A recent court case (Workmen's Auto Insurance Co. v. Guy Carpenter & Co., B211660 (c/w B213853)) specifically determined that the reinsurance broker does not owe a fiduciary duty to a reinsured company. The court rejected the company's argument that the broker, as the company's agent, had heightened duties including those of honesty, loyalty, integrity and faithful service, as well as a duty to make a full and fair disclosure of facts.

It was asserted that the broker breached its duty by failing to secure timely payments, failing to secure the best available terms of reinsurance and acting with the intent to injure the company by incurring inflated commissions. The court said the question was whether the broker was the company's agent and, if so, whether that agency imposed fiduciary duties on the broker as a matter of law such that the broker can be held civilly liable for breaching those duties.

The court said that an "independent insurance broker is not an agent of the insurer, but rather is an agent of the insured." But the court also said that a broker "cannot be sued for breach of fiduciary duty in a manner that conflicts with existing insurance law. In reaching this conclusion, we confess that agency law and insurance law are in conflict, resulting in a legal conundrum."

The company suggested to the court that case law and statutory law involving insurance brokers should not be applied to reinsurance intermediary-brokers because they have far more complex and comprehensive relationships with their clients. The court responded that such an argument should have been brought up sooner and ultimately allowed the broker to prevail because of procedural rather than substantive issues.

Comparing the relationship of an insurance broker with an insured to the reinsurance broker's relationship with a reinsured is amazingly naïve. Somehow, it escaped the court's attention that the reinsurance transaction is not strictly regulated, and that applying the same rules to a relatively non-regulated transaction was inappropriate at best. Perhaps the court believed that insurance case law developed in a vacuum, and that it was not tempered by regulatory oversight and legislative consumerism.

Still, the author assumes that the court would apply its same "(il)-logic" to other reinsurance brokers.

The aha moment

The broker itself defines "broker" as a reinsurance intermediary that negotiates contracts on behalf of the reinsured. Yet the broker says it does not have the traditional duties imposed in the agency-principal relationship.

The attitude by the broker is, in my opinion, the single biggest takeaway for companies ceding management of their reinsurance. It is confirmation that is incorrect to believe that your broker owes you the duties of honesty, loyalty, integrity and faithful service as well as a duty to make a full and fair disclosure of facts, and that it is acceptable for brokers to generate inflated commissions. It is now been made clear that, when push comes to shove, the standards to which your reinsurance broker is held are not really a whole lot different than when you are buying a used car, where statements made concerning the sale are considered "puffing"; just an opinion or judgment that is not made as a representation of fact.

Companies that delegate reinsurance risk management to a broker may themselves be breaching fiduciary duties to stakeholders. That is, while the case concluded that the broker does not have a fiduciary duty to the reinsured, courts are quick to confirm that officers of the reinsured do have a fiduciary duty to the reinsured.   Obviously, officers cannot meet their fiduciary duties by assigning those duties to someone whom the court has found to have no fiduciary obligation to the reinsured.

I do not fault the particular broker in its defense. The issue is not the particular broker in the case or brokers in general; the real issue is the willful ignorance of the reinsured. Not questioning the motives of the broker is naïve. Remember, the broker, like the used car salesman,  makes his money based on how much comes out of your pocket in the sales transaction.  Risk management requires truly understanding the environment in which you operate.

The above case is not unique in bringing to light the ignorance of courts concerning reinsurance. Judges have been known to throw up their hands when dealing with reinsurance and admit that they do not understand what is being presented.  In the case of Indiana Lumbermans Mutual Insurance Co. v. Reinsurance Results, Inc., in the U.S. Court of Appeals for the Seventh Circuit, Case Number: 07-1823, the court stated:

"The lawyers' oral arguments were excellent. But their briefs, although well written and professionally competent, were difficult for us judges to understand because of the density of the reinsurance jargon in them. There is nothing wrong with a specialized vocabulary - for use by specialists. Federal district and circuit judges, however, with the partial exception of the judges of the court of appeals for the Federal Circuit (which is semi-specialized), are generalists. We hear very few cases involving reinsurance, and cannot possibly achieve expertise in reinsurance practices except by the happenstance of having practiced in that area before becoming a judge, as none of us has."

Ignorance is only part of the problem

The reinsured holds much power but is afraid of using it. The playing field is certainly not level to begin with, but all too often the ceding company's management exacerbates this lopsided power arrangement. It is amazing how ceding company management knows instinctively that their clients have many alternatives, but somehow believe that they, as a client of the reinsurance broker, have no alternatives. Companies often do everything they can to protect the "long-term broker relationship."

This demonstrates a complete lack of understanding by ceding company management of their own fiduciary duties. The fiduciary duties of officers of insurance companies are to the company stakeholders, not to the reinsurance brokers.

This lack of understanding should be of particular interest to regulators overseeing insurance. All states now have a statute or regulation pertaining to recognizing a company in "hazardous financial condition"; one telltale sign is the lack of competence and fitness of those in management. Breaching a fiduciary duty could indicate lack of fitness.

Most insurance companies are ultimately in business to make money and serve their clients. Mistakenly believing that you are in business to make friends and keep long-term broker relations will put you out of business.  Reinsurance is a commodity. Thinking of it as anything else makes you an uninformed consumer.

Your reality - the Wild West

Your business (insurance) is a highly regulated one that owes a fiduciary duty to its clients. To stay in business, you must depend on reinsurance, offered by an entity (reinsurers) that is, for all intents and purposes, unregulated. Additionally, this commodity must be purchased in certain quantities or an agency (AM Best) that gauges how viable you are will let everyone know that you face questions.  You may have to go through a salesman (broker) that the courts have determined owes you no fiduciary duties, and whose income is based on how much it can sell you. That is, there is no  incentive for "your" agent to advise you of ways to reduce your costs. To people in other industries, it would appear that "your" agent actually doesn't work for you.

If the commodity you purchased turns out not to be what it was said to be, then you must arbitrate the matter with the entity that offered it. Reinsurance arbitration has proven to be every bit as costly and time-consuming as litigation but offers none of the advantages or safety nets provided by the courts. In spite of naïve judges, the court system is a better option. Judges are naïve only because reinsurance transactions so seldom land in court. Courts are a vastly superior forum that offers reason, rules and stare decisis, where precedent is followed, records are published and the same issues do not have to be determined multiple times. In arbitration, if a decision is made that is unfavorable, you may not appeal the decision. If this same scenario has been arbitrated before, you will never know it, because there is neither precedent nor a record. The outcome will not be determined by legal construction of the commodity you purchased and a set of interpretive construction rules but by the "custom and practice" of the industry, which coincidentally is neither written down nor uniformly agreed upon or adhered to. Arbitration only provides an advantage for the unregulated party to the transaction; it in no way benefits the regulated party. If the commodity you purchased does not measure up to the set of standards your regulator imposes, your regulator will punish you, not the entity that produced the commodity. Additionally, your clients to whom you owe a fiduciary duty have no recourse against the producer of the defective commodity you purchased even if it caused you to go out of business.

Substitute ANY other industry for insurance, reinsurance and broker in this scenario and you will quickly discern the absolute draconian forum in which you must operate.  Now you can see why I don't believe that the ceding company has a reasonable basis to believe that deferring reinsurance oversight to the broker is appropriate.

The next time you sign your broker-of-record contract, try this experiment:

Ask to insert the clause  - "the broker agrees and understands that it is acting as a fiduciary for the Company in all matters in which it services the Company, with all duties and standards imposed in a fiduciary capacity." While the court was not willing to assign such duties, the broker is free to contractually assume them!

• expansion of email as the predominant form of intra- and inter-company communication;
• growth of online data mobility project management tools using smartphones and tablets to access and transmit data;
• increased adoption of document imaging to replace paper recordkeeping files;
• growth of enterprise resource planning (ERP) platform systems and integration with best-in-class specialty software programs;
• estimators’ use of the same database to work from multiple locations on complex projects;
• increased adoption of, and massive data files generated by, BIM;
• emergence of hosted and cloud-based data recovery systems;
• expansion of e-discovery in litigation, which raises expectations for (and increases the risks of ) record retention; and
• proliferation of social media networks combined with bring-your-own-device policies, which creates new portals for hacking, malware and viruses.

• failure to initiate or maintain regular data backups;
• hardware failure;
• human error resulting in accidental deletion, overwriting of data or forgetting to add new IT systems/devices to backup protocols;
• failure to test the backup and data recovery restoration process to determine adequacy;
• software or application corruption;
• power surges, brownouts and outages;
• computer viruses, malware or hacking;
• theft of IT equipment; and
• hardware damage or destruction from vandalism, fire and water (rain, flood or sprinkler system discharge).

• Laptop motherboard failure. A project estimator was working offline when the motherboard crashed. Because of a tight deadline, he had to restart the estimate from scratch. Although the bid was successfully submitted on time, the estimator fell behind on pricing other jobs that the company failed to win.
• Lost iPhone. Pictures of a project safety incident with documentation of a mismarked “one-call system” utility spot were lost. The photo documentation had not been transmitted to the office, and the contractor lost the request for damages against the utility locating service. Moreover, the smartphone was not properly password-secured, allowing unauthorized access to contacts, client information and company data.
• Desktop computer backup location not properly mapped to server. When a workstation was upgraded with a new desktop computer, it was not mapped to the server for automatic backup. The computer hard drive crashed, and no files were backed up. Recovery using the old desktop computer was slow, and data created on the new computer was lost.
• New database not added to the nightly backup protocol. A company purchased a new customer relationship management database and, after a power outage, realized it had not been added to the nightly data backup protocol.
• Onsite data backup location destroyed. The building housing an onsite backup server was struck by lightning, which started a fire and resulted in a total loss of all current and historical data.
• Disaster recovery software not properly configured. While conducting a test of a company’s disaster recovery plan, it was discovered that some critical data was not being captured in the backup files.
• Laptop and tablet stolen from a jobsite trailer. The field equipment had not been backed up for several weeks, resulting in the loss of key project documentation.

• Determine the company’s recovery-time objectives, and plan and budget accordingly. Identify which functions and systems must remain operational at the time of a disruption or disaster. This requires advance planning and budgeting for necessary systems and technical support services. It also helps prioritize risk-reduction strategies, including investments in data management backup system and security upgrades.
• Develop a written business continuity plan that outlines specific responsibilities for protecting vital information and mission-critical data. The business continuity plan should include protocols for backup and synchronization of all office systems and virtual/mobile devices. It also should address the frequency and format for testing data management integrity and security, as well as how gaps will be identified and addressed.
• Inventory the company’s vital information and mission-critical data, and verify it is being backed up. Key considerations include how the data is being backed up, by whom and how frequently, as well as where the backup data is stored. It is important to ensure the data backup and restoration process work as designed.
• Initiate automatic scheduled backups, ensure the backup data is stored offsite, and test the adequacy of the data backup and restoration methods. Consider the added benefits of imaging the company’s servers to achieve a complete restoration of the data management system
• Develop a comprehensive diagram of the company’s integrated data management network, including all physical and virtual/mobile subsystems. Ideally, this will be an “as built” blueprint of the company’s configuration consisting of the hardware, operating systems, software and applications that make up the data management network.
• Institute policies regarding the use of the company’s Internet, including security protocols. Implement policies for user authentication, password verification, unacceptable personal devices and reporting of lost equipment. It is essential to communicate these policies and security protocols to all users and to train new employees.
• Establish proactive management of the company’s data and IT network. Ensure the company’s network administrator has state-of-the-art tools, including remote access, help desk diagnostics and anti-spam and malware protection. Request periodic updates on all software licensing audits and verification that all security patch updates have been installed on a timely basis. Establish a fixed replacement schedule for hardware and software.

I remember my first day as a stockbroker like it was yesterday, I was sitting at my desk in my brand new, three-piece suit. I was fired up, ready to start my new career! As I waited for my license to clear over the next three days, I researched different stock ideas that I could recommend to potential investors.

On the third day, the owner of the firm came up to me and asked, "What are you doing?"

I said, "I'm waiting for the phone to ring."

He looked at me with amazement and said, "That's not how this business works! You need to pick up the phone and start making calls." He gave me a list of people to call and walked away.

I sat there for a couple of minutes thinking, "What have I gotten myself into?" This was not how it was supposed to work. Months earlier, I had walked through the skyways in downtown Minneapolis watching stockbrokers jumping up and down with excitement as they watched the tape from the New York Stock Exchange while talking on the phone. It looked like so much fun. Obstacles weren't even on the radar!

Sometimes, it is better to not know about the obstacles that lie ahead.  In the movie "The Wizard of Oz," Glinda the good witch didn't tell Dorothy about all the obstacles she'd face: the poppy field, the spells, the guard. . .  well, you get where I am headed. Had Glinda told her about all of the obstacles, Dorothy might never have made it back to Kansas. She might not even have left Munchkin Land. To this day, I am grateful that I never realized all the obstacles I would encounter as a stockbroker.

My biggest obstacle? Myself. I was flat out afraid: of failure, of success, of the phone! I had severe call reluctance. What was I going to do? How was I going to overcome this? The telephone seemed to weigh a thousand pounds. I had a knot in my stomach the size of a basketball.

I remember the first call; I was terrified. The person I called hung up, and I was relieved, actually, I didn't have to say anything. The next person listened to my pitch but then hung up. I made several calls that day with no success, and I thought, "This is going to be a very tough road." I finally made it to the weekend, went home and did everything I could to avoid thinking about Monday morning.

When it inevitably rolled around, I felt like I was going to the slaughter house. I reluctantly headed to the office to attend my first sales meeting. I still had a knot in my stomach as I sat down to listen to Tom Vanyo, the owner of the investment firm. I had never been to a sales meeting before, and I didn't know what to expect. Deep down, I was hoping it would last all morning so I wouldn't have to get back on the telephone.

For the next 60 minutes, Tom talked about the value of personal development. He repeated over and over again that we must work on sales skills. He shared examples of how to ask better questions to engage the prospect and how to ask for the order more than once. I locked on to every word he said, taking several pages of notes. The entire meeting was inspiring and full of great sales ideas.

Afterward, walking back to my desk, I observed the top producers in the company making outbound calls. I noticed how enthusiastic they were. It was almost like being at a revival. As I pondered my next move, I thought, "Why not model excellence!" I asked a couple of the top producers if I could sit with them to observe their phone presentations. They agreed. I wrote down word for word what they said. I observed the key to their success: They were enthusiastic about what they were selling. I thought: I can do that.

I was so inspired. I still had a knot in my stomach about making phone calls, but I was not going to let that hold me back. Enthusiasm overcame my nerves. In my first month, I opened up more than 35 accounts and earned more than $3,000 in commissions, plus a $250 bonus for opening so many new accounts. Within eight months, I opened up more than 180 accounts. I still knew very little about sales. I did learn, however, the secret to overcoming my call reluctance: enthusiasm! And when I was excited, my prospects and clients got excited, too.

My first full month was simply amazing. I noticed that, with every phone call, my skills were improving dramatically.  This sent my confidence soaring. The more calls I made, the more confident I became. Tom was right. The key to success in sales was personal development.

You, too, can develop yourself.  You have unique skills and abilities.  Add those to a positive attitude, continuing personal development through learning and applying what you learn, preparation, persistence and enthusiasm, and you have some of the keys to transform your own call reluctance.

Incremental reputational risk, if not managed correctly, can chip away at a company’s brand for years and eventually result in lower sales and lower retention of customers.

Most risk management initiatives we hear about are “outside-in” approaches.  Managing the Three Bell Curves proposes an “inside-out” method that builds an organizational culture where reputational risk management is woven into the fabric of a company’s DNA.  The only way this can be done is by including the customer’s voice in just about all decision making.

What Is Organizational Culture?

I Googled “organizational culture” and got more than 36,000,000 hits in .32 second.   None of the definitions is wrong—but none is perfectly right, either.  What people miss is that organizational culture is an emergence – an immeasurable state made up of two or more relatively simple ingredients, where 2+2=7. 

Deal and Kennedy (1982) defined organizational culture as “the way things get done around here.”  Of all the definitions I’ve read, this simple one resonates with me most.  Deal and Kennedy’s definition, while not perfect, seems to be the most widely accepted.

“The Way Things Get Done Around Here”

While culture itself is extremely difficult, if not impossible, to measure and manage, the relatively simple ingredients of culture are not.  Because they are manageable, it is possible to guide the organization’s culture without being able to manage it directly.

When we think about “the way things are done around here” from a high level, we see there are really only three key ingredients:  employees, work and customers.  That’s all.  And managing all three well ensures customers get what they want, when they want it, at a quality level they expect (or better).   Guiding culture through the proper management of employees, work and customers results in a maximization of customer retention, brand strengthening and even growth (through referrals). 

The Three Bell Curves

The simple bell curve shows the normal distribution of things in many facets of business.  We use them when gauging success, failure, mediocrity and everything in between.   A bell curve can be assigned to each of the simple ingredients that make up your company’s culture.

Gallup estimates that 52% of American workers are not engaged and that a further 18% are actively disengaged.  This means  that only 30% are either engaged or actively engaged.    Where does your company stand?  There are several ways to find out.

1. Employee surveys
2. Employee giving
3. Attendance
4. Customer surveys

The impact of employees on reputational risk is obvious.  Or is it?  When we think about the impact employees have, most of us think about the customer-facing employee – the ones customers actually communicate with.  The fact of the matter is that, in many companies, most employees are back-office or noncustomer-facing.  These workers as a whole have every bit as much of an impact on customer retention and growth as those who are customer-facing.  This is because problems left unsolved in the back office always present themselves in some form or another on the front line.  Similarly, the problem solving that occurs in the back office creates a smoother experience on the front lines, helping those customer-facing employees provide a better experience.  This is even more the case in manufacturing, where a product does all the speaking for itself and there is no customer-facing employee to manage the experience.

While it’s one thing to come up with metrics, it’s a whole other thing to execute strategies for change or improvement.  Fortunately, much work has been done in the field of organizational psychology that has revealed the drivers of engagement.  Sirota Survey Intelligence, out of New York, has been capturing data regarding employee attitudes since the early ‘70s.  Their findings are really interesting.  In terms of drivers of engagement, the three most important areas should be:

1. *Employee equity (sense of fairness)
2. Employee camaraderie
3. Employee sense of achievement

*most impactful

By measuring and managing the workforce’s sense of equity, achievement and camaraderie, a company can make great strides toward reducing reputational risk.

Peter Drucker said, “There is nothing more useless than doing efficiently that which is not necessary.”  Unnecessary work (waste) results in a couple of things.  First, working with processes that aren’t necessary smacks an employee’s need for the sense of achievement in the gut – dead center.  Second, the customer pays for everything your company does, even if the work is considered “waste.”

Necessary work is activities that are required (usually by law) that customers aren’t necessarily interested in paying for but must.  Valuable work is work that customers would pay for.

The measure of value vs. waste comes during the process of problem solving.  Problem solving done the right way eliminates waste.  Done the wrong way, it adds complexity.  Workarounds, for instance, add waste.  Root-cause elimination removes waste and leaves more room for creating value.

Success on the” work” ingredient can be measured in terms of speed, cycle time and quality.  It also presents itself in overall customer satisfaction.  It helps employees to envision the work bell curve as they perform their everyday job duties.  If everyone had an “eliminate waste, maximize value” mindset, think of the ideas employees would come up with!  And once those ideas are acted upon, it leads to the employee’s sense of achievement and the removal of something customers didn’t want to have to pay for.

The Lean Enterprise Institute (Cambridge, MA) has a website that contains a plethora of useful information on working with the principles of lean inside and outside of manufacturing.  Check out http://www.lean.org for more information on thinking and working lean.

Fred Reichheld, who founded Bain's loyalty practice, was determined to find out why some companies were so successful while others weren’t.  In side by side comparisons, he and his research team found that customer advocacy was very strong among the successful companies while, at the mediocre or poor-performing companies, customer advocacy was weak.  This all makes perfect sense. What didn’t (make sense) was that there was no calculation, no indicator, that could help a company understand where it stands and how to move the needle to the right on the bell curve.

By asking just one question, the team found, a company could develop a benchmark and use it to improve results.  The one questions is: “On a scale of 0 through 10, how likely are you to recommend (company XYZ) to a family member, friend or colleague?” Having listened to answers to that question many times, researchers began to notice that customers who responded with a 9 or a 10 had actually promoted the organization or were going to in the future. Those who answered with a 7 or 8 were neither excited nor disappointed.  Customers who scored between 0 and 6, the team found, were most likely to damage the reputation of the company by speaking about an experience in a negative light.  

So how does a company calculate its Net Promoter Score?

A company’s Net Promoter Score is calculated by subtracting the percentage of detractors from the percentage of promoters:  %PROMOTERS – %DETRACTORS = Net Promoter Score.  Yes, it’s that simple.  NPS is a sign for everyone from the ground up to the corner office to see and work to improve.  It’s the customer’s voice.  It’s your company’s true north.  Measure it.  Improve it.

For more information on The Net Promoter Score , read The Ultimate Question by Frederick Reichheld. 

Conclusion

The inside-out approach to reputation risk management requires an understanding of the nature of organizational culture (the way we do things around here).

Net Promoter, Net Promoter Score, and NPS are trademarks of Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld

Is your organization ready to lose as much as 25% of its intellectual capital in the next decade? You need to be, because more than one quarter of the U.S. working population will be old enough to retire in less than three years, according to the U.S. Bureau of Labor Statistics.

This may lead to a shortfall of nearly 10 million workers. Add this flight to an average job stay of four years, where today’s employees switch to a competitor without so much as a backward glance, and businesses in America are at risk.

America is poised for a brain drain so dramatic that many companies will find themselves unprepared to face the coming talent shortage. Yet it appears few companies are taking steps to deal with the crunch. 

This article explores actions companies can take to manage looming intellectual losses. Some are straightforward; some will take more planning. Any organizational change comes from the top, and industry leaders must deal swiftly and strategically with the changes our work force will undergo in the coming years.

As companies increasingly rely on intellectual capital, the value of work force intelligence to an organization cannot be overstated. There is little doubt that the insurance industry, so reliant on intellectual capital, should be at the forefront of addressing the looming loss of intellectual capacity.

Where Did All the Experts Go?

Brain drain historically has been defined as the loss of human skills in developing nations, usually because of the migration of trained individuals to more industrialized nations or jurisdictions. However, as baby boomers begin to retire, the term is increasingly used to describe the loss of intellectual capital at U.S. organizations. Downsizing also takes its toll on work force intelligence.

The U.S. work force has changed dramatically. A baby boomer’s parents may have held one job in their entire careers; experts estimate a typical young American will hold from seven to 10 different jobs before retirement. Insurance organizations are experiencing brain drain as long-term employees retire, switch employers or change careers. There is little doubt—insurance organizations are about to see drastic changes resulting from this exodus.

Future employment demographics should sound an alarm to insurance companies in America. Over time, the lack of top talent can be devastating to an organization, especially in an industry as complex as insurance. Add an increasing dependence on technology, and future employee skill deficits are a certainty, not just a theory. While this exodus is beginning to hit the insurance industry now, it will accelerate greatly in the next few years as aging boomers, those best placed to assume senior management roles, retire. This talent shrinkage must be managed now, before organizations find themselves in crisis.

Penny-Wise, Pound Foolish?

It may seem profitable to replace an older, more costly employee with a younger person. However, organizations may lose a great deal more than they bargained for with that replacement. With the departure of these highly experienced employees, companies lose more than their individual expertise. Also lost is what psychologist Daniel Wegner calls “transactive memory.”¹ Transactive memory is information a person accesses that is outside of his or her own memory, information routinely called up by using another person’s memory.² Groups where this transactive memory is understood and valued function better than groups that lack this trait.³

Take co-workers. On a difficult property claim, an adjuster may turn to a co-worker and ask, “What is the name of that engineer we used a few years ago in Georgia on that storm-surge claim?” Our brains can store only so much information. If we have access to people around us who may be more suited to remember a particular type of information, then we don’t have to work as hard to remember items that we don’t understand, don’t recall or don’t need at the time we hear it.

Brain drain slows the work process and impairs a company’s product quality. It can result in inefficiency because of the time it takes employees to find new co-workers with the information they may need. It can also result in costly mistakes resulting in lawsuits, lost subrogation opportunities or claims paid that, with a thorough investigation, would have been denied. Probably most importantly, a work force lacking robust intellectual capital loses its strategic advantages and abilities to respond quickly to business opportunities.

Insurance professionals are concerned about brain drain, yet even a casual review of insurance literature shows that much of the focus in industry research centers on improving technology to enhance operations. Even the term “human-resource management” seems to be morphing into a robot-like term, “human-capital management.” This disembodied approach seems to negate the fact that we’re still dealing with people; yes, they may be “capital’ to a company, but most employees would be offended to hear themselves referred to in that manner. “Talent management,” the new euphemism for recruiting and retaining employees, again seems to dehumanize the worker. Few people appreciate being “managed” or referred to as “capital.”

The emphasis in insurance companies seems to have shifted away from quality toward quantity. How much faster can we complete a process, appears to be the question. Can we settle a claim in 30 days, even if we have to throw more money at it? Has customer service and quality been forgotten in the effort to improve company operations? Have we, in an effort to increase profits, driven much of our brightest talent right out the door?

The Devalued Older Worker

Insurance message boards are filled with complaints from older, highly experienced insurance professionals who cannot find work, some with two to three decades of knowledge. “I have a solution to the brain drain in the insurance industry. Hire me and all those still looking for work … and some of the people whose resumes are posted on the Broward County RIMS website, among others,”⁴ one frustrated professional said in a June 2007 on-line risk management discussion. If these complaints are true, the widespread reluctance by insurance organizations to hire older, experienced workers may backfire because of the lack of new talent breaking down doors to enter the industry.

Nowhere is brain drain felt more acutely, it appears, than in claims departments nationwide. According to Conning Research & Consulting,⁵ 70% of the nation’s adjusting staff is age 40 or older. “I have found this [talent leakage] particularly true in the claims arena,” according to James Brittle, a producer in the National Accounts division of Cobbs, Allen & Hall in Birmingham, Alabama.  “Coming from the highly engineered chemical and energy field, try to find one carrier that still has experienced and knowledgeable adjusters to handle property claims. There are two options — young and inexperienced or experienced and independent. The latter group is getting smaller and smaller. It’s not real comforting.”

How can companies prevent brain drain? Here are some possible solutions.⁶

1. Analyze current workforce strengths and talents to determine core competencies.

If an employee’s store of knowledge is known only to a few co-workers, then it is largely useless to the organization as a whole. It becomes an information silo, a vertical information cluster that is not transmitted laterally to co-workers, usually to the detriment of the organization. Analyzing employees’ expertise and knowledge and categorizing it so that it becomes accessible by other employees and departments is critical to improving and strengthening the work force.

2. Determine, through surveys or informal meetings or email queries, where employees go for specific information.

Who are your employees’ “information agents” in given areas? Imagine this scenario—a Lloyd’s underwriter wants to issue a binding authority to an agent in Florida. Before agreeing, however, the underwriter must determine wildfire hazards in the counties where the agent wants to write business. If the underwriter can, with a few keystrokes, search a database that shows Lloyd’s experts who understand catastrophe modeling and perhaps understand wildfire exposures particularly well, the decision to issue the binding authority can be made more easily and accurately, not to mention more quickly.

Knowledge Asset Mapping, written about extensively by British researcher Bernard Marr, allows organizations to locate and diagram internal knowledge. This visualization of intellectual capital, which Marr states is the “principal basis for competitive advantage,”⁷ can then be used as a strategic planning tool so that organizations can predict future intelligence gaps before they occur.

Today’s organizations must be agile to compete. Classifying employee knowledge to make it more accessible to others in the organization can help companies make decisions rapidly. It goes without saying that companies like Apple have seized marketplace opportunities to catapult themselves into leadership positions. Without sufficient intellectual capital, however, a company may not be robust enough to respond to opportunities as they arise.

3. Prepare to replace exiting information agents when those employees retire.

In smaller organizations, this process may not be formal. It may be as simple as acknowledging that an employee who is an expert on a subject is leaving. Notify all employees of the loss of this person, then direct them to another employee who may not have as much knowledge, but has some knowledge in that area. The company must develop incentives and time frames so that newer information agents can become experts on specific topics as gaps arise, and even before they arise.

4. Determine which employees are potential flight risks, whether to retirement, recruitment or family pressures such as aging parents.

Talk openly with employees who are considering retirement or having home/work difficulties to determine how you can retain them. Flexibility is the key—the employee may need more time off or greater leeway to work non-core hours or to work at home. If the Family and Medical Leave Act (FMLA) is voluntary, your organization should consider allowing FMLA leave.

5. Hire retiring employees as consultants on a part-time basis to retain their expertise.

With increasing cost of medical care for retirees, many welcome a supplement to their retirement income. Adding benefit package components that appeal to older workers, such as long-term care insurance or prorated health coverage for part-time work, may help retain them, as well.

6. Provide incentives for employees to consider postponing retirement.

When an organization considers the total impact of losing a long-term employee, it is generally cheaper to retain that employee than to hire and train a replacement, especially if the employee’s knowledge routinely saves the company money. Consider the following scenario:

A claims manager will retire in two years, after working more than 30 years for just two carriers. He is one of the top arson investigators in the Midwest, taking dozens of arson claims to trial or to closure. Currently, there is no one else in his company who handles arson files without his supervision, and no one who remotely approaches his level of expertise.

What happens to this company when he leaves? How much will his departure cost the company in terms of claims payments that might have, with his expertise, been compromised or denied? Can this organization really afford to lose the employee’s expertise without a solid exit strategy?

7. Use technology to drive intra-company communications.

Intranets, videoconferencing, peer-to-peer technology and podcasts are information ways that allow workers to communicate over distance and varying time zones. Encourage disparate and divergent workers to develop virtual relationships to share ideas and solve problems using these tools. Why not take advantage of your global work force?

8. Establish “practice communities” where individuals from various departments — claims, underwriting, marketing and reinsurance — meet regularly to solve problems.

According to James Surowiecki, author of The Wisdom of Crowds, a crowd is a group of diverse people with differing levels of intelligence and information who collectively make smart decisions. A good example of this wisdom, as many claims managers have found, is “round tabling” a claim. Allowing a group of adjusters with varying amounts of experience to determine a claim’s value or to develop a plan of action to kick a stalled claim forward often provides excellent results and acts as a learning tool for less experienced team members.

Surowiecki defines four elements that make a smart crowd. He recommends a diverse group because each person will bring a different set of experiences to the process. The crowd should have no leader, so that the group’s answer can emerge. But there must be a way to articulate the crowd’s verdict. Finally, people in the crowd must be self-confident enough to rely on their own judgment without undue influence from other group members.

With today’s sophisticated technology, organizations don’t have to rely solely on local talent. A company-wide initiative can be implemented readily with some help from your organization’s information technology department. Practice communities build virtual relationships that, in turn, make employees more connected to the organization.

9. Organize and memorialize your practice community results with wikis, a decade-old web application that allows many people to collaborate on a single document.

There are several sites dedicated to collaborative writing, including https://www.zoho.com/docs/. Visit http://www.wikipedia.org, the on-line encyclopedia written by collaboration, to view an example of wiki technology at its finest.

10. Implement a formal mentoring program.

Some insurance organizations have implemented mentoring programs. The National Association of Catastrophe Adjusters formed a mentoring program in 2005. While not online, it matches new adjusters eager to learn CAT adjusting with experienced field adjusters.

Aon Services is almost a year into an ambitious mentoring project. With 600 Aon employees in the pilot program developed with assistance from Triple Creek Associates in Colorado, Aon expects to roll out the program companywide. The program was not limited to senior manager mentors; anyone in the organization with good performance was eligible to participate. “This challenged our operational paradigms, to have a junior person mentoring a senior person,”⁸ according to Talethea M. Best, Aon’s director of U.S. talent development.

The results have been positive, she reports. 86% of the mentees and 62% of the mentors who responded to a recent survey felt that the process improved their own performance. 85% of the mentees and 78% of the mentors would participate again if asked.

“We encouraged a protégé-driven process,” Ms. Best said. Potential mentees used a computerized platform with specific parameters to search for what they wanted in the mentor relationship. “It was a win/win for all involved,” Ms. Best said.

“This [mentoring project] was an opportunity for us to think more strategically,” Ms. Best reported. “To retain employees, it is critical to make people feel invested and engaged. How do you make folks feel like they make a significant contribution? Mentoring is a way to address that,” at a cost of pennies per employee, Ms. Best said.

Not all managers are mentor material. To be effective, mentors must receive some training. Aon addressed this concern with initial employee development workshops.

To ensure the highest quality mentorship for your employees, it is critical that mentors are carefully selected not only for their technical skills, but for their ability to communicate effectively in an increasingly diverse work force.

11. Pool knowledge across organizations.

Your Encore, founded by Procter & Gamble and Eli Lilly, is a society of retired research scientists and engineers who “continue to provide value―at its highest level—to companies on a consulting basis,” according to its website. The insurance industry is particularly well-suited to this approach because risk pools changed the face of insurance, so the models to implement this approach are already well-accepted by our industry. Don’t be unreasonable with information, but do set some ground rules and ensure employees comprehend which information is proprietary and which can be shared.

12. Cross train employees.

“A former employer of mine combined the loss control and underwriting functions,’”⁹ and it worked out well, reports Mike Benisheck, director of risk management for Pacific Tomato Growers. “They had a historical loss ratio of 30–32% annually for about 15 years.” When the functions were separated, losses spiraled, Benischeck reported.

Cross training can limit employee burnout and provide new motivation for employees who feel stymied in their careers. It also strengthens an organization’s operational team.

13. Cultivate a culture that values expertise.

To prevent brain drain, an organization must provide an atmosphere that values aging workers and the knowledge they possess. Recognizing, but more importantly acknowledging, their contributions to the organization, not just the number of claims they close or the amount of new business they produce, may mean keeping employees a few years longer. Small changes in any organization, as anyone who read the book The Tipping Point knows, can mean enormous changes overall.

Younger workers should be made aware of demographic trends and what they mean to their careers. Many younger workers are eager for career advancement. The demographics pointing to a sharp talent drop are in their favor if they prepare themselves, and organizations help them prepare, to take supervisory and management positions. Few younger workers recognize this trend. Organizations that speak frankly of these developments and what they mean to each person, not just the organization itself, will build loyalty and perhaps help to cultivate patience in generations that are used to quick answers and quick solutions.

14. Encourage employees to join online insurance groups like RiskList or PRIMA-Watch.

Insurance professionals are notoriously generous with their time and information when it comes to helping their counterparts, as any insurance industry employee knows who belongs to a professional organization. Insurance server lists have been online for many years with a faithful membership. List members will respond to just about any inquiry with an impressive depth and breadth of knowledge, with some humor thrown in, as well.

15. Support employee membership in professional organizations like your local claims association, Insurance Women, RIMS or CPCU Society.

“Support” means paying dues and supporting the absences necessary for employees to both attend conferences and to hold committee positions. This gives employees a strong network to turn to for information and support. There has been a mindset in the industry that allowing employees to network outside the company increased the employee’s flight risk. More enlightened managers realize that if employees feel valued for their expertise and encouraged in their professional development, they are generally more loyal to their employers.

16. Offer incentives for obtaining professional designations. Offer greater incentives for attending classes rather than online participation.

According to the CPCU Society, in 2006, 88% of CPCUs were age 40 or older. Taking a class from an experienced instructor with students from other companies and disciplines gives students a much broader experience. It also exposes them to others with whom they can network or seek advice. Designations are a clear indicator that employees see insurance as not just a job, but a career.

17. Avoid the human resources “silo.”

An information silo is a pool of information that is not well-integrated in an organization. Human resources departments often act as “silos,” gatekeepers in the hiring process, by determining which applicants get interviewed. Forming inter-departmental hiring panels, teams that develop job descriptions, review applications and give input on general hiring and other personnel issues like employee retention, can greatly improve a company’s work force.

18. Don’t underestimate the impact that younger generations and their different work standards have on older workers.

There are four generations of workers in today’s increasingly diverse workforce. With Millennials, Gen Xers and Yers in the employment mix, many young people are either intimidated by older workers or are downright contemptuous. Older workers, in turn, often cannot comprehend their younger peers’ thinking and may be intimidated by their ease with technology.

Forming intergenerational teams can bring divergent employees together so that they can benefit from each others’ strengths, not just complain about their weaknesses. Utilizing younger workers who are good communicators and technologically proficient to train older workers in new technology can bridge two gaps—the generation gap and the technology gap. In turn, older workers can mentor younger employees and model appropriate and ethical behavior.

19. Consider the Total Cost of Jerks (TCJ) to the organization.

Verbal abuse, intimidation and bullying are widespread in the American work force.¹⁰ But some companies are taking notice. There is a growing trend in companies to consider the TCJ impact on the work force, including several organizations on Fortune’s “100 Best Places to Work.”

Robert Sutton, Ph.D., professor of management science and sngineering in the Stanford Engineering School, views “jerks” in a much more explicit light. Sutton wrote The No Asshole Rule, a business bestseller that provides steps organizations can take to quantify the cost of jerks and eliminate them.

He lists the “dirty dozen,” the top 12 actions taken by those who use organizational power against those with less power. “It just takes a few to ruin the entire organization,” Sutton writes.¹¹

Older workers may have seen it all, but they don’t always have the patience to put up with twits. That jerk in the cubicle next to a long-term employee may be the final nudge that pushes a valued older worker out the door. Most employees who have options like retirement tolerate jerks for just so long, and then they clean out their desks.

Eliminating toxic employees can improve more than the organization’s internal structure, because if an employee treats coworkers badly, how is he treating your customers?

20. Make the most of the existing work force.

Studies have found that as much as 40% of the time spent handling a claim can be spent in administrative tasks that don’t affect the claim’s outcome significantly. It makes sense, then, to drive work down to its lowest possible level of the organization. Are adjusters still issuing checks, composing the same letters over and over and answering calls that could be delegated? According to employment consultant Peter Rousmaniere, some corporations are outsourcing their claims-support systems.  “[Outsourcing] offers the potential of injecting into the claims management process some very intelligent, well-educated people who are very motivated to perform functions [that], due to global information systems, they can do proficiently.”

21. Don’t overlook diversity.

Many employees are overlooked in the promotional process because they are of different nationalities, ethnicities or gender than the dominant makeup of an organization. Whites follow a different career path than their non-white counterparts, according to David A Thomas, author of an article on minority mentoring that appeared in the Harvard Business Review. Whites frequently get more attention from their managers and hence more opportunities.

Thomas’s research showed that the one common attribute people of color who rose to the tops of their organizations had was mentorship, but mentorship that went beyond what he termed “instructional.” They had mentors who provided a deeper relationship that increased their mentees’ confidence and did not shy away from frank discussions about race.¹² If we fail in our organizations to see beyond employees’ gender, skin color or religious beliefs, we may overlook our brightest talent.

22. Address the problems of brain drain strategically.

To date, there is a great deal of discussion on brain drain in the insurance industry, but little empirical evidence to use to determine which methods might avoid this loss. Many insurance executives are talking about the problem in conferences and trade journals, but what are insurance companies doing to address it?

To create organizational change, an organization must start with a vision. What are the problems we face, and what are their consequences both short-term and long-term? Where will our work force needs and realities stand in five years?

Effective Organizational Change Begins with a Plan

Without a roadmap, even the savviest traveler occasionally gets lost. To address brain drain strategically, a company must develop a strong vision and a stronger plan. This plan can be implemented over time, but it must have clear goals and time frames to avoid becoming mired down in processes.

From top management to line supervisors, there must be a shared sense of urgency about this problem, because any critical initiative can go astray because of the competition that all organizations face in today’s highly competitive global market. To solve the coming talent crunch, organizations must commit the resources to tackle this problem strategically, while there is still time.

¹ Wegner, Daniel, Paula Raymond, and Ralph Erber. “Transactive Memory in Close Relationships,” Journal of Personality and Social Psychology 61 (1991): 923––929.

² Gladwell, M. (2000). The Tipping Point: How Little Things Can Make A Big Difference. New York: Little, Brown & Company.

 ³ Ibid.

⁴ RiskList Users Group, June 23, 2007.

⁵ “Generational Talent Management for Insurers: Strategies to Attract and Engage Generation Y in the U.S. Insurance Industry,” Deloitte & Touche, 2007.

⁶ Private communication.

⁷ Marr, Bernard, and J.C. Spender. "Measuring Knowledge Assets - implications of the knowledge economy for performance measurement." Measuring Business Excellence 8(2004): 18–27.

⁸ Private communication.

⁹ Private communication.

¹⁰ Lutgen-Sandvik, P., Tracy, S. J., & Alberts, J. K. (in-press). Burned by bullying in the American workplace: Prevalence, perception, degree, and impact. Journal of Management Studies.

¹¹ Sutton, Robert. The No Asshole Rule: Building a Civilized Workplace and Surviving One That Isn't. 1st. New York: Warner Business Books, 2007, p. 180.

¹² Thomas, David A. "The Truth About Mentoring Minorities: Race Matters." Harvard Business Review April 2001.

As a professional who spends his entire career on healthcare issues, I get very annoyed when I read articles that put an extremely biased and misleading spin on the emerging healthcare reform activities known as ACA or Obamacare.  Whether one is for or against ACA, it is good to have accurate reporting regarding it to help refine one’s thinking and personal preferences.  Sensational articles add little value and create unnecessary confusion in the marketplace. 

An excellent article written by former associate Bob Laszewski in his Jan. 6, 2014, blog titled “Will There Be an Obamacare Death Spiral in 2015? No” was recently taken completely out of context by the Weekly Standard in a second article released in their blog Jan. 13, 2014, (i.e., “Bailing Out Health Insurers and Helping Obamacare”).  It’s a big disappointment to see this type of questionable journalism.

As part of the transitional plan to implement ACA, carefully crafted, but not perfect, risk-mitigation programs designed to both protect and fairly allocate revenue among the participating health plans were embedded in ACA.  These alliterative risk-mitigation provisions have been called “the 3 R’s.”  They are:

• Risk Adjustor – sharing of revenue between plans to be sure revenue reasonably matches the spread of risk among the plans.
• Reinsurance – special protection for plans hit with a higher-than-expected number of catastrophic claims.
• Risk Corridors – risk-sharing program that reduces excessive profits on some plans and uses that to fund higher-than-expected losses on other plans.

The first one is a program that will continue long into the future.  The latter two are transitional. They will end after three years, when the program is designed to be stabilized.

Because of the high level of uncertainty and risk associated with ACA, the federal government wisely incorporated risk-mitigation programs.  All are designed to minimize material financial obstacles for volunteer participant carriers to be part of ACA.  Without the 3 R’s, it is very likely the number of participating plans/carriers would have been much smaller.  One of the keys to long-term ACA success is high participation by the public and the maintenance of a reasonable competitive market for the public to choose from.  We have yet to see the results of these programs, but they are there to be sure we have a viable marketplace.  This is definitely not a bailout for health plans. Rather this is a carefully crafted plan to mitigate unfortunate implementation risks in an uncertain environment.

Now for a discussion of the controversial blog:

The initial blog did not suggest, despite the accusation in the second article, that Obamacare is almost certain to cause insurance costs to skyrocket.  The blog accurately discussed the risk corridor program and how this mitigates risk in the initial years.

The second article expressed shock “that it will also subsidize those same insurers’ losses.”  ACA, by design, utilizes private insurance companies and health plans to underwrite insurance coverage offered through ACA and the exchanges.  The uncertainty about who will sign up, their health status, the propensity to use healthcare services, etc. makes it nearly impossible for a carrier to predict what it should charge.  ACA has created a logical marketplace with standardized benefits (i.e., Essential Health Benefits) and consistent plan designs (i.e., the metallic plans--Bronze, Silver, Gold and Platinum).  Even with these features, ACA creates uncertainty, and stable premium pricing is required to have a viable and competitive marketplace.  The likelihood of premium rate stability is enhanced if over a transitional period the “big worries” are mitigated.  These include:

• Selection bias among various carriers.
• Some assurance that people will sign up.
• Significant shock losses centralized in a single carrier.
• Surprising cost of health care for this population.

The long-term risk adjustment process solves the first issue.  The individual and employer mandates help resolve the second.  The transitional reinsurance program and transitional risk corridor protection resolve the third.  The last concern is subject to a two-way risk sharing.  Those carriers that “guessed” too high and overcharged will give up some of their revenue.  Those carriers that “guessed” too low are protected.  This is not a bailout; this is an equitable risk protection to ensure an orderly implementation of ACA.

The second article goes on to say that taxpayers subsidize big companies’ business expenses.  This, again, does not specifically address the real issue.  The transitional reinsurance program provides catastrophic reinsurance protection for all health plans in the exchange marketplace (i.e., initially claims in excess of $60,000 up to $250,000) primarily funded by a $5.25 per month per person charge for all health plans whether or not they are in the exchange marketplace.  Because those in the exchange are receiving a reinsurance benefit, I am not sure this is subsidizing anything.  For those out of the exchange, they are paying a fee and not receiving any benefit.  This could be considered a tax to those carriers.  Most, if not all, carriers are building this fee into their cost structure, so it is being passed on to the public.  However, the government has already proposed an increased reinsurance benefit and is already talking about reducing the premium.

The second article continues: “Insurers don’t have to pay out all of their costs,” suggesting that the risk corridor program is a bailout.  No, this isn’t a bailout. It is a temporary protection to help smooth out the premium rates.  Those carriers overcharging will get less money and those undercharging will receive some subsidy until the cost structures stabilize.  This is a short-term program providing assistance to the carriers as they calibrate costs under ACA.  This is not a bailout.  This is a two-way risk protection mechanism.  It does rely on a balanced marketplace.  To the extent the ACA rollout is flawed and carriers are all on the unfavorable side of the risk curve, the government will have to provide assistance, but the intent of the program is to be balanced.

In summary, we need more accurate reporting of the actual situation.  There are some concerns about the implementation of ACA, and they are real; they aren’t fabricated.  Fortunately, the 3 R’s are going to help mitigate some of these issues.  Without the 3 R’s there would be more serious issues than there will be with them.  If the program failed, if no carriers participated, if no one signed up, there would likely be a major government takeover.  That would be a serious issue with a federalization of the health insurance marketplace.  That did not happen and will likely not happen. 

Perhaps reflection as to why ACA emerged might be helpful.  Health costs and healthcare premiums were escalating far faster than we can afford.  They continue to increase much faster than the rest of the economy, which cannot continue without some type of intervention.  One hopes that ACA will be able to help resolve some of the concerns and issues.  Without some long-term improvement in the economics of healthcare we, as individuals and a nation, are faced with exceptional long-term economic challenges. 

Maybe we should be talking about this!

Rates Continue to Climb

In most of the U.S., rates for workers’ compensation insurance are continuing to climb, driven by rising medical costs, the low-interest-rate environment and the general unprofitability of the line of business.  This is in spite of the fact that many states have undertaken regulatory reform aimed at controlling medical costs and driving costs out of the system.  Despite significant investment in medical management efforts, workers’ compensation costs are consistently higher than group health costs for the same diagnosis. Why is this? Numerous studies have shown that a small percentage of medical providers are driving a large percentage of the workers’ compensation costs. Implementing treatment guidelines, drug formularies and utilization review protocols is a step in the right direction. However, until regulators find a way to remove abusive medical providers from the workers’ compensation system, high costs will always be a problem. Rather than treating the symptoms, we need to address the causes of rising costs.

The Potential Expiration of TRIPRA

Unless Congress takes action, the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) will expire on Dec. 31, 2014. Carriers are now writing coverage without the backstop of TRIPRA. What does this mean to the workers’ compensation industry? Companies with high employee concentrations in certain cities are already seeing fewer options, with some carriers scaling back their writings to reduce their exposure to a potential terrorism event.  Some carriers are setting policy expiration dates to coincide with the expiration of TRIPRA or are advocating for unilateral mid-term premium increases if TRIPRA is not renewed or is materially modified.  Many workers’ compensation underwriters are pushing for higher rates because of this issue.  If TRIPRA is allowed to expire, companies in certain industries and geographic areas may have no option but to obtain future coverage from their state funds as the commercial marketplace pulls back to avoid the increased risk.  The longer it takes Congress to act, the more pronounced this issue will become.

Impact of the Affordable Health Care Act (AHCA)

There has been much speculation about the potential impact that the ACHA will have on workers’ compensation.  Some feel it will increase leakage from group health to workers’ compensation, while others feel it will have the opposite effect. One thing for certain is that with increased coverage being provided on the group health side, the overall utilization of services will go up. With a finite number of medical providers available, this means it is imperative that workers’ compensation payers identify the providers who deliver the best clinical outcomes for injured workers. The focus on workers’ compensation medical networks in the future will need to shift from fee-for-service discounts to quality of care and best outcomes. This may cost more on a fee-for-service basis, but getting appropriate and timely care will generally lead to faster return-to-work, ensure the proper treatment and ultimately lower costs.

Integrated Disability Management

More employers are realizing that the impact of federal employment laws like the Americans with Disabilities Act (ADA) and the Family Medical Leave Act (FMLA) must be considered on workers’ compensation claims. Companies are also realizing the value of managing non-occupational disability so that valued employees can get back to the workplace and be productive. As a result, companies are requesting that their TPAs develop integrated disability management programs designed to handle both occupational and non-occupational disability in a consistent and effective manner. These integrated disability management programs are the next generation of claims handing and will expand in the future.

State Legislative Issues

Several states that passed significant reform legislation in the last two years are working to implement those reforms. Passing a law is only the first step, as the rules, regulations and implementation of those laws determines if they will achieve their intended purpose. The most significant issues to watch are in California, New York and Oklahoma.

When California passed SB 863 in 2012, the expectation from the state’s legislature was that it would increase benefits to injured workers while lowering costs for employers in the state. While the benefit levels for permanent disability have been increased, the savings components are still a work in progress. Litigation and unanticipated consequences of the bill have resulted in increased complexity and continually rising insurance rates.  For example, a significant component of the intended cost savings was to result from the new Independent Medical Review (IMR) process.  However, in recent months the volume of IMR requests has been many times what was anticipated, preventing the IMR provider from meeting the required turn-around guidelines and adding significant administrative costs to the system.  Based on their analysis of the higher costs, the California WCIRB recommended an 8.7% pure premium increase for 2014. There is currently talk of potential clean-up legislation to go along with the continued efforts at implementation. We will know by the end of the year whether SB 863 will be able to produce the promised cost savings.

New York streamlined its assessment process, resulting in a significant reduction of the assessment rate for most employers. These rates are adjusted annually and have varied significantly in the past few years.  It remains to be seen if these assessment savings will continue into the future.  In addition, New York has been struggling to implement the reforms that were passed in 2007 legislation, and it was 2013 before the last of the regulations were issued for this law. This 2007 bill was another piece of legislation that promised cost savings that have yet to fully materialize.

The big news in Oklahoma is the bill that allowed employers to opt-out of workers’ compensation starting in February 2014. The Oklahoma Supreme Court recently upheld the constitutionality of the legislation, clearing the way for its implementation. However, there have been delays in developing the rules and regulations supporting the opt-out plans, and this has in turned delayed carriers’ development of policies to cover new benefit plans. It appears unlikely that everything will be in place so that employers will be able to opt out beginning in February. In addition, the Oklahoma legislation included significant reforms to the underlying workers’ compensation system, so many employers considering opt-out will wait to see the impact these system changes will have on their workers’ compensation costs before proceeding.

Vendor Consolidation

In the last few years, there has been significant vendor consolidation in the worker’s compensation industry. First on the TPA side, and most recently on the medical management side. Much of this consolidation was driven by private equity investments where the tremendous medical spend in workers’ compensation is seen as an opportunity for a profitable return on investment.

All this consolidation is making buyers of these services uneasy. They question how this consolidation will affect the quality of the services they receive and wonder how their goals of reducing costs align with private equity’s goals of increasing revenues. These are legitimate concerns, and it is imperative that buyers remain vigilant concerning vendor partners.

Analytics

Despite the huge amount of premium, exposure and claims data produced by the workers’ compensation industry, many complain about the lack of actionable information. Dashboards and many other analytic tools do a nice job pulling data together in one place, but ultimately the data is only as good as what one does with it. As an industry, we will see a continued focus on the use of more meaningful analytics that can assist in identifying savings opportunities, formulating action plans and measuring the impact of change.

Assessing Return on Investment for Medical Cost Management Efforts

In the last few years, the money spent on medical management has been steadily increasing.  Programs including bill review, utilization review and nurse case management are all necessary components of any successful workers’ compensation program. However, it is important that these programs are constantly monitored to ensure they are being utilized appropriately. If left unchecked, these “cost-saving” issues can actually become cost drivers.

Impact of Presumption Laws on Municipal Budgets

In 2013, there were a handful of municipalities that filed for bankruptcy because of large underfunded workers’ compensation and pension obligations. This trend is not only likely to continue, but could get worse. The presumption laws in most states can turn common health conditions like heart disease and cancer into workers’ compensation claims. In California and Nevada, for example, a large number of retired police officers and firefighters are collecting both their pension and the benefits from a workers’ compensation presumption claim. The statute of limitations for linking these diseases to the workplace has been extended to more than 10 years in some jurisdictions. The resulting burden for paying the costs of these benefits in the case of public entities ends up falling on taxpayers.

Medicare Set-Asides

Many felt that the passage of the SMART Act in January 2013 was the end of the battle on Medicare Secondary Payer compliance issues. In fact, this was just the beginning of the fight. Implementation of the SMART Act has been slower than expected and the legislation did nothing to address the huge costs associated with Medical Set-Aside arrangements. The rules and case law associated with Medicare are constantly evolving, and now it appears that these reimbursement rights will be expanded to Medicaid coverage, which would create an entirely new monitoring and compliance area.  This is an issue payers need to remain diligent on.

Please join me on Jan. 15, 2014, for a Marsh-sponsored webinar to discuss these issues and other potential legislative developments to watch in 2014.  Click here to register.

The report in the journal Health Affairs about PepsiCo marks the first time a major organization has been found to be losing money in a wellness program (not including the ones that my colleagues and I are exposing as frauds, like British Petroleum and the Nebraska state employee program).  Highlights are as follows:

• Disease management alone was highly effective, with an ROI of almost 4-to-1;
• Wellness alone was a money sink, with each dollar invested returning only $0.48 in savings;
• The wellness savings were attributed to an alleged reduction in absenteeism, as reported by participants.  There was no measurable reduction in health spending because of wellness.

There are many reasons to think that this result, as unimpressive as it is, overstates the value of the program.  For instance, the report doesn’t measure the time that employees spent completing the forms and getting their blood drawn.  Nor does it include staff time or the fees to Mercer, which advised PepsiCo to launch the program. Nor does the report take into account the bias caused by participants having a more engaged mindset than non-participants, or the self-reporting of data for absences, the only slightly bright spot in the report. One suspects that the author, RAND’s Soeren Mattke, pulled some punches for political reasons, to avoid having PepsiCo suppress the entire study.

So where does this result leave the wellness industry, and by implication brokers who are earning commissions from it?

First, wellness only has one supporter left in Washington, DC, the Business Roundtable, an association of chief executives of large U.S. corporations. Its vice president was quoted in Reuters as saying Roundtable members are "as enthusiastic as they have ever been about these (workplace wellness) programs," adopting them to boost employee morale and improve recruitment.  One irony is that the Business Roundtable’s Health Committee is chaired by a CEO in the casino industry, an industry which has steadfastly defended its right to expose its employees to more second-hand smoke than all other industries combined.   Hence, one suspects an ulterior motive for the Roundtable’s support, such as being able to control employee behavior and increase employee share of premiums.

The other irony is that employees usually resent and sometimes revolt against programs designed to “boost their morale."

Second, no wellness program has ever saved any corporation a nickel.  The simple sleight-of-hand of comparing participants to non-participants and/or just measuring people who were high-risk to begin with while ignoring those whose risk factors increase will show savings where none exist.  Indeed, how could it be possible to improve health, let alone generate savings by improving health, by doing the opposite of what guidelines recommend, which is what wellness companies do.  For instance, the United States Preventive Services Task Force recommends screening asymptomatic people only once every five years (except for blood pressure), whereas almost all wellness vendors insist on annual screenings.  The literature is very clear that annual checkups for asymptomatic adults are expensive and counterproductive, and yet many wellness programs are measured by how many people they send to the doctor.

Third, there is more bad news on the way.  This Health Affairs article is a start, sort of like busting Badger or Skinny Pete, but there is some investigative work that will be revealed in the weeks ahead that, to continue the analogy, will be more akin to blowing up Gustavo Fring’s whole operation, exposing wellness as possibly the biggest scam ever to be played by the healthcare industry on corporate America.  (This may seem like a strong statement, but if you doubt it, simply bookmark this column for a month or two.)

Brokers and consultants would therefore be well-advised to start backing off from these programs.  The short-term commission sacrifice will more than pay for itself in long-term client retention.   Note that I said, “back off,” not “run away.”  Your clients have in many cases staked their reputations on wellness, advocating –- possibly with your help — for steadily larger budgets for programs and especially incentives.  You need to step back from the ledge together, keeping in mind the amount of political capital they’ve invested.  They relied on you to take them here.  Now they will need to rely on you to bring them back.

Editor's Note: See also our thought leader Tom Emerick's take on the PepsiCo news.

When PhoneDog vs. Kravitz was filed two-plus years ago, it highlighted a concern at many organizations about how to protect their right to own the content that they and employees post on social-media sites about their brands, plus the data about those who read that content.  

As we move into 2014, the concern remains because PhoneDog vs. Kravitz was settled out of court in late 2012, leaving no legal precedent, and because progress on the underlying issue on other fronts has been limited. (PhoneDog sued an employee, Noah Kravitz, who took 17,000 Twitter followers with him when he quit. PhoneDog claimed he was stealing a client list and owed the company $340,000. Under the settlement, Kravitz was allowed to continue using the @noahkravitz Twitter handle, but no other terms were disclosed.)

To address the issue of who owns an organization’s social media account, here are the four questions I receive most often on the topic, along with my responses:

1. Under what circumstances does the organization have the right to claim ownership of a social-media account if it was always operated solely by the employee? 

Response:  This issue had not received a lot of attention until PhoneDog vs. Kravitz even though organizations must protect their social-media assets, especially if they use social media as part of their marketing platform.

If there is a dispute about ownership, employers are suing for trade-secret protection of these social-media accounts. Employers are also alleging common law theories of misappropriation or conversion against former employees for taking contacts or passwords upon their departure from the company.

Former employees are also using the misappropriation and conversion theories to sue their former employees. This occurred, for instance, in Eagle v. Moran, where a company gained access to a personal LinkedIn account of a former employee and replaced her name and picture with that of her replacement. The former employee soon regained control of the account and refused to relinquish it, leading to a series of claims and counterclaims. The case raised the prospect that the company might own the account even though it had been opened in the employee’s name and even though she had sole control over it—the reason being that corporate policy stated that employees needed to open and operate social-media accounts. Again, however, the case didn’t set precedent because the record from the November 2012 bench trial remains under seal.  No final decision has been entered 

2. Under what circumstances is it just too bad for the company? In other words, when does a company simply have no rights to the ownership of a social-media account?

Response: Even though terms of the PhoneDog v. Kravitz settlement aren’t known, we do know that client lists, cultivated over time on a company’s good reputation and using its resources, are company property.  The question is: What standard applies to Twitter followers, LinkedIn contacts or Facebook friends – and how does one measure the value?   

Courts may consider the following factors when determining ownership of social media accounts:

• Who set up the accounts and directed the content?
• Were the accounts set up before or during employment?
• Who had access to the accounts and passwords?
• Was the name or account associated with the employer’s name or with the brand?

3. (a) Was there a signed policy at the opening of the account?

Response: Employers should obviously implement policies and develop agreements specifically relating to the ownership of company social media accounts, but is it currently “required” by law or otherwise? No.   (The plus side of PhoneDog v. Kravitz is that the media exposure meant that, according to research by law firm Proskauer, the number of employers who now have written policies about social-media use at work has climbed to 69% in 2013 from 55% in 2012.)

For the employer:

• Accounts should be set up by the company’s management (using the company name in the handle or account name). The company should maintain the passwords, should only give access to those who need it as part of their job duties and should direct the content.
• The employer must communicate to the employee in writing that it owns the accounts and the content and that content contributed as part of the employee’s job is owned by the company. (Such specific agreements could be an offer letter, a nondisclosure agreement or a noncompete agreement.)

For the employee:

• The employee needs to discuss, at least at the beginning of employment, company policy about who owns social media accounts, including personal ones if the employee is agreeing to use those accounts to promote the company’s business. Then, any changes could be addressed by an amendment to the applicable agreement with that employee.

 (b)   If there is a signed agreement, what is legally allowed to be included? 

Response: Here are a few examples of points that should be covered (courtesy of Anthony Zeller, employment litigation attorney, VanVleck, Turner & Zeller):

• Who owns an employee’s social media accounts that will be used for business purposes, along with any restrictive terms of use of the employee’s social-media accounts during employment.
• Ownership and use of the company’s social media accounts. Who retains the right to change the passwords? Who retains the right to edit and approve content? What is the process to approve content before publishing?
• What control, if any, the company will have over the employee’s or the company’s social-media accounts after the termination of the employment relationship. Is there a timeframe after employment during which the employee cannot use his or her own social-media accounts for competitive business uses?

4. Do laws differ significantly from state to state and from country to country?

Response:

• United States: Currently, adjudication of lawsuits is at the state level, so, yes, there is considerable variance.  Companies also need to be careful that any limits on an employee’s use of social-media accounts don’t violate other laws, which also vary state by state.
• International:   Yes, there is variance from country to country.

The law is still a work in progress.  But by paying attention to the key questions you can manage some of the risk as well as the moral and ethical issues when dealing with this question of who owns an organization’s social media account.

Disclaimer: The information contained in this document is provided only as general information and may or may not reflect the most current developments legal or otherwise pertaining to the subject matter thereof.  Accordingly, this information is not promised or guaranteed to be correct or complete, and is not intended to create, or constitute formation of an attorney-client relationship. The author expressly disclaims all liability in law or otherwise with respect to actions taken or not taken based on any or all of the content of this document.

Smart is cool, especially in electronics. Smart phones answer their users' most obscure questions instantly. Computers are smart, as are iPads, some TVs and even children's toys. So why can't workers' compensation medical provider networks be smart?

If they were, what would that look like?

Portrait of a Smart Medical Network

A smart medical network contains only the best doctors and other medical providers, those who drive the best results for injured workers and their employers. Moreover, a smart network does not rely on discounts on services as the requirement for participation. Instead, demonstrated positive outcomes are the qualifier for medical provider participation and continuing excellence.

Smart Networks Are Local

A network containing thousands of doctors is of no value to the injured worker. Workers need the closest provider who will treat them effectively and return them to work. The worker’s employer likewise needs the best local provider who will return the worker to pre-injury status in the shortest amount of time at the least cost. Smart networks are composed of this kind of medical doctors.

Network Participation Qualifiers

Smart networks are built by objectively measuring the performance of physicians who have actually treated injured workers. Objective evidence of performance is found in the data. Yet, indicators of performance are typically ignored in traditional networks. They do not measure or monitor the quality of provider performance. They simply contract with any providers and add them to the network directory.

Indicators of Quality

Many indicators of performance found in the data can be used to measure the level of provider performance. In the case of medical treatment of injured workers, the most telling indicators reveal doctors’ awareness and acknowledgement of the nuances of workers’ compensation that ultimately benefit both injured workers and their employers.

Revealing data elements influenced by the treating physician include return to work, medical costs, indemnity payments, legal involvement and disability status at the close of the claim. These outcome indicators in the data are important markers of quality and legitimate criteria for evaluation. Algorithms are executed using the indicators, and providers are scored based on their performance. Performance measurement must be objective and consistent. But performance measurement cannot end there.

Continuous Monitoring

To ensure continued quality, the data must be continuously monitored. Unlike traditional medical networks that contract for discounts with medical providers and go no further, smart medical networks for workers’ compensation continue to monitor for quality. Continuous monitoring is the very definition of medical management:

Good management is making sure what you did stays done!

California SB 863

In fact, California SB 863, effective Jan. 1, 2014 (now!), mandates continuous monitoring of medical provider costs and quality performance. This progressive legislation is an excellent model for selecting and monitoring smart medical networks, regardless of geographic location.

Establishing a smart medical network is essential, and the means are clear and available. However, the transition from traditional networks to smart medical networks can be tricky.

Converting to Smart Networks

Traditional networks are tethered to their established means of revenue generation. Shifting from the discount network model to the smart medical network model is challenging. The most practical approach is initially combining the two models, then weaning from the old model over time.

If the right physicians are a part of a smart medical network, claim outcomes will improve. Injured workers will receive good medical treatment and return to work early and successfully, and costs will be significantly reduced.

Moreover, physicians and other providers who qualify for smart networks should be rewarded. They should not have their fees reduced by discounts. Based on the excellence of their past performance, they should be included in the smart network on a very long leash. Continued performance for continued participation will be monitored scrupulously.

Win-Win

Nevertheless, it should be noted, payers have an obligation to participate in the transition to, and continuation of, smart networks by recognizing and paying for value received. Networks need support and cooperation from payers to integrate and analyze their data, score provider performance and realign medical provider preferences. The benefits will accrue to everyone: payers, networks, employers and injured workers.

Data Participation

Importantly, to achieve optimum results, data must be gathered from multiple sources and integrated for comprehensive claim analysis. Data from only one source, such as bill review, is sorely deficient for accurate analysis of medical provider performance. Claim system and pharmacy data must be added to bill review data at a minimum. Shortcuts in data gathering and analysis are not defensible.

Change Momentum

Network administrators are gradually stepping up to the challenge of shifting to smart networks. Momentum toward smart networks will be exponential with payer participation, resulting in quality improvement and cost control all around.