Speed and Savings
The dilemma of limited public sector budgets and crumbling infrastructure may have found a cure. The state of Pennsylvania took advantage of recent developments by surety bond underwriters to help secure an aggressive program to replace bridges around the state.
Surety bonds are required for work done by government entities, but this is a public-private partnership, so letters of credit were an option. But the sponsor, the state Department of Transportation (PennDOT), decided to use a surety bond program using new elements that included a fixed claims-determination process, and also liquidity provisions to ensure that work could continue during a claim.
The Rapid Bridge Replacement Project (RBR) is addressing 558 structurally deficient bridges across the commonwealth under a design-build-finance-maintain public-private partnership (P3) arrangement between PennDOT and Plenary Walsh Keystone Partners — the joint venture concessionaire, owned 80 percent by Plenary Group USA and 20 percent by Walsh Investors.
“This feature, which is more seen with contractor performance bonds in Europe, reduces the period of uncertainty in relation to a claim from a surety and for that reason it is assessed in a positive way from rating agencies and lenders.” — Michael R. Bonini, director, Public-Private Transportation Partnership Office, PennDOT.
Plenary Walsh is responsible for demolishing the existing bridges, maintaining traffic during construction, and then maintaining the new bridges for 25 years following construction. PennDOT will retain ownership of the bridges throughout.
It is the largest road project in Pennsylvania history.
Most of the bridges included in the program range from 40 to 75 feet in length and are located in rural regions on the state highway system.
The RBR is the first project to be completed under Pennsylvania’s 2012 P3-enabling legislation.
PennDOT said it chose the P3 structure to accelerate the replacement of the bridges and facilitate efficiencies in design and the construction of bridge components. This has resulted in a 20 percent cost savings over the life of the concession period, compared to PennDOT’s replacing the bridges itself, according to the agency.
Substantial completion of the project is expected on Dec. 31, 2017. Total cost is $1.119 billion; the design-build contract is for $899 million.
PennDOT said the batching of the projects will allow the bridges to be replaced and maintained at an average cost of $1.6 million each versus $2 million each if completed by PennDOT.
Commercial close occurred on Jan. 9, financial was March 18. Construction on the first bridges began this summer, and the bridges will be completed in batches. Substantial completion of the project is expected on Dec. 31, 2017. Total cost is $1.119 billion; the design-build contract is for $899 million.
“The key feature of the performance bond used for the Rapid Bridge Replacement project that is different from more traditional ones is that it spells out a specific process about accepting claims, dispute resolution and how long such a process can take,” said Michael R. Bonini, director of the Public-Private Transportation Partnership Office at PennDOT.
“This feature, which is more seen with contractor performance bonds in Europe, reduces the period of uncertainty in relation to a claim from a surety and for that reason it is assessed in a positive way from rating agencies and lenders.
“For PennDOT, this means a more streamlined process in relation to timely completion of the project and access to this mechanism if the contract is terminated and the design-build contract is assigned to PennDOT.”
New Delivery Method
Surety bonding is “in a state of rapid development,” said Michael Bond, head of surety for Zurich, which was a participating surety in the RBR. “This is a new delivery method in the U.S.
“The enabling legislation for P3 programs does not necessarily specify surety as opposed to letters of credit or other forms of performance security. Letters of credit have been used worldwide to provide liquidity to a project, but they don’t protect subcontractors.
“Performance bonds also cover payments for labor and materials. That ensures workers and suppliers are covered.”
“The Pennsylvania program is a very creative example of how the public works and surety industries are responding to current needs.” Michael Bond, head of surety, Zurich
Bond said that the innovations in the RBR program address some of the prevailing concerns about surety, namely the uncertainty of the claims process, and the possibility of untimely payments, that could cause a liquidity problem for the project.
“The Pennsylvania program is a very creative example of how the public works and surety industries are responding to current needs,” said Bond.
To be clear, the surety bonds are different from the public-works bonds or funding bonds that are issued by the state authority and actually pay for the project.
The surety bonds provide performance security that the concessionaire, Plenary Walsh in this case, will complete the project satisfactorily. If there is a default, there would be a call on the bond and the surety would step in to work with the authority and the contractors to complete the project.
“What is new and different is that in a traditional public-works project the government is the owner and counterparty to the contractor,” said Bond. “In the P3 model, the counterparty is a private entity created to execute the project.”
He added that while such a special-purpose entity has some advantages over traditional public-works operations, it also has some proscriptions. Notably, the project is funded on a limited-recourse basis, so if there are cost escalations or unforeseen expenses, the concessionaire cannot dip into the government pockets to cover. There is some contingency, but it is limited.
“This is the next level in construction [risk management],” said Doug Wheeler, regional managing director for construction services at Aon Infrastructure Solutions. Aon was the broker for the contractor.
A European Model
“This alternative project delivery model came out of Europe and into Canada, then into the U.S. There is more legwork up-front, but there are dozens of projects already on board. Pennsylvania is a big proponent, New Jersey is almost there [with enabling legislation], but Governor Christie vetoed the most recent proposal. In New York, there has been a push.”
This is a very exciting time in public works and surety, said Aon’s Grace Drinker, senior analyst of infrastructure.
She stressed that even though the P3 process is different than the traditional design-bid-build approach, “there are still checks and balances aplenty in P3. There have been P3 contracts cancelled because of oversight and scrutiny.
“There is no risk to public safety or the public purse in the P3 process,” Drinker said. “What it does is bring operating efficiency to infrastructure.”
With the P3 approach, she said, “it is possible to have a higher initial cost, but the operating efficiency over the 30-year lifecycle of a project is a net savings. There is a real value for money in this.”
Drinker added that “contractors prefer to use surety capacity to letters of credit capacity to meet lender requirements on projects.”
Wheeler concurred that contractor preference is a big piece of the puzzle. “Surety is more efficient for the construction industry.” He added that capacity in surety is finite, but not a concern.
“Bundling the bridges allows them to be replaced faster and cheaper,” said Steve T. Park, senior associate with Ballard Spahr in Philadelphia, the bond counsel to PennDOT.
“The typical design-bid-build process would have taken longer. They selected bridges that could be easily bundled, designs that were similar, so they could fix the most in one program.”
There was equal diligence on the other side of the table.
“We spent a lot of time de-risking the program,” said Sarah Roberts, president of Intech Risk Management, insurance advisers to the concessionaire.
“We spent a lot of time de-risking the program.” — Sarah Roberts, president, Intech Risk Management
“When people hear 558 bridges, the initial perception is that they were not certain it could succeed. But the project is actually easier to manage with a lot of bridges than it would be for a single project of the same size.
“With a single project, if there is a delay, the whole timeline is thrown off. With so many bridges, it is possible to swap out one for another and work around delays to keep the whole project on schedule.”
She is sanguine about the growth potential for P3 projects in the U.S., at least in the long term.
“I don’t think we are there yet in P3 in the U.S.; there is still a lot of coming of age to do. In this case, the P3 model had a direct benefit to the owner, PennDOT, and indirectly to the taxpayers of the state.”
Lynn Schubert, president of the Surety & Fidelity Association of America, confirmed that P3s, and most public construction in Europe are protected by letters of credit.
“In the U.S., our public construction prefers performance bonds for completion and payment. But the concern of the ratings agencies is the speed with which surety bonds are called upon.
“In the Pennsylvania [project], the contracts include a quick-resolution process. It is a little extra piece, but it is very exciting.”
Time for Property
Is it an insurance issue or a nonprofit issue? Is there an insurance market for these risks or is government intervention needed? Is Congress looking to tell the insurance industry what’s what or are lawmakers looking to facilitate a market-based solution?
The bigger question is: Whom do you trust?
At the heart of these questions is an insurance law: the Liability Risk Retention Act (LRRA). Having passed it in 1981 in response to a collapse of the product liability insurance market, Congress last amended the law in 1986 to include most commercial liability.
Since then, a vibrant subculture within the self-insurance world has grown up. In 2014, the average annual premium written by risk retention groups (RRGs) was $12.6 million. With 234 RRGs now in existence, according to the Risk Retention Reporter, that amounts to nearly $3 billion in total premium.
Despite such a success story, surprisingly, RRGs haven’t expanded further — say, to property coverages. It’s not for want of trying.
Janice Abraham, CEO of one of the biggest RRGs, United Educators, has been in her position for 18 years.
“I don’t believe the government should be in the business of insurance at all.” — U.S. Rep. Dennis A Ross, a Florida Republican
“I have been working on this for almost the whole time,” she said, referring to the fight for RRGs to retain property risk.
Right there with her has been Pamela Davis, CEO of another massive RRG provider, the Alliance of Nonprofits for Insurance (ANI). They spearhead a renewed effort to expand the LRRA to allow RRGs to underwrite property coverage.
The fight is being led in Congress by Florida Republican Rep. Dennis A. Ross, who assures constituents and insurance professionals that he’s a “strong free market person.”
“I don’t believe the government should be in the business of insurance at all,” he said. Efforts to expand the LRRA is not “the camel’s nose under the tent trying to get into the industry.”
Instead, Ross, whose brother Bill served as CFO of the Hillsboro County Boys & Girls Club, said that he appreciates the challenges nonprofits face, and hopes to create an opportunity for such groups to pool resources and focus on their primary missions, not premiums.
The pro-LRRA expansion argument is best illustrated by a plausible example: A nonprofit senior center can purchase $1 million in liability through an RRG to cover the liability to transport its seniors in a van, but that RRG cannot underwrite damage to the $20,000 van itself.
Or take the example of a college that buses its sports teams to various competitions and shuttles its students around campus. An RRG could offer the school millions in third-party liability, but not the thousands to fix the bus after a fender-bender.
That just doesn’t make sense, advocates said. Of course, their opponents tell a different story.
A primary argument for the new LRRA is that it won’t be a big change at all. The draft bill now in Congress would only allow certain groups to write coverages like property, fleet auto physical damage and business interruption: RRGs active for 10 consecutive years, with at least $10 million in capital and surplus.
Perhaps most limiting, the bill only applies to RRGs protecting 501(c)(3) organizations.
The argument: The commercial insurance market has failed these nonprofits. These community and educational nonprofits tend to be small in size and faced with unique risk.
“These are hard to cover property, auto physical damage issues that really warrant a lot of attention and a lot of risk management,” said Abraham.
Sometimes, commercial insurers are interested in these risks, Abraham said. Sometimes, they are not.
What often happens: A 501(c)(3) purchases liability insurance through an RRG, then finds it challenging to buy unbundled property from a commercial carrier. What’s more, seeking out unbundled property coverage adds operational costs to small organizations on constrained budgets.
According to Davis, 85 percent of 501(c)(3)s that would benefit from the law change have annual budgets of less than $1 million.
In United Educators’ case, schools come to the RRG year after year looking for help with this issue, Abraham said.
She went on the record — the Congressional Record — about that unmet demand when she testified to the Subcommittee of Housing and Insurance of the Financial Services Committee of the U.S. House of Representatives on May 20, 2014.
Davis said she hears from insurance brokers about these problems and the unmet demand. They tell her that only 6 percent of commercial markets would consider standalone property risks from nonprofits.
“I would love to see the market come up to [nonprofits] and say, ‘There is no need for this,’ ” Ross said, but unfortunately “games” are being played in the commercial market.
But the main takeaway from proponents is: A vote for the LRRA change is a vote that benefits communities and their nonprofits. It’s not about commercial insurance. So how can people dare oppose it?
The Other Side
Opposition is aligned against the LRRA expansion, just as it has been for the past 18 years that Abraham fought for it.
On one side of the opposition is the National Association of Insurance Commissioners (NAIC).
“These are hard to cover property, auto physical damage issues that really warrant a lot of attention and a lot of risk management.” — Janice Abraham, CEO, United Educators
The insurance regulators have never been fond of risk retention groups, as one insider in the captive insurance industry put it, perhaps in large part because the 1981 law and its 1986 addendum are two of only a few instances when the feds have intervened in state-based regulation.
In the last serious effort to reform the LRRA, a two-year attempt that ran aground in 2013, opposition from the NAIC was cited as one major reason the bill didn’t pass.
News reports at the time focused on the NAIC’s belief that RRGs are more prone to insolvency than commercial carriers.
For their part, commercial carriers might argue that RRGs aren’t on an even playing field. Once formed, RRGs are regulated only by the insurance department in the state in which they are domiciled (not in every state they write business).
Another argument might be that they aren’t as safe for consumers. RRGs are not subject to state guarantee funds in the event they go belly up.
Beyond these two distinctions and the fact that they can only write liability, RRGs are also a unique form of captive because only owners can contribute capital, only policyholders can be owners.
Independent insurance agents, represented by the Independent Insurance Agents & Brokers of America (Big I), also oppose expanding LRRA.
Jen McPhillips, its senior director of federal government affairs, said concerns include consumer protection and the fact that RRGs have no experience writing property, but the primary objection is the failure to demonstrate a market using empirical data.
“The traditional marketplace is there and is willing to take on the risk,” she said.
Whereas the original LRRA was passed in response to a clear crisis in coverage, no such crisis exists today.
Independent insurance agents, represented by the Independent Insurance Agents & Brokers of America (Big I), oppose expanding LRRA.
However, data does support the contention that RRGs serve their policyholders well.
In A.M. Best’s “2015 Captive Review,” the rating agency found that risk retention groups outperformed commercial counterparts in loss adjustment expense, underwriting expense and combined ratio, among others. They did not outperform them in policyholder dividends.
The review’s authors were also quick to mention the other benefit of the RRG structure — dividends and surplus buildup are returned to policyholders. Between 2009 and 2013, that amounted to $638 million for rated RRGs.
Also, RRGs are known to provide members with tailored risk management and loss-control services.
“Because RRGs serve a single industry, they are able to develop and share best practices including risk management initiatives, which isn’t common among commercial carriers,” wrote Christina Kindstedt, senior vice president of Willis’ Global Captive Practice for the Americas, in a blog calling for the LRRA expansion passage.
To insurers that voice concerns about RRGs not “playing on a level playing field,” David Provost, deputy commissioner for Vermont’s Captive Insurance Division, said: “Most RRGs are playing on a field that you abandoned.”
Vermont, it should be noted, is the No. 1 home for RRGs in the world; one-third of all groups are domiciled in Vermont, and they bring in two-thirds of all RRG-related premiums.
The Chances of Passage
Beyond the insurance industry lobbying against the bill in Washington, D.C., another hindrance is the overall inertia in the Capitol.
“Ask Congress,” said Abraham when asked why an LRRA expansion hasn’t passed. It “would be foolish to be overly optimistic” about the bill’s passage this year, she said.
As of early July, Ross had not yet presented the bill to the Subcommittee on Housing and Insurance, waiting on industry groups to provide market information.
Davis is optimistic and determined. Even if it doesn’t pass this year, she is “absolutely determined to get this through.”
“It certainly would help our schools and it would certainly help our small nonprofits in our communities,” she said.
The Doctor as Partner
Professionals helping employees return to work after being on disability or a leave of absence face many challenges. After all, there is a personal story behind each case and each case is unique.
In the end, the best outcome is an employee who returns to the job healthy and feeling well taken care of, while at the same time managing the associated claim costs.
Learn what most employers want from their group disability and life benefits program.
While many carriers and claims managers work toward these goals, in the end they often tend to focus on minimizing costs by aggressively managing claims to get the worker back on the job, or they “fast track” claims, approving everything and paying little attention to case management.
Aggressively managed claims can leave many employees and their doctors feeling defensive and ill-at-ease, creating an adversarial relationship that ultimately hinders return to work and results in higher direct and indirect employee benefit costs for the employer. Fast track or non-managed claims can lead to increased durations, costs and workforce productivity issues for employers.
Is it possible to provide a positive employee benefit experience while at the same time effectively managing disability and lowering an employer’s overall benefit costs?
A Unique Approach
Liberty Mutual Insurance’s approach to managing disability and absence management focuses on building consensus among all stakeholders – the disabled employee, treating physician, employer and insurer. And a key component of this process is a large team of consulting physician specialists, leading practitioners from a variety of specialties, highly regarded experts affiliated with leading medical universities across the country.
“About 16 years ago, our national medical director, Dr. Ed Crouch, proposed that if we worked with a core group of external consulting medical specialists – rather than sending most claims for Independent Medical Evaluations – we could do a better job making disabled employees and their attending physicians comfortable, and therefore true partners in producing better disability management outcomes and employee benefit experiences,” said Tim Kastrinelis, senior vice president, Distribution Partnerships at Liberty Mutual Benefits.
“In this way, our consulting physician and the attending physician are able to work with the disability case manager, the employee and the employer to deliver a coordinated, collaborative approach that facilitates a productive lifestyle and return to work.”
The result of Dr. Crouch’s initiative has produced positive results for the clients of Liberty Mutual Insurance. This consensus building approach to managing disability with consulting physician expertise has helped achieve industry leading client retention results over the past decade. In fact, 96 percent of Liberty Mutual’s group disability and group life clients renew their programs.
“By getting all stakeholders on the same page and investing heavily in consulting physician specialists, we have been able to lower claim costs and shortened claim duration for our group disability policyholders. …In the end, it’s a win-win for all.”
–Tim Kastrinelis, Senior Vice President, Distribution Partnerships, Liberty Mutual Benefits
A Collaborative Approach
In the case of complex disability medical health situations, Liberty Mutual’s disability case managers play a vital role in seeking additional expertise—an area where the industry’s standard has been to outsource the claimant for independent medical examinations.
However, Liberty Mutual empowers its disability case managers with the ultimate responsibility for the outcome of each claim. The claimant and the case manager stay together throughout the life of the claim. This relationship is the foundation for a collaborative approach that delivers a better employee benefit experience and enables the claimant to return to work sooner; which more effectively controls total disability claim and absence costs.
Sending a disabled employee with complex medical needs to an external specialist may sound like a cost-effective path, but it often comes at the cost of sacrificing the relationship and trust built between the employee and case manager. The disabled employee must explain their medical history to a new clinician, which he or she is often reluctant to do. The attending physician may be uncooperative as this move can appear to question his or her treatment plan for the employee.
As a result, the entire claims process takes on an adversarial atmosphere, building major roadblocks to the ultimate goal of helping the claimant return to a productive lifestyle.
Liberty Mutual takes a different approach. Nearly 100 physicians representing more than 30 medical specialties are available to consult with its medical and claims professionals, working side-by-side with case managers.
More than 95 percent of these consulting physicians are in active practice, and therefore up-to-date on the latest clinical best practices, treatment guidelines, therapies, medications, and programs. Most of these physicians are affiliated with leading medical universities across the country. “We recruit specialists from around the country, getting the best from such prestigious institutions as Harvard, Yale, and Duke,” said Kastrinelis.
These highly-credentialed physicians help case managers focus on providing the support needed for the disabled employee to successfully return to work as quickly as appropriate. Their collaborative work with the attending physicians provides the behind-the-scenes foundation that leads to a positive claimant experience, results in a better outcome for the claimant, and more effectively reduces total claim costs.
Coordinated Care Plan
When one of these consulting physicians reaches out to an attending physician, there’s an immediate degree of respect and high regard for his or her opinion. This helps pave the way to working together in the best interest of the employee, improving treatment plans and return to work results.
In this process, the claimant is not sent to yet another doctor; instead, the consulting specialist works with the attending physician to help fill in the gaps of knowledge or provide information that only a specialist would have. Although not an opportunity to direct care, these peer-to-peer discussions can help optimize care with the goal of helping the employee return to work.
The attending physician may have no knowledge of the challenges the employee faces in order to return to work. A return to work plan created in concert with the specialist, disability case manager, employer, and attending physician can set expectations and provide the framework for a proactive and effective return to a productive lifestyle.
“Our consulting physicians bring sophisticated medical expertise to the discussion, and help build consensus around a return-to-work plan, helping us more effectively impact a claim’s outcome and costs, and at the same time provide a better claimant experience,” said Kastrinelis.
“We can work more collaboratively with the attending physician, manage expectations, and shepherd the employee through the process much more effectively and in a much more high-touch, caring, and compassionate manner. Overall, we’re able to produce better outcomes as a result of this consensus building approach.”
“Our approach – including the use of consulting medical experts – helped us significantly reduce disability costs over two years for one large health service company,” notes Kastrinelis. “We cut average short-term disability claim durations by 4.2 days in that time, while increasing employee satisfaction with our unique disability management model and collaborative, partnership approach.
How did Liberty Mutual’s unique approach lower claim costs, reduce disability duration and improve the benefit experience for one customer?
“By getting all stakeholders on the same page and investing heavily in consulting physician specialists, we have been able to lower claim costs and shortened claim duration for our group disability policyholders,” said Kastrinelis.
“Plus, we, the employee, and the employer also get the bonus of creating a better employee benefit experience. This model has shaped our disability and absence management program to more aptly reflect our core mission of helping people live safer, more secure lives. In the end, it’s a win-win for all.”
How does Liberty Mutual provide a superior employee benefit experience?
Tim Kastrinelis can be reached at email@example.com. More information on Liberty Mutual’s group disability and absence management offerings can be seen at https://www.libertymutualgroup.com/business-insurance/business-insurance-coverages/employee-benefits.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.