Self-Insurer July 2012 by SIPC

July 2012

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Assessing your own

RISK & SOLVENCY or said differently…

“How RISKY are we?”

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JUly 2012 | Volume 45

July 2012 The Self-Insurer (ISSN 10913815) is published monthly by Self-Insurers’ Publishing Corp. (SIPC), Postmaster: Send address changes to The Self-Insurer P.O. Box 1237 Simpsonville, SC 29681

FEAturES

Editorial Staff

ArtIclES 10

From the Bench

Domicile Direct Washington, DC

PuBlIShINg DIreCTOr James A. Kinder MANAgINg eDITOr erica Massey

SeNIOr eDITOr gretchen grote

Assessing your Own Risk & Solvency or Said differently… “how risky are we?” by Joel Kress

ART Gallery: Leveling the field for smaller employers

IrS Notice 2012-40 Provides Clarification with Regard to Health Care reform’s $2500 Cap for health FSA Salary reductions

SIIA International Conference Wrap-up

DeSIgN/grAPhICS Indexx Printing CONTrIBuTINg eDITOr Mike Ferguson DIreCTOr OF OPerATIONS Justin Miller DIreCTOr OF ADverTISINg Shane Byars Editorial and Advertising Office P.O. 1237, Simpsonville, SC 29681 (888) 394-5688

SIEF hosts congressional Briefing detailing Self-Insurance

2012 Self-Insurers’ Publishing Corp. Officers

InduStry lEAdErShIp 32

SIIA Chairman Speaks

James A. Kinder, CeO/Chairman erica M. Massey, President lynne Bolduc, esq. Secretary

The Self-Insurer

July 2012

Assessing your own

rISK & SOlveNCy or said differently…

“How risky are we?”

by Joel Kress

July 2012

The self-insurer

ell before the National Association of Insurance Commissioners (NAIC) released their proposed Own risk and Solvency Assessment (OrSA), we have been asking the question, “how risky is our captive insurance company?” It seems like an innocuous question, but stripping away the layers of complexity took many years as each nuanced answer created another question. even with a hypothetically incontrovertible answer as to the amount of risk we bear, it is impossible to gauge the risk appetite of our Board of Directors and the impact of future business opportunities. The Oxford english Dictionary (OED) defines Risk as “(Exposure to) the possibility of loss, injury, or other adverse or unwelcome circumstance; a chance or situation involving such a possibility.” The key words for discussion within a captive insurance company are “adverse” and “unwelcome.” Statistically, there may be the same equally remote chance of no claims occurring as a $20,000,000 claim occurring. But, we spend all our time worrying about, planning for, and purchasing insurance for the $20,000,000 loss. (Perhaps this downside risk is given greater attention because no one ever got fired for upside risk!) For the layperson, we might be able to revise the OED definition to read “the chance of things not going as planned” but, for the insurance layperson, it usually goes something like, “the chance of claims costing more money”. The following article looks to trace the history of our risk analysis odyssey, assess the benefits and detriments of our current method, and look to the future for improvement.

The Question and the Process The labyrinthine question was (and is), “how risky are we?” The non-linear process continues to this day. In conjunction with our consulting actuary, we began a conversation which unraveled some of the challenges to answering the question. The first challenge was to determine which risks to model. More complex and holistic models aim to quantify risk such as Interest rate risk, Currency risk, etc., but we decided to simply model the most detrimental and most quantifiable risks: underwriting risk and reserve Development risk. For underwriting risk, we sought to quantify the risk transfer contracts we write on an annual basis. Our Company writes reinsurance to a specific niche market. Depending on the contract, the Self-Insured retention (SIr) and our Company’s limit of liability varies. For reserve Development risk, we outlined and measured the risk associated with all past contracts we have written. Since our Company is almost 10 years old, and we write liability, Workers’ Compensation, and Property reinsurance coverage, there will be years (and decades) of further Incurred But Not reported (IBNr) development on our Balance Sheet. This type of risk accumulates geometrically as the years move on. Another significant challenge was to supplement our Company’s data, since our loss experience alone is limited and statistically non-credible. using actuarial principles, we compiled our own loss experience by line of business and policy year. Our limited and non-credible loss experience was then supplemented by industry reinsurance data. From this database, our actuaries were able to select both a frequency and severity distribution. The product of the two distributions is a single loss distribution, which statistically estimates our predictability of loss (sample in Chart 1 and Figure 1).

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July 2012

Using commercially available simulation software, we then created a profile for each contract written in the most recent policy year (2011). Each profile contains a contract’s effective date, expiration date, and line of business. The profile also differentiated Severity information: SIr attachment, our Company’s limit of liability, quota share, etc.; and Frequency information: Claim Count, loss Costs, exposure Base, etc. (See Chart 2). The goal was to distill the amount of exposure to loss, which is simply frequency x severity, that our Company held as the risk bearing captive.

Again and Again. 10,000 times… Our selected loss distribution looks like many other (re)insurance loss distributions. It is skewed towards the right, which indicates a chance, albeit slim, of a large, calamitous loss. In our discussion of risk, everyone seems content to focus on the right side of the curve. This is the statistical side of the curve that “costs more money”. The majority of risk is for contracts which are currently being written, since the insurable events have not yet occurred. To assess this risk, we turn to modern technology. using the above discussed input variables, the simulation software estimates our Company’s losses for the current policy year’s contracts. The algorithm is as follows: 1. Randomly identifies a number of claims based on the selected frequency distribution. 2. Randomly identifies a size for each claim based on the selected severity distribution. 3. Assigns each claim and its associated severity to a contract written based on the selected frequency exposure percentage.

The final piece was to estimate the risk for the historical policy periods. Our Company receives an annual Statement of Actuarial Opinion, which includes an actuarially determined expected value, or point estimate, for IBNr and Case reserves by line of business and policy year (see Chart 3). using the selected loss distribution, we could also measure the variability around the expected loss reserves. This variability or, of greater concern, the variability of losses costing more than expected, was the third piece to our risk metric.

4. Using the contract profile, the exposure to the Company is calculated. 5. Sums all the Company’s exposure for the entire current policy year.

July 2012

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This process is for a single statistical policy year. To take advantage of the simulation software and the law of large Numbers, this algorithm is run for 10,000 hypothetical policy years. From this tome of data, the statistical metrics such as expected level, 60th Confidence Level, 70th Confidence level, etc. are determined. The output is shown in the second column of Chart 4 labeled “loss Forecast”.

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July 2012

the power of the information Age None of this minutia would be possible without the power of computers. It is one thing to program an algorithm to do a set of tasks, as outlined above. It is another thing entirely to make the computer work for you.There are two main benefits of having this tool at our Company’s fingertips.

The third column labeled “reserves” is the variability of the historical policy year’s reserves. Note, the Expected figure of $28,504 (rounded to the 1,000) matches the actuarial opinion figure in Chart 3. These two columns are added together in “Forecast and reserves” and the difference between the expected and various Confidence Levels can been seen in “Amount over Expected”. This is the end of the simulation portion of the process. From here, we needed a way to measure the results. We decided to use Surplus as a measuring stick since it is easily understood, readily calculable, and of concern to most interested parties. At the top right of Chart 4, you see our year-end 12/31/10 Surplus level of $23,275 (in 000’s). Below it is the column labeled “Adjusted Surplus”. This is calculated by subtracting the respective amounts in column “Amount over expected”, which can be thought of as a drain on Surplus. For instance, at a 60% Confidence Level, our Surplus would need to make up a $965,000 shortfall in losses. This is the risk we are modeling. The amount of extra money our current and historical contracts will cost beyond what is expected. The last step was to determine the statistical benchmarks we would measure ourselves against. Five benchmarks of ruin are listed. The first is the total Captive’s Contributed Capital, which represents the point in which all contributed capital could be returned, and all losses could be paid for by premium and investments. By pegging that number at the 86.6% Confidence Level, this implies a 13.4% chance of our risk contracts depleting our Surplus to the point of the exact amount of contributed capital. The second set of benchmarks is the risk Based Capital (“rBC”) marks of Company Action Level, Regulatory Action Level, Authorized Control Level, and Mandatory Control level. These benchmarks signify varying degrees of regulatory authority from “requesting a comprehensive financial plan to address concerns” to “taking steps to place the insurer under control”. respectively, the chances of this happening are between 17.2% and 0.4%. 8

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The first benefit stems from the first natural question any analyst looking at one data point has: “how has this changed over time?” As stated previously, our Company has existed for almost 10 years. Since the first couple of years were considered premature, we aimed to recreate historical snapshots back to 2006 to compare to the current measures of risk. Charts 6 and 7 show how the Contributed Capital and two rBC Benchmarks have changed over the past several years. The model correctly estimated increases in our Company’s capacity and additional contracts written, but by and large we have become less risky over the years. The second benefit of the model is to be able to simulate hypothetical future policy years. These results are shown as the right-hand bars of Charts 6 and 7 (lightly shaded 2012 data). This output was run before the 2012 contracts were written, essentially allowing us to create “What If?” scenarios. Most of our contracts do not change from year to year, but “What If ” you have the opportunity to write a contract valued at roughly 20% of your portfolio? how does that affect the risk to your current Surplus? Are you comfortable with an increased (or decreased) risk to your Company’s assets? These are all questions we can now answer, at least from a consistent and statistical standpoint.

“Essentially, all models are wrong, but some are useful.” -George E.p. Box It is fairly common knowledge that all models are limited in their ability to simulate real world events. Our Company’s model is no exception to this statement. Albeit imperfect, we believe there are large benefits to maintaining and assessing our risk tolerance for current and future books of business using this particular model.

Acknowledging the model’s flaws is the first step towards understanding it is just one tool that management has to make sure our Company is running smoothly. We are constantly tweaking the model to make it more accurate, more relevant, and more useful. In the immediate future, we aim to be able to tie it to budgeting, integrate it with pricing, and use it within governance. With respect to governance, this may help our Company later on down the road with the NAIC’s OrSA initiative. By creating a policy around risk, as the proposed OrSA directs, our Board of Directors and regulators can feel comfortable that management’s day-to-day decisions will not exceed the predetermined desired risk levels. how risky are we? A lot less so, now that we know more than we did before. n Joel Kress is the underwriting manager at Government Entities Mutual, Inc. PCC. GEM is a protected cell captive domiciled in the District of Columbia. He can be reached at joel.kress@gemre.com.

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msl2162 - 06/12

The self-insurer

July 2012

Bench From the

by Thomas A. croft, esq.

have two significant court decisions to report on this month in the stop loss arena. The first involves the enforceability of a forum selection clause in a stop loss policy form, and came out favorably for the industry; the second involved the ability of a stop loss carrier to make an independent judgment as to whether a claim had been properly paid by the Plan. That one did not turn out favorably. I recommend that interested readers follow up their review of my summaries, below, and read both these court opinions in their entirety at www.stoplosslaw.com.

v. RMTS, et al. No. 8:12Cv96, in the united States District Court for the District of Nebraska, June 6, 2012.) In an important decision for the stop loss industry, a Nebraska federal court has enforced a forum selection clause in a stop loss policy that required “venue for any legal action filed by either party under this Contract shall be in Columbus, Ohio.” Columbus is the city in which the carrier, Nationwide, has its headquarters.

After the suit was filed in Nebraska state court, the defendants removed the case to the federal district court for Nebraska, as was their right due to diversity of citizenship between all Plaintiffs and all Defendants. Then, based on the forum selection clause in the policy, Defendants moved to dismiss the case or, in the alternative, to have the Nebraska federal court transfer it to the federal court for the Southern District of Ohio in Columbus. Plaintiffs resisted the motion on the grounds that enforcement of the clause would be “unfair and unjust; [and] altogether unreasonable.”

The group and its TPA were located in Nebraska, and had filed suit in state court there over the denial of a stop loss claim, naming Nationwide and its Mgu, rMTS, llC, as defendants. (Because the Court sealed the Complaint from public view, apparently due to the existence of PhI within it, we cannot know at this point what the TPA’s alleged cause of action was against Nationwide or rMTS, but that is a puzzling question to be sure).

In analyzing the matter, the Court first had to decide whether the enforceability of the clause should be decided under state or federal law. After reviewing the applicable precedent within the eighth Circuit,

Federal Court Enforces Forum Selection Clause in Stop Loss Policy (Mid-American Benefits, et al.

July 2012

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it concluded that federal law should control. This, I believe, is result that the majority of federal courts around the country have adopted. The Court next observed that, under federal law, forum selection clauses are presumed to be valid, unless they are shown to be “unfair” or “unreasonable.” looking to a u.S. Supreme Court case decided in 1991 involving Carnival Cruise line – Carnival Cruise line, Inc. v. Shute, 499 u.S. 585 (1991) – where a forum selection clause printed on the back of a passenger ticket stub was found to be reasonable and enforceable, the Court noted that Nationwide, like Carnival, had a reasonable basis for limiting the number of places it could be sued. Both do business in many different venues, and thus have a legitimate interest in confining lawsuits against them to their home turf. The Court also noted that, just because a forum selection clause is in a form contract, and there had been no actual bargaining by the parties about it, it could still be reasonable. The test is whether enforcement of the forum selection clause “would actually deprive the opposing party of his fair day in Court.” Notice that a “fair day” can be had, according to the Court, in a forum far away from where the plaintiff resides. The Court also rejected the notion, urged by plaintiffs, that there ought to be a special rule for insurance contracts, and that forum selection clauses in them should be subject to deeper scrutiny for reasonableness than in other contracts. The Court also noted that the purchaser of a stop loss policy (and its TPA/Broker advisors, presumably sophisticated business entities) always have the option of declining coverage from a carrier whose policy has a forum selection clause in it. This aspect of the Court’s rationale

illustrates the importance of the TPA/ Broker insisting on getting a specimen policy form before having its client sign an application for coverage, at least where there is a new carrier involved. I know of only a few carriers that have forum selection clauses in their policies at present, but now that there has been a published opinion by at least one federal court enforcing such a clause in the specific context of a stop loss policy, I expect that we might see more. Nevertheless, this decision is at the trial court level, and is not controlling authority as to other courts.

Arizona Federal court says stop loss carrier Must Accept Plan Administrator’s Eligibility Decision (Regional Care Services Corp. v. Companion Life Insurance Co., No. Cv-10-2597-PhX-lOA, in the united States District Court for the District of Arizona, April 24, 2012). Comment: First we get the California legislative initiative to limit self-insuring, and now this. Written by a Magistrate Judge, this opinion keys on the language of the Plan giving the Plan Administrator the following authority: “It is the express intent of this Plan that the plan administrator shall have the legal discretionary authority to construe and interpret the terms and provisions of the Plan, to make determinations regarding issues which relate to eligibility for benefits, to decide disputes which may arise relative to a participant’s rights, and to decide questions of Plan interpretation and those of fact relating to the

Plan. The decision of the plan administrator will be final and binding on all interested parties.” (emphasis added) To those who read and interpret Plan language on a regular basis, this provision or something akin to it is a familiar aspect of most Plan Documents. The case – and the parties’ crossmotions for summary judgment – involved an eligibility dispute over an adopted minor child not living with her parents, and thus involved the definition of “dependent” under the Plan. That definition provided: eligible Classes of Dependents: A dependent is any one of the following persons: 1. A covered employee’s spouse, life partner, and unmarried children from birth to the limiting age of nineteen (19) years . . . The dependent children must rely on the covered employee for over one-half of their support (as described in Section 152 of the internal revenue code). The term “children” shall include natural children living in the same household as the employee, adopted children or children placed with a covered employee in anticipation of adoption. Step-children who reside in the employee’s household may also be included as long as a natural parent remains married to the employee and also resides in the employee’s household… (emphasis added) The Plan had determined that the child qualified as a dependent, and paid significant medical expenses, and sought reimbursement for them from the stop loss carrier.

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July 2012

The Mgu/Carrier disagreed, and denied the claim. There were two issues: 1) did the child have to live with her parents to qualify as a dependent; and 2) did the reference to Section 152 of the Internal revenue Code import all the requirements of that Code Section, or was it simply referring to the support requirements? The first of these required interpretation of the sentence: “The term “children” shall include natural children living in the same household as the employee, adopted children or children placed with a covered employee in anticipation of adoption.” The Mgu/Carrier read the sentence to mean all children had to live in the same household to qualify; the group read it to mean that only natural children had to. The Court analyzed this as a simple grammatical issue. It concluded that the phrase “in the same household” only modified the word “children” in the first part of the sentence, not the remaining categories of “adopted children” or “children placed a covered employee in anticipation of adoption.” It cited cases for the proposition that, under the “last antecedent rule, a limiting clause or phrase should ordinarily be read as modifying only the noun or phrase that it immediately follows.” law and grammar often intersect. The second issue involved interpretation of the phrase “The dependent children must rely on the covered employee for over one-half of their support (as described

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in Section 152 of the Internal revenue Code).” The Plan administrator had received the adoptive parents’ last-filed tax return, on which they had claimed the child as a dependent, and on this basis had concluded that the support requirement was met. however, the Mgu/Carrier urged an interpretation that required that all of the requirements of IrS Code Section 152 (and there are many) be satisfied. It is not discussed in the Court’s opinion, but one can infer that there were aspects of Section 152 which were not met on these facts. So the issue boiled down to whether the parenthetical phrase “(as described in Section 152 of the Internal revenue Code)” imported more than the support requirement into the Plan. The Court agreed with the Plan Administrator, and rejected Companion’s reading of the phrase. In my opinion, neither of these issues was particularly difficult, and they came out the right way. The Court could have limited its discussion to the interpretational issues at hand. But this opinion cuts a much broader swath than simple judicial interpretation of plan language. Indeed, it echoes and re-asserts certain positions espoused in a handful of cases since the Iowa District Court’s decision ten years ago in Computer Aided Design Sys. Inc. v. SAFECO Life Ins. Co., 235 F.Supp.2d 1052, 1062 (S.D.Iowa 2002), aff ’d by 358 F.3d. 1011 (8th Cir. 2004), including Zurich North America v. Matrix Service, Inc., Nos. 04-5101 and 05-5027, 10th Cir., October 18, 2005); and, most recently, Diversatek, Inc. v. QBE Ins. Corp. and SLG Benefits and Ins., LLC, No. 07C-1036, in the united States District Court for the eastern District of Wisconsin, November 30, 2010, appeal docketed April 23, 2012, No: 12-1974, in the united States Court of Appeals for the Seventh Circuit.

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July 2012

Specifically, it concluded that the

The Court’s oft-repeated rationale

is a widely held belief in the industry –

discretion given the Plan Administrator

for this conclusion was based on the

used to justify practices like “mirroring”

in the Plan (quoted above at the

stop loss policy’s express incorporation

the Plan Document – and in my view

outset) meant that the stop loss

of the Plan Document in the “entire

a correct one, so long as there is clear

carrier had no right to second guess

contract section” of the policy.

language in the stop loss contract

an eligibility decision made by the Plan

unsurprisingly, such incorporation is

establishing the carrier’s right to do so.

Administrator, and was bound by it,

nearly (if not completely) universal in

Importantly, the Court’s discussion of

absent proof that the decision was an

the stop loss contracts I have seen in

the issue suggests that the only such

abuse of discretion – i.e., “arbitrary and

more than ten years of practice in the

language in the Companion contract

capricious.” In other words, that the

stop loss area.

was the following:

stop loss carrier must overcome the

Companion responded to the

Companion “[w]ill pay, subject

same burdens a plan beneficiary must

group’s arguments in this regard

to the terms, conditions and

overcome when challenging a Plan

by emphasizing that the “operative

limitations of the Contract,

Administrator’s decision on a benefits

document” here was the stop loss

the following benefits . . . to

question. This is the same standard

policy, and not the Plan Document,

the Contractholder within a

used in ERISA denial of benefits cases,

because a carrier has a right to make

reasonable time upon receipt of a

although the Court was careful to

an independent evaluation of the

fully executed Proof of loss.”

point out that it was looking to erISA

correctness of a Plan Administrator’s

by analogy, as this was a simple contract

decisions for purposes of adjudicating

dispute between stop loss carrier and

the stop loss claim, as opposed to

“the form authorized by the

its insured under state law, not involving

making any determination about the

Company to be used for the

erISA.

participant’s claim under the Plan. This

submission of claims as well as

July 2012

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The Stop Loss policy defined “proof of loss” as:

the supporting documentation reasonably necessary for the company’s independent evaluation of the legitimacy and extent of the claim.” (emphasis added) If there was other language in the Companion contract helpful to Companion’s position on this issue, the Court did not discuss it. (I have seen several variations of carriers’ attempts at protecting themselves from handing over their checkbook to a plan administrator in their policy language. Some are more effective than others). The Court acknowledged that the reference to “independent evaluation” of the claim in the policy definition could be construed as being at war with the (incorporated) language from the Plan giving the Plan Administrator discretion to make “eligibility determinations” that were “final and

binding on all interested parties.” however (and this part is a stretch in my view), the Court concluded that the “evaluation” Companion had the right to make under the terms of the stop loss contract was subservient to the “determination” the Plan Administrator had discretion to make under the Plan, the word “determine” connoting “more authority and finality of a decision.” Semantics, it appears, matter. Companion also argued that the Plan Administrator’s decision was not “final and binding” on it, because it was not an “interested party” under the Plan. (See last sentence of first quote above at the outset). The Court quickly disposed of this argument, noting: “Again, the Stop-Loss Policy incorporates the Employee Benefit Plan, which includes all of its provisions. By so doing, the stop-loss carrier, Companion, became an “interested party” as used in the Benefit Plan. The phrase is not limited to beneficiaries or participants and states that “[t]he decision of the plan administrator will be final and binding on all interested parties.” (Court’s emphasis) A final irony: it turns out that the parent of the dependent child at issue was apparently not even a participant in the Plan because he worked for another company. The whole case could have been decided on this point alone, but wasn’t. Why? Because early on in the discovery process Companion answered a request for Admission from the group asking it to admit that the parent was an eligible participant in the group’s plan. At that time, Companion had no reason to doubt that proposition, and made the admission. later that same year, the group produced the parent’s tax return to Companion in document discovery. It revealed

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July 2012

that the parent was employed by a corporate entity separate from the plaintiff group. Companion seized on this fact in its briefing in connection with the crossmotions for summary judgment, but the Court refused to consider the argument because Companion had never filed a separate motion to withdraw its admission. The Court ruled that that was the only procedurally correct way a party could retract an answer to a request for Admission under the Federal rules of Civil Procedure. As I used to tell my first year Civil Procedure students: “procedure sometimes becomes more important than substance.” As I mentioned, I do not think the case was wrongly decided, only wrongly reasoned. There are many ways in which the other cases relied on by this Court can be clearly and convincingly distinguished from the situation here. Indeed, many of those cases (or the Courts of Appeals’ decisions considering them) provide a roadmap for escape from the Plan-Stop loss Contract tug-of-war witnessed in this case with the appropriate use of policy language. And here is food for thought: what if stop loss policies merely referenced the Plan Document, and did not actually make it a part of the stop loss contract by incorporating it by reference? Feasible? It might eliminate lots of problems, though it could cause others. n

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11th Annual

Conference

October 29-30, 2012

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July 2012

dOmicilE DIreCT >> Washington, dc

several caveats to forming a captive, emphasizing the required capital, operating costs and specific fact pattern required to achieve insurance company tax treatment.

Mike O’Malley, Managing Partner of Strategic risk Solutions, Inc., presented “Knowing your risk… and your risk Solutions.” The session focused on the basics of captive insurance companies, including the reasons for forming one, and three common insurance risks where captives could be the best solution. Mr. O’Malley gave a basic overview of risk management framework, a history of captives, types of captives available, the uses of captives, and the decision making process for forming a captive. he then discussed several case studies, including direct access to reinsurance, managing program costs, and profit center captives. he concluded with

In the session “Taking the Anxiety Out of risks” J. Sterling Shuttleworth, CeO of venture Captive Management, llC and a panel from National Assisted living risk retention group (NAlrrg), including John leandro, guy Pierce, and John Weeks, discussed the success they have had by forming a captive. NAlrrg was formed by members of the North Carolina Association long Term Care Facilities (NCAlTCF) in 2003, is domiciled in Washington, DC and currently operates in 10 states, providing general and Professional liability Insurance. NAlrrg has a proven track record of financial stability, with total assets of $7.2 million and a Demotech, Inc. Financial Stability rating of A- exceptional.

he Captive Insurance Council of the District of Columbia held an educational seminar, Turning uncertain into Predictable, on April 24th in Charlotte, North Carolina.

The NAlrrg established an Audit/ Finance Committee, risk Management/ loss Prevention Committee, Claims Committee and an underwriting Committee to ensure control. Members of the NCAlTCF and other partners provided funds for the initial capital. In 2003 NAlrrg was incorporated in South Carolina, licensed by the South Carolina Department of Insurance, and registered by the North Carolina Department of Insurance. The first NAlrrg policies were issued to NCAlTCF members in North Carolina in October 2003.

J. Sterling Shuttleworth

July 2012

Members of the NCAlTCF were becoming disillusioned with the yoyo effect of the insurance market cycle. There was a continued loss of traditional insurers that offered coverage to Assisted living Facilities, and the Assisted living Facilities were being lumped in with skilled nursing facilities. Facing the scenario that members could be without coverage, members of the NCAlTCF contracted venture Captive Management to undertake a feasibility study regarding coverage options. It was recommended that a risk retention group was the best fit, due to the allowance for certain exemptions (State Insurance laws, Blue Sky laws) and the vision for creating a national program. The rrg could provide coverage at a reasonable cost, offered a potential long term business opportunity, gave better control of premiums, rates, claims, risk management and underwriting profits.

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In February 2005 NAlrrg redomiciled to Washington, DC because of their friendlier business atmosphere. NAlrrg expanded the insurance program to other states, now operating in 10 states. Total premiums generated from inception to date are $13.8 million, and their claims ratio from inception to date is 21%. NAlrrg has been so successful due to good claims experience, low limits of liability philosophy, risk management and claims management. Since its inception, they have never had reason to increase premiums; in some occasions they have reduced premiums. The rrg is personal in the sense you have to buy-in to participate. Participants have a vested interest, and participate in all aspects of managing the rrg.

Dana Sheppard

The next session, “What Does Washington, DC have to Do With All of This?” presented by Dana Sheppard, Associate Commissioner, Department of Insurance, Securities and Banking, and Arthur Perschetz, Counsel, Faegre, Baker & Daniels, focused on what makes Washington, DC a unique domicile, how to get started with the licensing process, and how to have a successful captive in DC. Mr. Sheppard summarized the history of the domicile, the breakdown of captives in Washington, DC by type and industry. he discussed the steady captive growth in DC, emphasizing the stability of the domicile, and provided a list of well known captive owners that are domiciled in DC, such as AArP, Amtrak, Subaru, general Motors, goldman Sachs, and the New york/ New Jersey Port Authority.

Arthur Perschetz Mr. Perschetz concluded the session by discussing captive laws in Washington, DC, specifically cell law, incorporated cell captives and best practices. The seminar concluded with a panel discussion and question and answer session with Bill Bartlett, President of Bartlett Actuarial, and Melissa hancock, regional Manager of Strategic risk Solutions. For more information on the Captive Insurance Council of the District of Columbia (CIC-DC), including information on their next educational Session and Annual Conference, visit www.dccaptives.org. n

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July 2012

SIEF

hosts Congressional Briefing detailing Self-Insurance

SIEF is a 501 c 3 organization affiliated with the Self-Insurance Institute of America, Inc. (SIIA). The June 13th congressional briefing was part of a series of briefings that the foundation will provide to Congress consistent with its mission to raise awareness and understanding of self-insurance/alternative risk transfer. The next congressional briefing, “An Intro to Captives” will be September 12th, presented by Andrew Cavenaugh.

July 2012

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s national healthcare reform continues to be a hot topic throughout the country, key Congressional staffers received a timely lesson on self-insured group health plans on June 13th from the Self-Insurance educational Foundation, Inc. (SIeF) during a luncheon briefing event held in the united States Capitol. uSI Insurance Services is one of the largest employee benefits brokerage/ consulting firms in the United States, with an extensive focus on alternative financing solutions for their clients. Because of uSI’s commitment and expertise in self-funding consulting, SIeF reached out to uSI and robert Melillo, their National vice President- risk Financing Solutions to present to nearly 50 Senate staffers who specialize in healthcare policy.

that self-funding is the ideal not-forprofit program. The conversation also went on to address some of the common misunderstanding of self-funding; who should verses who shouldn’t, how are people doing it wrong, and a focus on the importance of the financing philosophy they choose to adopt, not size of group. It was helpful to share with staffers the great deal of rigger, well thought out defined process to mitigate risk for these groups. With self-funding they can capture their claims data to help manage the spending.” n

such as a lack of regulation and that only large employers can successfully self-insure. The presentation concluded with an extended question & answer period. “This was a good opportunity for us to share some of the strategies with those who make policy. The interaction and questions posed by the group were very pointed and well thought out, which indicated to me that they were interested in other mediums than the exchange and Mlrs” said Melillo. “The topic of not-for-profit came up, and the discussion lead in the direction

The presentation consisted of a detailed overview of the workings of self-insured group health plans. Specifically, attendees learned the differences between self-insured and fully-insured plans, including the many reasons why employer-sponsors choose to self-insure their employee benefit plan. The briefing also lent time to discuss and counter common myths about self-insured group health plans,

Dick Goff, SIIA Director of Government Relations, Jay Fahrer and Rob Melillo

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July 2012

Art gAllery by Dick Goff

Leveling the field for smaller employers

here’s a whole wing of the ArT gallery devoted to models of alternative risk transfer programs to support employee benefit plans. In recent years that mission has increasingly drawn the interest of those who toil in alternative funding – you could say it’s the holy grail of captives. Now a new program has come over the horizon from the Pennsylvania town of Conshohocken where Andrew Cavenagh is managing director of Pareto Captive Services. While many ArT programs begin as a result of the captive manager’s goal to form an ArT structure, this one begins with a very tight focus on a potential customer’s need. “We’re totally focused on the employer of 50 to 500 people who has had what we call the ‘Dammit!’ moment,” Andrew explains. “That occurs when the employer says, ‘Dammit, I’m not paying another ten percent premium increase without being able to see our experience data or have control of our coverage.” Pareto’s new program is designed for what Cavenagh estimates to be the 30 percent of employers of small-to-midsized companies that have experienced that “Dammit!” moment and are ready to roll up their sleeves in order to control their future.

July 2012

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With a structure that includes both conventional stop-loss insurance and a captive for excess losses, it appears to me that Pareto has created an opportunity for medium- sized employers to take part in the inherent advantages ART provides. It puts them in the same game that larger companies have always been able to play. • Cavenagh says his company’s new approach is based on four core beliefs that he cites as: • The conventional health insurance market for employee groups of 50 to 500 is broken and won’t be fixed. • Self-insurance provides an employer greater control of coverage and an understanding of claims data that is not available in the traditional commercial health insurance market. • It is possible to drive down claims and to drive down costs through interventions such as wellness programs that are based on claims experience data. • Most employers believe the first three points but still fear the volatility that self-insurance implies. Catastrophic claims surpassing ordinary stop-loss limits can be borne by the employer of thousands of employees, but can devastate smaller employers. “Our goal was to provide a mechanism to reduce that volatility and make a selfinsured ERISA plan attractive and appropriate to medium-sized employers,” Andrew told me. “A captive insurance company that is wholly-owned by employer members serves as a shock-absorber for the system.” “By sharing risks in a larger group, employers get the benefits of insurance for claims that would typically be lasered. They are willing to contribute to the pool to cover another employer’s catastrophic claim because they may have a similar claim

by one of their employees during the next several years,” he said. I noted that Pareto’s group captive is a different structure from the popular segregated cell captives where each member’s risk is managed in its own “silo.” “Cell captives have an advantage of being relatively easy and inexpensive to join,” he acknowledged, “but they don’t provide employer-owners ultimate control over their captive. Our approach provides the employers with a captive that they truly own and control at a fraction of the typical start-up costs.” Pareto has formed and funded a captive, Contrarian re, which is currently gaining members in a triangular structure that includes conventional stop-loss coverage issued by an admitted carrier. In this program the stop-loss company buys coverage from the captive for a layer of excess losses. As owners of the captive,

employer members stand to gain from successful experience in the form of reduced future premiums.

universities, rural hospitals, nursing homes or members of other industries that share a common risk profile.

“We believe that a group captive needs an independent program manager,” Cavenagh says, “in order to avoid the inherent conflict of interest that is created when the captive is effectively managed by either the stop-loss company or a retail broker or consultant. how can a broker make a decision in the best interests of the group captive if it’s to the detriment of one of its clients? Or how can a stoploss carrier fairly negotiate both sides of a reinsurance agreement? With our structure we’re able to focus just on the group captive itself.”

Pareto has structured a two-step distribution system where it first aligns itself with selected benefits brokers in each geographic area and then seeks qualified employers for the program.

While the current program seeks employers of diverse industries defined by their size of 50 to 500 employees, Cavenagh envisions forming homogeneous future programs for groups of independent colleges and

Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm and Bermuda broker at dick@taftcos.com. Andrew Cavenagh may be reached at cavenagh@ paretocaptive.com.

To my view, this program is coming along at the right time, when employers are increasingly nervous about the effects of national healthcare reform and when many conventional brokers are loading up their books of business to help withstand the changes to come. It could be called a case of ArT to the rescue. n

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July 2012

PPACA, HIPAA and Federal Health Benefit Mandates:

Practical

The Patent Protection and Affordable Care Act (PPACA), the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and other federal health benefit mandates (e.g., the Mental Health Parity Act, the Newborns and Mothers Health Protection Act, and the Women’s Health and Cancer Rights Act) dramatically impact the administration of self-insured health plans. This monthly column provides practical answers to administration questions and current guidance on PPACA, HIPAA and other federal benefit mandates.

Q&A

IRS Notice 2012-40 Provides Clarification with Regard to Health Care reform’s $2500 cap for Health FsA Salary Reductions

ection 9005 of the Patient Protection and Affordable Care Act (“PPACA”) amends Internal revenue Code (“Code”) Section 125 to cap health FSA salary reduction elections for taxable years beginning on or after January 1, 2013 at $2500. As discussed in our article in the March Flex reporter, implementation of the $2500 cap caused a great deal of confusion for non-calendar year plans. Recent IRS guidance in the form of IRS Notice 2012-40 clarifies several issues with regard to how the $2500 cap should apply. Specifically, Notice 2012-40 provides that – • the $2,500 limit does not apply for plan years that begin before 2013. Thus, a non-calendar year cafeteria plan that includes an FSA would not need to implement the cap for a fiscal year that commences prior to January 1, 2013; • the term “taxable year” in § 125(i) refers to the plan year of the cafeteria plan as this is the period for which salary reduction elections are made; • plans may adopt the required amendments to reflect the $2,500 limit at any time through the end of calendar year 2014. however, the plan must operate as if the $2500 cap is in effect for the 2013 plan year;

July 2012

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• in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year; • the cap applies to salary reduction contributions and employer contributions that can be cashed out or used to purchase taxable benefits. Thus, non-elective employer contributions (e.g. matching contributions) that cannot be cashed out do not count against the cap; • the cap applies on a per employee/participant basis to all plans within the same controlled group (for benefit tax purposes)

of the employer. Thus, for example, a husband and wife who work for the same employer could each make a $2500 election, and an employee with two jobs with unrelated employers could elect the full $2500 under the plans of each unrelated employer, but the employee could not make a salary reduction election in excess of $2500 under the plan(s) of all related employers; and • in the event of a short plan year on or after January 1, 2013, the $2500 limit would be prorated based on the number of months in the short plan year. In addition, short plan years adopted prior to January 1, 2013 would not be respected where a principal purpose of the short plan year is to delay the effective date of the cap. While the Notice provides clarification and welcome relief in many

respects, it does not specifically address how plan sponsors that have adopted the $2500 cap early (i.e., before the guidance was issued) should treat their plans now that it is clear that the cap applies on a plan year basis. Thus, for example, an employer with a fiscal year that commenced between January 2, 2012 and the publication of the Notice that adopted the $2500 cap early (i.e., out of an abundance of caution) may want to increase its cap now and allow existing participants to make a higher election. While such an employer could, most certainly, adopt a higher cap for the remainder of its 2012 fiscal year (e.g., for new employees), no event has occurred that would enable participants to change their existing elections. Thus, in the absence of further transition relief from the IrS, employers should not re-open existing elections where they adopted the $2500 cap early in fiscal year 2012. n

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July 2012

self-funded businesses and/or entities outside of the u.S that is shaping the way we do business today and in the future” she said.

20 1 2

Self-inSurance inStitute of america, inc.

INteRNAtIoNAl CoNfeReNCe June 5-7, 2012 Biltmore Hotel Coral Gables, Florida n

IIA held its annual International Conference June 5-7, 2012 in Coral Gables, FL. The program for the International Conference is specifically designed to help companies with international risk management needs understand the self-insurance solutions available to them. This year’s conference focused on opportunities available in latin America. “Coming to the SIIA International Conference is an excellent way to meet people who are in similar industries in different countries around the world, particularly here with latin America, and where you can gain a real insight as to the thinking and the new concepts and new ideas that are being fostered in different countries.” said Joe Antonell, President Medical Bill review, health Systems International. he continued, saying that by attending the International Conference “we can learn about new ways to connect and do business in these countries. “ The International Conference provides “ a better understanding of what our International members do and why they value SIIA, “ said SIIA President John Jones. “As SIIA President, one of my top initiatives is to broaden our International exposure and membership, so I wanted to attend and get a feel for that sector and who is involved. I also wanted to attend to rub elbows and engage some of the SIIA members that I do not generally see at the domestic conferences, and that was very beneficial for me. The group was quite interesting and focused.” lisa greenblott, President and Chief executive Officer of DCC, Inc. also expressed the benefits of attending the International Conference. “I have always wanted to attend the SIIA International conference and I am so glad I did. It is a great networking opportunity venue like the other SIIA conferences, however, this particular conference also allows you to learn about and connect with

July 2012

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Besides the networking opportunities, SIIA’s International Conference had a program of sessions lead by industry experts. Paul Obolensky, vice President, latin America region of Chartis Insurance presented “Opening the Door to latin America – An Overview of Self-Insurance Opportunities.” he explained that due to the expansion of private sector economies, an increasing number of companies in latin America have been turning to self-insurance/alternative risk transfer programs to better manage their cost of corporate risk. In “The Privatization of Health Care Throughout latin America,” Martin Crannis, Managing Director of Maiden life, and robert DiCianni, Senior vice President, International, of Pan American life Insurance group, reviewed recent activity within latin America that has lead to increasing privatization of health care insurance as governments struggle to finance universal coverage, while building sufficient infrastructure to care for their newly covered populations. The session focused specifically on Columbia and Costa rica, although emphasizing that with Costa Rica, there is more of a de-monopolization than privatization. Costa Rica, and Central America in general, has also seen more use of captive activity. Stu Anolik, Managing Director of CBIZ MhM, llC presented the session “Private Investment in Provider Facilities,” discussing private investment interests in health care facilities, due to the rising demand of medical services from the “baby boomer” generation. he said there

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July 2012

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is a prominent expanding footprint in other countries, as well as an increase in domestic tourism (such as somebody from Iowa traveling to Johns hopkins for treatment). There are several issues for investors, such as liability, quality control, internal liability, federal laws, and post-op care, since some physicians are reluctant to take over care, and the insurance coverages for the post-op care. he emphasized the need for proper counsel, stressing that due diligence and using local professionals is paramount and key for success. “enterprise risk Management (erM) in Corporate health, Disability and Workers Compensation Programs,” presented by Ana Claudia Pinto, MD, the Medical Manager for Mercer Marsh Benefits – Brazil, discussed the application of the erM methodology approach to health Management, allowing companies to identify risks and health related costs to achieve a better rOI, and consequently increase their market competitiveness and employee productivity. The main pillars of erM include identifying exposure through risk assessment, finding financial opportunities through diagnosis, and forming an action plan through integrated solutions. She gave several case studies, emphasizing medical management and wellness, explaining that wellness and prevention programs are becoming more common in Brazil. “Self-Insured group health Plans in Mexico and Its Best Practices” was a panel discussion on the successful implementation of a self-insured program, Cooperativa La Cruz Azul, S.C.L., in Mexico. Dealing with issues such as higher premiums, poor service, lack of flexibility in coverage, lack of detailed claims information, desire to implement preventative

Ana Claudia Pinto, MD

John Rooney, Jr., P.A. programs, and lack of sensitivity in special cases, lead to the decision to create a self-insured program. Since the implementation of the program, they have seen consistency in medical spending, significant savings, and better employee motivation due to wider benefits. Other sessions included eduardo lara di lauro, Principal, Managing Director of Milliman, Inc., Pierre Saddik, President of Saddick International Consulting, and Alan Watts, vice President, health reinsurance of rgA International Corporation presenting “Mexican health Insurance Marketplace in 2012,”“Concerns With The Regulatory Environment in Brazil and the Impact on the Upcoming 2014 World Cup and 2016 Olympics,” by John h. rooney, Jr., of The law Office of John h. rooney, Jr., P.A., and “Perspectives on Medical Travel to latin America,” a discussion

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July 2012

on the Medical Tourism trend, specifically in Costa rica, presented by robert hall, DDS, Director of Dentavac. The conference concluded with a case study style presentation from luis Alexandre Chicani, President of Bencorp, on the formation of a TPA in Brazil, and how it has positioned itself to serve the country’s growing self-funded marketplace in “TPA the Brazilian Way – A Look Inside One of the World’s Fastest growing SelfFunded Marketplaces.” n

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July 2012

SIIA ChAIrMAN SPeAKS Alex Giordano

SIIA ‘Raises the Game’ at National Conference

uring a recent visit with a colleague I mentioned that he might want to register for SIIA’s National Conference this October in Indianapolis. “I don’t know,” he said. “I’m not really into those big mill-around meetings.”

“I understand,” I said. “Why would you want to spend time with all the key people in our industry? It’s much easier to travel to visit them in their offices around the country.” “Now you’re being sarcastic,” he accused me. I pressed my advantage: “Maybe you’re just not concerned about how health care reform and other current issues will affect self-insurance. you probably have a whole different career planned out for your future.” My friend admitted that he is concerned about government actions

affecting self-insurance. I told him that SIIA’s health care track of seminars at the conference would include expert views of health reform in separate sessions targeted specifically to employers, stop-loss insurers, and managing general underwriters and third-party administrators. “SIIA says it is ‘raising the game’ and that’s the theme of this year’s conference,” I told him. When I left his office he was leafing through the conference brochure. he looked up to wave good-bye and said, “I see you’re going to have an Oktoberfest party.” I’m pretty sure I’ll see him there.

authored by SIIA Chief Operating Officer Mike Ferguson. It may be accessed at http://self-insuranceworld. blogspot.com. Mike pulls together separate elements of federal and state government actions for a perspective of “big-picture” themes. One issue he reported recently is the government’s attention to stop-loss insurance for self-insured employee benefit plans. “The feds are taking a closer look at how the availability of stop-loss insurance facilitates the growth of the self-insurance marketplace, and what that means for health care reform implementation,” he wrote. he said federal focus was confirmed when the “tri-agencies” of health and human Services, labor and the IrS jointly issued a formal request for information about stop-loss insurance. While acknowledging that specific questions are largely objective, Mike read the tea-leaves indicating concerns by the government that employers may work around health care reforms by self-insuring and obtaining stop-loss insurance. he wrote that powerful interest groups and influential policy makers among others are now pushing regulators to question stop-loss insurance for reasons that are largely fictional, but nonetheless can resonate politically.

Of course, lots of government action will occur between now and October. SIIA conference program leaders will continue to evolve their presentations to stay current and provide the latest news and industry responses.

SIIA is also involved in government action along a separate judicial “front” comprised of court cases where the interests of self-insurance and alternative risk transfer must be defended. Three current cases include:

One source to help make sense of the crosscurrents of government attention being paid to self-insurance is the “Self-Insurance World” blog

SIIA v. Michigan Gov. Rick snyder: SIIA’s federal court lawsuit

July 2012

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challenges Michigan’s health Care Claims Assessment Act that created a one percent medical claims assessment imposed on “carriers” defined to include employers who sponsor group health plans and their third party administrators. SIIA’s position – supported by 11 previous court findings – is that such a law is a violation of erISA and must be set aside. GPA Holdings, Inc. v. Baylor Health care systems: SIIA filed an initial amicus brief and is filing a second, more extensive brief on this case in the Texas Supreme Court. SIIA supports gPA’s request that the court reverse an adverse judgment that TPAs can be held financially liable for health care services incurred by self-insured group health plans. SIIA’s position is that TPAs would be deemed as plan fiduciaries, a clear violation of ERISA. US Airways v. McCutcheon: SIIA is partnering with the National Association of Subrogation Professionals (NASP) to file an amicus brief asking the u.S. Supreme Court to review a problematic federal appellate court ruling. At issue is whether a court can substitute its judgment for the otherwise lawful terms of self-insured health plan documents. If the appellate ruling stands, the McCutcheon decision undermines erISA preemption as well as decades of established case law leaving plans no longer reasonably certain that their documents will be enforced as written. We are now living in the most challenging days of our industry, with the prospects of contentious government action at many levels. But SIIA members can be confident that their organization vigorously monitors events and intercedes on their behalf when their interests are threatened. n

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July 2012

SIIA would like to recognize our leadership and welcome new members Full SIIA Committee listings can be found at www.siia.org

2012 Board of Directors chAirmAn of The BoArD* Alex giordano, vice President of Marketing elite underwriting Services Indianapolis, IN PresiDenT* John T. Jones, Partner Moulton Bellingham PC Billings, MT vice PresiDenT oPerATions* les Boughner, executive vP & Managing Director Willis North American Captive + Consulting Practice Burlington, vT vice PresiDenT finAnce/chief finAnciAl officer/ corPorATe secreTAry* James e. Burkholder, President/CeO health Portal Solutions San Antonio, TX

committee chairs chAirmAn, AlTernATive risk TrAnsfer Andrew Cavenagh, President Pareto Captive Services, llC Conshohocken, PA chAirmAn, GovernmenT relATions Horace Garfield, vice President Transamerica Employee Benefits louisville, Ky

34 2012 July 2012 | The self-insurer 34 July | The self-insurer

regular members company name/Voting representative

Dorothy Cociu, President, Advanced Benefit Consulting & Ins. Svcs., Inc. , Fullerton, CA

chAirwomAn, heAlTh cAre Elizabeth Midtlien, Senior vice President, Sales Starline uSA, llC Minneapolis, MN

Michael Alberico, Senior vice President, Practice leader, Assurance Alternative risk, Schaumburg, Il

chAirmAn, inTernATionAl greg Arms, Global Head, Employee Benefits Practice Marsh, Inc. New york, Ny

David goldfarb, President, DSG Benefits Group, LLC, Dallas, TX

chAirmAn, workers’ comPensATion Skip Shewmaker, vice President Safety National St. louis, MO

William Davis, Chairman & CeO, echo health Inc., Westlake, Oh Steven Pekala, Senior vice President, JlT re - North America, Chicago, Il

Directors ernie A. Clevenger, President Carehere, llC Brentwood, TN ronald K. Dewsnup, President & general Manager Allegiance Benefit Plan Management, Inc.Missoula, MT Donald K. Drelich, Chairman & CeO D.W. van Dyke & Co. Wilton, CT

John Foley, SvP, Domestic Markets, Pan-American life Insurance, New Orleans, lA Mark hendryx, President, resolutia, Inc., Chicago, Il Jim Sheffield, WellPoint, Inc., Indianapolis, IN

Steven J. link, executive vice President Midwest employers Casualty Company Chesterfield, MO Elizabeth D. Mariner, executive vice President re-Solutions, llC Wellington, Fl

SIIA New Members

contributing members Antonio Briceno, vP, International Medical Affairs, global health Center, Cleveland Clinic, Weston, Fl larry vance, Fox-everett, Inc., ridgeland, MS

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July 2012

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