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Ugly truths about insurance dilemmas.

Insurance insolvency. Workers' compensation costs. Doom and gloom, with no light at tunnel's end. Or is there?

To understand the complexities of the problems, one must trace them back to their roots. The recent Midwest Regional Workshop sponsored by the Chicago, Northeastern Illinois and Wisconsin chapters of RIMS did exactly that, as well examine how the catastrophes can be handled.

Insolvency in the insurance industry can be blamed in large part on cycles caused by corporate mismanagement, according to Edgar Clark, vice president of Alexander & Alexander Inc. in San Francisco. "Despite declining prices, carriers insist on maintaining market share," he said. "That insistence creates cycles. The cycles, in turn, because of pricing and legal problems, lead to insurability issues. Most insurers who try to price now for future claims don't really do a very good job of it, particularly in the casualty area."

Mr. Clark said he recently attended a seminar at which the effects of electromagnetic fields were touted as the next major crisis for insurers. During the seminar, he said, representatives from about eight major insurance and reinsurance carriers decided that they should exclude electromagnetic field-related claims from their companies' policies. "Does that sound like an issue you had in the 1970s called pollution?" Mr. Clark asked. "What happens is that as these cycles come and go, the insurance industry focuses in on insurability issues and excludes those things we're basically after insurance for. Because of that, risk managers say: The hell with the insurance industry; we ought to go into the alternative marketplace.' What does that do in terms of cycles and insurability? That is what the insurance industry calls adverse selection: The good risks go away, and they're left with more and more bad risks."

The problem of insolvency is also complicated by the issue of price versus security. Mr. Clark recalled an astronaut who, following a minor fire on a launchpad prior to liftoff, cracked: It's comforting that we got the low bid in terms of services and suppliers."

"I don't know what the answer is," he said. "Most risk managers know in their hearts that they want a long-term relationship with a carrier, that they want to live with them day in and day out. But they also have management that says: 'You can save me 20 percent by going to the Threadneedle Insurance of Grand Cayman.'" The savings to management, he added sardonically, are funneled into year-end executive bonuses.

Insolvency is further complicated by a lack of forecasting abilities. "A general insurer today will know in one year about 34 percent of the ultimate claims for general liability and about 67 percent for workers' compensation. In four years, they'll know about 79 percent of general liability and 95 percent of workers' compensation. That's fine for the primary insurers, but much of what a primary insurer does is based on what the reinsurance market does," Mr. Clark said. "If you look at the same state for a reinsurer, at the end of one year, a reinsurer will know about 4 percent of the general liability claims and about 9 percent of the workers' compensation claims. After four years, a reinsurer will know about 33 percent of the general liability claims and about 32 percent of the workers' compensation claims. So there's this thing that feeds upon itself; it's part cycle, part long tail versus short tail."

Warning Signs

So how does a risk manager know if a carrier is teetering on the brink of insolvency? Mr. Clark believes the signs include an approach of underwriting anything, particularly in risky lines or ones in which the insurer has inadequate controls, reserve levels and rates, bad investments, unsound reinsurance, late claims payments and a tendency of "giving the pen away" to managing general agents. Other signs are poor audit opinions, disputed or no actuarial certification letter, SEC loss reserve disclosures that are not made public, and changes in auditors, actuaries and management.

Rather than wait for bad news to hit the headlines, Mr. Clark urged risk managers to research the solvency of their carriers. This research does not involve elaborate investigations, but rather requests for information that should be available to the public. "In the past five to six years, 50 percent of insolvencies occurred in the excess and surplus lines areas"' Mr. Clark said. "Most surplus lines carriers are unlicensed, unregulated, probably unrated, but their financials are available."

Other sources of information include the National Association of Insurance Brokers, rating agencies, insurance department examination records and, as Mr. Clark added, the exchange of "gossip, hearsay and innuendo." He noted that obtaining this information is a proactive process. "You have to be out and active in the business which you are in," he said. "You must do your due diligence today and not tomorrow."

The Workers' Comp Mess

For those who confuse real life with make-believe, Noreen Orbach is quite clear which is which. "I wish I could stand here and say that I've got a quick fix, and when you leave here you'll know how to save hundreds of thousands of dollars in workers' compensation," she said. "But neither can I click my heels nor spread fairy dust. We're not going to come up with quick answers or quick fixes."

Ms. Orbach, president of the Midwest Business Medical Association, a regional preferred provider organization, noted that workers' compensation costs are increasing 10 percent annually, and that most workers' compensation carriers "are saying they have not posted a profit since 1985." The causes of this dilemma, she explained, include an aging work force, expensive medical procedures, increased drug and alcohol abuse, a lack of incentive for medical providers to practice cost-effective or cooperative care and new diagnoses that sometimes lead to litigation when carriers refuse to recognize the problems.

However, insured employers are also to blame. As costs climb, Ms. Orbach said, employers spend little time in addressing the problems, other than voicing frustration. "Similarly, employers inadequately follow-up with employees on their injuries or get involved in claims processing. If you sit there and say you're frustrated and you're facing costs and you put the blame on everyone else, go and look in the mirror," she said.

Ms. Orbach argued that too much emphasis is placed on employees who file false claims or exaggerate injury severity. "In most instances, that employee wants to get better and return to work," she said. "We all focus on the employee with a hidden agenda, but usually the employee who's looking to achieve some kind of financial gain from a workers' compensation claim is an indication there are other problems in the workplace."

Ms. Orbach believes that the business community has adopted the fatalistic view that workers' compensation is an uncontrollable expense. However, she disagrees with this belief. "The overall goal of sound managed care is simply achieving quality care, intelligent prevention and informed buying," she explained.

Ms. Orbach told the risk managers they should look for a "comprehensive and geographically diverse universe of providers sensitive to workers' compensation injuries." The geographic diversity is important, she added, because employees rarely live in the same neighborhood. Ancillary and alternative providers, as well as psychiatrists, psychologists, chiropractors and podiatrists, should be considered. She cited the need to discount prescription drugs and to issue identity cards to record prescription orders. Furthermore, risk managers must perform medical necessity audits, similar to line-item audits, and they must work in partnership with providers. "You must be strict but punitive to avoid giving the image that you're cutting benefits," she said.
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Author:Hall, Phil
Publication:Risk Management
Date:Dec 1, 1991
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