Risk Insider: Frank Russo

Hire for Integrity

By: | May 26, 2016 • 3 min read
Frank is the Senior Vice President of Risk and Legal Affairs and Privacy Officer for Silverado Senior Living, a nationally recognized provider of memory care assisted living, home care and hospice services. He can be reached at [email protected]

As risk managers we are all too familiar with being awakened by calls in the dead of night involving major incidents, accidents, injuries or events. The root cause of many of these misfortunes is often our employees and — unfortunately — their bad habits.

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In more cases than we’d like to see, the bad outcome may have been caused by a negligent, careless, hostile, disgruntled or even criminal employee.

Yes, we all have (or should have) strong safety protocols and policies and procedures in place to prevent these accidents from occurring. In addition, we all provide (or should provide) risk management and safety training to our employees, especially after these serious events occur.

But all the training in the world won’t offset a bad hire. So what if we had a risk management time machine? What if we could go back in time and prevent that disastrous event from happening by not hiring the employee who was responsible? What would that be worth to you and your organization?

What if we could go back in time and prevent that disastrous event from happening by not hiring the employee who was responsible? What would that be worth to you and your organization?

At Silverado, we assessed our hiring process to determine if we could mitigate and reduce risk based on how we hire. Our conclusion? Yes, we absolutely could.

We looked at traits common to what we would consider “bad hires,” and the shared traits of employees who were terminated for cause and/or caused or contributed to an avoidable accident.

Several years after making the decision to include risk management in our hiring practices, our claims data and new safety culture has validated our initial belief.

The Importance of Integrity

Warren Buffet said, “In looking for people to hire, you look for three qualities; 1. Integrity, 2. Intelligence, 3. Energy.” At Silverado, we incorporated an integrity screen for ALL new hires companywide a couple years back. To work for Silverado, you must pass this test.

I understand we all need to be profitable to survive. So adding an extra step and upfront expense may seem unnecessary or even impractical, especially for something that isn’t a state or federal requirement.

But we concluded early on that it was the right thing to do in order to employ the safest and highest integrity employees possible.

In our case, these employees are providing care to thousands of vulnerable memory-impaired individuals whom we are entrusted with every single day. Knowing care is being provided by high integrity people is extremely important to us.

We also know that any cost or time associated with it will be paid back tenfold by a reduction in claims (and related hard and soft costs). And we have the data to prove it.

Two years after making integrity screens part of the Silverado culture, we wanted to look at the effect on our risk data.

The University of Arizona ran an in-depth two-year independent study on our employees who took the integrity test and those who didn’t. This study specifically addressed workplace injuries (workers’ compensation claims) and focused on frequency and severity. The results showed even greater impact that we anticipated.

  • Incidence of any claim being filed is nearly 3 times as strong among non-test takers.
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  • Incidence of a claim exceeding $5K is nearly 4 times as strong among those who never took the test.
  • Incidence of a claim exceeding $20K is nearly 12 times as strong among those who never took the test.
  • Internally we also found that hiring for Integrity positively affected our turnover rate as well as our professional liability frequency.

At Silverado we have found that higher integrity equals lower risk. By hiring for integrity we have successfully been able to mitigate risk from the initial hiring process and prevent many injuries (and associated costs) before they ever occur.

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Risk Insider: David Hershey

Getting Reserve Analysis Right

By: | May 24, 2016 • 3 min read
David S. Hershey is the Risk Manager for Sprague Operating Resources LLC / Lexa International. He is a 2014 Risk & Insurance Risk All-Star and a 2014 Liberty Mutual Responsibility Leader. He can be reached at [email protected]

For those insureds who carry deductibles or self-insured retentions, the concept of year-end valuations for your known and IBNR financial obligations is not exactly a surprise.

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Actuaries provide risk managers a report that is based on a tried and true formulation (usually very conservative), to determine the expected financial obligation (a combination of short- and long-term liability), that reduces your company’s bottom line along with the other usual and customary business expenses.

The intent of this article is focus on those who may not realize some advance preparation and understanding of how the reserve analysis process works can provide a significant impact on the amount of funds set aside for the payment of current and future (known and unknown), claims expenses.

Let’s consider a workers’ comp example.

The basic approach to calculating the amount of cash needed to fund your claims reserve starts with your loss runs.

If your actuary is unwilling or unable to provide a thorough and understandable explanation of the science and philosophy surrounding your reserve analysis, you may want to consider a new provider.

Your insurer produces loss runs that contain two key figures: incurred and paid loss amounts.

The incurred amount is the insurer’s best estimate as to the eventual cost of the total claim. The paid amount is that portion of the claim which the Insured has already paid and has or will expense during a prior or future period.

The difference between the two (incurred – paid), is the amount of the outstanding reserve or the estimated amount of the claim that remains to be paid (such as continued treatment and future indemnity during the recovery period).

The funds that are of concern in determining the amount of the reserve can be calculated by the following equation: suggested insured reserve amount = insured’s payments per claim + remaining reserve amounts capitated by the insured’s deductible or SIR.

Total outstanding reserve (applying the per claim deductible cap of $500,000), in this example is determined to be $1,950,000.

To calculate the amount of claim money initially needed to be reserved by the insured, each individual claim whose deductible has not already been satisfied, less any amounts paid by the Insured and then summed revealing the minimum amount the insured should be expecting to pay for future claim obligations resulting from the designated policy period.

Claim amounts due in excess of the deductible or SIR will be paid by the insurer and therefore will not impact the insured’s balance sheet or income statement.

The preceding example provides the insured a very basic approach in determining the annual claim reserve adequacy. Actuaries will apply different factors to the initial reserve ($1,950,000), to factor the probability of claim growth due to changes in treatment (as an example) and for inflation. The common terms used to describe these modifications are trending and development.

Trending and development factors can be obtained by individual insured history, broker factors, a ratings agency or from your insurer.

The goal from the perspective of most risk managers is to accurately project future monetary commitments from known and unknown claims without over reserving, the result of which can cause an unnecessary restriction of cash that could be used for other purposes.

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The selection of the factor that is best for you should be a collaborative effort and in most cases is flexible. A lack of attention and understanding of the basic process by which the annual reserve analysis will most likely result in an inefficient use of your company’s capital.

If your actuary is unwilling or unable to provide a thorough and understandable explanation of the science and philosophy surrounding your reserve analysis, you may want to consider a new provider.

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Sponsored: Liberty International Underwriters

Helping Investment Advisers Hurdle New “Customer First” Government Regulation

The latest fiduciary rulings create challenges for financial advisory firms to stay both compliant and profitable.
By: | May 5, 2016 • 4 min read
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This spring, the Department of Labor (DOL) rolled out a set of rule changes likely to raise issues for advisers managing their customers’ retirement investment accounts. In an already challenging compliance environment, the new regulation will push financial advisory firms to adapt their business models to adhere to a higher standard while staying profitable.

The new proposal mandates a fiduciary standard that requires advisers to place a client’s best interests before their own when recommending investments, rather than adhering to a more lenient suitability standard. In addition to increasing compliance costs, this standard also ups the liability risk for advisers.

The rule changes will also disrupt the traditional broker-dealer model by pressuring firms to do away with commissions and move instead to fee-based compensation. Fee-based models remove the incentive to recommend high-cost investments to clients when less expensive, comparable options exist.

“Broker-dealers currently follow a sales distribution model, and the concern driving this shift in compensation structure is that IRAs have been suffering because of the commission factor,” said Richard Haran, who oversees the Financial Institutions book of business for Liberty International Underwriters. “Overall, the fiduciary standard is more difficult to comply with than a suitability standard, and the fee-based model could make it harder to do so in an economical way. Broker dealers may have to change the way they do business.”

Complicating Compliance

SponsoredContent_LIUAs a consequence of the new DOL regulation, the Securities and Exchange Commission (SEC) will be forced to respond with its own fiduciary standard which will tighten up their regulations to even the playing field and create consistency for customers seeking investment management.

Because the SEC relies on securities law while the DOL takes guidance from ERISA, there will undoubtedly be nuances between the two new standards, creating compliance confusion for both Registered Investment Advisors  (RIAs)and broker-dealers.

To ensure they adhere to the new structure, “we could see more broker-dealers become RIAs or get dually registered, since advisers already follow a fee-based compensation model,” Haran said. “The result is that there will be likely more RIAs after the regulation passes.”

But RIAs have their own set of challenges awaiting them. The SEC announced it would beef up oversight of investment advisors with more frequent examinations, which historically were few and far between.

“Examiners will focus on individual investments deemed very risky,” said Melanie Rivera, Financial Institutions Underwriter for LIU. “They’ll also be looking more closely at cyber security, as RIAs control private customer information like Social Security numbers and account numbers.”

Demand for Cover

SponsoredContent_LIUIn the face of regulatory uncertainty and increased scrutiny from the SEC, investment managers will need to be sure they have coverage to safeguard them from any oversight or failure to comply exactly with the new standards.

In collaboration with claims experts, underwriters, legal counsel and outside brokers, Liberty International Underwriters revamped older forms for investment adviser professional liability and condensed them into a single form that addresses emerging compliance needs.

The new form for investment management solutions pulls together seven coverages:

  1. Investment Adviser E&O, including a cyber sub-limit
  2. Investment Advisers D&O
  3. Mutual Funds D&O and E&O
  4. Hedge Fund D&O and E&O
  5. Employment Practices Liability
  6. Fiduciary Liability
  7. Service Providers D&O

“A comprehensive solution, like the revamped form provides, will help advisers navigate the new regulatory environment,” Rivera said. “It’s a one-stop shop, allowing clients to bind coverage more efficiently and provide peace of mind.”

Ahead of the Curve

SponsoredContent_LIUThe new form demonstrates how LIU’s best-in class expertise lends itself to the collaborative and innovative approach necessary to anticipate trends and address emerging needs in the marketplace.

“Seeing the pending regulation, we worked internally to assess what the effect would be on our adviser clients, and how we could respond to make the transition as easy as possible,” Haran said. “We believe the new form will not only meet the increased demand for coverage, but actually creates a better product with the introduction of cyber sublimits, which are built into the investment adviser E&O policy.”

The combined form also considers another potential need: cost of correction coverage. Complying with a fiduciary standard could increase the need for this type of cover, which is not currently offered on a consistent basis. LIU’s form will offer cost of correction coverage on a sublimited basis by endorsement.

“We’ve tried to cross product lines and not stay siloed,” Haran said. “Our clients are facing new risks, in a new regulatory environment, and they need a tailored approach. LIU’s history of collaboration and innovation demonstrates that we can provide unique solutions to meet their needs.”

For more information about Liberty International Underwriters’ products for investment managers, visit www.LIU-USA.com.

Liberty International Underwriters is the marketing name for the broker-distributed specialty lines business operations of Liberty Mutual Insurance. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. This literature is a summary only and does not include all terms, conditions, or exclusions of the coverage described. Please refer to the actual policy issued for complete details of coverage and exclusions.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.




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LIU is part of the Global Specialty Division of Liberty Mutual Insurance.
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