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Insurance issues for financial institutions.

FOR RISK MANAGERS, KEEPing on top of the trends affecting crime insurance bonds and directors' and officers' (D&O) liability policies is critical to maintaining sufficient coverage for their institutions' risks. At the 1993 American Bankers Association (ABA) National Security and Risk Management Conference held in Orlando, Florida on February 7-10, industry professionals offered suggestions on how risk managers can enhance fidelity bond coverage by sharpening policy language and working more closely with underwriters. And in regard to D&O insurance, several speakers discussed how recent banking regulatory changes are creating greater exposures for directors and officers, thereby intensifying the need for adequate coverage.

Financial Institution Bonds THE LACK OF CLEAR policy wording in financial institution bonds - which provide protection from losses resulting from employee dishonesty, theft and forgery - can create coverage problems for risk managers, said William C. Jennings, fidelity bond manager at the CNA Insurance Co. in Chicago, Illinois. "Over the last six or seven years, underwriters have sometimes turned to attorneys for assistance in drafting policies that define risks in a more precise manner than in the past," he said. "However, sometimes this strategy has not worked, and has resulted in policies that our clients cannot understand and that don't meet their needs." Mr. Jennings recommended that brokers and underwriters focus on improving contract language while working with risk managers to determine the exact nature of the risks to be covered. "This will result in policies that people can understand and that cover the risks they're supposed to cover."

In order to improve the quality of their coverage, risk managers should review the language used in their bonds, declared William J. Kelly, senior vice president of J.P. Morgan in New York and this year's conference chairman. Noting that the contractual language used in bonds evolves over time in order to meet new conditions, Mr. Kelly said that in many cases these changes make sense. "However, too often changes arise simply because of a broker's - and sometimes an underwriter's - desire to differentiate the product without adding any value," he said. "As a result, voluminous amendments, and in some cases whole new companion policies, are developed, when the addition of a single word would have sufficed."

As an example, Mr. Kelly noted that the traditional policy definition of a counterfeit is "an imitation that is intended to deceive and be taken as an original." However, some insurers have altered the wording so that counterfeit is defined as "an imitation of an actual valid original that is intended to be taken as the original." Mr. Kelly pointed out that whereas the first definition is clear, the second one is nebulous. "Under the second definition, you apparently have to prove that the counterfeit is an imitation of a specific actual original, right down to the serial or certificate number, and that the imitation was intended to be taken as the original," he said. "And although knowledgeable underwriters have told me that this was not really the intent, then why change the definition in the first place?"

Because of these ambiguities, Mr. Kelly suggested that risk managers review their bonds to see if they have any of the provisions he discussed. "If these provisions are found, I recommend that they be amended by rider," he said. "However, if it is not possible to make these alterations, it may be necessary to change the policy form."

Risk managers may find that now is a good time to review their policies, said Jamie R. Anthony Jr., president and chief financial officer at Willis Corroon Financial Services Corp. in New York. "Most corporate risk managers have chosen to use this competitive environment to analyze the wording of contracts in more detail, and to negotiate contract language that is more meaningful for their operations," he said. "Through such negotiations, many coverages can be enhanced." Reporting on the market changes that occurred throughout 1992, Mr. Anthony said that "while competition did not appear to be as intense as in 1991, the sheer number of underwriters and the overabundance of capacity has continued to make this line a buyers' market."

New Bank Regulations

RISK MANAGERS are faced with new regulations that have radically altered the regulatory structure of the banking industry, declared Brad G. Welling, associate director of American International Group Inc. in Washington, D.C. "These new regulations have greatly increased regulators' control over banks' financial affairs, and have increased exposures for directors and officers," he said.

Congress passed these regulations in response to the bank and thrift failures that occurred during the 1980s, said Mr. Welling. "This legislative onslaught started with the Financial Institutions Reform, Recovery, and Enforcement Act of1989 (FIRREA)," he said. "This act made directors and officers of financial institutions personally liable for monetary damages in civil actions for gross negligence, and increased the sanctions regulatory agencies can levy against directors and officers." FIRREA also increased potential civil penalties from $1,000 to $1,000,000 per day, and maximum criminal penalties from $5,000 to $1,000,000, he added. Congress did not stop there, however. "One year later, it passed the Omnibus Crime Control Act of 1990, which makes it easier for regulatory agencies to give cease and desist orders to so-called troubled banks, or to freeze their assets," said Mr. Welling.

Then, in 1991., Congress passed the Federal Deposit Corporation Improvement Act of 1991 (FDICIA), which "makes extensive demands on directors and officers to comply with a wide array of supervisory standards, regulations and reporting requirements," said Mr. Welling. One major section of the act requires each bank to meet stringent capital levels, which, if not achieved, allow regulators to remove or replace the bank's officers and directors."

Another possible regulation includes a repeal of the statute of limitations for lawsuits against directors and officers. "If passed, this ruling would extend the statute of limitations from three to five years for lawsuits brought by the Federal Deposit Insurance Corporation (FDIC) or Resolution Trust Corp. against directors and officers," said Mr. Welling. "The legislation could result in new lawsuits, particularly in cases where an agency has reviewed a case, closed the file and decided not to sue."

D&O Insurance

THESE LEGISLATIVE changes have heightened exposures for directors and officers of financial institutions, said Charlotte A. Rowan, vice president-risk manager at AmSouth Bank, N.A. in Birmingham, Alabama. "According to the 1989 Wyatt Co. D&O survey, banks experienced 55 percent more claims activity than manufacturers did, and twice as much as insurers," she said. Although Wyatt's 1991 survey indicated that the number of claims affecting banks has decreased somewhat since 1989, Ms. Rowan said that the threat of liability is still an onerous burden for directors and officers of financial institutions. "For 1993, Wyatt projects that fully trended indemnity costs will equal about $10 million, not including defense costs," she added.

According to the 1991 ABA Bank Industry survey, 78 percent of banks purchased D&O coverage, and 83 percent purchased excess D&O coverage, said Ms. Rowan. The survey also shows that financial executives believe that although it is important to have D&O coverage, it is expensive and extremely difficult to obtain.

This latter belief may turn out to be true for some institutions, declared James H. Ostrom, senior underwriting officer at The St. Paul Cos. in St. Paul, Minnesota. "This year, the bottom 25 percent of banks will have trouble getting coverage, due either to cost or availability," he said. The new, more stringent regulations are also likely to create more exposures. "The new regulations and the possibility of the extension of the statute of limitations could generate more D&O claims," said Mr. Ostrorn. As a result, risk managers should examine their D&O coverage, as well as the financial stability of their insurer. "Look at your insurer from a claims standpoint to determine what its claims policy is," he added.

TODAY, MEDICAL COSTS have become a top concern among U.S. corporations. In order to determine the extent to which self-insuring companies utilize medical cost containment techniques, professors Richard B. Corbett, Claude C. Lilly, Robert A. Marshall and Nancy Sutton-Bell of the department of risk management and insurance at Florida State University conducted a mail survey of major industrial firms selected at random from the Fortune 500. "A large number of management and cost control techniques are popular among companies that self-insure all or part of their medical expense plans," says Dr. Corbett.

The survey, which contains the responses of 58 member firms of RIMS, catalogued the management and cost control techniques used by the respondents. These techniques were divided into six categories: utilization review (UR), alternative providers, cost containment measures, wellness programs, financing strategies and other techniques. In the category of UR, the responses indicate that self-insuring firms use several UR techniques, but to varying degrees. For example, 90 percent indicate that they use continued stay review, 79 percent indicate they make pre-admission second opinions mandatory and 48 percent say they utilize retrospective stay reviews. Another 36 percent of the respondents have review programs for non-hospital benefits.

Many of the respondents also report that they use alternate providers in their self-insurance plans. Among these providers, the most popular are health maintenance organizations (HMOs), with 88 percent of respondents claiming they use them. Another 66 percent of respondents use preferred provider organizations (PPOs) or preferred provider corporations (PPCs), and 36 percent provide access to non-MD providers such as chiropractors. As for cost containment measures, 72 percent report using outpatient testing, 60 percent use a prescription drug plan, and 55 percent utilize contract provisions.

In the category of wellness programs, the respondents were asked about their use of various wellness strategies. Here, the assumption was that self-insurers would utilize a wide variety of measures presumed to cut health care costs. The survey found that 79 percent use employee assistance programs (EAPs), 55 percent use smoking cessation programs, 43 percent employ wellness education, and 40 percent utilize preventive health care programs. Another 34 percent offer well baby care programs, while 33 percent provide nutrition workshops and 5 percent offer family planning. Iso asked about Respondents were a their use of two financing techniques, capitation arrangements with providers and risk-based (lifestyle) pricing. The survey indicates that so far, few selfinsuring firms use either approach, since only 24 percent and 5 percent reported the use of capitation arrangements and risk-based pricing, respectively. However, risk-based pricing may be so new that many firms are unwilling to try it until they learn that other companies have had some success with it. The survey also explored a few other techniques. These incude pre-employment physicals (64 percent), Section 125 premium sheltering (57 percent) and 401 (k) plans (22 percent).

Other Techniques BESIDES REPORTING ON their firms' use of these cost containment measures, the respondents were also asked to state whether they used any techniques that were not listed on the survey form. The responses reveal that several companies have taken creative approaches to managing and controlling the costs inherent in self-insured, as well as other, plans. For example, a large number of respondents mentioned pre-admission authorizations and case management as techniques they have used. Other cost containment techniques mentioned include the use of a fitness center, direct contracts with hospitals for discounts, prenatal education and a 1-800 health care advice telephone line. Several respondents also mentioned the use of a medical audit reward program and an in-house medical department with staff physicians. One company indicated that they use deductibles, co-payments and plan annual dollar limits for "areas of plan abuse," This latter comment appears to indicate a desire to control user behavior in health services.

Some of the other possibilities the respondents cited are best expressed via direct quotes. For example, more than one respondent said that "we won't pay for non-emergency weekend hospital admissions." Other respondents stated that they are "moving to managed health care in those geographic areas where managed care networks are available." One respondent cited aggressive and accurate claims processing by a third party administrator and limitations on benefits for certain treatments or medical conditions. Several others echoed this idea, usually in reference to treatments for substance abuse and mental conditions.

Another respondent advocated the use of a "hospital bill incentive," along with aggressive attempts to recover any payments from the medical plan that could be recovered from third parties, Also mentioned were screening programs for possible high-risk pregnancies, benefit reductions for use of non-PPO hospitals, and volume case management review. Another respondent mentioned the use of a "gatekeeper model." Penalties for noncompliance with utilization review were another suggestion from a respondent who also listed home health care, skilled nursing, and hospice care programs as other cost containment methods.

Only one respondent mentioned a pre-existing conditions provision as part of a self-insured plan, possibly due to the no-application, no'underwriting approach usually followed by a non-insured plan. Perhaps the most provocative technique came from a respondent whose firm indexes employee contributions, deductibles and out-of-pocket stop-loss to the plan's claims experience in the prior year. Another respondent cited the use of a 'nonduplication' provision as opposed to a standard coordination of benefits provision." One respondent commented that employee contributions to the plan can be considered a form of cost control.

Study Implications

SEVERAL IMPLICATIONS can be derived from the survey results. Some management/cost control techniques appear to be very popular among the operators of self-insured medical expense plans. These include continued stay reviews, pre-admission authorizations, HMOs as provider organizations, outpatient testing and EAPs.

Some other ideas achieved moderate popularity among the respondents, including retrospective stayreviews, review programs for nonhospital benefits, the PPO approach, and access to non-MD providers such as chiropractors. Other moderately popular approaches include prescription drug plans, contract provisions, smoking cessation programs, preventive health care, pre-employment physicals and stress reduction programs.
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Author:Christine, Brian
Publication:Risk Management
Date:Apr 1, 1993
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