you cannot perform a specific job. This is a very different take on the meaning of "disability."

Perhaps because of the years of training required to become a professional, private disability insurance is common in the medical field. There are websites devoted to the preservation of income for doctors. Under "own occ" coverage policies, a surgeon who can no longer perform surgery could collect a substantial amount of money for many years, depending upon how the policy is worded. The fact that this highly skilled individual has transferable skills that might lead him or her to become a fabulous administrator has no bearing on eligibility for benefits. For whatever reason, if the doctor cannot perform as a surgeon, his or her disability income for life is assured.

I am not questioning why a doctor would want this coverage. It makes sense. Heck, it makes sense not only for doctors, but for anyone who goes through extensive training to take on professional responsibilities. My question is on the other side: who would want to take on this risk transfer? Who would want to write this kind of business? How would you underwrite a policy where the potential payouts are huge, the definition of disability is exceptionally broad and the premiums relatively small?

"Any occ" Coverage
I am suggesting that the risks of writing "own occ" coverage are too open-ended for my tastes. It seems based upon the peculiar premise that we were put on this earth to do one specific thing only. "Any occ" coverage seems more sensible: if I am disabled from working, I collect benefits. If I can return to some productive work, these benefits are reduced or eliminated. The goal should be to keep people active and productive. Under "own occ" policies, we actually encourage disability, by limiting our vision of what people can and should be doing in the world of work.

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February 1, 2005


Roberto Ceniceros of Business Insurance reports that the SEC intensified its probe of Interstate Bakeries, moving from an informal to a formal investigation of its workers comp reserves. The company employs more than 30,000 workers and is the nation's largest wholesale baker. Think Twinkies, Hostess, Drakes, and Wonderbread.

According to Columbus Business First, the inquiry began last July when the Kansas City-based company said it might have incorrectly accounted for reserves. More recently, the company filed for Chapter 11 and ousted executive staff:

"Interstate Bakeries in December removed its treasurer and senior vice president of finance after identifying a "material weakness" that allowed the $40 million workers' comp charge to go unreported for two quarters.

According to unaudited financials the company recently released, the $40 million charge accounted for most of the company's swing from a $27.5 million profit in fiscal year 2003 to a $25.8 million loss in fiscal year 2004."

$40 million is a lot of cupcakes. Reserves have been the demise of more than one company, let's hope this large employer will be able to weather the challenge. We recently discussed reserve problems in the context of a Kentucky self-insurance group (SIG) that was grossly under-reserved, and also discussed what happens to workers comp claims when an insurer defaults. This bears watching.

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January 27, 2005


The world of insurance is built upon the concept of risk transfer: instead of taking on the full cost of risk, we buy insurance. For a fraction of the cost of what we might lose, we pay premiums to transfer the (relatively) remote risk to someone else.

But what if the activity involves enormous risk? And what if the people seeking insurance are by definition thrill seekers and lovers of danger? How would you underwrite them?

In an article in the Los Angeles Times (registration required), Charles Duhigg describes the world of Ken Schulteis, President of Global Underwriters, which writes more than 10,000 insurance policies a year for people climbing mountains, racing cars and stepping out of their predictable routines. (They also cover diplomats on assignment and oversees defense contractors -- in today's world, activities at least as dangerous as mountain climbing.)

Global offers rescue insurance to mountain climbers. (And you think you have problems!) This type of insurance raises the classic insurance question: would you want to sell insurance to anyone who thinks they need it? The article quotes Schulteis as saying "The more I learn about people, the more I worry about selling insurance. I always ask myself: Will selling a sane person insurance make them take insane risks?"

Once adventure-seeking climbers have rescue insurance, will they become more reckless, simply because they feel safe? "People start taking small risks," says Schulteis, "figuring rescue is nearby. But gradually those risks become deadly."

To frame the article, Duhigg tells the story of a well-planned climb gone bad, with one climber nearly paralyzed after being hit by a falling rock and the other without a cell phone to call for help. They are eventually rescued -- and Global picks up the tab.

Some people feel more alive when they are at risk. That's why they climb the mountain in the first place. The riskier the climb, the greater the challenge. But how does an underwriter sort out the reasonable risk (the prudent risk-taker) from the reckless? It appears that Global is a profitable company, so they must be making good decisions. In the meantime, as we approach each day with our own little risk assessments that range which shoes to put on in the morning to when to cross the street, it's comforting to know that some people are making risk assessments that dwarf anything that we have to deal with. Better them than us.

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January 4, 2005


In our previous blog on experience rating, we discussed the disproportionate impact that frequency has on an employer's workers' compensation premiums. The first $5,000 of each claim (primary losses) are counted dollar for dollar in the calculation of the "mod." Losses above $5,000 are discounted substantially. Therefore, a lot of small claims can raise your premiums faster than a single large claim. Once again, for an excellent overview of experience rating, we recommend NCCI's white paper.

When are the numbers actually crunched to determine an employer's premium? Do employers have to obsess about reserves throughout the policy year or is there an optimum time to review losses?

When it comes to determining the experience rating for your next policy year, there is only one day that really counts. About six months after the end of your policy year, a summary of your losses (the unit stat report) is prepared by your insurance carrier(s) and submitted to your rating bureau. For employers with open claims in prior years, it is essential to make sure that the numbers contained in the unit stat report are accurate and reflect an up-to-date understanding of the status of each open claim.

When Should you Look at Losses
So when should an employer review open claims? If your company has more than a half dozen open claims, you should review the losses at least quarterly. Request a loss run from your carrier (your agent can help with this). Go over each open claim with the claim adjuster, to make sure that you have a clear and effective strategy to achieve closure. Ideally, you are working with the adjuster to return the employee to full or modified duty. If, on the other hand, return to work appears unlikely, you should be working toward closure by settling the claim. In the world of insurance, "the only good claim is a closed claim." This quarterly review process ensures that you have an appropriate focus on every open claim.

For employers with just a handful of open claims, quarterly reviews are usually not necessary. At a minimum, request a loss run three months after the end of your policy year. This gives you plenty of time to review the status of each open claim and take action toward resolution. You have fully three months to impact reserves prior to the submission of that all-important unit stat report.

"Aggravated Inequity"
There may be times when a claim is closed after the unit stat report has already been submitted, but still prior to the beginning of the next policy year. If the claim closes at least 25% below the prior reserved level, you are entitled to a recalculation of your experience rating under the "aggravated inequity" rule. This rule, containing a deliciously inexplicable name, applies only if the claim is closed. If the reserves are reduced but the claim remains open, you are not entitled to a recalculation. All of which brings us back to our primary point: make sure you are comfortable with the reserves three months prior to the submission of the unit stat report.

Savvy managers don't have to spend every waking moment worried about reserve levels for open claims. There is that one time of year, however, when a laser-like focus on open claims can be very helpful in controlling losses. Make note of your policy end date, move forward three months, and place a post-in in your calendar to review your loss runs. You will be taking action just ahead of that one crucial moment when reserves really count.

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December 31, 2004


There is an image from this past week that has troubled my sleep: a huge wave, some 20 feet high, barrels toward a coastline. People stand in the shallow waters of the shore, paralyzed by what they see coming. The tsunami roars across the beach and a way of life comes to an end.

Those of us involved in insurance-related businesses are well versed in the intricacies of risk transfer. Businesses purchase insurance because they have to and because they do not want to shoulder the entire burden of their losses. But nowhere in our schemes, in the careful calculations of our actuaries, is there room for the scale of the catastrophe that took place this past week. Over 100,000 people are gone and many more are at risk. Entire communities have disappeared into the murky waters. Nature's awesome indifference has swept away everything, from indigenous populations to the tourists escaping the cold winds of North America and Europe. All have disappeared in a fierce rush of water that receded almost as quickly as it appeared.

I was scheduled to write about experience rating, the mechanism that aligns a company's workers compensation losses with its costs. And I will do this, but at this point it can certainly wait until next year. For the moment, as we all pause to look back on the year that is ending and look forward to the one that is beginning, I want to express the hope that mankind will truly come together in a generous and non-partisan manner to ease the burdens of the survivors and begin a rebuilding project of unprecedented scale.

Best wishes to all our readers for a peaceful and prosperous New Year!

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December 22, 2004


Back in September, we promised to provide a strategic look at experience rating, the calculation unique to workers' compensation insurance that aligns every insured's premium with that company's historic losses. For a basic primer on experience rating, we recommend going to the source: The National Council on Compensation Insurance website provides a well-written document (PDF) that will walk you through the fundamentals of experience rating.

When we train employers on experience rating, we focus on employer strategies: what can you do to minimize the future cost of insurance? How can you translate a basic understanding of experience rating into a reduction in future premiums? Keep in mind that in experience rating, size matters. Large insureds with large premiums are expected to have more losses than smaller insureds. Indeed, because their margin of error is smaller, companies with premiums in the $10,000 to $50,000 range can easily find themselves in a lot of trouble with just a few injuries.

The Rating Period
In workers' compensation, your past history follows you along like a faithful dog. In fact, losses that occurred 5 years ago still impact what you are paying today for insurance. The rating period for your 2005 policy (the policy which begins any time during the 2005 calendar year) includes all the losses from 2001, 2002 and 2003. On the other hand, losses prior to 2001 are gone forever: they cannot impact your experience rating, even if the reserves are increased substantially.

Primary Losses Are the Most Expensive
Every time you report a claim to your insurance company, a reserve is set for the claim. The reserve projects the total indemnity payments (lost wages), medical bills and expenses for this particular claim. The first $5,000 of each claim is considered "primary." Any amount of reserve above $5,000 is considered "excess" loss. Any reserves above a state-specific ceiling (ranging from $100,000 in most states to as high as $175,000 in Massachusetts) is "unratable"; that is, it does not count at all in the calculation of your experience rating.

So what does this mean? Experience rating places more emphasis on the frequency of injuries than on the severity. An employer with one large loss ($100,000) will pay less for future insurance than an employer with 10 smaller lost time claims of $5,000 each - a total of $50,000 in losses -- because the full $50,000 is "primary loss" in the premium calculation for the second employer, while there is only $5,000 in primary losses for the first employer. Experience rating cushions the blow of the large loss, but hammers employers with frequent losses.

Small Employer, Big Trouble
Here's where a lot of smaller employers get caught: if you have a frequency problem (a lot of relatively small injuries involving at least some lost time) and just one big loss, the primary losses add up in a hurry. You quickly exceed the "expected" level of primary losses. As a result, your experience rating pushes up into the "debit" zone. You start paying a lot more for insurance.

If you find yourself in this position, with an experience modification well above 1.0, you need to learn more about the intricacies of the rating process itself. There are opportunities for minimizing the impact of your losses. All of which will be the subject of additional blogs over the next month.

NOTE: States vary in their application of experience rating procedures. Check with your local authority if you have specific questions.

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December 14, 2004


Members of a self-insurance group (SIG) in Kentucky are learning a harsh lesson in joint and several liability. More than 4,000 employers who are or were members of AIK Comp, a plan promoted by Associated Industries of Kentucky, face some $51 million in unfunded claims. Apparently, AIK reserves were insufficient to cover claims, and now all current members -- and even some former members -- are liable for the shortfall.

In workers comp, insurers often refer to the long tail. Essentially, this means that the costs of the claim extend well beyond the actual event or occurrence that the insurance covers. With most types of insurance, if a claim occurs, the payment is made within a short amount of time. With workers comp, payments cover medical costs and wage replacement (also called indemnity payments) over the life of the claim. Insurers estimate the ultimate cost of the claim and set aside reserves, the amount estimated as necessary to pay claims. In recent years, underreserving has been a factor in the demise of some very prominent insurers.

It's too bad to see such a mismanaged pool because well-run SIGs can be viable and beneficial alternatives for small to mid-size employers that would not qualify for stand-alone self insurance. Recently, an A.M. Best report demonstrated that SIGs and captives often outperform traditional insurance programs:

"The combination of at-risk member capital, as well as joint and several liability, is a strong incentive to control losses, minimize frictional expenses, and detect and control fraud, according to the report. These factors benefit the results, with the five-year average loss and loss-adjustment-expense ratio for rated self-insurance pools at 60.6, vs. 89.3 for captives and 80.8 for A.M. Best's commercial casualty insurance industry composite."

Employers need to conduct rigorous due diligence before joining a SIG. As with any self-insurance program, they need to ensure their own house is in order and their loss experience is good - there are no shortcuts for good loss control; employers also need to ensure that the prospective SIG is very cautious in selecting its members, both in terms of member financial solvency and in terms of risk management and loss control requirements. If the entry threshold is low, that should be a serious sign for caution.

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October 25, 2004


Roberto Ceniceros of Businss Insurance points to a recent interesting decision by California's 2nd District Court of Appeals in Los Angeles dealing with general and special employers. The case involved a claim by an employee of RemedyTemp, a temporary staffing firm, considered the general employer; the employee was injured while on assignment at Jacuzzi Inc, the contracting or special employer. Normally, Remedy Temp's insurer would be responsible for the claim, but in this case, the insurer - Reliance - was in liquidation. The court found that Jacuzzi - not the California Insurance Guarantee Association (CIGA) - was responsible for the claim.

There are several interesting issues involved in this case, perhaps more than can be easily addressed in one post, but we'll give it a try. The whole issue of "general" vs. "special" employers is one facet worth discussing. But by way of laying groundwork, let's first look at the issue of employee protection when an insurer goes belly up. Sadly, this is not an uncommon scenario in recent times. In the first quarter of 2004, NAIC recorded 20 property casualty insurer insolvencies.

In this case, the original insurer, Reliance National, went into liquidation. While remedies vary state to state, most jurisdictions have an established state guaranty fund as an insurer of last resort to ensure outstanding workers comp claims are paid. A guaranty fund is usually funded through assessments of a state's licensed insurers. If an insurer fails and a claim is pending, the guaranty fund generally pays the claim and seeks recovery through litigation. Generally, guaranty funds leave no stone unturned in an effort to exhaust any other available insurance .

This is a simplistic summary of a much more complex issue. The Insurance Information Institute (III) has an excellent overview on the issue of insurer insolvencies and state guaranty funds that is well worth a read. Just look at how the Reliance insolvency affected Pennsylvania and the tsunami effect it had on other states:

The Pennsylvania Insurance Department is seeking to recover hundreds of millions of dollars from former executives of the bankrupt Reliance Global Holdings and its insolvent subsidiary Reliance Insurance Company and also from companies that the department says owe the company money. Reliance has only about $5.9 billion in assets, which are being disbursed rapidly because the company has to pay claims as well as the salaries of administrative staff and law firms that keep the firm running until the liquidation process is complete. The company has 144,000 claims amounting to $8.7 billion, almost twice as many claims as expected. Every state has been affected by the insolvency, but those most severely impacted are California, New York and Texas. At the time Reliance was declared insolvent it had 187,000 unsettled claims. In a lawsuit filed in June 2002 in Philadelphia, the insurance commissioner blamed the company's executives for the failure, charging them with draining cash from the company to support their "lavish lifestyle." Reliance Insurance Company, established in 1817, is the largest insurance company to be liquidated in U.S. history.

Guaranty funds have been severely challenged by the flood of insolvencies in recent years. For example, III says that in California, where may insolvencies have occurred, the Guaranty Fund faced a more than $750 million shortfall, no small part of the recent crisis.

In the case at hand, Mark Micelli v. Jacuzzi, Inc., Remedy Temp, Inc., American Home Insurance Co., Reliance National Indemnity Co., and California Insurance Guaranty Association (PDF), the court reaffirmed the idea of CIGA as an "insurer of last resort," and found that joint and several liability existed between Remedy Temp and Jacuzzi, and that Jacuzzi's workers comp insurer, American Home Assurance, qualifies as "other available insurance."

The implication for temp staffing agencies remains to be seen. According to Ceniceros' report:
The appeals court ruling could cause customer dissatisfaction for RemedyTemp and "could affect thousands of companies that, in part, rely on temporary staffing to avoid the costly overhead associated with carrying additional workers compensation insurance," RemedyTemp said in a statement.

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September 27, 2004


Business Insurance reports that the outlook for extending the Terrorism Risk Insurance Act (TRIA) looks positive. The bill was enacted to provide a $100 million federal backstop for insurers but it is set to expire at the end of next year. As we approach one of the primary policy renewal cycles, insurers are getting edgy about the idea of TRIA expiring.

Insurance Journal reports on testimony that the Council of Insurance agents & Brokers (CIAB) made before the Senate Banking Committee last week. Albert R. (Skip) Counselman, a former CIAB chairman and president and CEO of Riggs, Counselman, Michaels & Downes, Maryland's largest independent brokerage firm, told the Senate that the private marketplace will not be prepared to take on the full risk posed by potentially catastrophic terrorism losses by the t