TRIA Inaction is ‘Disconcerting’
As a member of the Risk and Insurance Management Society’s (RIMS) External Affairs Committee, chair of RIMS Political Action Committee Risk Pac, and a former president of RIMS, I was very saddened to see that Congress left Washington without providing an extension to the Terrorism Risk and Insurance Act (TRIA).
It is even more disconcerting because there appeared to be a compromise in the works between the House of Representatives version and the Senate version, which would have extended the Federal backstop for six years.
RIMS has worked diligently with key members of Congress and other support organizations to clearly articulate the challenges that employers and their risk managers would face if a Congressional extension of TRIA did not occur prior to the deadline of December 31, 2014.
As the nation’s economy is gaining some momentum after the significant challenges of the worst recession since the 1929 Depression, subjecting the business community to the potential significant impact of policy cancellations for terrorism coverage for property coverage as well as workers’ compensation coverage is absolutely unnecessary and a dereliction of duty on the part of Congress not to have taken action on TRIA.
Businessweek has now written that there is a potential cancellation of Super Bowl XLIX as a result of the backstop not being extended.
Speaker Boehner has gone on record that Congress will fix this as soon as Congress gets back to work in the new year, potentially with a retroactive date.
All that is fine but the bottom line is that this should not have happened and it is unfortunate that politics trumps rational decision-making, thus putting businesses in the cross hairs of potentially having lapses in coverage, which is essential to good business operations.
Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.
Good Morning Shah Alam
From his perspective in the third row, John Treme could make out the colorful costumes and motions of the dancers below him.
Treme, the risk manager for Vitalex, a pharmaceutical manufacturer based in Pennsylvania, was attending a performance of Joget Lambak, a traditional dance of Malaysia. The occasion was the grand opening of a Vitalex factory in Shah Alam, one of Malaysia’s manufacturing cities.
Normally, Treme wouldn’t be at an event like this. But he’d been conducting some business with a local insurance partner and happened to be in country on the event date: In other words, the timing was right for him to get a ticket.
Treme might’ve been feeling kind of lucky — but he didn’t.
To a focused, open observer, the movements of the assembled dancers and the music of their accompanying musicians were mesmerizing. John Treme, however, was a man easily distracted by his vivid imagination, combined with a razor-sharp memory that wouldn’t leave him alone.
As Treme watched the dancers, a strong, steady breeze, laden with moisture, passed through the performance space.
“Breeze … storm … tropical storm … typhoon.” Treme’s overactive mind skipped through the severity escalations unbidden. It was just what his brain did.
His brain also harassed him with the memory of his instructions from treasury when he’d been sent to bind the property coverage for the factory in Shah Alam.
“Just get us some basic property coverage with a local partner, we’ll let the global master property program handle the overflow if there ever is any,” the company treasurer told Treme at the time.
That put Treme in a tough spot. It went against his nature to not do as he was bidden. Still, the idea of “basic” coverage in typhoon country gave him the willy-nillies.
“What if something happens?” he asked himself when he couldn’t sleep at night.
“What if we get hit?”
“What are we doing in Malaysia in the first place?” he asked himself in his weaker moments.
He very well knew what Vitalex was doing in Malaysia.
The company had the right specialty with its focus on products in oncological medicine.
Pharmaceutical products in that area were high-growth. But sales in the mature markets like the U.S. and Europe were flat. If Vitalex was going to succeed in the highly competitive world of global pharmacy sales, it needed to move aggressively into high-growth markets like Asia and Southeast Asia.
It also needed to keep costs down, hence the treasurers’ concerns about what he perceived as duplicative or redundant insurance coverages.
A colorful flourish by one of the dancers and a particularly loud sequence from the Malaysian drummers brought Treme back into the moment; somewhat. He reassured himself by counting the offshore layers of reinsurance that Vitalex had on its master global program.
“We’re going to be okay,” he said softly, but still out loud. One of his co-executives looked over at him with concern.
As it turned out, John Treme’s worries were justified. It was really just a matter of time.
Eighteen months after the Vitalex factory in Shah Alam began production, Typhoon Ahayan roared up the Straits of Johor, packing wind speeds of more than 100 miles per hour. The typhoon slammed directly into Shah Alam, causing substantial wind and water damage to Vitalex’s new factory.
“How bad is it?” John Treme asked the plant’s manager, when power was restored sufficiently for phone service, two days after the storm.
“You better get over here,” said Smitty Fields, the plant manager.
A Mortal Blow
Due to a nice run of luck, Vitalex thought of themselves as the chosen ones due to their long string of uninterrupted business with no major property losses.
In placing the coverage for the Shah Alam factory, John Treme engaged in some fairly tense discussions with Terra Firma Ltd., a U.S.-based carrier with an A + rating, which had been on Vitalex’s program for years, long before John Treme came to work for the company.
The Vitalex facility in Shah Alam cost $250 million to build. Against some rather stiff resistance from the underwriters with Terra Firma and Vitalex’s broker, Treme prevailed in placing a $5 million property policy to cover the facility.
The reasoning from the Vitalex C-suite was that the company’s layers of reinsurance on its master global program were robust enough to pick up any slack should the Shah Alam factory suffer a sizable loss. And there was that aforementioned shield of good fortune the company deluded themselves into thinking would last forever.
John Treme was two hours back in country and in his hotel, preparing to visit the typhoon-ravaged Shah Alam factory when he got a disturbing text message.
“Please get here ASAP, I have bureaucrats on my back.”
It was from Smitty Fields.
When Treme got to the factory, the damage the facility suffered was clearly visible. Siding was torn off three quarters of the manufacturing space and parts of the roof appeared to be missing. And that was just on a cursory glimpse. Happily, or perhaps unhappily, some of the office space appeared to be functional.
There were two matching black SUV’s parked conspicuously near the front entrance. When Treme got to Smitty Field’s office, the men who drove those SUV’s were waiting.
“The cavalry’s here,” Smitty said with something resembling a smile when John walked into the office.
John barely had time to shoot Smitty a questioning look before Mr. Yei spoke.
“You are Mr. Treme, correct?” Mr. Yei said.
“Yes, I am,” Treme said. “How can I help you gentlemen?”
Mr. Razak consulted a file briefly before speaking.
“We work for Bank Negara Malaysia, the insurance regulator in this country,” Mr. Razak said. “We have questions about your coverage of this factory.”
“Like what?” Treme said, again shooting Smitty a look, which Smitty ducked.
“Who is your local carrier?” Yei said.
“Ungku Assurance,” Treme said.
“And your carrier in the United States?” Mr. Yei said.
“Terra Firma Ltd.,” John Treme said.
“If I may, gentleman, may I ask what’s going on here? We’ve got a severely damaged factory here and I need to get to work on the assessment and claims process,” Treme said.
“Yes, we think that is highly advisable,” Mr Razak said.
“We only have one question of substance for you today,” Mr. Yei said. “Although I think we are going to have more later,” he said unsmilingly.
“And that is …” Treme began.
“And that is …” Mr. Razak continued for him, holding out a document.
“Why did you arrange for only $5 million in coverage for a $250 million operation, that is, if your valuations can be believed,” Mr. Razak said.
“Gentlemen, we are very well capitalized company with substantial reinsurance protection on our global program,” Treme said.
“I don’t think there’s going to be a problem drawing down from our reinsurers to get this plant back up, if that’s what your concern is,” Treme said.
“I hope that’s the case because it’s of great concern that you have a gap in the tens of millions in your local coverage in all probability,” Mr. Yei said.
Mr. Razak jerked his head in the direction of the factory.
“The good people and the government of Shah Alam trusted that your company came here with good intentions, to do business and create local jobs,” Mr. Razak said.
“Your company’s failure to place adequate local coverage brings that premise substantially into question,” he said.
Minutes later, Treme stood with Smitty Fields, watching the two black SUVs wheel out of the storm-damaged parking lot.
“What do you think all of this means?” Smitty said to Treme.
“I’m not sure, I’m not sure,” Treme said. “I don’t want to think it, but we might be a little bit screwed,” he said.
Six months later, John Treme was on a conference call with his broker, Fred Tallex, and a vice president with Terra Firma, Suzette Pines.
“Okay Fred, do you want to take us through this?” John said to start things off.
“Sure,” Fred said, sounding like he was already mentally finished with the topic.
“Bank Negara Malaysia informed us yesterday that we are free to draw down the $40 million from Vitalex’s reinsurers to complete the factory restoration,” Fred said. “That’s the good news.”
“You all saw the email this morning,” Fred continued.
“Yes,” said Suzette Pines, somewhat tersely.
John didn’t say anything, yet.
“No one got fined, but the local regulators have got our brokerage and Terra Firma in their cross-hairs now,” Fred said.
“Sure looks like it,” Suzette said.
There was a long, awkward pause, which John attempted to fill.
“Well, we’ve only got a month or two to firm up the coverage on the renovated plant,” Treme said. “Can we get going on that?”
“Who’s we?” Suzette Pines said.
“Well, you’re our carrier in Asia,” Treme said.
“John, not any more we’re not. We have lost our appetite for this risk. A regulator that’s going to be in our grill all day long now will do that.”
“So you’re not …” Treme began.
“Sorry John, sorry but no way,” Suzette said. “No way if I want to keep my job and I do want to keep my job, such as it is,” she said ruefully.
“Guys, I’ve got to go, I need to pick up another call,” Suzette said.
“ ‘Bye Suzette,” Fred said.
Treme was too nonplussed to say goodbye.
“Now what?” Treme said to Fred after Suzette hung up.
“I really don’t know,” Fred said. “This project has so much stink on it I don’t know who we’re going to find and that’s not even bringing up price.”
“Well, can you …” Treme began.
“Yep, I’ll get started today John. You know we got reprimanded too,” Fred said, barely veiling his impatience.
“I know Fred, I know,” John said.
The business restoration delays suffered by Vitalex in getting the reinsurance draw down amidst the ongoing distraction of the investigation by Malaysian insurance regulators had severe impacts on Vitalex’s ambitions in Asia.
Vitalex suffered 14 months of business interruption due to the storm damage and the time needed to jump through regulatory hoops while trying to get the plant rebuilt.
A Munich-based competitor, Mayer Corp., which has a nimble, efficient manufacturing facility in Vietnam, was successful in taking substantial portions of the Asian oncology drug market that Vitalex was counting on as a difference maker.
Other markets might pay out like Asia had the potential too, but it would be years before Vitalex would be in a position to take advantage of them.
Risk & Insurance® partnered with FM Global to produce this scenario. Below are FM Global’s recommendations on how to prevent the losses presented in the scenario. These “Lessons Learned” are not the editorial opinion of Risk & Insurance®.
Six Dimensions of a Successful Global Risk Management Program
1. Breadth and depth of a network: Risk managers want a consistent level of products and hands-on services delivered as well as the ability to offer broad, compliant, on-the-ground coverage. They need to settle claims locally and they want their carrier to offer consistent performance in terms of policy documentation and contract certainty.
2. State-of-the-art global master form combined with broad “standard” local underlyers: The ideal global program matches local coverage and master coverage as closely as possible. This maximizes coverage in the local territory and the local loss payment. Should a loss occur, it can be paid with certainty at the local level.
3. Balanced global and local service: Most risk managers value consistency when it comes to certain important aspects of their program, including capacity, coverage, claims and the level and quality of key services they choose. Yet keeping local constituencies and decision-makers engaged (and happy) can be an equally important element of a successful global program.
4. Consistent loss prevention engineering service, protocols and deliverables: As companies expand their footprints overseas, they often find the challenges they face in understanding hazards and managing risks grow disproportionately.
Companies often discover the prevailing standards of protection and construction differ significantly from what they may be used to at home. Local codes may be lax or non-existent, often in regions that may be more prone to natural hazards.
5. Claims control and settlement via in-house claims adjustment network: One way of ensuring prompt claims service anywhere in the world, is by insurers recruiting, training and retaining well-qualified claims professionals with on-the-spot authority, who are located around the globe.
6. Success in the global arena: A successful risk management plan depends on a concerted effort from numerous parties, including underwriters, engineers, brokers, contractors and countless others who are integral to its success. Taking that same simple plan “global” means that extended communication lines, cultural differences, language barriers and time zones must be added to the list of challenges.
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.