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- According to a major international reinsurer, catastrophic insured losses (all insurers) from all sources totaled $49 billion in 2004. More than half the losses ($32 billion) resulted from a series of hurricanes that hit the United States and the Caribbean. A major contributing factor to the size of the losses is the increase in concentration of insured values in coastal areas. The disasters caused more than 300,000 fatalities - most from the Indian Ocean tsunami. Total economic loss was approximately $123 billion, including uninsured loss.
- For the second year following reform legislation limiting non-economic damages in medical malpractice cases, Texas doctors have received some good news about insurance premiums. One major insurer has reduced premiums for 90% of its insured doctors, ranging up to a 30% reduction but averaging 14%. A company spokesman attributed the rate decrease to passage of the legislation.
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| Experience modifiers - another reason to check those loss reports |
Experience modifiers affect your premiums. Insurers use sometimes complex formulas to penalize or reward insureds based on their loss experience. Low losses mean lower premiums and vice versa.
Some formulas, such as those used for workers compensation, are established by standardizing agencies such as the National Council on Compensation Insurance (NCCI) or state agencies. There are rules for application of the formulas. One of those rules pertains to cut-off dates for considering claim reserves.
Reserves are the amounts that claim adjusters estimate will eventually be paid on a claim, in addition to what has already been paid. Reserves vary over the life of the claim as more information becomes available. The important thing to remember is that they are based on judgment.
Experience rating formulas have cut-off dates for including claim reserves in the experience modification calculation that are often 6 months prior to policy expiration. The insurer must report the claim costs (paid amounts plus reserves) to the rating agency. Claims are indicated as either "closed" or "open."
Because of the timing, it is possible, even likely, that some claims reported as "open" to the rating agency are actually closed when the calculation takes place. Although insurers are supposed to file corrective subsequent reports, this may not happen or may not happen in a timely fashion. The result can be a higher modifier, resulting in higher premium, than the insured deserves.
Aside from timing, there is also the problem that an insurer's reserves may be overestimated or may not be revised in light of new information. This too, will result in higher premium. Once the information has been filed, most agencies will not amend their modifiers until the next annual filing period.
When subject to experience rating, it is wise for insureds to review their claims prior to the cutoff dates for reporting to rating agencies. The claims should be reviewed to assure that all that should have been closed actually have been, and to provide the opportunity to question high reserves on claims. This is an area where your insurance professional can be of great assistance and may save your company money.
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| A "vicious circle:" Financial restatements and lawsuits |
Financial restatements by corporations sometimes produce shareholder suits because of their impact on earnings and on shareholder wealth. Restatements may also affect share value because of perceptions by the markets that something may be wrong at the company. The Sarbanes-Oxley Act requires diligent scrutiny of financial statements by corporate executives of publicly traded companies. Diligent scrutiny leads to the discovery of more accounting errors. More accounting errors lead to more restatements. More restatements produce more suits.
A recent report, 2004 Annual Review of Financial Reporting Matters by the Huron Consulting Group reflects a 28 percent rise in financial restatements (amended refilings) from a year earlier. The 414 restatements set a new record.
Aside from the disruption this vicious circle can cause to a company, it also affects the perceptions of Directors and Officers (D&O) liability insurers. Partly because of turmoil in industry caused by the run of accounting scandals in recent years, and partly due to other market factors, D&O insurance has become expensive and sometimes hard-to-obtain.
Perhaps even more than some other types of insurance, D&O coverage requires careful preparation for policy renewals or for "shopping the coverage." Statements made on coverage applications become "warranties" and are relied upon by underwriters providing the coverage. It is important to provide accurate information while at the same time presenting it in the best light possible. Restatements or other potential "red flags" may need to be accompanied by explanations with the application.
The key to successful renewals or placement of new coverage for D&O liability is to begin early, allow plenty of time, be accurate and thorough, and spend time with your insurance professional developing a presentation. Although this approach requires some effort, it can pay off in the long run in terms of better coverage and possibly lower cost.
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| "Contingent" business interruption |
Business interruption insurance helps an organization become whole after losing income or incurring extra expense following an insured property loss. The key is that the loss must arise out of damage to your insured property.
Some organizations face economic loss when damage occurs at someone else's property. A classic example occurred when a factory that supplied chips to a cell phone maker burned down. The cell phone maker was unable to supply phones for a number of months and lost hundreds of millions of dollars and valuable market share. The loss was at least partially insured, however, by the cell phone maker's purchase of contingent business interruption which covered the income loss even though caused by property damage to another's property.
Many organizations that could use this type of coverage do not purchase it either because of cost or because they fail to recognize the exposure. This is a risky approach. However one organization got a lucky break through the courts.
The case is Zurich American Ins. Co. v. ABM Industries, Inc., 2005 WL 299700 (2nd Cir., 2005). ABM provided janitorial, engineering, and other services at the World Trade Center. When the WTC was destroyed in the terrorist attack, ABM lost a good part of its business. ABM submitted a claim to its insurer for business interruption. Since the property was not actually owned by ABM, even though it operated the facility, the insurer determined that the appropriate coverage would be "contingent" business interruption, which ABM had purchased, but at a lower limit than the other coverages in the policy - an amount inadequate to cover the loss.
ABM contended that coverage should apply under the business interruption portion of the policy not the "contingent" part. The argument was that the extensive use and operation of the premises gave ABM an "interest" in the property. The insurer argued that since ABM did not own the property, only the contingent coverage applied.
The insurer won in the District Court. ABM appealed and won at the Circuit Court. The appellate court held that ABM did have an interest in the property and the fact that its interest was not an "ownership" interest did not matter. One should note, however, that this policy was not "standard" and some of the decision relates to its specific language.
There are two important lessons here. The first is that contingent business interruption is coverage most businesses should at least consider. The second lesson is that it is important to know what your policy contains both before and after a claim. If your business is dependent on others for its revenue sources, you may wish to discuss contingent business interruption insurance with your insurance professional.
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| How to get free professional help |
Surprisingly, many insureds overlook one of the greatest resources available to them - their insurance companies' staff. Many insurers provide expert loss control, claims and other services to insureds at no additional cost. If your company does not take advantage of all the services offered, however, you may not be getting all you paid for, since the cost of these services is factored into premiums.
- In the property insurance arena, loss control engineers from insurers can provide such services as hazard analysis, testing and measurement, analysis of code or regulation compliance and many others.
- Workers compensation insurers often provide industrial hygiene analysis and monitoring, job safety analysis, OSHA training, medical review, courtesy inspections and additional services.
- Some liability insurers can provide training in preventing claims and losses, handling incidents, best practices in employment or corporate governance and a wide variety of other types of service.
- Typical services across all lines of coverage include claim detail analysis, litigation management, and help in understanding the complexities of insurance policies.
The types, level and quality of services can vary substantially from one insurer to another. Some services are offered only at additional cost. However, it can pay to inquire as to what services are available from your insurers and to consider how the services may work to your firm's advantage.
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| The dark side of insurance reform |
Last year, California imposed a system of treatment guidelines and utilization review in its workers compensation system in an effort to reduce the spiraling cost of occupational injuries. Implementation has created a few difficulties.
According to reports, some California doctors are limiting their workers compensation practices or refusing to handle such cases. The biggest complaint seems to be the paperwork involved and the level of scrutiny to which the treating physician's decisions are subject.
In order to implement the statute, the state made guidelines developed by the American College of Occupational and Environmental Medicine (ACOEM) "presumptively correct" with regards to treatment decisions until the state can develop new standards. Such standards are already late and no completion date is available.
Detractors of use of the guidelines say they never were intended as tools for utilization review, but rather were developed for other purposes: to guide physicians providing treatment. The guidelines' use for utilization review is unnecessarily strict and results in too many denials of service, they say.
Defenders of the guidelines, including spokespersons for the American Insurance Association (AIA), say that the guidelines provide for a range of treatment options. One has to fall well outside the guidelines for a denial to result, they maintain. The guidelines help stop over-treatment and ineffective care says the AIA.
Some doctors appear to agree that medical services have been overused at times but still feel that the guidelines are too strict. Another complaint is that doctors performing the utilization review may be out of the area and not familiar with the case or with the practice of medicine locally. They also may be motivated by pressure from insurers to deny treatment, some believe. Other doctors, including physicians involved with ACOEM, maintain that the guidelines simply require a more methodical approach than some physicians prefer.
Part of the controversy may be resolved when the state eventually adopts its own guidelines. That may please many parties including a panel of experts who studied the issue for the Rand Corporation, and the lead author of the legislation. Both parties have expressed concern that the guidelines may not be the best tool for review and that specific new guidelines are needed.
Many insurance reform laws seem to work well, such as California's MICRA and the Texas law limiting non economic damages in medical cases. Other laws sometimes suffer in implementation. Some just seem to need time to work out the details.
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| Does your liability insurance protection go all the way up? |
What could be more disheartening than to discover that the high level of insurance you purchased does not provide all the protection you expected? Unfortunately, you may not find this out until a large loss occurs.
For most organizations purchasing liability insurance, coverage begins with a "primary" policy. In most cases, this policy provides a limit of one or two million dollars. If the insured perceives the need for higher limits of coverage, this usually is arranged by adding a "layer" or "layers" of coverage with additional policies. These policies may be called "umbrella" or "excess" policies.
Umbrella policies usually layer on top of several types of liability protection, most often "general" liability, auto liability and "employers" liability. Sometimes the umbrella policy provides broader coverage than found in the underlying. Excess policies often lie above only one type of coverage or above an umbrella policy.
It is important in most cases, that the higher-level policy cover the same things as the primary policy. Usually the main purpose of obtaining the higher-level policy is to increase the protection provided by the lower-level policy. When the higher-level policy duplicates the scope of coverage in the lower-level policy it is referred to as "follow form" or "following form."
Just because a policy is supposed to be "follow form" (it may even say that on the policy) does not necessarily mean that it truly is. In recent years, the trend has been toward what might be called "conditional" follow form. Such policies follow the underlying policy with exceptions.
It is important to read your policies. Interaction between primary and higher layers of coverage is one of the many reasons. Look for words to the effect: "The terms of the underlying insurance apply to this policy unless they are inconsistent with the terms of this policy," or "Except as provided by this policy." These are sure signs that something may be covered by the primary but may not be included in the excess.
Sometimes it may be impossible to find an umbrella or excess insurer that will cover exactly everything covered by the primary insurer. If your policies contain such restrictions and are not true "follow form," you may wish consult with your insurance professional for guidance.
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| Safety incentive programs |
Use of safety incentive programs to control costs of occupational injuries has its detractors and admirers. Detractors say that safety incentives just don't work, or that when they are effective, they may encourage suppression of injury reporting or legitimate claims. Admirers usually say that such programs can be powerful behavior modifiers, but that they need careful design and implementation.
Some examples of incentives include:
- Monetary awards such as cash incentives after accident-free periods
- Prizes such as a raffle of a new vehicle to teams without incident over a defined period
- Recognition such as plaques, award banquets, etc
- Time off such as additional vacation
- Badges of distinction such as pins, embroidered jackets, etc. celebrating the achievement
- Fostering competition between groups
The important thing to remember when attempting behavior modification is that it is a power tool. Like any other power tool, careful handling is required. To remain effective the tool must be maintained. Improper handling of incentive programs can result in de-motivation and cynicism in workers. Programs can become stale. Safety incentive programs may work for your organization, but only if they are well planned and thought out. Then they must be monitored and modified as necessary throughout the program to preserve their freshness and effectiveness.
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