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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Risk Insider: Terri Rhodes

Momentum Builds for Single Leave Mandate

By: | May 24, 2016 • 3 min read
Terri L. Rhodes is CEO of the Disability Management Employer Coalition (DMEC). Prior to returning to DMEC, Terri was an Absence and Disability Management Consultant for Mercer delivering strategic absence and disability management solutions to clients of all sizes, Director of Absence and Disability for Health Net and Corporate IDM Program Manager for Abbott Laboratories.

Earlier this year I identified the key disability management-related themes of 2016. The trend of offering paid parental leave is now gaining momentum.

New York

At the end of March, New York state became the fifth state to mandate this type of leave. The program provides employees up to 12 weeks paid time to bond with a new child or to care for a parent, child, spouse, domestic partner, or other family member with a serious health condition.

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The duration of the leave doubles the six weeks allotted in California and New Jersey, and is triple the four weeks of paid leave Rhode Island offers.

New York’s law does away with many of the exceptions in similar laws. It will cover full-time and part-time employees, and there will be no exemptions for small businesses. Employees only need to be employed by the company for six months to be eligible.

This raises an important point. Most of the paid leave action is with large companies.

The law does allow employers to limit two employees from taking this benefit at the same time for the same family member, limiting exposure in the case of more than one family member working for the same employer.

Although New York’s paid leave law takes effect on January 1, 2018, it will be gradually phased in with only eight weeks of leave with a 50 percent of pay cap, increasing ultimately to the full 12 weeks at a 67 percent cap by 2021. As is the trend, this is an employee funded benefit through a weekly payroll tax of approximately $1 per employee.

San Francisco

In April, San Francisco’s Board of Supervisors passed the Paid Parental Leave Ordinance (PPLO), making it the first city in the country to enact such an ordinance.

This new law provides supplemental compensation for California employees receiving partially paid leave under California’s Paid Family Leave (PFL) law to bond with a newborn child or newly placed child for adoption or foster care, among other reasons.

During the leave period, the employer will be required to supplement employee pay, so the combination of monies received under the PFL (currently 55 percent wage replacement) and the PPLO will provide compensation equal to 100 percent of the employee’s gross weekly wage.

Payment is made from a worker-funded state disability program and calculated as a percentage of the employee’s wages (55 percent) subject to the maximum weekly benefit amount set by the PFL program. Very similar to the state PFL, there is a cap on the maximum weekly benefit amount of $924, which equates to an individual with a salary of $106,740.

San Francisco’s law will be phased in quickly. In January 2018, all companies with 20 or more employees, with any of those individuals regularly employed in San Francisco, will be required to comply.

Private Employers

Since February, there have been almost weekly announcements about employers adopting or improving their paid leave policies. Here is just a sampling:

  • Twitter: 20 weeks of paid parental leave
  • Wells Fargo: 16 weeks of paid leave
  • Anheuser-Busch: 16 weeks of maternal leave; 2 weeks of paid leave for secondary caregiver (male or female)

Whether aimed at employee attraction or retention, paid leave is now becoming a “must-have” for large organizations.

This raises an important point. Most of the paid leave action is with large companies.

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According to the American Action Forum, in companies with 500 or more employees, paid family leave rose a solid 5 percent, from 17 percent in 2010 to 22 percent in 2015. But in companies with fewer than 50 employees, the needle has only moved from 7 percent to 8 percent from 2010 through 2015.

The myriad of laws, regulations, and policies is creating an administrative burden for all companies. And, for many smaller employers, the varying laws and policies are creating an actual competitive disadvantage.

It is likely that employers of all sizes would welcome some consistency in these laws that are leaving some to ask, “Who is going to pay for all of this?”

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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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