In talking with our self-insured clients, we have been reminded that we should produce a few more articles that pertain to the challenges of the self-insured arena.

We have been engaged in various claim projects and have recently conducted several surveys, where structured settlements were widely utilized to ensure quality financial outcomes and reduce expense. A structured settlement is a financial or insurance arrangement that includes periodic payments that a claimant accepts to compromise a statutory periodic payment obligation or to resolve a personal injury tort claim.

Structured settlements have been utilized extensively for high value personal injury cases in the past. However more recently, have been used for a wide variety of circumstances including Medicare Set-Asides and Special Needs Trusts.

When the self-insurer or insurer settles a case with a claimant, it finds itself with a long term payment obligation. To fund the obligation, the defendant takes one of two typical approaches; delegates its periodic payment obligation to a third party who purchases an annuity (“assigned”), or purchase an annuity from a life insurance company (“buy and hold”),

In the “buy and hold” type of case, the defendant retains the periodic payment obligation and funds it by buying an annuity from a life insurance company. The payment stream purchased under the annuity matches exactly, in timing and amounts, the periodic payments agreed to in the settlement agreement. The self insured defendant or insurer owns the annuity and names the claimant as the payee under the annuity, thereby directing the annuity issuer to send payments directly to the claimant. If any of the periodic payments are contingent on someone continuing to be alive, then the claimant (or whoever is determined to be the measuring life) is named as the annuitant under the annuity.


In an “assigned case”, the insurer or self insured defendant does not wish to retain the long-term periodic payment obligation on its books. Accordingly, the insurer or defendant transfers the obligation, through a legal device called a qualified assignment, to a third party. The third party, called an assignment company, requires the insurer or defendant to pay it an amount sufficient to enable it to buy an annuity that will fund the newly accepted periodic payment obligation.

While each method has its advantages, there has been an overwhelming acceptance of the “assigned” case method to reduce financial exposure and cash flow obligations, and eliminate liability from the risk takers balance sheets. Either method will allow an organization to improve their financial condition and to gain strategic advantages over the competition.

In my many years working for insurance companies and TPA's, I have found that employers and their agents start to rush everything through to get their Workers Comp policy ready to renew on 1/1. These five areas are critical to reducing or avoiding an increase in Workers Compensation premiums.

1. Why is your business renewing on 1/1? A large majority of policies renew on 1/1. Moving your renewal date to February 1st means that you are not in the mad rush to renew by the first of the year. This renewal date will let your agent and underwriting department have more time to renew your policy. It is the same as not running an errand during rush hour traffic.

2. There is no need for a rushed reserve review now. Your Experience Modification Factor (Emod or Xmod) was cemented in place many weeks ago. There is no use to try to fix it now as it is too late.

3. It is advisable to not use the same payroll figures from last year. As many businesses have cut back on staff and/or hours over the last few months, it is advisable to use a forecast of lower payrolls. If your company has more payroll than expected, the premium auditor will correct it at the yearly premium audit. This is a careful balancing act as forecasting the payrolls too low will result in a sticker shock at the premium audit.

4. Renewing with the same insurance carrier without questioning your agent. Workers Comp insurance carriers change their variables and rating values often. There are very few instances where staying with a certain carrier will benefit an employer. Brand loyalty can sometimes be very expensive in the insurance business.

5. Do you know the name and email addresses of all the Workers Comp adjusters who are working on your claim files? If you do not, your company is throwing money down the drain. The adjusters function just like a financial adviser in any other financial institution. The reserves your adjusters set on the files are the main figures that feed into your E-Mod.

A highly controversial piece of legislation just went into effect due to the Tennessee Legislature's severe error. The error was due to the state trying to over-regulate the Workers Compensation insurance industry. On January 1, 2010 the small businesspeople of Tennessee will bear the brunt of their error.

The Tennessee Legislature tried to rectify the situation where uninsured subcontractors in the construction industry had employees that were left uncovered for workers comp in case of an on-the-job accident. The legislators should have beefed up the ability of insurance companies to audit these companies. This would have fixed the situation in short order.

What the legislature passed in 2008 was a travesty for businesses. Sole proprietors and the very small businesses in Tennessee are going to pay up to 50% of their earnings in Workers Compensation premiums. At one time, companies with six or fewer employees were exempt from having to provide Workers Comp coverage.

The moral of this article is that the legislatures in any state should bring in Workers Comp expert witnesses before writing and passing such horrendous laws. There are so many intricacies such as this example where trying to correct a problem causes a much worse one. The Tennessee Legislature even had a chance to correct the law in 2009, but let it stand as passed in 2008.

I sometimes receive questions such as "Why do I write about one state's Workers Compensation situation?" My answer is that what happens in one state can happen in yours very easily. I have seen similar types of errors made in West Virginia, California, Oklahoma, North Carolina, and many other states. Calling in Workers Compensation expert witnesses to testify will avoid these situations in the future.

I received quite a few inquiries on the first listing of the most common mistakes made by insurance companies when reporting employer data to the rating bureaus. Please see the full blog or Policy Mistakes for the Top 10.

Why I decided to print this list is that I often hear from employers and their agents that insurance companies are very accurate in their data reporting. Almost any of these could cause premium overcharges. The next 20 in the list are:

11. Cancellation/Reinstatement transaction ID code is not a valid code

12. Policy not found on Rating Bureau database.

13. Too many transactions missing.

14. Too many transactions missing- primary name record

15. There are duplicate transactions within the submission.

16. There are duplicate sequential transactions

17. ARAP factor is required for assigned and experience rated.

18. ARAP factor is below the minimum of 1.00 for policy [----].

19. Transaction type is not approved for electronic reporting

20. Required Endorsement Report not listed.

21. Required Endorsement Items not included

22. Endorsement Record is not valid

23. No location reported for entity [---].

24. Too many transactions without exactly one header record

25. This policy contains USR's and cannot be cancelled or reinstated. Please review.

26. We have received multiple cancellations with different effective dates

27. Multiple state premiums were reported with the same rating date.

28. There are duplicate non-key field change transactions within the submission.

29. Incorrect Endorsement for this policy period.

30. We have not received the original policy for this change transaction.

If you have any questions on these, please email or call me at (800) 813-1386.

I have often heard this phrase from employers "As far as we know, our insurance carriers are reporting everything to NCCI or our State Rating Bureau accurately." I decided to check and see if insurance carriers are highly accurate in their reporting.

I found a list of the Top 30 Mistakes That Carriers Make When Reporting Information I will list the Top 10 -

1. This policy is a duplicate of a policy already on our database.

2. No specific location city must be blank.

3. No specific location zip code must be blank or zero.

4. No specific location state must be blank.

5. Policy expiration date - [--/--/--] must be greater than effective date.

6. Policy total estimated standard premium cannot be less than policy minimum premium.

7. Transaction issue date :[--/--/--] must be within range of transmittal letter.

8. Duplicate header records not allowed.

9. Endorsement __________ is not attached

10. Reason code must be zero.

While most of these would not necessarily effect the premiums that you might have to pay, #5, #6, #7 and #9 seem to be premium drivers for your Workers Comp policy. We are not saying that insurance companies make mistakes all the time. It is just when they do, it could cost you $$$.

That is why I recommend always checking everything on your Workers Comp policy whether you have an agent or not. Assuming everything is copacetic may be costing your company premiums.

I decided to take a step back and look at the forest and not the trees in this and some of the next blog posts. The Risk Management Process may look basic, but not following the natural flow can cause an enormous financial burden to small and large companies alike.

While working with various organizations, clear differences become apparent between organizations that employ a continuous series of steps to manage loss exposures versus those that don’t. If the organizational goals are clearly defined, an organized, continuous risk management process may be applied.

Such events as pending insurance renewals, serious claims, a merger or acquisition, debt or equity restructurings, or new laws or regulations can initiate a process. With a continuous process, these events can be managed in a more productive and less reactive way.

Solutions

The risk management process consists of six key steps which, when applied in a continuously, result in higher organizational profitability, quality, and asset value.

1. Identification of Losses.

There are a wide variety of methods and techniques to identify loss exposures which would interfere with an organization’s objectives. The use of document, compliance, inspection, and expert reviews typically reveals areas in which additional risk management techniques and services should be focused.

2. Analysis of Losses

The analysis of losses are typically reviewed by frequency, severity, total dollar amounts, and timing. This analysis enables an organization to develop projections, prioritize exposures, and allocate risk management resources.

3. Risk Management Techniques.

Loss exposures may be addressed with a wide variety of risk control and financing techniques. These include thousands of different products and services which may be used to deal with very specific risk exposures.

4. Selection of The Applicable Technique.

Once the first three steps have been completed, the techniques that prevent or reduce losses are put into play. All financial and non-financial matters should be taken into consideration.

5. Implementation.

All the various techniques used require immense support and guidance from the organization’s management team and governing body. Without this support, the methods will be less effective and the organization will not adequately meet its defined goals.

6. Monitoring and Revisions.

Acceptable standards and results-based performance measurement throughout the organization is vital. With constant monitoring and revisions, the organization will utilize its risk management for higher financial and social results.

As I previously mentioned, even though this blog centers on Workers Compensation, it is sometimes best to take a step back to the basic steps to prevent and reduce losses.

The House recently passed the Wall Street Reform and Consumer Protection Act of 2009. The legislation is a great move overall to protect consumerism in the US. The part of the bill that concerns me is the creation of a Federal Insurance Office (FIO). Many years ago, Congress had decided to let the states monitor their own insurance activities. This had operated very well for decades.

The AIG bailout had very little to do with the insurance products that AIG provided for consumers and businesses. The financial sector of AIG is the area that failed horribly. Congress decided to protect all consumers from a financial insurance meltdown. They did not separate the financial sector of AIG from its insurance products when crafting this part of the bill.

There were two things that jumped off the screen when I read them. The FIO is going to be an informational source for the federal government. Why would this be needed unless more regulations are coming down the road? The other and more frightening part of the FIO is the title of systemic risk regulator. There is some mention that the property and casualty arena would be excluded - for now.

Insurance is built on a certain systemic risk or there would be no need for insurance products. Would the FIO regulate Class Codes for Workers Compensation? Could the FIO create its own federal insurer of last resort that would compete with carriers? Will agents have another pile of forms to complete every time an insurance transaction is initiated? I am sure you have your own questions about this change in the insurance system.

I just returned from an NCCI State Advisory meeting in South Carolina. I will cover the meeting more closely and cover NCCI's prediction of the FIO in my next post. It was right on target.

The National Council on Compensation Insurance (NCCI(r)) provides meetings in most of the states every year where they provide rating information. I am not putting in a plug. I rarely recommend service providers or their services.

These conferences are great to show the "State of the State" as far as the NCCI is concerned. These are different from the producer workshops that NCCI provides in some of the states. The statistics that NCCI provides concerning NCCI Class Codes and other areas are second to none. I am surprised at times that the meetings do not sell out.

I just attended a conference in Columbia, SC. The symposium was time well spent. If you happen to miss the conferences, they provide the slides used for their presentation. The information is at this address.

You may have to sign up for a free NCCI account to access this page. As they say, there is no such thing as a free lunch, but there is a ton of free statistical info if one takes the time to access their pages. As with this blog, all info from the NCCI is copyrighted.

I used to post often about the plight of North Dakota's Workforce Safety and Insurance (WSI). The WSI is responsible for the administration of North Dakota's monopolistic Workers Comp program. The WSI has had many trials and tribulations as one of the last remaining monopolistic programs in the country.

Monopolistic Workers Comp programs are ran by the state. They do not allow any sort of competition from the insurance markets whatsoever. I recently came across an article where an unnamed third consultant was going to examine whether or not there were inappropriate denials where benefits should have been paid to the injured workers.

The first consultant, Marsh, said there were 16 files that indicated benefits should have been paid to the injured workers. This was part of a much larger file review. The claims were instead denied and defended to pay no benefits. A second audit was performed by Connolly and Associates. They found no wrongdoing.

Why is there actually a need for a third audit? Marsh had said out of a group of files some of those should have had benefits paid and then Connolly found nothing wrong. Why go to the expense of having a third review company look at the files? Nothing is going to change the numbers.

In the file reviews that we have performed, we have found files where benefits should have been paid. However, that was OUR OPINION. We were not there to handle the files. The TPA or carrier took corrective action and that was the end of it.

I am sorry that I skipped doing an article to finish up the Ladder of Insurance(c). The Federalization of Workers Comp surfaced again. I always want to post on that situation as soon as there is any type of change.

When I do presentations, I like to bring up the situation where a sole proprietor may have 20 or more people on their Workers Comp policy and not know it. As I mentioned before, the Ladder of Insurance means that in a court situation, an uncovered liability will be covered by whatever insurance policy is in place. If a subcontractor has no policy in place and there is an accident, the courts will always go up the ladder rungs of the subcontractor - contractor relationship until a viable Workers Comp policy is found.

A sole proprietor has hired a company to remove a tree that is affecting their office. The subcontracting company does not have an insurance policy in place. The sole proprietor does not ask for a certificate of insurance. The uninsured tree removal company sends out 20 people to remove a very huge tree. If any of the tree removal employees are injured, who would end up paying for their claim?

The subcontractor does not have a valid Workers Comp policy in place. The sole proprietor has a policy for themselves only. Where would the Workers Comp court place responsibility? They would likely use the policy of the sole proprietor. I do realize there are exceptions to this rule in certain states.

How does a sole proprietor take care of this situation? They need to obtain a valid and current certificate of insurance from the subcontractor not only for liability insurance but also Workers Compensation.

I have actually seen this scenario play out on a death claim. One extra point is that the sole proprietor should also call the agent listed on the certificate of insurance to make sure there is a policy in place.

Recently, a bill was passed by the House that establishes a Federal Insurance Office (FIO) for international insurance transactions. As I had predicted numerous times in the last few months, the insurance - and in turn - Workers Compensation insurance landscape is slowly but radically changing.

In a large % of phone consultations that I perform for our investor clients, I am often asked what major development would change the "playing field" for Workers Comp over the next seven to ten years. I always answer that the slow but steady progression of the government's attempt to regulate insurance almost makes any forecasting by me nearly impossible after five years into the future.

The Professional Insurance Agents Association (PIA) has commented that they are very concerned the bill would allow proponents of federalizing insurance to advance their agendas. I could not agree more. As we all know, federalizing any type of insurance would lead to more paperwork, control, and inefficiencies.

The first business conducted by FIO would be a study of federal insurance regulation. This seems to be a conflict of interest as the FIO itself is in the position of recommending to Congress whether the power to regulate insurance should be removed from the states and made into another federal bureaucracy. My concern is that if any government agency produces a report that justifies it existence and allows expansion, the report may be biased towards expanding its duties.

Can you already see the results of the report? I can.

I received a great question on my post about certificates of insurance and subcontractors. What happens if a main contractor is a sole proprietor and does not cover themselves on the certificate of insurance?

This question is a great one. Business owners and certain executives can opt-out of workers' compensation coverage. If a sole proprietor opts-out, then the policy is actually a "ghost policy" of sorts. The subcontractor has a policy, but it covers no employees. The insurance auditor will definitely charge the main contractor for the coverage of the sole proprietor in this case.

If there is any question on why the insurance premium auditor would do this, please see my last post on The Ladder of Insurance. If the sole proprietor was injured, it is almost a guarantee that the Workers Comp courts would place the responsibility for payment on the main contractor's Workers Compensation policy.

Next Up - Your Company May Be Covering Extra Employees For Work Comp Coverage

I had originally written on this subject within the last year. As I have recently covered subcontractors, I thought this would be a good time to cover the Ladder of Workers Compensation Insurance(c) again. This is a term that I invented a few years ago.

The Ladder of Workers Comp insurance has to do with the responsibility of lawfully covering all employees with Workers Compensation insurance. The courts have taken the position if a subcontractor does not cover their employee with Workers Comp insurance then the main contractor would be responsible to cover the employee. The courts will "move up the rungs of the ladder" until an insurance policy is found to cover the employee for a given claim.

The Ladder of Insurance applies in all states. I have seen no exceptions to this circumstance. That is why it is beyond important to have current certificates of insurance for each subcontractor that works for your company.

Many years ago as an adjuster, I was working for a carrier that covered a certain school system for Workers Comp. I denied a claim where a subcontractor that was working for a school system fell off of a roof and unfortunately incurred fatal injuries. The subcontractor did not have current Workers Compensation coverage, but instead had provided the school system with an out-of-date certificate of insurance. The denial did not stand and the school system had to pay full death benefits. The subcontractor's insurance carrier would not pay as they rightly denied coverage.

That was my first experience with the Ladder of Insurance. I do not want to be repetitive. The school system very quickly learned a tough lesson on certificates of insurance. They are worth obtaining from all subcontractors.