Self-Insurer Mar 2012 by SIPC

March 2012

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Saving Money on Workersâ&#x20AC;&#x2122;

Compensation Claims

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MARCH 2012 | Volume 41

March 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

ArtIclES 10

Editorial Staff PuBlIShINg DIreCTOr James A. Kinder MANAgINg eDITOr erica Massey

SeNIOr eDITOr gretchen grote

20 Saving Money on Workers’ compensation claims by Reginald Davis, MD, Michael Kaplan, MD, PhD, Greg Hobelmann, MD, Richard Goff,Wallace Judd, PhD, and Dusan Bratic, JD

DeSIgN/grAPhICS Indexx Printing

CONTrIBuTINg eDITOr Mike Ferguson

From the Bench: Michigan Court of Appeals Affirms Summary Disposition in Favor of Stop loss Carrier and Mgu in Disclosure Case ArT gallery: ‘Trickle down’ of lPT can benefit captives What’s essential About “essential health Benefits” – HHS Bulletin Creates Issues for All group health Plans Investment Considerations & Strategies for Captives in 2012

DIreCTOr OF OPerATIONS Justin Miller

InduStry lEAdErShIp

DIreCTOr OF ADverTISINg Shane Byars Editorial and Advertising Office P.O. 1237, Simpsonville, SC 29681 (864) 962-2201 2012 Self-Insurers’ Publishing Corp. Officers

domicile direct Captive Insurance & The DC Difference

28 SIIA Chairman Speaks

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

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March 2012

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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

CHAIRWoMAn, HeAlTH CARe elizabeth Midtlien, Senior vice President, Sales Starline uSA, llC Minneapolis, MN CHAIRMAn, InTeRnATIonAl greg Arms, Global Head, Employee Benefits Practice Marsh, Inc. New York, NY CHAIRMAn, WoRKeRS’ CoMPenSATIon Skip Shewmaker, vice President Safety National St. louis, MO

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 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 regular Members company name/Voting representative eunhee Kim, President/CeO, eK health Services, Inc., San Jose, CA Deborah Pfeifle, CeO, gould & lamb, Bradenton, Fl Ken See, horizon Blue Cross Blue Shield of New Jersey, Newark, NJ John Youngs, CeO/President, Prodigy health Insurance, Newport Beach, CA

Employer Member company name/Voting representative Thomas Barcelona, CeO, Barcelona Creative group, Palos heights, Il reaburn King, vice President, McCoig, Plymouth, MI Diane harrington, hr Director, Otto environmental Systems North America, Inc., Charlotte, NC Jason Bietz, Business Manager, Yankton School District 63-3, Yankton, SD

contributing Member company name/Voting representative Justin Tysdal, Executive Officer, Seven Corners, Inc., Carmel, IN

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March 2012

Saving Moneyon

Workers’ Compensation Claims by Reginald Davis, MD, Michael Kaplan, MD, PhD, Greg Hobelmann, MD, Richard Goff,

Wallace Judd, PhD, and Dusan Bratic, JD

March 2012

The Self-Insurer

very self-insured company is plagued by increased workers compensation costs. Ideally, a company wants to reduce medical costs, reduce reserves, close a case and return the claimant to work. Now there are methods to do all these things using Internet tests, which produce documented improved outcomes. When a self-insured company has a claimant who doesn’t have obvious injuries, or a protracted time out of work, the company is faced with difficult decisions. The concerns are: 1. how much pain does the claimant really have? 2. Is the claimant telling the truth about the pain and injury? 3. If you can establish that the claimant is telling the truth, why is the claimant not getting well? 4. What can the company do to return the claimant to work? 5. Should the company settle the case or undergo the expense of pursuing the case? let’s address each of these concerns.

how much pain does the claimant have? Pain is a totally subjective experience. There are no good objective tests which can quantify pain. So, asking “how much pain do you have?” is the wrong question to ask, due to the various problems with the methods of quantification.

Is the claimant telling the truth about the pain and injury? very often, companies think the long term claimant is a malingerer. They point to the absence of objective medical evidence, and try to prove the claimant is faking. The psychological test most often used to “prove” this is the Minnesota Multiphasic Personality Inventory (MMPI). however, a group of researchers from Johns hopkins hospital found that no scale of the MMPI reliably predicts the presence or absence of organic pathology. Insurance companies recently have been using the “fake-bad” scale of the MMPI, which finds that 80% of claimants are malingerers. however, the test had not been permitted as evidence in several court cases. Moreover, in a 25 year prospective study on 50,000 patients, researchers from Mayo Clinic found that there were no MMPI differences in patients who did or did not get well after surgery, proving that there were no correlations between MMPI scores and surgical results. however, there have been seven articles published about a test available over the Internet, called the Pain validity Test, which can predict which claimant will have real organic pathology. This test has been evaluated on 794 patients by researchers at Johns hopkins hospital. In the most recent publication, the Pain Validity Test could predict with 95% accuracy, which claimant would have moderate or severe finding on at least one objective measure of organic pathology (eMg/Nerve conduction velocity studies, MrI, CT, bone scan, gallium scan, facet blocks, root blocks, nerve blocks, provocative discograms, sensory nerve current perception threshold studies, etc.). This test could also predict, with 85% accuracy, which claimant would not have pathology, or only mild abnormalities. The Pain validity Test has been used as part of medical testimony in numerous depositions and trials. Unlike the “fake-bad” scale of the MMPI, the Pain validity Test has never been challenged nor disallowed in these cases.

If you can establish that the client is telling the truth, why is the client not getting well? Once the company has established that is claimant is telling the truth, why does the claimant have normal X-rays, MrI, CT, and eMg/nerve conduction velocity studies? The answer is simple. The client has had the wrong tests. As the result of the wrong tests, the client has the wrong diagnosis. Why are X-rays, MrI, CT, and eMg/ nerve conduction velocity studies the wrong tests? Because these tests are anatomical tests. They merely take a picture. however pain is a physiological condition, i.e. if a sensory nerve is irritated, by movement or chemical reactions (not visible on anatomical tests), not just compression by bone (visible on anatomical tests), it produces pain. As an analogy, if there is an oven on the wall, and you take a picture of the oven, and look at the picture, can you tell if the oven it hot? Supposed you take a thermometer, and put it in the oven and it reads 375 degrees F? Can you tell if the oven is hot? That’s the difference between anatomical and physiological tests. Anatomical tests just take a picture, while physiological tests measure the response of a person to some stimulus. In many studies of the value of X-rays, an anatomical test that detects bony pathology, the correlation between pain and the findings on X-ray, indicate that X-rays are of little use in accessing objective pathology in the neck and lower back, because there are too many other structures, other that bone, which can cause pain, which just do not show up on X-ray. The MrI, another anatomical test, is also a poor predictor of organic pathology in the discs of the neck and the back. This is due to the structure of the vertebral disc. A vertebral disc is like

The Self-Insurer

March 2012

a jelly doughnut, with the doughnut portion, the annulus, surrounding the jelly portion, the nucleus pulposa. When a disc herniates, the nucleus pulposa (the jelly portion) protrudes through the annulus (the doughnut portion) and sticks out in the spinal canal or neural foramen, compressing the nerve root. This anatomical disruption will show up on MrI, CT, and/or myelogram. however, most physicians do not know that there are pain fibers in the rear one third of the annulus, or the doughnut portion, which, when anatomically compressed or chemically irritated, will produce pain that feels exactly like a herniated disc pushing on a nerve root. however, this “internal disc disruption,” i.e. the herniation of the nucleus pulposa into the posterior portion of the annulus, does not show up on the anatomical tests such as MrI, CT or myelogram, because there is no anatomical distortion the annulus, and no protrusion of the nucleus pulposa (jelly) beyond the annulus (doughnut). Additionally, a disc can be herniated, without producing any pain. In one study of 93 patients with no back pain whatsoever, 27 of them (30%) were found to have a herniated

March 2012

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disc. Therefore, the MRI has a 30% false positive rate. On the other hand, Sandu at Cornell reported that in 53 patients with severe back pain had normal MrIs of their back, but when they received a test which stimulated the pain fibers in the disc level that corresponded with the level where they experienced pain, this test found that 41 of the 53 (78%) reported this test. Therefore, the MrI has a false negative rate of 78%. Brathwaite found comparable results. In summary, the MRI has a 30% false positive rate, and a 78% false negative rate, so that the accuracy of the MrI for detecting damaged discs is less than chance, i.e. less accuracy than flipping a coin. The CT is a widely used test for determining bony lesions, and solid lesions in the lung, liver, brain, kidney and other parts of the body. however, in research from Johns hopkins university School of Medicine, Dr. Zinreich (the head of neuroradiology), Dr. long (the head of neurosurgery) and Dr. Davis, their orthopedic colleague, evaluated 100 patients with severe back pain, who had a normal CT of the back. When a 3D-CT reformatting was done, bony lesions were discovered in 56% of the patients.

eMg/nerve conduction velocity (eMg/NCv) studies are done to determine nerve damage in nerve roots, or after the nerve roots mix in either the brachial or lumbar plexus, the mixed peripheral nerves that emerge from the plexus, which are comprised of contribution from many nerve roots. This test is a physiological test, which mean you do something to the patient, (stimulate a nerve electrically) and measure his or her response (the speed with which the nerve message is transmitted, or the response in the muscle). however, in order to understand what eMg/ nerve conduction velocity (eMg/NCv) studies really measure, it is important to understand a nerve has both sensory and motor fibers. The most common error in medical testing is inappropriately using the eMg/NCv test, for a client who complains of pain, but not weakness. Pain is a sensory phenomena, and weakness is a motor function. The message of pain is carried by the pain fibers, which are sensory nerves traveling from the arms and legs to the brain. Only 5% to 10% of the nerves in a nerve bundle are sensory fibers, so if they are damaged it is very hard to measure their lost electrical input. The eMg/NCv test measures the speed of the nerve fibers, and the response of the muscle to motor nerve stimulation. Since motor fibers make up 90% to 95% of a nerve bundle, and they travel from the brain to the arms and legs, most of the electrical activity in a nerve is from motor fibers. Therefore, using a predominantly motor test (eMg/NCv) to measure sensory phenomena is inappropriate. It is like using a tire gauge to measure water temperature. however, there is a sensory test that measures just sensory nerve fibers. This is called a current perception threshold test.

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WWW.INETICO.COM TOLL FREE 877.601.2200 PHONE 813.258.2200 FAX 813.514.0607 ACCREDITED CASE MANAGEMENT DISEASE MANAGEMENT 400 N. ASHLEY DRIVE, SUITE 1550, TAMPA, FLORIDA 33602 HEALTH UTILIZATION The Self-Insurer | March 2012 7 © Self-Insurers’ Publishing Corp. All rights reserved. MANAGEMENT URAC

Should I settle the case or undergo the expense of pursuing the case?

experience of the researchers of over fifty years of diagnosing and

If the client has a Pain validity Test that shows he or she will have a moderate

treating patients with chronic pain. The

to severe abnormality on at least one objective measure of organic pathology,

Diagnostic Paradigm is available over

and still has normal X-rays, normal MrI, normal CT and normal eMg/NCv

the Internet, in english and Spanish.

studies, there is a very good chance that this client has had the wrong tests, and

The test takes 20 to 60 minutes

is misdiagnosed for that reason. In fact there is a 40%-67% chance that this client

to complete, and provides emailed

is misdiagnosed. In the case of RSD (CRPS) this misdiagnosis rate may reach 71%

results is less than five minutes.

, and if there is an electrical shock or lightning strike involved in the cause of the

The Diagnostic Paradigm correlates

injury, the misdiagnosis rate may reach over 90%.

with the Johns hopkins doctors’

how can you determine if a claimant is misdiagnosed? You could send the

diagnoses 95% of the time. How do

client to another doctor, but there is no guarantee the other doctor will make a

you know that the Johns hopkins

correct diagnosis either. In fact, there is a 40%-67% chance that you will still get an

doctors’ diagnoses are better than

incorrect diagnosis. however, if the Pain validity Test shows your client’s complaint

the diagnoses your own doctors have

of pain is valid, then research from medical centers in louisiana, Maine, Oklahoma,

given you? The most objective way

Finland, and Delaware report that there is a 87%-94% chance that a proper

of determining this is by evaluating

diagnosis and proper testing will provide objective evidence of organic pathology.

outcome studies.

How do you get a proper diagnosis? The answer – take a careful medical history and use the correct tests.

Most insurance companies report that if a claimant is out of

researchers at Johns hopkins university School of Medicine have published an article describing a Diagnostic Paradigm. This Diagnostic Paradigm is designed to provide accurate diagnoses of 104 of the most common post-traumatic injuries seen after workers compensation or automobile accidents, based on a combined

work for two years or more on a workers compensation claim, their return to work rate is less than one percent. using the techniques of the administration of the Pain validity Test, and the Diagnostic Paradigm in the same type of patients, i.e. out of work for two years or more, one nationally known pain clinic, staffed by Johns hopkins doctors, had a return to work rate of 19.5% for workers compensation patients, and 62.5% for auto accident patients. In addition, these patients had a 90% reduction in the use of medication, and a 45% reduction in doctor visits. This is a quantifiable cost savings, and dramatic improvement in patients, by using a combination of The Pain validity Test and the Diagnostic Paradigm. This scenario is really a winwin-win situation for all parties concerned. The company saves money, the claimant gets better care, and the doctor improves his or her diagnostic capabilities. n

March 2012

The Self-Insurer

Reginald Davis, MD, is Assistant

surgical failures Pain, (supplement 2)

Professor of Neurosurgery, Johns

S-258, 1984

Complaint of Chronic Back, Neck and

Hopkins University School of Medicine.

Spine # 28 (2) pp 129-33, ’03

Limb Pain Using the Mensana Clinic

Michael Kaplan, MD, PhD was Assistant

Pain Research and Clinical

Pain Validity Test, The Forensic Examiner,

A Multi-Center Study for Validating the

Professor of Anesthesiology Johns

Management, Vol. 13, p.119-122,

Vol. 14, No. 2, pp. 41-49, Summer 2005,

Hopkins University School of Medicine.

Elsevier, 2002

An Internet Questionnaire to Predict

Greg Hobelmann, MD, was Assistant Professor of Anesthesiology Johns Hopkins University School of Medicine. Richard Goff is managing partner of Taft Associates, and past president of the Self Insurance Institute of America. Wallace Judd, PhD is former VP of Kelly Services and CEO of www.AuthenticTesting.com. Dusan Bratic, JD is an attorney in private practice in Pennsylvania. Resources: www.WrongDiagnosis.com

Magnetic resonance imaging of the

lumbar spine in people without back pain., N Engl J Med. Jul 14;331(2):6973..1994 7

Association between findings of

provocative discography and vertebral endplate signal changes as seen on MRI., J Spinal Disord., Oct;13(5):438-43, 2000 8

Vertebral end-plate (Modic) changes on

lumbar spine MRI: correlation with pain reproduction at lumbar discography, Eur Spine J., 7(5):363-8, 1998 9

Three dimensional CT imaging on

www.InternetMedicalEvaluations.com

post-surgical “Failed Back” Syndrome, J.

www.MarylandClinicalDiagnostics.com

Comput Assist. Tomograph, 14:574-580,

www.DiagnoseMyPain.com

1990

www.WebMD.com

the Presence or Absence of Organic Pathology in Chronic Back, Neck, and Limb Pain Patients, Pan-Arab Journal of Neurosurgery, April 2008 15

Comparison of Clinic Diagnosis

versus a Computerized Test Diagnosis for Chronic Pain., Pan Arab Journal of Neurosurgery, Vol. 11, No. 2, pp. 8-17, Oct. 2007 16

Validating and Treating the Complaint

of Chronic Pain: The Mensana Clinic Approach, in Clinical Neurosurgery, Edited by P Black, Williams and Wilkens, Baltimore, Vol. 35, Chapter 20, pp. 385397, 1989

Electrodiagnostic functional sensory

evaluation of the patient with pain: A Footnotes:

review of the neuroselective current

A Comparison Between the MMPI

perception threshold (CPT) and pain

and the ‘Hendler Back Pain Test’ for

tolerance threshold (PTT), Pain Digest,

Validating the complaint of Chronic Back

8:219-230, 1998

Pain in Men, The Journal of Neurological

& Orthopaedic Medicine & Surgery, Vol.

in Chronic Pain Patients Involved in

6, Issue 4: 333-337, December, 1985,

Litigation, Psychosomatics, Vol. 34, #6, pp.

A Comparison Between the MMPI and

494-501, Nov.-Dec. 1993, Overlooked

the ‘Mensana Clinic Back Pain Test’ for

Physical Diagnoses in Chronic Pain

Validating the Complaint of Chronic

Patients Involved in Litigation, Part 2,

Back Pain in Women, Pain. No. 23:243-

Psychosomatics, Vol. 37, #6, pp. 509-

Overlooked Physical Diagnoses

251, 1985, A Comparison Between the

517, November-December. 1996

MMPI and the “Mensana Clinic Back

Pain Test” For Validating the Complaint of

Regional Pain Syndrome, Pan-Arab

Pain, Journal of Occupational Medicine,

Journal of Neurosurgery, pp 1-9, October,

Vol. 30, pp. 98-102, 1988

2002

Malingerer Test Roils Personal-Injury

Differential Diagnosis of Complex

Overlooked Diagnosis in Electric Shock

Law, Wall Street Journal, March 5, 2008,

and Lightning Strike Survivors, Journal

Front Page

of Occupational and Environmental

Pre-Morbid MMPI profiles of low back

pain patients: Surgical successes vs.

Medicine, Vol. 47, No. 8, pp. 796-805, Aug. 2005

The Self-Insurer

March 2012

Bench From the

by Thomas Croft

Michigan Court of Appeals Affirms Summary Disposition in Favor of Stop loss carrier and MGu in disclosure case (Evangelical presbyterian church v. American Fidelity Assurance company, et al., no. 299625, in the Michigan court of Appeals, January 12, 2012).

his case presented a classic disclosure issue, but required resolution of several creative arguments raised by the Plaintiff concerning principles of agency, appointment of insurance agents by carriers, incorporation by reference of the Disclosure Statement into the stop loss policy, and other issues. (Disclosure: I represented the carrier and the Mgu in the trial court and on appeal). As related by the Court of Appeals in its opinion, the essential facts were that the Church (a religious organization with a self-funded plan)

March 2012

The Self-Insurer

used Group Health Managers (“GHM”) as its TPA and stop loss broker for several years. In 2006, the Church switched to highmark as TPA, but continued to use ghM to assist it in shopping for stop loss coverage. The Court found that ghM would “help guide the Church through the [stop loss] application process, including completion of a disclosure statement.” In late November 2005, excess reinsurance underwriters Agency, Inc. (“XSRE”), an MGU for American Fidelity Assurance Company (“AFA”), sent GHM a renewal proposal for the Church’s stop loss insurance for the calendar year 2006. One of the conditions of the renewal was that the Church complete a disclosure statement within 15 days before the effective date of the policy “whose terms are incorporated herein.” An authorized representative of the Church signed the renewal summary as accepted on December 8, 2005. The disclosure statement, which was entitled “Plan Sponsor Disclosure Statement and Contract Addenda,” required, among other things, that the Church disclose Plan participants who had incurred charges over 50% of the specific deductible in the previous 12 months and those with certain enumerated diagnoses, including cancer. On the same day, the Church representative who

had signed the renewal summary also signed the disclosure statement in blank. ghM later listed two individuals on the disclosure statement based on information it had received from the Church and provided it to XSre. At the time the disclosure statement was signed, there were two additional Plan participants who should have been listed on the disclosure statement-either because they had met the claims threshold or had had been diagnosed with cancer, or both—but they were not. The Church later blamed ghM for these omissions; ghM blamed the Church. (These parties entered into a settlement agreement before the appeal of the case). On January 19, 2006, the Church completed the policy application. roy Neal, ghM’s owner, signed the application as “Broker/Agent of Record.” XSRE then issued the stop loss policy, effective January 1. later, the Church submitted claims for reimbursement of medical expenses paid on behalf of the two persons omitted from the disclosure statement to XSre. On behalf of AFA, XSre denied them on lack of disclosure grounds.

Thus, the Court of Appeals was faced with this question: is a stop loss carrier (or its Mgu) liable for the acts and omissions of the insurance agent selling the carrier’s policy? The Court answered this question with reference to Michigan case law precedent, holding that ghM was an “independent agent” and therefore is deemed to have represented the Church and not the insurer/Mgu in the transaction in question. According to the Court, an “independent agent” is one who is “able to place insurance with various companies.” The Court also looked to the renewal summary on this issue, which provided that any “[b]roker involved in any communications with [XSre] and/ or [AFA] is/are at all times acting as solely as the agent(s) of [the Church] and not the agent(s) of [XSre] or [AFA].” Accordingly, the Court held that where an insurance agent represents several carriers, he/she is

The Church sued ghM, XSre and AFA on various theories. essentially, the Church asserted that ghM had botched the application process resulting in the lack of disclosure that led to the claims denials, and that AFA/XSre were responsible (i.e., vicariously liable) for ghM’s alleged failings in this regard because ghM was acting as their agent. The Church also contended that ghM had not been properly appointed by AFA to serve as an agent to sell insurance in Michigan as required by Michigan law. The trial court granted summary disposition (the Michigan equivalent of a summary judgment) in favor of AFA and XSre, and the Church appealed to the Michigan Court of Appeals.

the agent of the insured and not the carrier. Thus, neither AFA nor XSre were vicariously liable for any acts or omissions ghM may have made in the application process. As noted previously, the Church also claimed that AFA’s failure to appoint ghM to sell insurance on its behalf in Michigan had legal consequences. The Church argued that AFA should not be able to take advantage of the “independent agent” rule since it had not complied with Michigan law requiring appointment of insurance producers. Thus, the Church contended that the lack of appointment of ghM meant that AFA was vicariously liable for ghM’s alleged actions on the unique facts of this case. AFA countered this argument by pointing out that ghM’s owner, roy Neal, signed the policy application as “Broker/Agent of Record,” and that he was properly appointed in Michigan to sell AFA’s products.

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The Court resolved the issue of who was acting as agent/broker of record against AFA, finding that Neal signed the policy application in a representative capacity for ghM, not individually. The Court stated that this conclusion resulted from the fact that the Church “had an ongoing relationship with ghM and worked with several of its representatives.” However, the Court also found that GHM’s lack of appointment did not affect its status as an “independent agent,” such that “AFA did not violate Michigan law by failing to appoint ghM as its agent,” because GHM was deemed to be acting for the Church and not AFA by operation of the “independent agent” rule. In other words, the Court rejected the Church’s arguments about the legal effect of ghM’s lack of appointment.

The Court further rejected the Church’s claim of negligent representation against AFA for allegedly misrepresenting “through its application and policy language that it would comply with Michigan law and only sell insurance through an appointed agent.” Again, the Court noted that the agent in the transaction was acting for the Church and not AFA, so that appointment was not required. Further, the Court found that there was no language in the stop loss policy or application warranting that AFA would only sell insurance through a legally appointed agent. The Court dealt with the Church’s breach of contract claim (for failing to reimburse for the medical expenses of the two claimants) against AFA last. The Church argued that the entirety of AFA’s rationale for denying the claims was the failure to list the two persons on the disclosure statement. The Church contended: (1) that the disclosure statement had not been incorporated into the policy such that AFA could not rely on it as the basis for denying claims; and (2) that the terms of the disclosure statement only required the Church to make “reasonable inquiry” and that the Church did so by relying on GHM to get it right. Not only did the Church seek reimbursement for the claims (in the approximate amount of $175,000), it also sought rescission of the stop loss contract and refund of all premium (about $540,000).

March 2012

The Self-Insurer

For its part, AFA made several counter-arguments. As to the Church’s first point that the disclosure statement was not incorporated by reference, AFA pointed to the “entire agreement” section of the stop loss policy, which, while not mentioning the disclosure statement by name as one of the policy documents included in the agreement, provided that attachments to the application were included. The Church claimed that the disclosure statement was not physically attached to anything, and therefore, in essence, it “didn’t count.” AFA argued that the evidence showed that the disclosure statement was mailed to ghM with the rest of the policy documents—in short, that the adequacy of the Church’s disclosure in this case “should not turn on the existence of a paperclip.” Further, AFA pointed out that the disclosure statement was merely the vehicle by means of which the Church made its representations to AFA, that the policy’s “Non-Disclosed Losses” provision stated that no claims would be honored if required information was not disclosed, and that, whether or not the disclosure statement was attached to anything, it did not disclose what the parties agreed should have been disclosed at the time of underwriting. The Court rejected the Church’s contentions on the attachment/ incorporation by reference point, concluding that the disclosure statement was a part of the parties’ contract because the “policy and disclosure statement reference each other,” via the Non-Disclosed Losses provision, the title of the Disclosure Statement as a “Contract Addenda,” and references to the policy within the body of the disclosure statement. It also agreed with AFA that the policy did not specifically require physical attachment for a document to become part of

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the parties’ contract, and that the evidence showed that the disclosure statement was included in the packet of policy documents sent to ghM when the policy was formally issued. As to the Church’s second point regarding “reasonable inquiry,” the Court noted that the body of the disclosure statement did state that, by signing the signing the disclosure statement, the Church warranted that the list of disclosed individuals was “complete and accurate” and “after reasonable inquiry” “nothing [had] been omitted.” Despite this, the Court concluded that the “reasonable inquiry” language did not provide any defense for the Church because of other language in the body of the disclosure statement and in the policy’s NonDisclosed Losses provision. Specifically, the Court noted that the disclosure statement also stated that:

“If claims are submitted for any Covered Persons who meet the criteria outlined above… and this Covered Person was not disclosed to [XSRE] on this form, then no coverage will be provided for charges incurred by that Covered Person by [AFA].”

Therefore, the Court concluded that “the disclosure statement was required to be accurate, and the Church’s claims for breach of contract against AFA were appropriately dismissed [by the trial court].” I believe this analysis by the Michigan Court of Appeals on the “incorporation by reference” and “reasonable inquiry” issues has the potential to influence courts in other jurisdictions on these commonly arising disclosure issues. Finally, the Cour t disposed of the Church’s claim for rescission and refund of premium by observing that there had been no breach of contract or other wrong committed by AFA upon which such a remedy could be based. n

And, the Court again pointed to the Non-Disclosed losses provision in the stop loss contract, and noted that it had no “reasonable inquiry” language.

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March 2012

The Self-Insurer

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The Self-Insurer

March 2012

tax obligation of $100,000. • A revitalized capital city experiencing a growth and cultural renaissance, making it one the world’s most attractive business destinations. • A well-developed transportation infrastructure, making travel to D.C. convenient and inexpensive compared to most other captive domiciles.

types of captives Allowed • Agency / Pure • Association / Protected Cell • Branch / rental

Acceptable corporate Forms • Stock / reciprocal • Mutual / limited liability Companies • Both For Profit and Non-Profit entities Are Permitted

Minimum capital requirements • $100,000 regardless of form of ownership • Minimum capital must be in the form of either cash or letter of credit

Minimum Surplus requirements • Agency Captives – $300,000 • Association Captives (Stock) – $300,000 • Association Captives (Mutual or Reciprocal) – $500,000 • Pure Captives – $150,000 • Rental Captives – $300,000

types of direct Insurance permitted • All types of insurance except direct personal lines and workers’ compensation

• May also offer excess workers’ compensation insurance to parents/affiliates

reinsurance • May take credit for risks ceded to any reinsurance approved by the Commissioner • May assume risk from other insurers

Investment limitations • A captive may invest its assets in any investment approved by the Commissioner

Best practices • The DC law permits the Commissioner to authorize a captive insurer qualified to conduct business in the District to engage in any activity permitted by a captive insurer in any other jurisdiction n

Do you aspire to be a published author? Do you have any

stories or opinions on the self-insurance and alternative risk transfer industry that you would like to share with your peers? We would like to invite you to share your insight and submit an article to The Self-Insurer! SIIA’s official magazine is distributed in a digital and print format to reach over 10,000 readers around the world. The SelfInsurer has been delivering information to the selfinsurance/alternative risk transfer community since 1984 to self-funded employers, TPAs, MGUs, reinsurers, stoploss carriers, PBMs and other service providers.

Articles or guideline inquiries can be submitted to Editor Gretchen Grote at ggrote@sipconline.net. The Self Insurer also has advertising opportunities available. Please contact Shane Byars at sbyars@sipconline.net for advertising information.

The Self-Insurer

March 2012

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March 2012

The Self-Insurer

March 2012

Art gAllerY by Dick Goff

‘Trickle down’ of LPT can benefit captives

rT continually benefits from the insurance version of the economic “trickle down” theory, as longstanding practices of the traditional industry are adapted for use by the alternative community often with significant strategic benefits.

numbers that would indicate the real losses likely wouldn’t be as high as projected and that the contract will show a profit after losses are paid. An insurance company’s largest liability is the combination of known claims plus IBNr. The relationship of this liability to total assets will be a major determinant of the company’s AM Best rating, bank credit rating and liquidity.

I’m thinking of the example of loss portfolio transfers (lPT) that in the past have been used for one giant corporation to take over the underwriting losses of another giant corporation, for a price. This just proves that an insurance contract may be written on just about any proposition if the actuarial and underwriting stars align. If company A, for example, wants to clean up its balance sheet by sending off known losses and the mysterious “incurred but not reported” (IBNR) losses, company B may take them over for a negotiated premium that could be somewhat fewer dollars than company A’s total projected losses. This takes into consideration the time value of money, so company B would have to be pretty sure that it could invest the premium to show a profit after paying the losses. The wild card in the transaction is the IBNR figure. Company A wants that figure to be as large as possible in order to strengthen its balance sheet by that amount. Company B looks for “fluff ” in the

March 2012

The Self-Insurer

A common use of lPT is when a company may decide to stop writing a class of business with a long exposure tail (such as workers’ compensation). rather than continue administering all its policies and paying claims while no new premiums are coming in, the company is often better off by paying to make them someone else’s problem. That’s the conventional world of lPT. Now we turn to ways this method is being adapted by the ArT world, with some entrepreneurial advantages that may be rewarded on both sides of such transactions. risk retention groups (rrg) are micro insurance companies with many of the same financial challenges including constant attention to the balance sheet. RRGs continuously look for ways to improve their financial health to maintain the benevolent attention of regulators or increase liquidity to write new business. Strategically, the lPT could help a captive or rrg to exit a line of business or even go out of business without a long “runoff ” of claims on its books. LPTs can be structured with either a guarantee that no claim can come back to hunt the cedant, or with a cap that may allow excess claims to revert to the company. That distinction can make a big difference in the size of the transaction cost. An LPT could be welcome relief for – just for example – a self-insured group

(SIg) workers’ compensation plan such as those that regulators are attacking in New York, California and elsewhere. lPT programs could be viewed as “regulator appeasement” plays that allow the SIg to survive and come back another day, perhaps as a traditionally fronted captive program, hypothetically speaking. rrgs can free themselves from historic claims liabilities and use the lPT model to continue rolling away their claims every year if they wish, as a pure shareholder play by the owner-insureds. The question for the loss assuming company is whether or not it thinks there is a lot of fluff within the IBNR figure or, if not, that an adequate investment return may be made. If a deal passes actuarial and underwriting muster it’s a win-win-win for shareholders, regulators and the insurer of future losses.

IntroducIng

lPTs even provide the opportunity for rrg program administrators to play on both sides of the table in transparent transactions without any conflict of interest. We know of an rrg program administrator who proposed to its domicile regulator to form a new captive that he would own for the purpose of assuming the rrg’s losses through an lPT transaction. The regulator was very pleased to see the potential strengthening of one of his rrg companies, but aware that the NAIC continues to kibbutz rrg operations, he said, “We think it’s a great idea but please don’t ask us to approve and license the captive. Take it to a new domicile.”

Of course, lPT transactions aren’t for the weak of heart. And both sides will want to use their own actuarial teams, so transaction costs can be a major factor. But these deals can clearly be beneficial in an increasingly competitive and more stringent regulatory environment. n Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm and Bermuda broker at dick@taftcos.com.

The ArT program administrator can decide which side of an lPT transaction to play on. It’s like when you picked between the giants or the Patriots, with the lPT serving as the betting line.

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The Self-Insurer

March 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

What’s Essential About “Essential health Benefits” – HHS Bulletin Creates Issues for All Group health plans

n December 16, 2011, the Department of health and human Services (HHS) issued the Essential Health Benefits Bulletin (the “Bulletin”) relating to the definition of essential health benefits (EHB) under the Affordable Care Act (ACA). The Bulletin sets forth the approach hhS intends to take in defining EHB and solicits comments on this intended approach. The definition of EHB is especially important for small group health coverage, whether offered through or outside of an Exchange; however, this definition is also significant for all types of group health plans subject to ACA, including self-insured plans and plans in the large group market, as follows: • Non-grandfathered fully-insured small group health plans, as well as individual market policies offered inside and outside exchanges, must include the ehB, effective for plan years beginning on or after January 1, 2014. • Self-insured group health plans (including small group plans) and large group plans are not required to offer the EHB; however, the definition of EHB is relevant for such plans because ACA’s restriction on annual and lifetime dollar limits applies to all ACA covered plans with respect to benefits that are EHB. This article focuses on the significance of EHB for large group and self-funded group health plans for purposes of applying the restriction on annual and lifetime limits.

March 2012

The Self-Insurer

Background: Statutory Provisions Defining EHB ACA’s statutory provisions provide that HHS is to define EHB, subject to parameters set forth in the statute. Specifically, ACA provides that ehB are to include, but are not necessarily limited to, the following 10 general categories and items and services covered within the categories: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care. In addition, EHB are to reflect the “typical” employer plan. In order to help inform hhS regarding the typical employer plan, ACA provides that the Department of labor (DOl) is to conduct a survey of employer plans. In response to this statutory directive, the DOl submitted a report to hhS in April 2011 discussing survey data relating to benefits in employer plans.

a group health plan may impose restricted annual limits on the dollar value of benefits, as follows: • $750,000 for plan years beginning on or after September 23, 2010, but before September 23, 2011 • $1.25 million for plan years beginning on or after September 23, 2011, but before September 23, 2012 • $2 million for plan years beginning on or after September 23, 2012, but before September 23, 2013 Determining ehB for purposes of the restrictions on annual and lifetime limits: Under interim final regulations issued in June 2010, the Departments of hhS, Treasury and labor stated that, for plan years beginning before the issuance of regulations defining ehB, for purposes of enforcement, the Departments will take into account “good faith” efforts to comply with a reasonable interpretation of the term ehB. Pending issuance of regulations

U&C / R&C / UCR PRICING DATA

restriction on lifetime and Annual limits lifetime limits: ACA prohibits group health plans, including grandfathered group health plans, from imposing lifetime limits on the dollar value of ehB. This prohibition is part of the first wave of health care reforms, and applies for plan years beginning on or after September 23, 2010. Annual limits: ACA also generally prohibits group health plans from imposing annual limits on the dollar value of ehB for plan years beginning on or after January 1, 2014. For plan years beginning on or after September 23, 2010, and before January 1, 2014,

defining EHB, group health plan sponsors have been applying this “good faith” standard. Depending on the particular benefit involved, plan sponsors may look to a number of sources in order to provide support for a good faith determination, starting with the 10 categories of benefits listed in the statute. For example, a common interpretation is that vision and dental benefits for adults are not ehB, because only pediatric vision and dental benefits are listed in the statute. Thus, for example, if dental benefits are bundled in a major medical plan so that they are not excepted benefits under HIPAA, such benefits may be subject to annual dollar limits (as was typically the case before ACA). In other cases that might not be so clear—e.g., for benefits that might fit into one of the 10 categories, depending on how they are ultimately defined—plan sponsors often consider whether the benefit is offered under a “typical” employer plan.

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The Self-Insurer

March 2012

A number of sources may be used to inform this determination, such as the survey data published by the DOL, private surveys conducted by consulting firms or other entities, and information regarding insurance company practices. If a benefit is offered only subject to strict limits, this might also be a factor taken into account in some cases. As a result of the lack of specific guidance, different plan sponsors and insurers may have taken different positions on whether certain items and services are ehB for purposes of the restrictions on annual and lifetime dollar limits under the good faith standard. Further discussion of the regulations and other guidance relating to the restrictions on annual and lifetime limits, including the temporary waiver program established by hhS, may be found at: Alston & Bird health Care reform update: hhS Annual limit Waiver Program Will Close on September 22, 2011; No Waiver Application required for Certain hrAs (Aug. 21, 2011) Alston & Bird health Care reform update: New Prescription requirement for OTC Medicines and Drugs Will Impact Administration of FSAs, hrAs and hSAs; and Guidance on Waiver Process for “Mini-Med” (Sept. 15, 2010) Alston & Bird health Care reform update: Departments Issue Core Interim regulations (June. 29, 2010)

(1) the largest plan by enrollment in any of the three largest small group insurance products in the state’s small group market; (2) any of the largest three state employee health benefit plans by enrollment; (3) any of the largest three national FehBP plan options by enrollment; or

the EhB Bulletin

(4) the largest insured commercial nonMedicaid health Maintenance Organization (hMO) operating in the state.

As noted above, the Bulletin describes the approach that hhS intends to take when issuing regulations defining EHB. The Bulletin does not contain a detailed list of ehB; rather, hhS largely leaves the determination of ehB to each state. Thus, under the approach in the Bulletin ehB, may vary by state.

hhS intends to assess the benchmark process for the year 2016 and beyond based on evaluation and feedback. hhS has an ambitious timeframe for determination of the benchmark plan to be used for 2014 – enrollment data is to be based on the first two quarters of 2012, and the state selection is to be made in the third quarter of 2012 (i.e., by the end of September of this year). If a state does not select a benchmark health plan, the default benchmark for that state would be the largest plan by enrollment in the largest product in the state’s small group market. The Bulletin also provides rules for supplementing the benchmark plan if it does not contain all the required ehB, which vary by benefit.

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under the Bulletin, ehB will be defined by a “benchmark” plan selected by the state. This approach is similar to the approach established for the Children’s health Insurance Program (ChIP) and certain Medicaid populations. A state may choose one of the following as the benchmark plan for 2014 and 2015:

March 2012

The Self-Insurer

ACCREDITED INDEPENDENT REVIEW ORGANIZATION

In order to provide additional information on the proposed method for determining ehB, hhS separately released a list of the products with the three largest enrollments in the small group market in each state using data from healthCare.gov. hhS provides the names of the three largest products in

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Symetra Stop Loss, filed as a group Excess Loss policy, and Select Benefits group insurance policies are insured by Symetra Life Insurance Company, 777 108th Ave. NE, Ste 1200, Bellevue, WA 98004 and are not available in all states or any U.S. territory. Policies may be subject to limitations and exclusions. Select Benefits is not a replacement for major medical insurance or other comprehensive coverage. Symetra® and the Symetra logo are registered service marks of Symetra Life Insurance Company. LMC-5586 3/2011 © Self-Insurers’ Publishing Corp. All rights reserved.

The Self-Insurer

March 2012

each state ranked by enrollment as well as a list of the top three nationally available Federal Employee Health Benefit Program (FEHBP) plans based on enrollment. This list may be found at http://cciio.cms.gov/resources/files/Files2/01272012/top_three_ plans_by_enrollment_508_20120125.pdf.

What does the EhB Bulletin Mean for large Group plans and Self-Funded plans? The EHB Bulletin is helpful in that it reconfirms that large group plans (including fully insured plans) and self-funded plans (including both large and small group plans) are not required to offer ehB. With respect to what ehB means for such plans in terms of applying the restrictions on annual and lifetime dollar limits, however, the Bulletin is not so helpful. The Bulletin does not address issues that may arise with self-funded plans. The reliance on states to determine ehB will be particularly problematic for self-funded plans that are not subject to state law because of erISA preemption. Further, many large group plans, including both fully insured and self-insured, apply to a broad group of employees in different states, and it is not clear how ehB would be determined in such cases. The EHB Bulletin does address one specific benefit, indicating hhS’ intent to exclude non-medically necessarily orthodontia from the definition of EHB. At this point, in the absence of more specific guidance on EHB, the good faith standard should continue to apply for purposes of defining EHB in applying the restrictions on annual and lifetime limits. going forward, however, if hhS does not address the specific issues for plans that are not required to offer EHB, then such plans may be forced to look to state law. For a multistate plan, including an insured

March 2012

The Self-Insurer

plan, it is not entirely clear what this will mean. For example, it is not clear whether a plan would be able to follow the ehB determination where the plan is sitused or whether plans will be required to provide benefits consistent with all state requirements in which their participants reside. Focusing on state law is particularly troublesome for self-funded plans that currently are not familiar with or subject to state rules as a result of erISA preemption. It is to be hoped that the regulatory agencies will address these concerns and provide a workable rule before guidance is formally issued. n Attorneys John R. Hickman, Ashley Gillihan, Johann Lee, and Carolyn Smith provide the answers in this column. Mr. Hickman is partner in charge of the Health Benefits Practice with Alston & Bird, LLP, an Atlanta, New York, Los Angeles, Charlotte and Washington, D.C. law firm. Ashley Gillihan, Carolyn Smith and Johann Lee are members of the Health Benefits Practice. Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner’s situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. Readers are encouraged to send questions by E-MAIL to Mr. Hickman at john. hickman@alston.com.

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The Self-Insurer

March 2012

Investment considerations and Strategies for captives in 2012 by Carl E.Terzer

ince most P&C insurance business lines are still waiting for the ever-elusive hard market to take hold, there will be continued pressure on insurers’ portfolios to produce yield. unfortunately, we have probably seen the end of a 30 year bull market in bonds, the main generator of consistent and steady income for insurance companies. The Fed will continue to suppress interest rates, perhaps through 2014, to provide liquidity to our struggling, on again-off again economic recovery. The continued low yield fixed income environment may cause insurers to consider: 1) requiring more disciplined underwriting to enhance underwriting profits providing an offset to meager investment returns and/or 2) add more risk to the investment portfolio to enhance returns. From an investment perspective, the two key issues in 2012 that will most affect whether adding risk will produce the desired result are: 1) the disposition of the european debt crisis (sovereign bonds) and 2) the anticipated u.S. election results. I expect that we will have a clearer vision on both of these issues by mid-year. Should both of these issues be resolved favorably, that is Europe finds the political will to make sufficiently stringent austerity plans backed by appropriate financial commitments to comfort the markets, and the Presidential race reveals a candidate who can provide the markets with sufficient confidence that an economic/ business friendly environment lays in the near term future, respectively, then risk-on strategies

March 2012

The Self-Insurer

should produce strong results. Our leading indicator of the market’s interpretation of developments on both these key issues will, as always, be the somewhat questionable predictive power of the uS equity market. (although the sovereign debt market and general economic health of europe will also be important to watch) Not to be fooled by the strong equity market performance early in the first quarter, the stubbornly slow economic recovery and the lack of clarity regarding the aforementioned events still presnt a chance for a bear market in equities through mid-year 2012. This risk hinges mainly on the european debt crisis and the usual leading economic indicators of the uS

economic recovery’s pace. My advice to insurers is to add risk cautiously, particularly and in some cases exclusively, to their surplus portfolio. They should obtain downside protection whenever possible…the cost of portfolio insurance may be well worth it. I also encourage clients not to panic and skew their strategic asset allocation to accommodate current market volatility or short-term views. If they have practiced appropriate asset liability management in the construction of their bond portfolio supporting reserve requirements, then they should be equipped to handle short term market volatility. The surplus portfolio should have an investment time horizon that far exceeds our troubled current environment which has been characterized by weekly or monthly whipsawing of the market. however, for very cautious investors or those that are thinly capitalized, reducing risk in equities making up a predominant share of the surplus portfolio might be advisable as a short-term tactical strategy. For others, equities will offer superior expected returns in the foreseeable future. Timing entry and exit point can be as much luck as skill. It may also be time to explore other asset classes, particularly those with low correlations to asset classes in their existing portfolio. That is, the decision should not be limited to bonds vs. stocks. Ten year correlations listed below show asset classes that should be considered for their risk reducing diversification benefits. Selecting asset classes that will optimize the risk reward characteristics for your portfolio should be a periodic exercise as part of proper investment program oversight.

ten year correlations uS Fixed Income outlook What should be expected for the boring bond market? More of the same, I am afraid. Interest rates will be kept low for the next 18-24 months. This Fed strategy coupled with a very sluggish economic recovery significantly reduces the possibility of interest rates spiking anytime soon. Inflation, the stealthy enemy of bonds may be another matter. Last year, the US inflation rate was as high as 3.87% in September but is projected to drop significantly over this year. However, this does not tell us

the real story for bondholders. low inflation rates in absolute numbers, perhaps below the Fed target rate range of 1.7-2% may seem harmless but relative to interest rates inflation can be quite meaningful. The Fed’s forced low short term interest rate environment has the dual purpose of creating “easy money” to assist in the economic recovery but also the stealthy affect of deflating the Federal deficit. In other words, the Fed reduces the uS debt burden by paying back bondholders with dollars that are worth less, an effective but invisible “tax” on investors. This artificially low rate environment has sustained a negative real returns1 on near-cash equivalents,and even Treasuries under 5 years in maturity, which erodes principal over time. very conservative investors, whose main investment objective is preservation of principal, can no longer seek these investment vehicles that may have been the mainstay of their portfolios without abandoning their investment objective. Investors require a positive real rate of return, even if credit risk is theoretically zero (e.g. Treasuries). Why?

The Self-Insurer

March 2012

Because of the time value of money. however, in this challenging market of the last few years, investors seem happy to avoid principal losses in the equity markets and settle for low, but nominally positive bond returns. But should they?

Asset class returns: 10 years

Adding risk to insurance portfolios As mentioned, earlier, some insurers are looking to add risk to their surplus portfolio to increase overall returns. This doesn’t necessarily mean increasing the equity component of the portfolio. Several fixed income asset classes will increase returns with less volatility (risk) than equities. There are also many other asset classes that may be appropriate to consider given the captive’s lifecycle stage. The “Periodic Table” above shows that asset class performance often flip-flops from year to year. Again, a properly diversified insurance portfolio tends to dampen volatility of returns, smoothing out the whipsawing affects of the market’s directional changes. This is illustrated above by looking at the “Asset Alloc.” Returns, which represent a sample diversified portfolio, versus either a bond or stock portfolio, represented by Barclays Agg and S&P 500, respectively. Modeling additional asset classes, using sophisticated analytics tools, into an existing portfolio can serve to find a captive’s or self insured’s optimal asset allocation. This strategic asset allocation exercise provides executive management great insight into their insurance company’s or fund’s hypothetical behavior under various market conditions using different asset allocation combinations. Company behavior is typically highlighted in very familiar terms: 5 years worth of projected balance sheet and income statements for each economic scenario tested, for each asset allocation used in the analysis. In this manner, the allocations can be

March 2012

The Self-Insurer

optimized around the unique financial circumstances, investment objectives and risk tolerance of any insurance company. getting this strategic allocation optimized is very important. In fact, it will account for more than 90% of an insurance portfolio’s long term result2. A high quality bond portfolio, properly structured around projected claims payout patterns and duration matched for immunization, serves as ballast in every insurer’s investment program. Bonds provide a solid foundation for reserves, protecting the company’s claims paying ability. however, with the low return expectations for the bond market, it is imperative that insurers carefully look

to optimize their asset allocation, if they haven’t already done so, to produce the most efficient risk-reward combination to give their investment program

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12/8/11 11:05 AM

The Self-Insurer

March 2012

SIIA ChAIrMAN SPeAKS Alex Giordano

legal threats to every member

IIA members attending this month’s 27th Annual legislative & regulatory Conference in Washington, DC, could expect an earful about our overflowing platter of legal challenges in defense of our industry. earlier this year we issued an invitation for members to take a role in this year’s legal battles by donating to SIIA’s legal Defense Fund. Of course litigation is very costly and cannot be financed through SIIA’s general operating budget. We asked for voluntary contributions that would be earmarked specifically for litigation purposes. While that appeal included a deadline for response, the door is always open for further donations. I would wager that every SIIA member could find at least one key issue affecting his or her business among the specific cases and anticipated threats that are confronting us. here’s a sampling of challenges to the self-insurance/ ArT industry that SIIA will face in 2012: State regulation of stop-loss insurance. Certain states are actively exploring new regulations that would improperly restrict stop-loss carriers from providing coverage to smaller self-insured group health plans and/ or more tightly regulate attachment points. Self-insured health plan subrogation rights. A recent federal court ruling restricts the ability of self-insured health plans to enforce the subrogation terms specified in their plan documents and permitted by ERISA. This ruling is expected to be appealed. State regulation of captive insurance companies/risk retention groups. In addition to the current Nevada case arguing that erISA preempts the state from interfering with a vermont-domiciled rrg, many states have become increasingly aggressive in regulating all forms of alternative risk transfer programs. Some of these regulatory abuses are ripe for legal challenges. IrS treatment of Art programs. The IrS has signaled that it will be taking an increasingly aggressive position that most employee benefits captive programs do not incorporate true third party risk and therefore should not be allowed. Industry experts are currently contesting this interpretation, and litigation may be necessary to effectively counter such adverse treatment by the IrS. EEoc AdA enforcement. The equal employment Opportunity Commission (eeOC) has started to hammer workers’ compensation selfinsurers with big fines in connection with the updated Americans with Disabilities Act (ADA) based on their return-to-work policies. It is reported that eeOC is now going after TPAs with these legally questionable enforcement tactics.

hang together or separately That was Benjamin Franklin’s view of the American patriots’ situation when independence from Britain was declared by the colonies. his advice now also embraces industry trade associations like SIIA, which endow members with far greater legal strength than they can muster on their own.

March 2012

The Self-Insurer

rather than each affected SIIA member company having to take their grievances to court, we can do the job together – more effectively and cost-efficiently. But in order for that to happen, we must stockpile a financial arsenal that will overcome our challenges. learn how at www.siia.org or by calling 800-851-7789.

An earlier spring Those from the northern tier of the country will be especially attracted to attend SIIA’s upcoming TPA & Mgu/ excess Insurer Forum on April 16-18 in Charleston, South Carolina. Just think of magnolia blossoms and balmy breezes as you register to attend. This year’s event will have the added feature of a golf tournament to benefit the Self-Insurance Educational Foundation (SIeF) that carries the load of providing educational events to members of Congress and industry educational publications for your clients and prospects. The tournament will tee up early that Monday, April 16, at the Arnold Palmer-designed riverTowne Country Club located on the scenic Wando river. It’s also a great event to promote your company’s corporate brand through a variety of sponsorship opportunities. On that score, contact SIIA’s Shane Byars at 800-851-7789 or by e-mail at sbyars@siia.org. For conference and tournament information go to www.siia.org. n I’ll see you there!

The Self-Insurer

March 2012