Tag Archives: premium

healthcare

Why Healthcare Costs Rise So Fast

This is the first of a two-part series, by David Toomey and me, on why healthcare cost growth has historically been much higher that general inflation. 

If you want to truly understand why corporate healthcare costs have risen faster than nearly anything else over the past 40 years, read this article.

In 2001, David was managing large accounts for a major carrier/TPA (third-party administrator) when the largest hospital system in the market issued a notice to terminate its relationship with the carrier, to begin negotiating for higher unit prices. (When hospitals want a very high fee increase, they sometimes start the process by terminating participation in a carrier’s network.) This notice began a tumultuous series of negotiations that involved the local press. The fee increase demanded by the hospital system was high single digits, above market and highly inflationary for the area. This system was already paid a premium because of its large market presence.

David moved quickly to engage major self-insured clients and educated them on the cost impact. They told him to hold firm, as they could not absorb the increases. When asked what they would do if this major hospital was not in the network of the carrier that employed David, many responded that they would turn to another carrier so as not to disrupt employees who used the hospital system!

There were no questions by employers on the quality of the hospital’s care or on its commitment to process improvement. Although they realized that they could not really afford the higher prices, they felt that avoiding disrupting employees (even in a fairly minor way, by having them use a different hospital system) trumps company profits and affordable payroll deductions. That position meant David had no leverage at all in negotiating with the hospital system.

As a result, employer and employee health costs ratcheted up in that market. That’s too bad, but this story is the norm.

We’ve seen this same scenario continuously in our careers. Even if a hospital or clinic is used by fewer than 5% to 10% of a company’s employees, getting complaints from employees—even just a few—trumps corporate profits, shareholder returns, rising payroll deductions, restraining rising deductibles and rising employee out-of-pocket health costs. Even though self-insured employers are the ultimate purchasers of healthcare, they usually just roll over when providers keep raising their charges year after year.

In every market, by definition, half the providers are below average. While company benefit managers profess to want the best-quality care for their employees, they willingly accept larger fee increases from the worst providers. Why? Avoiding a few employee complaints has always been more important than deleting poor-quality providers, ones with a high rate of harming patients. (By “harming patients,” we mean providers with high rates of misdiagnoses, high rates of prescribing bad or suboptimal treatment plans and high rates of infections, some of which are deadly.)

Sally Welborn, head of benefits for Walmart Stores, recently called for self-insured employers to take the lead in reforming how providers are paid and in making hard, value-based purchasing decisions. (The term “value” excludes providers that have a high rate of misdiagnosed patients and give them profitable but unnecessary treatments.)

Soon, you can read Part Two on how employers can obtain value from the provider community.

opt-out

Debunking ‘Opt-Out’ Myths (Part 6)

“Transparency” demonstrates whether a product or service has real value to society. It also promotes collaboration and process improvement. So, what does transparency mean, and how can the same standards be applied, in the context of workers’ compensation and the Texas and Oklahoma “options” to workers’ compensation? There are lessons all can learn on a path of progress.

Transparency in Workers’ Compensation

Transparency within the workers’ compensation industry has dramatically improved over the past 20 years, but some aspects remain translucent, at best.

From an insurance agent and employer perspective, workers’ compensation is too often viewed as a complex government mandate to be complied with in the easiest manner possible. Most employers do not have the wherewithal to affect significant claims, dissect an experience modifier or otherwise engage with workers’ compensation systems beyond the review of insurance quotes, the payment of premium and the initial filing of a claim. Who can blame them with so little information readily at hand?

For both employers and injured workers, most states provide little clear information on system rights and responsibilities. When was the last time you got on the Internet and reviewed all of an unfamiliar state’s workers’ compensation laws? Or attempted to find or build your own summary of benefits or claim procedures for an unfamiliar state workers’ compensation system? We go to the “For Employers” or “For Injured Workers” tab on the state system website but see only a high-level review of system benefit requirements and information on how to file a claim. But how is each form of benefit computed? When do they start and stop? What are the other exclusions and limitations on benefits? It is no wonder that employers and injured workers with concerns about their rights and responsibilities on a particular claim often engage legal counsel to navigate.

At a workers’ compensation regulatory level, a few states excel at providing meaningful information that is readily accessible. For example, the Texas Department of Insurance has a research and evaluation group that continually generates good information on system performance. But most states provide little (if any) data on actual workers’ compensation system performance. There is no universal standard or consistency in what scant workers’ compensation information on regulatory costs, injury claim costs, employee satisfaction or other outcomes is available from government agencies at no charge to the general public.

Many nongovernmental organizations (NGOs) do great work to fill this information void. The U.S. Chamber of Commerce, National Academy of Social Insurance (NASI), Workers’ Compensation Research Institute (WCRI) and other high-quality organizations provide helpful summaries of legal differences between state systems, as well as insightful claim data analyses. This information can be very useful to legislators, regulators and large employers, as well as insurance company executives and claim adjusters. It is rarely accessed by small business to affect their cost of workers’ compensation or by injured workers to advance their claim.

The largest workers’ compensation NGO is the National Council on Compensation Insurance. NCCI privatizes the collection and analysis of claims and other statistical data for nearly 40 states and hundreds of insurance companies. NCCI tackles the enormous challenge of making sense of data flowing in disparate fields across different technology platforms, with a talented staff of more than 900 employees. In 2014, NCCI generated $152 million in net sales, with assets of $151 million and total equity of $42 million, for its insurance company members.

Most NCCI data is proprietary and only available at significant expense to member insurance companies and certain state regulators. Only high-level summaries are provided to the general public, and most of that information is macro-focused on premium rate setting and insurance company profitability.

State regulators use NCCI loss-cost projections to help set insurance premium rates. Projected loss-cost reductions are commonly viewed as a direct monetization of recent workers’ compensation law reforms. However, insurance companies are allowed to substantially deviate from those expectations when setting premiums for individual employer policies. Some insurance companies may reduce actual premium rates just enough to maintain credibility in view of recent reforms but maintain premium rates at the highest possible level for the benefit of their shareholders. Workers’ compensation is a highly risky business to underwrite, and shareholders reasonably expect profits. But we should understand that NCCI’s projected loss-cost reductions and premium rate projections may or may not translate to the lower costs employers have been told to expect from reforms.

Transparency in Options to Workers’ Compensation

In comparison to workers’ compensation systems, the option industry is relatively new and does not have a similar, robust infrastructure of NGOs to fill the information voids. But interest in and movement toward option programs is growing daily, and option proponents are committed to transparency.

The states of Texas and Oklahoma begin the process by maintaining employer coverage lists. Texas maintains a searchable database of employers that carry workers’ compensation insurance and a list of employers that do not. Coverage is entirely voluntary in Texas, and employers on this latter list have self-reported (and most likely sponsor) an injury benefit plan.  The Texas Department of Insurance indicates that 95% of all Texas workers have either workers’ compensation or injury benefit coverage. Employers on neither Texas list are out of compliance with current legal reporting requirements and may have no workers’ compensation or injury benefit coverage for employees. Those are the companies that truly fit the derisive term “opt-out,” which is unique to Texas. The Oklahoma model and what other states are considering is a more highly regulated “option” to workers’ compensation. For the state of Oklahoma, every employer must have workers’ compensation or be approved as a “qualified employer” (https://www.ok.gov/oid/workerscompreform.html) that sponsors a legally compliant injury benefit plan and satisfies financial security requirements.

From an insurance agent or employer perspective, insurance companies writing option policies have long insisted on a higher level of engagement than is common in workers’ compensation. Such agent and employer engagement requires transparency and understanding. Transparency is emphasized through simple requirements for active, pre- and post-injury communication between employers and employees, particularly on the need for immediate injury reporting, use of approved medical providers and following doctor’s orders. Safety program integrity is also commonly verified, particularly in the Texas Option environment, where both injury benefit and simple negligence liability exposures are insured.

Option injury benefit plan documents and claim procedures have been widely available in the public domain since the early 1990s. These benefit plans are the functional equivalent of a state workers’ compensation statute, describing the plan’s funding, benefit payment and administration processes.

Insurance companies have brought transparency to, exercise substantial control over and bring consistency across a large number of option programs by requiring most employers to use standardized injury benefit plan documents. In Texas and Oklahoma, option insurance companies freely distribute to independent agents their template plan documents and policy forms that vary because of competition on the breadth of coverage. Insurance agents then review these documents (often on a checklist), along with claim procedures and safety requirements with employers interested in implementing or renewing an option program. Employer implementation of the standardized program, including communication to all covered workers, is a condition of the insurance coverage. All injury claims must then be managed by the insurance company’s owned or contracted claims unit.  Only large employers are allowed more flexibility to unbundle claims administration and make pre-approved customizations to their benefit plan.

Hundreds of papers, articles, interviews and presentations that provide good information on options to workers’ compensation have been available over the past two decades. For example, http://www.partnersource.com/media/35242/partnersource_media_compilation_for_publication_1-21-2016.pdf. An abundance of information is available now, and this library is growing.

For injured workers, Option plans provide substantially greater transparency than workers’ compensation. Every employee covered by an option plan sponsored by a private employer must be provided a detailed summary plan description (SPD) in accordance with the Employee Retirement Income Security Act. In plain language, the SPD must explain how the plan works, what benefits are available, how those benefits are provided, any exclusions and limitations applying to those benefits and the employee’s rights and obligations under the plan. A highlights section is commonly included at the front of the SPD.

The SPD must be provided within 90 days of an employee becoming covered by an option plan but is routinely provided at the time of hire. Any material change to the plan must also be communicated. All of this information must be provided to each employee in a hard copy or electronically in a manner that satisfies regulatory standards. Another copy of the SPD is also available at any time upon request. Interpretive assistance is required for non-English reading employees.

This transparency fosters employee appreciation for the program, as well as compliance with the accountability requirements found in option benefit plans. Open communication from employers promotes faster accident reporting, earlier medical diagnosis and treatment, a reduction in the number of disputes and less dependence on regulators and lawyers for basic information and claims support.

Every covered employee and beneficiary also has access to the official injury benefit plan document and their claims information. Employers that fail to provide requested information face monetary penalties. Plan participants can include information in and otherwise affect their claim file, and have access to state and federal courts for benefit disputes.

Though available to plan participants, publication of option benefit plans for review by the general public is not required by law. Oklahoma Option benefit plans were publicly available until the 2015 Oklahoma legislature decided to provide broad confidentiality of qualified employer application files in an effort to mirror the application file confidentiality of self-insured employers under workers’ compensation. The idea of establishing a public database of SPDs has also historically proven impractical. For decades, the federal government required employers to file a copy of the SPD for every employee benefit plan. That filing requirement was eliminated in 1997 because the government could not efficiently store the documents, such documents were rarely requested by the public and the related employer and taxpayer expense was deemed wasteful. Perhaps this subject should be revisited in the electronic age.

At a system performance level, most option employers are small companies, with owners relying on their independent insurance agent for periodic updates on their own program performance. But there are also thousands of other workers’ compensation industry professionals who understand and support option programs. Many sophisticated, Fortune 500 risk managers, who are very aware of their brand value and most important asset manage option programs that cover billions of dollars in payroll. Many “A”-rated insurance companies support the option insurance marketplace and write approximately $150 million in annual premiums. Employers, insurance companies and many nationally recognized third party administrators and brokers successfully support resolution of tens of thousands of option injury claims every year. And several nationally respected actuarial firms have confirmed option program success for their clients.

Self-interested opponents of option programs like to theorize about bad things that might happen under an option program, and falsely proclaim that option program savings only occur at the expense of injured workers. But what option industry professionals know from actual experience is that savings come from fewer employees being taken off work, faster return to work for employees who have been disabled and fewer disputes. This all speaks to better outcomes for injured workers and less cost-shifting to state or federal government programs. Those are the facts that truly deserve more transparency and study by policymakers. These facts are already reflected in many studies and reports recently summarized and released as Part 2 of a “Resource Guide” from the Association for Responsible Alternatives to Workers’ Compensation.

Data on tens of thousands of Texas option claims is now in the hands of many insurance companies, third-party administrators and others. For example, PartnerSource prepares statistically credible claim analyses for many individual employers annually and conducts biennial benchmarking studies of Texas option claims across six different industries, covering billions of payroll and hundreds of thousands of workers. These benchmarking studies include sub-industry segmentation and data on the types of benefits, dollar/duration/percentage limits and other injury benefit plan terms most commonly used among option employers, as well as the insurance types, limits and retention levels.

Consider this good-faith snapshot of Texas option industry aggregate data: [http://www.partnersource.com/media/34154/texas_option_data_review_for_publication_1-22-16.pdf]. Similar, expanded data reports, reviewed by independent actuaries, are expected in 2016.

Better-established processes within private industry for aggregating claims data and collective insurance premium price setting seen in the workers’ compensation environment are simply not present today and have not been urgently needed in the option environment. For example, employers that sponsor option programs have focused on the results of their own individual programs. Option insurance companies individually set their own premium rates in a competitive environment, unsupported by the exemptions to antitrust laws and other protections enjoyed by the workers’ compensation insurance industry. Unlike in days of old, insurance companies and individual employers are able to collect and analyze a significant volume of data from their own experience, as well as other publicly available information, to chart their own destiny – something some option opponents fear most.

Undoubtedly, more option industry aggregate data would be instructive and helpful to employers, insurance companies, legislators, regulators and other policymakers. But there is nothing nefarious in the lack of publicly available option data today, and option programs should not be held to a standard higher than workers’ compensation. All of the above-named NGOs that generate workers’ compensation system data have had decades to organize, refine, obtain many millions of dollars in funding for and publish industry aggregate and state-specific information. Data collection and reporting efforts in the option environment are in an early stage of development but can be expected to steadily advance.

This process of gaining additional option industry transparency must be about more than satisfying voyeuristic curiosity. We must also distinguish between what is needed “for the public good” and the self-interest of certain option opponents. Even with approximately 50,000 injuries occurring outside of the Texas and Oklahoma workers’ compensation systems every year, we’ve seen no credible evidence to indicate that workers’ compensation systems generally perform better than option programs in any respect, and option opponents remain unable to muster more than a few anecdotes about option claims that have gone awry. Perhaps this will change as more option claims data becomes publicly available, but it will require independent verification through access to workers’ compensation system data that should also become more publicly available.

Lastly, this process of gaining more option industry transparency must be about more than collecting data at unnecessary taxpayer expense for the sake of saying it has been collected. Note that substantial reporting of option program information has been reported to the state of Texas (on Forms DWC-5 and DWC-7) and the federal government (on Form 5500) at significant employer and taxpayer expense for decades but has not been used for any purpose. So, it should come as no surprise when employers, insurance companies and service providers are unable to support new data reporting mandates without a clear articulation of both the need and value, including regulatory commitment and funding to collect, sort, analyze and report such data.

The Texas Alliance of Nonsubscribers took a neutral position on bills that would have added new option program claims reporting requirements in the 2015 Texas Legislative Session. The alliance is actively working with the Texas Division of Workers’ Compensation to improve employer compliance with and the usefulness of current reporting requirements and to extend workers’ compensation or injury benefit plan coverage to more Texas workers.

Accepting the Call for Option Program Improvements and More Transparency 

Employers and industry supporters of options to workers’ compensation support more public disclosure of program terms, claims data and other information and are actively working to achieve it. For example, option program improvements will likely be seen in 2016 as both Texas and Oklahoma employers and insurance companies positively respond to the past year’s dialogue and claims experience by broadening injury benefits coverage for hundreds of thousands of injured workers. Option programs are able to respond to important needs much faster than hyper-regulated systems that only change after protracted legislative and rulemaking processes. New option legislation introduced in other states will also reflect significant enhancements over prior proposals.

Industry conferences are also responding to the need for more information on options to workers’ compensation. This topic has been featured at many professional and regulatory conferences in the past year, and more are scheduled in 2016. In view of widespread interest and the fact that option programs today cover more workers than 23 individual state workers’ compensation systems, these and other national workers’ compensation events should consider going beyond the one-hour session overview or debate. They can include an entire educational track that allows attendees to become truly knowledgeable about option program design, implementation, administration and regulatory requirements.

Investigations of options to workers ‘compensation by the National Conference of Insurance Legislators, International Association of Industrial Accident Boards and Commissions and the U.S. Department of Labor will also be welcomed.

More transparency and transformative change can result when option opponents and supporters simply sit down to work together. Whether discussing injury reporting requirements, compensability, medical expense coverage, financial security or other important public policy issues, civil dialogue matters. Those who are willing to have a reasoned discussion and information exchange will find ready partners on the current path of progress. Because sooner or later, all industries tend to change for the better, and we should be prepared to lead that change or adapt.

Cyber Threats to Watch This Year

2015 was a year in which cyber criminals continued to innovate and expand their activities. As 2016 commences, look for insider threats to take center stage and for leading companies to respond. Meanwhile, cybersecurity and privacy issues will continue to reverberate globally. Here are a few predictions for the coming year:

Ed note_Edward Stroz

Cyber threats and elections– Threat actors targeted the websites and emails of presidential candidates in 2008 and 2012. Campaign websites continue to be used to raise money, making them targets for hacktivists and cyber criminals alike. Expect to see U.S. primary frontrunners and eventual nominees successfully targeted and to see at least one campaign undermined by a data breach.

IoT spurs new rules– This will be the year consumers awaken to security and privacy concerns attendant to the Internet of Things. A major physical disruption — through the breach of a connected car or medical device or weak security in a connected toy — will spur regulators and consumers to demand action. Expect companies to spend untold amounts on testing and retrofitting IoT devices to meet hastily approved “privacy and security by design” rules.

Insider threats get addressed– Insider threats — current or ex-employees with knowledge of, and access to, the corporate network — will take center stage in 2016. This will push human resources leaders onto cross-functional cybersecurity teams in many organizations. Expect leading-edge companies to invest in technologies that identify and, in some cases, prevent insider threats before they cause material damage.

International data flows narrow– Uncertainty arising from the demise of the EU-U.S. Safe Harbor pact will disrupt international data flows. Expanding European nationalism, distrust of U.S. surveillance and subpoena power, the prospect of triggering huge fines for transborder transfers and political disputes over alternatives will drive some U.S. companies to avoid doing business with Europe altogether. Meanwhile, other multinationals will opt to segregate business functions geographically by building local cloud services and data centers that protect them from penalties.

Boardroom shuffle– With concern mounting over cyber risks, organizations will evaluate fresh approaches to ensure boards are well-informed and comfortable making strategic decisions. Expect the appointment of specialist, non-executive cyber directors and the formation of dedicated cyber-risk committees (similar to audit committees) with independent advisers. Regulators may also pursue the concept of “cyber competent” people as a requirement for boards.

Cyber insurance spike– Demand for cyber liability coverage will continue to rise. Expect premiums to also rise because of constantly evolving threats, immature risk models and an underdeveloped reinsurance market. This will affect retailers, healthcare providers, banks and others that are considered high risk. Uncertainty about the concentration of exposure will lead regulators to impose cyber incident “stress testing.” This is a way to model the impact of multiple, simultaneous incidents on cyber insurance carriers — and potentially stop those that fail these tests from writing new policies.

Captives: Congress Shoots, Misses

In late December, Congress put together a last-minute “tax extender” package that, among many other things, made some changes to section 831(b) of the Internal Revenue Code. That section allows “small” captive insurance companies to elect to exempt from income tax all of their insurance income.

These small captives have been widely used in recent years by owners of large, privately held businesses to allegedly add to their existing insurance coverages while enjoying immediate income tax reductions. Further tax benefits could include conversion of ordinary income to capital gains and a potential estate transfer benefit, depending on the ownership of the captive.

Congress has changed those benefits a bit, by eliminating any estate planning benefits, starting in 2017. But Congress failed to address the true levels of abuse that this code section has spawned and, indeed, may have made things worse.

These “enterprise risk” or “micro” captives are primarily used as a form of tax shelter, notwithstanding the pious claims of captive managers that they are meeting legitimate insurance needs. While such needs certainly may exist in some clear cases, the vast majority of entrepreneurs forming these captives care much more about the tax benefits than any increased insurance coverage.

The IRS knows this and has stepped up both audits of individual companies and larger, promoter audits of captive managers in an effort to crack down on captives that are being formed without the intent to form an insurance company. In addition, the IRS is well aware that unscrupulous captive managers create vastly inflated “premiums” payable by the operating company to the captive to maximize the tax benefits of owning such a small captive. These premiums often bear no relation to third-party market costs, nor can they be justified by a reasonable actuarial analysis of the actual risk being insured by the captive.

Another abuse is found in captive managers’ offering the new captive owner what the IRS would call a sham “pooling” arrangement, to comply with certain “risk distribution” requirements of court cases and revenue rulings.

There are many cases pending in the Tax Court that attempt to corral these abuses. Their outcome is, of course, uncertain.

So the Treasury Department went to the Senate Finance Committee in early 2015, hoping to obtain legislation that would gut section 831(b) (and put a lot of captive managers out of business).

Instead, the department got legislation that only stops these captives from being used as estate planning tools.

The legislation also increased the annual allowable premium paid to such captives, from $1.2 million to $2.2 million, indexed for inflation. The reasons for this failure have a lot to do with Sen. Chuck Grassley of Iowa, who has long wanted an increase in premium to benefit certain farm bureau captives in his state. He needed some revenue offset to allow for the increase, and, by closing this “estate planning loophole,” he can claim that tax revenues will increase.

That claim may be doubtful (only about 1% of taxpayers end up being subject to the estate tax), and captive managers now have a new, higher goal of $2.2 million for the “premiums” to be paid to these small captives.

It is also clear that this new legislation will have no effect on the current robust enforcement actions underway by the IRS. The issues of inflated premiums, sham pooling arrangements and lack of substance in the alleged insurance transaction remain in force and subject to serious scrutiny.

It is unlikely that Congress will bother to look at this code section again any time in the near future.

As a result of this new legislation, section 831(b) captives can generally no longer be owned by the entrepreneur’s spouse, children, grandchildren or trusts benefiting them. (Details about how the legislation achieves this change can be found in other sources).

Perhaps as many as half of all existing micro captives were formed with estate planning in mind. These captives will have to change their ownership or dissolve before the end of 2016. Tax professionals should review all captives owned by their clients to ensure that they remain complaint with the changes in the law. Relying on the captive managers may not be sufficient.

How to Assess Costs of Business Interruption

As a professional loss accountant with more than 20 years of experience with business interruption (BI) valuation, I can understand why policyholders struggle with finding a repeatable, efficient system that produces an accurate measurement of their BI exposure. Over the years, some of my clients recognized the issues with the traditional BI values approach, and decided to make a change. Unfortunately, too many companies continue doing what they have always done, even when there is a better way available.

BI

Consider for a moment, just how important BI information is to your underwriter. The numbers you report give the underwriter the basis for writing coverage and calculating premium. Each renewal provides policyholders the opportunity to present their unique BI exposure. Unfortunately, this opportunity is often squandered because of a misunderstanding of business interruption values and the exposures they represent. The point of this article is to share a proven, alternative approach.

Understanding BI Values

First, there’s the ratable value. It is the “big number” that is calculated for the business as a whole, assuming a 12-month, total shutdown of all revenue-generating operations. This worst-case and often unrealistic scenario is the information requested by the insurance company, usually in the form of a one-page worksheet. Without additional information, the underwriter will use this information to set limits and charge premium.

The ratable value calculated is somewhat meaningless, except that it establishes the base assumption that is used as the BI value in all other scenarios, such as unincurred cost categories. The ratable value is seldom a reflection of your exposures. Better ways to assess your exposures are to examine your maximum foreseeable loss (MFL) and probable maximum loss (PML) scenarios.

What Is Maximum Foreseeable Loss?

The MFL, as the name indicates, is the worst-case scenario. This is not as extreme as the ratable value scenario, but pretty close. The assumptions used here include a complete breakdown of protection and loss mitigating factors while you are hit where it hurts at the worst possible time. An example would be the loss of a unique distribution center to a retailer during the holiday shopping season — say the distribution center that handles online orders goes up in smoke on Cyber Monday.

The factors used to measure the ratable value would be used in this scenario to determine the business interruption value. Certain assumptions may change depending on the duration of the loss scenario. For example, labor expense may be considered completely saved in the ratable value scenario because of the assumption that there is nothing left, but only partly saved in an MFL scenario.

What About the Probable Maximum Loss?

The PML is the same as the MFL, except that loss mitigation efforts and protections work properly. The PML also takes into account pure extra expenses used to retain customers. The PML can help with decision making on purchasing extra expense coverage.

What Happens in Underwriting?

Although I’m not an underwriter, I’ve typically seen insurance companies take an engineer’s approach to MFL and PML scenarios that vary only in duration. This singular perspective does not account for the rest of the pieces of the puzzle. The other pieces are the finer details that actually occur during a claim. In a real claim, topics like seasonality, make-up and outsourcing would surely come up, but you won’t see them on any BI worksheet.

The MFL and PML should be based on realistic loss scenarios and measured as if they were a claim. Simply applying the ratable value to loss-period assumptions produces misleading and inflated numbers. This is precisely why it is in your best interest to develop your own valuation method based on real scenarios.

Why Create Exposure Scenarios?

If BI values are based on assumptions, and you are using the worksheet, then the assumption is a 12-month loss scenario. Can you imagine a scenario in which your operations would only be affected for six months? The worksheet makes a blanket assumption of 12 months whether realistic or not. Coming up with various loss scenarios by location would flesh out a more realistic representation of the impact of each particular loss. The scenarios would also highlight high-risk locations along your supply chain, which could improve your business continuity planning.

An exposure analysis project is not only an accounting project; it’s an integrated business exercise offering multiple benefits to an organization. The goal is to identify and examine loss scenarios and the resulting ripple effects.

It isn’t necessary, nor is it practical, to anticipate every possible loss scenario. It’s better to prioritize by perceived risk and probability. Then, develop a good sampling of loss scenarios from which you can determine the impact to operations and the mitigating actions that would be taken. Depending on the exposure, involve the appropriate internal personnel, e.g., operations, sales, business continuity, IT and accounting. The external experts you may involve are your broker, legal counsel and, of course, a forensic accounting firm that specializes in insurance work. Additionally, your company’s business continuity plan (BCP) and incident response plan should be factored in. However your scenarios play out, the loss accountants can calculate the business interruption as though it were an actual claim.

As you can see, this approach would produce a more accurate BI value by location and overall. It’s the right way to look at business interruption, so make it a part of your approach with underwriters.