California employers have a legal duty to respond to certain employee complaints.  Failure to respond or failure to respond appropriately can result in significant liability.  This is particularly true with complaints of harassment, discrimination and other unlawful conduct.  Accordingly, employers should never take employee complaints lightly.  Even if no legal duty to investigate exists, a well-managed response can minimize or even eliminate problems and improve employee morale.

Achieving the well-managed response is not easy.  It takes careful planning and execution.  Fortunately, most employers do a very good job of managing their employees, and complaints are infrequent.  Unfortunately, this means most employers have little experience at managing the complaint process.  Being aware of and strategically planning at each step of the process can help make up for the lack of experience.

Here’s how you do it:

Receipt of the Complaint

How an employee complaint is received can be critically important.  If the employer has not created a culture of trust and respect, employees will not be comfortable coming to management with complaints.  That may mean fewer complaints but will also mean bigger problems — employees are not required to complain to the employer before filing a lawsuit.  Consistent with the culture of trust and respect, the manager receiving a complaint should express an interest in and concern for the employee making the complaint.  Remember, the employee is not happy about something.  A closed-minded, uncaring demeanor during the first contact will only make the unhappiness grow.

It is also very important to be aware of and address the complaining employee’s expectations.  If the employee requests that the complaint be kept confidential, the manager must be able to explain why it cannot be kept completely confidential and must be able to do so in a way that does not alienate the employee.  The manager should also address the employee’s expectations for the process and the result.  Obviously, it is too early for the manager to make promises about the result, but he can help build confidence in the fairness of the process.

Act Immediately

Once a complaint is received, the employer should act immediately.  Any delay in taking action on an employee complaint will be magnified tenfold in litigation, and the employer will have a very difficult time overcoming the perception that the complaint was dismissed as unimportant.

Conduct an Investigation

Every employee complaint warrants an investigation.  That does not mean that every complaint requires a lengthy, formal process conducted by professional investigators.  The investigation might be as simple as asking the employee a few questions.  Regardless of its scale, the investigation’s purpose remains the same: to get an accurate understanding of the facts.  Only with a solid understanding of the facts can the employer make an informed decision on the complaint.

As an initial matter, the employer must determine who will conduct the investigation.  Will it be conducted by a single individual or several people working in coordination?  Will it be conducted by the employer’s own staff or by an outside investigator?  In either case, the employer should consider the following factors:

• The nature and seriousness of the complaint.  Complaints about the speed of the copy equipment do not warrant the same level of investigation as complaints about sexual harassment.
• The skill and experience of the investigator.  Whether an employee or outside professional, the investigator should understand how to conduct a good investigation and have the skill to do it.  In some cases, an internal investigation is preferred.  If the employer does not have a skilled investigator on staff, the employer should hire an expert to guide and coach the employee conducting the investigation.
• The investigator’s neutrality regarding the facts and witnesses.  Any bias, real or perceived, can render the investigation useless.
• The investigator’s quality as a witness.  The investigator may well be a key witness in future litigation.  The ability to speak well and inspire confidence is essential in that arena.  It is equally important in giving the complaining employee and witnesses confidence in the investigative process.
• The outside professional’s qualification.  California law requires outside investigators to be either a licensed private investigator or an attorney.
• Whether creating a legal privilege around the investigation is important.  If it is, the investigation must be conducted by an attorney and conducted in a manner that maintains the privilege.
• The scope of the investigation.  The investigator should find the facts and assess the credibility of the witnesses and information obtained.  The investigator should not make legal conclusions or suggestions on what actions to take, even if he is an attorney.

It is important to understand that the investigator or investigators cannot follow a set formula or pattern in every investigation and expect success.  A specific and strategic plan is always advised.  The plan will include consideration of who will investigate, who will investigate which parts, what order witnesses will be interviewed in, where they will be interviewed, what kind of record will be created and who will be responsible for communications.   As important as it is to have a strategic plan, it is even more important to not follow it blindly.  As facts are uncovered and circumstances change, the plan may need to be adjusted.  By definition, a good investigation will be flexible enough to ensure that all of the relevant facts are uncovered with a minimum of collateral damage.

Review the Investigation and Respond

The employer bears the ultimate responsibility for responding to the complaint.  Doing so appropriately requires a clear and complete understanding of the facts.  If the employer is uncertain about any facts contained in the investigator’s report, they should be clarified.  If the employer is not confident that the investigation was thorough, further investigation should be ordered.  With all the facts and confidence in them, the employer will decide what actions to take on the complaint.  This is the point where an employer should be interested in legal conclusions, particularly if the complaint is serious.  The deliberations about what actions to take and why should be protected against disclosure.  Often, it is advisable to have such deliberations protected by the attorney-client privilege.

While the deliberations may be secret, the decisions resulting from them are not. They will need to be communicated to the complaining employee and other interested employees and communicated effectively.  Once again, a strategic plan is critical.  How something is communicated is often as powerful as the content of the communication.   The effort put into the investigation and the problem-solving potential of the complaint process can all be lost by careless final communications.

Employers cannot escape the duty to investigate employee complaints.  Nor should they want to.  Employee complaints can be healthy for an organization.  They can uncover problems before they cause significant damage.  They can also be a vehicle for increased employee morale and productivity.  But the positive aspects surrounding employee complaints can only be achieved with a properly handled complaint process.

Although there is a backlash against meetings in some quarters—Intel used to order executives to calculate before a meeting how many processors would have to be sold to cover the portion of participants’ salary being spent in the meeting—there is a system of meetings that can produce remarkable results. The system involves regular, planned meetings that leaders have one-on-one with subordinates that support seven important processes:

• Communications
• Effective, supportive relationships
• Targeted management development
• Solid delegation
• Strong accountability
• A high-performance culture
• Continuous improvement

A disciplined One-on-One Meeting System will not only increase productivity but will help your direct reports become better leader-managers. Your employees will see what great leadership looks and feels like, and the experience will be a game changer.

Unfortunately, leaders in most fast-paced, mid-market companies typically become caught up in the wave of day-to-day work and devote little thought to one of their most significant leadership opportunities: growing performance capacity.  A business keeps growing, but the people don’t.

There are three common adversaries that hold companies back in their quest to stay competitive:

1. Keep doing the same thing
   “It’s still working, so why should we change?” is something we hear in businesses that do not actively look for ways to improve performance. A surprising number of mid-market companies have that exact mind-set. The problem is generally that leaders don’t know what they don’t know and won’t venture into areas where they have no knowledge. Change has not become an ally.
2. Superficiality
   This means not digging deeper into understanding people and systems, and their impact on business results. Spending time with direct reports addressing performance opportunities usually only occurs when a problem arises. Even then, there is often little preparatory work.
3. Inconsistency
   In our humanity, we struggle to keep our good habits going—the bad ones. . . not so much. What is good for us often loses to competing demands that are easier to deal with. (I often cite exercise and diet as examples of difficulty in staying the course.) We often embrace a new process for several months until some crisis throws us off course, then go back to old patterns.

As with just about anything in life, the quality of the outcome of the One-on-One Meetings depends on the quality of the preparation. In this system, the direct report is charged with preparing the agenda and providing it to the boss in advance of the meeting. (You should assist your direct reports; over time, you will all get better at creating agendas that support high-impact meetings.)  We suggest regular consideration of the following kinds of subjects:

• Budget status
• Action plan progress – status of key projects
• Growth and development
• Issues of concern
• Developing people. Who are the stars? Who needs coaching?
• How you are developing your successor?
• Systems improvement initiatives
• How you feel about your job and our working relationship – what could be better? Am I giving you enough support?
• What can I be doing to support your growth and development?

Authors Marcus Buckingham and Curt Coffman reported some jarring information about managers in their book, First, Break All the Rules: What the World's Greatest Managers Do Differently, for which they interviewed more than 80,000 managers in 400 companies:

First, on the down side, managers were usually the reason someone left an organization. It wasn’t compensation or benefits that, as a rule, caused people to leave their companies. It was the kind of manager they worked for. People generally stay in their jobs if they like or get along with their managers. A poor manager will usually cause good people to leave. The big downside is that poor managers allow poor performers to keep them company.

Second, the managers who ultimately became the focus of Gallup’s research were those who excelled at turning each employee’s talent into performance. And performance is usually dependent on three critical factors – talent, knowledge and skill.

Accordingly, we believe that mid-market companies have a significant opportunity to improve performance by developing their managers.

As a CEO, I was often satisfied with good performance because I had not yet gained the knowledge about what would turn good performance into great performance. To achieve the best outcomes, leadership issues need to be addressed, and One-on-One Meetings will help you do that.

As the GOP settles in for a long-term fight about what it would like to put in Obamacare’s place, it should look hard at a just-released reform plan from the House Republican Study Committee written principally by Reps. Steve Scalise (R-La.) and Phil Roe (R-Tenn.).

The most revolutionary aspect of the House plan — officially titled the American Health Care Reform Act — is its decoupling of insurance from employment.

Americans have gotten health insurance through their jobs essentially since World War II, when wage and price controls forced employers to compete for workers by offering generous fringe benefits, like health insurance. This insurance, of course, is simply tax-free income provided by employers.

Individuals, by contrast, have had to purchase coverage with dollars that have already been taxed.

This system puts entrepreneurs and the self-employed at a significant disadvantage — and limits people’s employment choices. Workers may stay in jobs they don’t want, simply so that they don’t lose their health insurance, particularly if they or their family members have a pre-existing condition.

The RSC health reform plan would give a tax deduction of $7,500 to every American — and $20,000 to every family. If a person bought coverage that cost less than that, then he could keep the difference as untaxed income.

This system would help arrest the non-stop growth of health costs. After all, most Americans over-consume health care because their employer-subsidized coverage insulates them from the full cost of their care. Such over-consumption drives up costs.

The RSC plan would also grant consumers the ability to purchase health insurance issued in other states, where it may be cheaper.

That makes a lot of sense. There is no reason that health insurance should cost two and a half times as much in Rhode Island as in Alabama. Increasing the size of the insurance marketplace — and therefore increasing competition — will drive down prices.

The RSC proposal would inject consumerism into the healthcare marketplace in other ways, too. For instance, it could lead to more use of Health Savings Accounts (HSAs). These accounts allow patients to save pre-tax dollars for health services — and to keep whatever they don’t spend. Consequently, HSAs encourage Americans to take care of their health and shop smartly for care. About 15 million Americans today have HSAs.

The RAND Corporation estimates that the average American worker who switches from a traditional health plan to a consumer-directed one uses 14 percent fewer medical services – without any associated adverse effect on health outcomes.

Overall health costs come down, too, because providers have to compete for patients’ business. According to RAND, expanding the share of employers with HSA-style plans to 50 percent — from the current 13 percent — would reduce national health costs by $57 billion per year.

Critics of consumer-driven care claim that it prevents those with pre-existing conditions from finding affordable coverage. All the tax-free savings in the world won’t be of use if coverage is too expensive.

The Study Committee’s plan would ensure that folks with pre-existing conditions could get affordable coverage by devoting $25 billion in federal funding for state-level, high-risk pools. Premiums in these pools would be capped at 200 percent of the average premium in the state.

Finally, the RSC plan attempts to rein in the more than $100 billion spent every year on unnecessary treatments and testing ordered by doctors trying to protect themselves from the threat of lawsuits. GOP lawmakers would limit the amount of lawyers’ fees and non-economic damages in medical liability cases.

The RSC plan isn’t perfect. Tax deductions favor the relatively well-off; those with lower incomes often can’t take advantage of the full value of the deduction. So lawmakers should swap out the deduction for a refundable tax credit that applies equally to all Americans, regardless of income. In addition, while the intent is right on limiting lawyers’ fees and damages, tort reform of this sort is better left to the states, which traditionally have jurisdiction in medical-liability cases.

The House Republican Study Committee plan is also incomplete. Lawmakers must reform Medicare and Medicaid, too. Spending in the two programs already exceeds private health insurance spending — and will only grow in the future.

Congress must bring Medicare and Medicaid outlays under control — and vouchers for beneficiaries and states are the best way to do so. Empowering individuals and state leaders to spend their Medicare and Medicaid dollars as they see fit will inject much-needed competition into the healthcare marketplace — and thereby reduce costs.

Although the House Republican Study Committee’s plan is an exciting starting point for replacing Obamacare, it ought not be the finish.

“The workplace is the last crucible of sustained human contact for many of the 30,000 people who kill themselves each year in the United States. A coworker’s suicide has a deep, disturbing impact on work mates. For managers, such tragedies pose challenges no one covered in management school.” (Shellenbarger, 2001)¹

Five things employers need to know about workplace mental health and suicide include some bad news…

1. Depression is a top driver of health care costs to employers.^{2 3} Depression represents employers' highest per capita medical spending. (The per-capita annual cost of depression is significantly more than that for hypertension or back problems, and comparable to that for diabetes or heart disease. People with depression also have more sick days than people suffering from other conditions.)⁴
2. If we take a snapshot of any workplace at any given point in time, at least one in five people will have a diagnosable mental health condition.⁵ The most common are mood disorders like depression or substance abuse disorders like alcohol abuse.
3. The majority of people who die by suicide are of working age. While other groups’ suicide rates are holding steady or decreasing, the rates for men and women in the middle years have increased significantly over the last decade.

And some good news…

4. By engaging in simple preventative steps (e.g., stress management or depression screenings) anyone can help maintain their own mental health. By learning practical tactics (e.g., becoming suicide prevention gatekeepers or referring coworkers to employee assistance services) employees can help promote the mental health and safety of others.^{6 7}
5. A comprehensive and evidence-based approach to suicide prevention and mental health promotion exists,⁸ is cost-effective⁹ and gives employers a clear guide on what to do. By being “visible, vocal and visionary” leaders, employers can set the expectation that a culture of health and safety is a priority and that mental health promotion and suicide prevention are a critical part of that priority.

While managers often feel responsible for the well-being of the people they supervise, very few have been given any substantial training in how to identify people in a suicide crisis and how to link them to life-saving care. Employers can play a critical role in closing this gap through a comprehensive approach.

A five-year analysis of the nation’s death rates released by the Centers for Disease Control and Prevention found that the suicide rate among 45- to 54-year-olds increased 20% from 1999 to 2004, while rates for youth and elderly persons are decreasing. The Surgeon General’s National Strategy for Suicide Prevention targets employers as critical stakeholders in the prevention of suicide.¹⁰

While suicide prevention may seem to be too intensive for workplaces to take on, there are many upstream prevention strategies that do not take much effort but yield tremendous results. Here are low-cost, high impact strategies employers can take to promote mental health and prevent suicide:

1. Promote the Suicide Prevention Lifeline. This free resource (1-800-273-8255 [TALK]) is available to employees 24/7 and used by both people in crisis and those who are trying to support them. The line connects to local crisis call centers and is answered by certified volunteers, most of whom have had more training and experience in de-escalating suicidal behavior than many of our mental health professionals.
2. Participate in National Screening Days.  Whenever we can identify a health condition early in its course, we are in a much stronger position to prevent it from escalating. Employers can help coordinate screening days as a part of a larger national awareness effort. Mental Health Screening offers workplaces promotional and screening tools for National Depression Screening Day (October), National Eating Disorders Awareness Program (February), National Alcohol Screening Day (April), and National Anxiety Disorders Screening Day (May). In addition, their WorkplaceResponse program gives employees an anonymous opportunity to self-screen for depression, bipolar disorder, Post Traumatic Stress Disorder, generalized anxiety disorders, eating disorders, and alcohol use disorders.  These screenings offer immediate results and referrals to an organization’s employee assistance program and community-based resources.
3. Reward Mental Wellness. For example, the Working Minds program offers a contest every year to workplaces that have developed mentally healthy policies and practices that demonstrate positive outcomes like retention, lower absenteeism, and higher employee satisfaction. These workplaces then become the model for others.
4. Change the Conversation Through Social Marketing.  By showing models of people who have experienced significant psychological distress and who have recovered and are thriving, employers can show that struggles are normal and increase a sense of efficacy among the hopeless. For example, workplaces can develop a multimedia campaign that lets people know they are not alone if they are thinking about suicide and that many resources exist to help. If the company’s leaders are courageous enough to model this message, the culture of the organization usually shifts accordingly.
5. Offer Educational Programs on Mental Illness. Employee assistance professionals can provide “lunch-and-learn” sessions that increase awareness about the signs and symptoms of depression, bipolar disorder, alcohol dependence, and other mental illnesses that can lead to suicide.  These presentations should share how treatments are effective while dissipating misperceptions people have that create barriers to care.
6. Training Staff to Become Suicide Prevention Gatekeepers. In addition to offering general training, workplaces should train key people in suicide prevention gatekeeper methods. The concept is similar to CPR – train lay people to know the warning signs of a life-threatening situation and how to sustain a person’s life until they can be linked to professional care. Many models for this training exist, including Working Minds, QPR, and ASIST. For more information, review the gatekeeper matrix on the Suicide Prevention Resource Center website.

As our workplaces accelerate from the industrial age to the information age and beyond, we come to increasingly rely on our mental muscle to get us through our workday. Like any other muscle, our mental muscle can get injured or fatigued, and we can experience high levels of distress, sometimes leading to a suicide crisis. Workplaces can prepare for this in many ways and develop a comprehensive approach to reduce suicide risk and promote mental resiliency.

For more information, visit WorkingMinds.org. Working Minds is one of the first programs in the country to provide workplaces with a comprehensive approach to suicide prevention. Working Minds is a priority program of the Carson J Spencer Foundation based in Golden, Colorado. In a little more than a lunch hour, employees at all levels of a workplace can be taught how to identify warning signs and risk factors and help link distressed coworkers to appropriate care.

¹ Schellenbarger, S. (2001, June 13). Impact of colleague’s suicide is strongly felt in workplace. The Wall Street Journal.

² Mental Health America (n.d.) Depression in the Workplace.

³ Witters, D. (2013, July 24). Depression Costs U.S. Workplaces $23 Billion in Absenteeism.

⁴ Managed Care Magazine (2006, Spring) Depression in the Workplace Cost Employers Billions Each Year: Employers Take Lead in Fighting Depression.

⁵ Gray, T. (2004) ValueOptions Articles - Managers.

⁶ Paul, R. & Spencer-Thomas, S. (2012). Changing Workplace Culture to End the Suicide Standstill. National Council Magazine. (2), 126-127.

⁷ Spencer-Thomas, S. (2012). Developing a workplace suicide prevention program. Journal of Employee Assistance, 42(1), 12-15.

⁸ National Action Alliance for Suicide Prevention (2013) Comprehensive Blueprint for Workplace Suicide Prevention. Retrieved from https://actionallianceforsuicideprevention.org/task-force/workplace/cspp

⁹ National Institute of Mental Health (2007, September) Workplace Depression Screening, Outreach and Enhanced Treatment Improves Productivity, Lowers Employer Costs.

¹⁰ U.S. Department of Health and Human Services, Public Health Service. (2001). National strategy for suicide prevention: Goals and objectives for action, p. 67.

Even though people talk a lot about the value of analytics for workers’ compensation, few have actually implemented them in ways that provide their full value.

To improve, insurers should draw on lessons from, of all things, supermarkets. Supermarkets and grocery stores have long automatically documented transactions at the register. When those transactions are analyzed in context with other data, such as inventory turns and factors such as season and weather, conclusions can be drawn about how buying behavior, and predictions can be made. Operational decisions spring from the analytics, such as diverting high-demand inventory to regions that are projected to need it. The result is increased sales and satisfied customers.

Like the supermarket industry, the workers’ compensation industry collects data continually. Bill review systems document medical bills received and recommend payment based on data analysis. Claims systems document medical bills paid, indemnity paid, work loss, legal actions and other factors, all related to the claim. Still more data is collected related to pharmacy, utilization review and other issues.

But, amazingly, the rich data is rarely converted to operational tools like those that drive supermarkets. Most in workers’ compensation neglect to use their data to identify opportunities to mobilize action early and limit, or even thwart, potentially high risk and costly situations.

As with supermarkets that anticipate demand, insurers should analyze all available data in real time, and alerts about workers’ compensation should be sent to appropriate persons to give them the jump on problems. Adjusters and nurse case managers should receive specific information regarding new conditions so they can mobilize action—when a known, high-risk condition occurs in a claim, that information should be automatically transmitted to an appropriate person. A simple example is when multiple prescriptions of opioids are found; a nurse case manager should be electronically notified and take action. 

Besides saving money, analytics can allow for a formal infrastructure for medical management, optimizing efficiency.

So, as unlikely a model as supermarkets might appear to be, workers’ compensation companies should learn a lot from them.

Think about the challenges that face those in charge of a nuclear aircraft carrier. It:

• Is manned by a bunch of 20-year olds.
• Has jets with engines that can suck a person into the intake if the person is too close.
• Has planes whose exhaust can severely burn a man or blow him overboard.
• Deploys jet fighters that reach 150 mph in 2 seconds during takeoff.
• Executes landings that essentially are controlled crashes.
• Must fuel aircraft with engines running.
• Handles all manner of explosive materials.

Yet, for all the hazards, accidents on flight decks are surprisingly rare. Because so many things could go wrong but almost never do, experts consider an aircraft carrier a “high reliability organization.” The clarity about individual responsibility and about how to function as a team is astounding.

Many of us have been involved in projects where the stakes have been high and we have had to prepare to an exceptional level and pay attention to every detail. But think of what is needed to enable this level of performance every day!

I have to admit I have not seen the level of high reliability you find on the flight deck of an aircraft carrier in very many mid-market businesses. Let’s face it. For businesses, the stakes are not as high as they are on a flight deck. But the principle is there for us to apply – clarity and preparedness escalates the predictability of success. And I’ve seen the principle work for units in a business that had really embraced continuous improvement.

Look at your business organization. Think about this outline of preparedness for each business unit (BU):

1. Prepare the description of the 3-5 most important functions of each BU (that contribute to key results for success).
2. What is necessary for each function to be performed optimally?
3. What should the measured results be for each results area (success criteria)?
4. What processes should be used to assure timely, accurate, high-quality performance?
5. How will customer satisfaction (internal & external) and targeted results be measured and achieved?

How high do the stakes have to get for us to shift into a higher mode of clarity and preparedness? As business leaders, we are the ones who get to make that decision.

If this is an area of leadership you would like to read more about, email me and I will send you my white paper on PERFORMANCE MANAGEMENT - Accountability Based Job Performance.

The “good health = lower cost” equation is an oversimplification of reality and needs to be better understood if we’re to address the causes that help drive up costs for workers’comp.

Yes, people with medical problems are generally more expensive to care for than those without the conditions, but consider the studies that found that:

• Reducing a significant risk factor did not produce lower costs or reduce absences. A successful weight-loss campaign did not produce any cost savings in the next two years, leading the authors to caution against expectations of a positive short-term return on investment.
• The length of absence because of an injury depends largely on the doctor.  A study found that 3.8% of physicians in Louisiana accounted for 72% of all workers’ compensation costs. Patients who chose—or happened to have treatment from—“cost intensive physicians” could expect to have five times higher costs, even after adjusting for age, sex, medical condition, and other factors.
• Individual beliefs affect the number of absences for back pain. Workers who have high levels of fear that work will lead to pain are absent more than workers with similar pain severity but low fear.
• Health improvement alone does not improve return-to-work following extended absence. European researchers found that improved health did not guarantee return to work, especially when certain psychosocial factors—like depression and low self-efficacy— and work factors were present.
• Companies that self-insure their workers’ compensation benefit have fewer employees who are injured. After controlling for a large variety of other factors, authors concluded that companies that directly manage their experience rating invest more effectively in prevention and reduce injury rates.

In sum: Health improvement may not save money or result in someone coming back to work if: a) they believe their work is harmful; b) they dislike or have conflict at work; or c) they choose a doctor who prefers longer, more expensive treatments.  Finally, a company’s commitment to prevention and safety today is driven in part by the financial risk it carries for injuries tomorrow.

Improving health is a worthy goal in itself, but, for a variety of reasons,cost savings will not be a certain result.

When we oversimplify the problem of health costs, we risk being disappointed when investments in health programs don’t bring the savings we expect. While there is no shortage of calls for programs that promote “health improvement,” that only gets us so far toward any goal of cost containment or absence reduction. Therefore, the right approach must reach beyond a condition-specific focus and provide personal expertise, aligned incentives, education, and support to the whole person and her or his family.

A weak economic recovery and regulatory issues are providing significant challenges to traditional business models in property and casualty insurance, especially in commercial lines. Carriers can no longer rely on investment income, and market-share consolidation should be a growing concern leading into 2014.

History tells us that the winners will be companies that are more progressive in their use of new operating models and tools, including advanced data and analytics.

Nigel Morris, managing director of QED investors and co-founder of Capital One, recently said: “In the late ‘80s and early ‘90s, Capital One was at the vanguard of a revolution deploying data-driven strategies in the credit card industry ... I believe that insurance carriers increasingly have the same opportunity to grow the size and profitability of their businesses by more specifically meeting their customer’s needs.”
 

The credit-card industry shows what might happen in P&C. During that time in the late 1980s and 1990s, new marketing and risk-assessment strategies fundamentally changed the credit-card industry. Technology and information-based companies like Capital One flourished and garnered significant market share while those that clung to traditional methods floundered. The agent of change? Analytics. In 1988, Capital One (originally Signet Bank) was founded because it saw an untapped opportunity to leverage credit-score and consumer-spending patterns to find the best risks within the subprime market and revolutionize the credit-card industry.

Similarly, Progressive Insurance pioneered the use of analytics, also leveraging credit scores, to insure nonstandard risks at profitable rates and shake up the auto-insurance market.

The adoption of sophisticated technologies essentially creates a perfect storm. Those who use the best analytics create positive selection, gaining profitable market share. Those who don’t use analytics suffer from adverse selection, ending up with poorer-performing risks because they are working with outdated pricing and risk-assessment strategies.

As Matthew Josefowicz, managing director of Novarica, wrote in a recent report, “The massive proliferation of easily accessible data combined with the increased power of modern analytical tools has the potential to transform the insurance industry dramatically over the next decade. The strategy and operations of insurers in the near future could be nearly unrecognizable to current market leaders.”

Data and analytics will only continue to evolve and change the way business is done, whether it’s in insurance, banking, healthcare, shopping or another industry; the accessibility to personal information is truly transforming the world we live in and how we do business.  In the insurance world, companies like Valen Analytics are creating solutions and providing insights to help drive overall success, for instance by helping carriers manage and segment their portfolios to drive underwriting profitability.

Valen’s 2014 Outlook: Commercial Lines report sheds light on the industry’s top challenges and offers information to help better prepare and adapt for 2014; it is available in full here.

I have unfortunately worked with the families, estates and partners of several agency owners who have passed away.  Most of the deaths occurred unexpectedly.  In all cases, the person who passed left the family, estate and partners with far more problems than necessary.  So, my question to you is this: If you passed away tomorrow, what problems would you leave behind?

One situation I absolutely dread is when I have to tell a family the agency is not worth anything near what the recently passed relative (usually the father) said it was worth.  Agency values are not what they once were. So, you may be telling your partners and loved ones that the agency is worth more than it really is, a practice that, while possibly innocent, is still cruel.

Get your agency valued using real world values so everyone’s expectations are realistic.  Put yourself in your family’s and partners’ shoes.  The income from the agency will be eliminated upon the sale.  Will the agency’s sale be enough to support their standard of living? 

You will uncover problems such as bad debt.  I have seen a number of agency owners die with sizeable accounts receivable that were quite old and totally uncollectible.  These debts may total 20 percent, 25 percent, even 30 percent of the agency’s commissions.  Even if an agency is worth some high multiple, those bad debts have to be deducted.

You will also find issues that you can address, sometimes rather easily. It’s horrible when a widow learns that her husband did not really own all the business on the books.  He always meant to get around to fixing his producers’ contracts but died before he did. As you get your agency valued, however, you can confront the issue and correct it. There have also been situations where all the important accounts are written by the deceased, and there is no one in the agency to take over those accounts.  Those key accounts most likely will not stay with the agency, so its value is not going to be what the estate may have thought.

Another example: keeping lousy books.  It is not imperative for an owner to keep good books and good data.  It is smart, and it is a good business practice, but it is not imperative.  However, if a person dies and the books are poor, the agency is not going to sell for full price.  Who will pay full price for an agency for which no one knows the true income and the true state of its balance sheet? 

Getting a valuation will force you to look at issues such as contracts and books—in time to fix any problems.

I know many readers are thinking these things never happen, but they do. How do you know you do not have similar issues if you have not had your agency valued by a competent appraiser? 

Two other issues to focus on:

Agency Ownership

Do you really own your agency?  I have seen a number of situations where the agency’s contracts were so poorly written that the agency did not clearly own the business on its books.  Maybe the owner knew this at one time and had forgotten because nothing bad had happened.  On a day-to-day basis, it didn’t really matter. But when the agency is being valued, especially when it is being valued because the owner has died, it does matter, and that is not when anyone wants to discover the problem. As more and more clusters develop and even age, this is going to be a bigger and bigger problem.

Buy-Sell Agreements

What happens when a person dies with a bad buy-sell agreement with his partner?  Unless luck and goodwill are in plentiful supply, nothing good happens.  The partner may have been the greatest, most unselfish person on earth, but is his or her family just as unselfish?  This is important because, at least for a time, the dead partner’s family will be partners, too.

For example, what happens when the surviving partner realizes the buy-sell agreement poorly defines value?  This may leave the door open for the dead partner’s estate to claim any amount of value. I have seen, more than once, claims of two times premiums!  It is not always that the other side is greedy; often, they are just uneducated about the insurance world. Combine that with grief and a feeling of immense vulnerability, and they may not want to settle for a reasonable value.

Another great example is where the agency’s balance sheet is poor and the estate’s trusted advisor discovers some rule of thumb that agencies are worth some multiple of commissions, but fails to understand that balance sheet deficits, especially trust ratio deficits, must be deducted.  If you have ever tried to buy out a partner at full price while the agency has a trust ratio deficit, you will know how difficult it is to make payroll and other payments.

The readers of this article have the opportunity to fix a wrong before the wrong occurs.  The pain survivors feel when a loved one or partner dies is already immense.  Why exacerbate it by leaving them a business in a mess?