Maximize the Advantage of Finite Risk
The concept of finite risk is not new. Finite risk, in this context, is intended to maximize your tax deductibility for known losses. Currently, the practice is to deduct losses as they are incurred, typical GAAP policy. An insurer, on the other hand, has the benefit of statutory accounting rules which allow for the deductibility when the loss is incurred, allowing for accelerated deductions early in the project term.
The principle of determining the optimal method of risk financing for known losses has various tax implications often influencing the cost effectiveness of the project. Based on specific criteria, the IRS has allowed deductions for the entire finite risk payment when in conjunction with certain insurance related policies.
Consider the advantages of finite risk transactions and remediation cost containment – the latter being an insurance policy.
The basic application for finite risk coupled with remediation cost containment is designed for entities that have acknowledged environmental liabilities that will require funding for a period of time extending into the future (usually 4-plus years).
The finite risk portion of the product is structured similar to an annuity generating payments for remediation expenses on a scheduled basis. Remediation cost containment coverage will provide financial security for the entity in the event the cost of the remediation project exceeds a previously determined level.
The remediation project is calculated on the basis of total cost, annual cost and projects duration. The total project is calculated at net present value factoring the time and frequency value of money. A lump sum payment is paid to a third-party fiduciary (the insurance company), and a commutation account is established in an off-shore or on-shore facility.
When remediation costs are incurred in conjunction with the previously determined payment schedule, payments are made from the commutation account on the behalf of the entity. If the cost of the cleanup exceeds the original estimates, even if for a change in law during the project period, the remediation cost containment insurance will pay the difference.
Depending on the fiduciary selected, the interest generated in the commutation account can be tax exempt. The lump sum payment or installments paid to the commutation account can be tax deductible in the year the payments are made. The insurance premium payments for the remediation cost containment coverage can also be tax deductible. In the event the project cost less than the original estimation and subsequent funding, any balance remaining in the account is returned to the entity.
In addition, risk-financing techniques such as this can result in substantial balance sheet adjustments, added financial security, increased credit ratings, and modifications in the accounting footnotes. Once the remediation phase is completed, any ongoing operation and maintenance that may be associated with the long-term monitoring may also be transferred to the third-party fiduciary.
To maximize the cost benefits of your risk management program, the underwriter must understand the specifics of the remediation project and the additional protection that can be extended under the Brownfields legislation.
Alternative Vision Saves Millions
Steve Stoeger-Moore saved Wisconsin’s 16 technical colleges $10 million in premium over the past 10 years.
He did it by helping to create an alternative insurance system whereby the schools obtain nine varieties of coverage — including general liability, auto liability, workers’ compensation, property, violent acts, and most recently, cyber risk — via a mutual municipal insurance company.
That company is Districts Mutual Insurance (DMI). The mutual taps reinsurance markets including Gen Re and Fireman’s Fund, to obtain coverages above retention layers held by the individual colleges.
Most of the time, DMI also holds a retention layer.
The alternative insurance structure was devised in the midst of the hard markets of 2001-2003, when a few of the schools’ finance professionals wondered whether there might be a better way to go, said Stoeger-Moore.
At the time, he said, the Wisconsin Technical Colleges — which had been purchasing their needed insurance products as a consortium — were reeling from annual rate increases year after year.
“The schools had been seeing double-digit increases in premium for three straight years as of 2003, with compounded increases of 20 percent each year during ’01, ’02, and ’03 — all driven by market conditions, not losses,” Stoeger-Moore said.
In fact, he said, the schools’ loss ratio over the three-year period was just 27 percent.
“The coverages appropriate to higher education had become more and more restricted. Carriers were selectively writing various businesses, and M&A activity among insurers was taking a lot of options off the table,” he said.
“No college pays for a loss suffered by another college. And no college pays a premium based on a loss at another college.” — Steven Stoeger-Moore, president, Districts Mutual Insurance
Meanwhile rates were going up and up and up every year, Stoeger-Moore said.
The solution: DMI.
Before the mutual was formed, Stoeger-Moore served as risk manager for the Milwaukee Area Technical College, one of only a few state technical schools that had a risk manager in place.
As the market hardened, school finance officials approached Stoeger-Moore, who developed the blueprint for DMI and agreed to take on the insurer’s day-to-day operations.
“It’s an insurance carrier that has no employees,” he said.
On the other hand, via independent vendors, DMI has experts working as third-party claims administrators, accountants, and auditors, besides commercial insurance carriers like London-based Beazley, which is now partnering with DMI in underwriting a cyber breach response program.
Stoeger-Moore said that it is illegal for insurers to pool their exposures, payments, or reserve funds under Wisconsin state law.
“No college pays for a loss suffered by another college,” he said.
“And no college pays a premium based on a loss at another college.”
Stoeger-Moore has his share of fans. “Steve is really the most knowledgeable insurance technical person I’ve ever met. He created this whole thing,” said Joe DesPlaines, DMI’s business continuity and crisis response consultant.
DesPlaines said Stoeger-Moore envisioned that the mutual would offer insurance coverage as well as risk management consulting including crisis response planning, employee health and safety, and security assessments.
DMI’s budget is derived from college premium payments, said Stoeger-Moore.
Linda Joski, area vice president for Arthur J. Gallagher and Co. in Wisconsin, which brokers all reinsurance coverages for DMI, said that Stoeger-Moore is one of a kind.
“He is innovative and creative and works so well with these colleges,” she said.
Steven is also being recognized as a 2014 Responsibility Leader.
Creating His Own Solution
When the 16 institutions comprising Wisconsin Technical Colleges faced persistent problems obtaining insurance coverage suited to their unique needs, Steven Stoeger-Moore didn’t just find the solution — he created it.
Stoeger-Moore helped to establish Districts Mutual Insurance (DMI) in 2004 to represent the colleges and provide better insurance and risk management services.
Under his self-implemented “Rule of 16,” he ensures that if any school has a problem, all 16 colleges benefit from DMI’s solution. That dedication led to the development of comprehensive risk management programs — provided to each school at no cost — for electrical and fire safety inspections, emergency response planning, legal consultations, and employee health and safety consultations, among many others.
And when those programs were tested, Stoeger-Moore sprang into action. In the past 10 years, the Wisconsin Technical College System has weathered both a tornado and a major fire. Both times, he was at the scene within 24 hours of the event, providing claims and insurance guidance as well as comfort for shaken colleagues.
Stoeger-Moore has also worked to bolster the industry’s future by encouraging young people to consider a career in risk management. Through DMI, he creates opportunities for young people to learn about the colleges’ unique challenges and the programs created to meet them.
Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, perseverance and/or passion.
Responsibility Leaders overcome obstacles by doing the right thing over the easy thing to find practical solutions that benefit their co-workers and community.
The Promise of Technology
The field of workers’ compensation claims management seems ideally suited as a proving place for the power of technology.
Predictive analytics in the hands of pharmacy and medical management experts can give claims managers the data they need to intervene in troublesome claims. Wearables and other mobile technologies have the potential to give healthcare providers “real-time” reports on the medical condition of injured workers.
Never before have the goals of quick turnaround and transparency in managing claims appeared so tantalizingly achievable.
In the effort to learn more about technology’s potential, in September, Risk & Insurance® partnered with Duluth, Ga.-based Healthcare Solutions to convene an information technology executive roundtable in Philadelphia.
The goal of the roundtable was to explore technology’s promise and to gauge how advancements are serving the industry’s ultimate purpose, getting injured workers safely back to work.
Big Data, Transparency and the Economies of Scale
Integration is a word often heard in connection with workers’ compensation claims management. On one hand, it refers to industry consolidation, as investors and larger service providers seek to combine a host of services through mergers and acquisitions.
In another way, integration applies to workers’ compensation data management. As companies merge, technology is allowing previously siloed stores of data to be combined. Access to these new supersets of data, which technology professionals like to call “Big Data,” present a host of opportunities for payers and service providers.
Through accessible exchange systems that give both providers and payers better access to the internal processes of vendors, a service provider can show the payer the status of the claim across a much broader spectrum of services.
“One of the things I see with all of this data starting to exchange is the ability to use analytics to predict outcomes, and to implement workflows to intervene.”
–Matthew Landon, Vice President of Analytics, Bunch CareSolutions.
“Any time that we can integrate with a payer across multiple products such as pharmacy, specialty and PPO services, what it does is gives us a better picture of the claim and that helps us to drive better outcomes,” said roundtable participant Chuck Cavaness, chief information officer for Healthcare Solutions.
Integration across multiple product lines also produces economies of scale for the payer, he said.
Big Data, according to the roundtable participants, also provides claims managers an unparalleled perspective on the cases they manage.
“One of the things that excites us as more data is exchanged is the ability to use analytics to predict outcomes, and to implement workflows to intervene,” said roundtable participant Matthew Landon, vice president of analytics with Lakeland, Fla.-based Bunch CareSolutions, A Xerox Company.
Philadelphia roundtable participant Mike Cwynar, vice president of Irvine, Calif.-based Mitchell International, agrees with Landon.
“We are utilizing technology to consolidate all of the data, to automate as many tasks as we can, and to provide exception-based processing to flag unusual activity where claims professionals can add value,” Cwynar said.
Technology is also enabling the claims management industry to have more productive interactions with medical providers, long considered one of the Holy Grails of better case management.
Philadelphia roundtable participant Jerry Poole, president and CEO of Malvern, Pa-based claims management company Acrometis, said more uniform and accessible information exchange systems are giving medical providers access to see how bills are moving through the claims manager’s process.
“The technology is enabling providers to call in or to visit a portal to figure out what’s happening in the process,” Poole said.
Another area where technology is moving the industry forward, according to the Philadelphia technology roundtable participants, is mobile technology, which is being used to support adjustors and case managers and is also contributing to quicker return to work and lower costs for payers.
The ability to take a digital tablet to a meeting with an injured worker or a health care provider is allowing case managers to enter data and give feedback on a patient’s condition in real time.
“Our field-based case managers have mobile connectivity to our claims systems that they use while they’re out of the office attending doctor’s appointments, and can enter the data right there into the system, so they’re not having to wait until they are back at the office to enter critical clinical documentation,” said Landon.
Injured workers that use social media, e-mail and the texting function on their mobile phones are staying in better touch with those that are charged with insuring that they are in compliance with their treatment plans.
Wearable devices that provide in-the-moment information about an injured workers’ condition have the potential to recreate what is known in aviation as the “black box,” a device that will record and store the precise physical state of an employee when they were injured. Such a device could also monitor their recovery process.
But as with many technologies, worker and patient privacy also needs to be observed.
“At the end of the day, we need to make sure that we approach technology enhancement that demonstrates value to the client, while ensuring patient advocacy,” Landon said.
As payers and claims managers set out to harness the power of computing in assessing an injured worker’s condition and response to treatment, the cycle of investment in companies that serve the workers’ compensation space is currently playing a significant role.
The trend of private equity investing in companies that can establish one-stop shopping for such services as medical case management, bill review, pharmacy benefit management and fraud forensics has huge potential.
“Any time that we can integrate with a payer across multiple products such as pharmacy, specialty and PPO services, what it does is gives us a better picture of the claim and that helps us to drive better outcomes.”
— Chuck Cavaness, Chief Information Officer, Healthcare Solutions.
The challenge now facing the industry, one the information technology roundtable participants are confident it can meet, is integrating those systems. But doing so won’t happen overnight.
“There’s a lot of specialization in the industry today,” said Jerry Poole of Acrometis.
Years ago there was a PT network. Now there’s a surgical implant guy, there’s specialized negotiations, there’s special investigations, said Poole.
The various data needs to be integrated into an overall data set to be used by the carriers to help lower the cost of risk.
Securing Sensitive Information
Long before hackers turned the cyber defenses of major national retailers inside out, claims management professionals have focused increased attention on the protection of data shared across multiple partners.
Information security safeguards are changing and apply to what technology pros refer to “data at rest,” data that is stored on a particular company’s servers, and “data in flight,” data that is transferred from one user to another.
Mitchell’s Cwynar said carriers want certification that every company their data is being sent to needs to have that information and that both data at rest and data in flight is encrypted.
The roundtable participants agreed that the industry is in a conundrum. Carriers want more help in predictive analytics but are less willing to share the data needed to make those predictions.
And as crucial as avoiding cyber exposures and the corresponding reputational damage is for large, multinational corporations, it is even more acute for smaller companies in the workers’ compensation industry.
Healthcare Solutions’ Cavaness said the millions in loss notification and credit monitoring costs that impact a Target or a Home Depot in the case of a large data theft would devastate many a workers’ compensation service vendor.
“They’d be done in a minute,” Cavaness said.
The barriers to entry in this space are higher now than ever before, continued Cavaness, and companies wishing to do business with large carriers have the burden of proving that its security standards are uncompromising.
Workers’ compensation risk management in the United States is by its very nature, complex and demanding. But keep in mind that those charged with managing that risk get better results year after year.
Technology has a proven capability to iron out the system’s inherent complications and take its more mundane tasks off of the shoulders of case adjustors.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Healthcare Solutions. The editorial staff of Risk & Insurance had no role in its preparation.