Tag Archives: work comp

Self-Insured Retention vs. Collateral – What is the True Cost of Risk?

Each year, the corporate risk manager scrutinizes workers’ compensation excess insurance proposals from one or more insurers, trying to figure out the cost-benefit of the company’s self-insured retention (SIR), such as $250,000, $500,000, or even much higher. The “SIR” terminology applies whether the company is utilizing an insured high deductible, captive or legally self-insured workers compensation program. As we all know, claims below the chosen level of retention are “retained” (paid for) by the entity, not the excess insurer. And despite what level of self-funding is chosen, the risk manager gambles that the company’s injury/illness prevention program and competitively safe working environment is going to beat industry statistical odds. Why buy insurance on something that has little likelihood of occurring anyway? Your hope is that the premium money you save choosing a higher deductible will more than offset the claim costs associated between a lower and a higher deductible / self-insured retention.

With that decision made, the risk manager then dutifully works on an annual operating budget to project the direct and allocated costs of the entity’s “expected” workers’ comp claims, including excess insurance. With that task done, the workers comp risk factors have pretty much been addressed, right? Not really. The unaddressed factor in this self-insured/high deductible scenario — which goes up most corporate ladders to the CFO or Treasurer — is the issue of collateralization. Collateral, by definition is that which serves as protection for a lender against a borrower’s default (failure to pay an obligation).

For example, when you take a mortgage out on your house, the amount you owe the lender is supposed to be adequately collateralized — at least since the ’08 housing bubble burst — by the sales value of your home. In fact, in today’s post-recession real estate market, banks are requiring excellent lender credit ratings as well as a real estate loan that is typically no greater than 80% of the appraised value of your home. After all, your home is the bank’s only secured collateral in the event you default on your mortgage.

So, who is taking the risk if your company fails to make its workers compensation claim payments within the self-insured retention — which is often 90% or more of all corporate claims costs? The fact of the matter is simple. No insurer, captive, or state/governmental agency has any intention of bailing out your company if and when it goes bankrupt, or for whatever reason, fails to meet its workers compensation obligations under the law. In the event of default, therefore, the company’s excess insurance policy must drop down to pick up any unpaid claim costs on a “first dollar” basis. Does this mean the excess insurer is out of pocket for the losses paid within the self-insured retention/high deductible?Simply put, no insurer is willing to take the risk that its insured may be unable or unwilling to pay its high deductible. Similarly, no state government wants to assume to liability of a legally self-insured entity failing to pay its workers compensation obligations. The only sure way to avoid having the excess insurer, captive, or the State assuming the costs arising from a default is to require sufficient collateralization of the policy periods covered by high deductible or self-insurance.

In the case of insurers, the terms, timing, and amount of collateral is negotiated and typically requires that the insured put up: a cash deposit; an irrevocable letter-of credit; securities (i.e. certificates of deposit); or a surety bond payable to the insurer in the event of default. For insurers, the collateral target is determined by actuarial estimates, including the estimated ultimate cost (including IBNR and ULAE) of all claims within the entity’s high deductible or SIR retention level.

Obviously, the collateral requirement grows in the aggregate with each policy year of workers comp coverage. Now, you understand why the entity’s CFO is concerned. Tying up your company’s collateral or its credit revolver (the amount your bank(s) provides your company as a line-of-credit) is a huge issue. While the cost and amount of this may vary to some degree depending upon your company’s credit rating and banking relationships, the fact of the matter is that this collateral can build up to significant amounts over the years. In California alone, there are dozens of large companies with sizable self-insured retentions with aggregate workers compensation claim risks from $100 to $500 million. The amount of collateral required is almost always determined by an actuary — usually the insurer’s unless you are a true self-insured entity.

Knowing that virtually every high deductible or self-insured option you choose requires collateral, how do you decide which option is the most cost-effective? It’s important that you have a very savvy, experienced, and knowledgeable insurance broker or consultant assisting you in weighing these options. Furthermore, your broker must understand the implications of collateral demands when risk is retained. This is a much more challenging process than simply selecting an SIR based upon excess insurance quotes.

So the question arises … How much collateral do we need to post? What will it cost our entity to tie-up this amount of money each year? To the CFO, this issue may be the driving factor in your workers compensation strategy. Essentially, there are two major factors that determine collateralization: (1) the expected amount of aggregate claim exposure; and (2) the entity’s credit risk rating or factor.

In general, the only break you’ll get in posting the actuarially determined deposit is if you’re with an insurer that may consider your company a “good credit risk” and allow you to post your annual collateral (keep in mind that it’s in aggregate) on a delayed basis, such as 3 to 6 months into your new policy year. In my previous experience as a VP of Risk Management for an international company doing business in 38 states, we hired a leading actuarial firm to challenge the quarterly actuarial numbers asserted to us by our excess insurer’s in-house actuary. Usually, we were able to negotiate some minor concessions relating to the collateral posted with the carrier. The amount of collateral was revisited at a minimum of every quarter.

Most states allow a self-insured the opportunity to choose its own self-insured retention (up to a certain limit); its excess carrier (if any); and in many states, self-insured’s are allowed to self–administer their workers comp claims — as opposed to using the excess insurer or a designated Third Party Administrator.

In California, the Self-Insurers’ Security Fund (a non-profit entity that guarantees the take-over and payment of private and group self-insured entities in the event of default) pioneered an option in 2003 that no other state, except North Carolina, has been able to offer. Individual self-insured entities with equivalent credit ratings of AAA (A+) to B3 (B-) are eligible for the Alternative Security Program (ASP). Under this arrangement, qualified self-insured’s have their “deposit” (State-required collateral) covered by the Security Fund. In short, the self-insureds pay an assessment that mimics their cost of securing a Letter of Credit (LOC) from a bank. The Security Fund uses a sliding scale with 16 intervals, AAA to B3, to determine the factor (multiplier) used to determine its annual assessment. Included in the assessment calculations are the Security Fund’s operating expenses, hedging costs, as well as any funds targeted to build the Security Fund’s reserves. In 2010-11, this factor ranged from 16 basis points (AAA) to 355 basis points (B3).

The distinct advantage to this unique ASP program option is that nearly 350 California individual self-insured entities are able to free-up large sums of monies or a Letter of Credit. The Security Fund annual assessment is a fee, and the company’s credit revolver is not impacted since there is no secured debt arrangement. This frees up nearly $5.9 billion of workers’ comp collateral each year, and it allows these self-insured companies — including non-profit and religious organizations — to use their creditworthiness to pursue business and organizational goals.

Rethinking The Incentives Built Into The Workers’ Compensation System

A few months ago, my husband began experiencing back pain. First it was nagging, then moderate, and within a couple of days it had reached an intolerable level. I was shocked to see this stoic man with a “mind over matter” approach to his health succumb to such pain. He was completely unable to function.

And so the medical journey began. First came a prescription for opiates, and then came diagnostics (yes, in that order). Next came an epidural injection and then therapy and exercise. At this point, the story sounds much like what we experience in Workers’ Comp on a daily basis. The difference was … this was not Workers’ Comp. My husband is a self-employed realtor. If he doesn’t work, there is no opportunity for pay. There would be no Temporary Disability, no Permanent Disability, no “add on” disabilities, no attorneys. The only motivation was to recover quickly enough to be able to work.

We found the best specialists, in this case opting for a spine clinic that specializes in treating athletes. Diagnostic tests were completed within days, and the epidural was done within a week. No Utilization Review delays. No authorizations. No shopping for discounted diagnostics. No delays … on anyone’s part. It was truly the “sports medicine” approach — excellent up-front treatment, with everyone focused solely on achieving a positive outcome. He cooperated fully with his physician’s advice, doing all the exercises prescribed while at the same time steadfastly refusing to accept any limitations. And his only financial incentive was to be well enough to work. And therein lay my “light bulb” moment.

It would be naïve, of course, to assume that motivations alone can make the difference. Granted, the underlying condition was amenable to quick results. But we all know that much of the time when we see protracted outcomes, it was not the underlying condition that caused the outcome. Many of the outcomes we see are the result of the “system” and those of us who make our living from the system.

Do we do everything in our power to assist the injured worker in his recovery? Do we contribute to the problem unintentionally by incenting the wrong behaviors, or through our application of the very principles meant to protect the injured worker? In particular, do we use Utilization Review as a tool, or as a crutch?

Utilization review allows us to curtail physical therapy at 24 visits. But is that the right thing to do? Likely some circumstances warrant the use of the “cap,” while others do not. While we should use the tool to prevent abuse, shouldn’t we also apply common sense? Research tells us that for people taking opiates, it is critical to keep moving and avoid retiring to the couch. It seems that until we are able to wean the worker off the opiates the therapy is likely actually therapeutic. What about the person who is improving? Should we curtail the therapy before the results are achieved?

It is also fairly common practice to deny gym memberships through Utilization Review. But, for a motivated injured worker, isn’t the gym the most cost-effective way for an injured worker to build strength and restore function? In most cases, a month’s gym dues are less costly than one or two physical therapy treatments.

What about Functional Restoration? Wouldn’t it make sense for us to consider functional restoration in cases that appear amenable? It can be the most effective tool in returning some motivated people to full function and to work!

In addition to the lessons about utilization review, my husband’s injury has heightened my awareness of the issue of cooperation and financial incentives. I believe it’s appropriate to ask ourselves whether the system motivates cooperation or whether it actually motivates “claimant behavior.” Does the person who cooperates fully with the medical rehabilitation plan often end up with a much smaller payday than the person who “works the system?” Is the system fraught with unintended financial consequences?

What if we took a practical approach to Utilization Review, and also offered financial incentives to get well, rather than to sustain ongoing disability? What if we provided incentives to go to therapy, or go to the gym? What about Incentives to cooperate? What about incentives to participate in functional restoration of all different types?

Without turning the system upside down, we can certainly turn our thinking 180 degrees. Perhaps we can find a way to reward injured workers for doing the right thing. And perhaps we can use Utilization Review as a tool, and not as a crutch, to make smarter decisions about the treatments we approve. We can shortcut the unnecessary and costly Utilization Review and give injured workers the best possible chance to recover. Its the right thing to do. And its good business, as well.

Note: In case it occurs to anyone, I did get a HIPPA compliant release from my husband before sharing his story!

The Reasonable Accommodation Process Done Right

In the recent (unpublished) decision by the California Court of Appeal, Moore v. California Surety, the Court held that the employer’s handling of the interactive process and attempts to provide reasonable accommodation to an injured worker were wholly adequate, and that the employee’s case was properly dismissed as a matter of law.

In Moore, the employee, who was working as a “bounty hunter”, suffered a back injury in the course and scope of his employment. He was declared TTD for some time. When he was released to return to work with significant restrictions the employer searched for an alternate, available position for the employee and offered the employee two “desk jobs.” The employee turned down both positions, stating that they were too far away from his home and that he was not interested in the jobs. The employer then stated they would try to find a position in their corporate office, but the employee stated he needed to make the same amount of money as he was making in the position he was employed when injured.

The next time the employer tried to speak with the employee (via its counsel) it was referred to the employee’s newly hired attorney. Further conversation with that attorney revealed that plaintiff was interested in settlement of his purported claims, and no mention of continuing the interactive process was mentioned. Soon thereafter the employee filed suit against the employer claiming, among other things, that he was denied reasonable accommodation and terminated.

The Court ruled that there was no evidence that the employer terminated the employee or that it failed to engage in the requisite interactive process. It heavily relied on the fact that several alternate positions were offered, but were turned down. The Court further asserted that it was the employee who discontinued the interactive process, choosing to sue the employer rather than request additional information about possible job openings.

What This Means For You
This is an example of the correct way to handle the interactive process. The employer timely respond to the employee’s initial need for reasonable accommodation, looked for alternate positions that the employee could fill and promptly offered them to the employee and continued with the interactive process until the employee cut it off. As difficult as the interactive process can be this shows that with adequate preparation and the assistance of counsel it can be done right.

Practice Tip
It is clear that the offer of alternate positions was a key element in this employer’s success. While an employer is not required to create a position for an injured worker who seeks accommodation, an employer must do an investigation of all available positions which the employee is qualified for and could fill. It is recommended that these investigations be well documented to show that an employer has made appropriate efforts to put the employee back to work.

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