Insurance considerations for the nursing home care industry

October 23rd, 2014 No comments

The population of Baby Boomers age 85 and over is expected to triple by 2050, according to the Census Bureau. This growth may result in a greater need for nursing home care services – increasing the industry’s risk exposure. In their recent Captive Review article entitled “Preparing for the boomers,” Milliman consultants Jill Rosenblum and Tony Bloemer answer several questions nursing home management should consider related their insurance program.

Here is an excerpt from the article:

Am I big enough to self-insure?
According to the US Centers for Disease Control and Prevention, the average nursing home houses approximately 88 residents. Generally speaking, a single 88-bed nursing home is not big enough to take on much risk or start a captive. For a larger nursing home or system, the decision to retain risk is dependent on the financial stability and risk appetite of the insured. A [well-capitalized] nursing home system should consider a large-deductible plan and based on its annual insurance expense could consider forming a captive. Several concerns specific to nursing homes, such as the large variance of claim costs by state and the impact of Medicaid residents on claim frequency and severity, are important to consider when assessing the overall size of the [program] and the ability to self-insure. An annual insurance expense of $500,000 across all casualty coverages is a rough starting point when considering a large-deductible [program] or formation of a traditional single-parent captive. Forming an 831(b) captive, popular as of late, can be considered if the annual insurance expense is less than $1.2m.

What are the advantages and disadvantages of retaining risk?
Purchasing insurance provides financial stability in the short term but is less cost-effective in the long term. It is no surprise that insurance companies charge more than the expected cost of claims in order to generate a profit. Most small insureds are willing to pay the insurer a profit margin in order to [stabilize] their own results. However, when an insured becomes large enough to absorb some of its own volatility, it makes sense to start retaining some risk to keep the insurer’s embedded profit in-house. An easy way to do this is by taking on a large deductible. With the baby boomer generation on the long-term care horizon, now is a great time for nursing home systems in particular to reassess their insurance [program].

What role should the c-suite have in creating business value through enterprise risk management?

October 22nd, 2014 No comments

Enterprise risk management (ERM) is at its most effective when it informs every aspect of the business and when the ERM framework is continually evaluated and updated. A key objective for senior management and board members should be to foster a risk-aware culture across the organization, and to actively monitor and update ERM.

A new paper entitled “The role of top management and the board in ERM” by Milliman’s Mark Stephens, Olivia Wang, and Vikas Shah assesses the characteristics of executives at companies with the best ERM frameworks. The paper takes a look at companies labeled “Trendsetters” in the Milliman Risk Institute’s 2014 ERM survey.

For more perspective on the survey, read this seven-part blog series.

Milliman releases analysis of participating business in Asia

October 21st, 2014 No comments

Milliman today announced the release of a new research report, “Participating business in Asia: Where do we go from here?” The research highlights strong demand for participating business (par) in Asia, and the challenges it has faced from the recent low interest-rate environment.

“Par business represents a significant proportion of the new business being sold in Asian markets and has been gaining market share in recent years”, said Milliman Principal Richard Holloway. “Following the Global Financial Crisis, we have seen a general shift away from unit-linked products toward par products, perhaps because consumers have come to recognize the value of the underlying guarantees that par offers. With this latest research, we look more closely at the concept of unitized with-profits (UWP) as an alternative product offering for insurers in Asia to consider. UWP has yet to develop a foothold in Asia, but it may be a more appropriate platform for writing par policies in the future. ”

The report offers an overview of par business in China, Hong Kong, India, and Singapore before introducing the concept of UWP, which became the main type of par business offered in the United Kingdom during the 1990s. It then explores how UWP could be applied in the specific example of the Singapore market, with comparisons to existing products.

To read the entire research report, click here.

How will Prop 46 and ACA affect medical professional liability?

October 20th, 2014 No comments

The medical professional liability (MPL) industry experienced sustained profitability in 2013. Profits are likely to continue over the next several years. There are a few market uncertainties like healthcare reform and California’s Proposition 46 that will test insurers’ current business models though. In this article, Milliman consultants Richard Lord and Stephen Koca explain how these issues may affect the MPL industry moving forward.

This excerpt provides some perspective:

Physician shortage?
The huge influx of insured individuals, which is expected to top 30 million by the time ACA is fully implemented in 2016, could lead to a shortage of physicians, who may turn over some of their duties to nurse practitioners or physician assistants. Lacking the same expertise as a physician, these providers may fail to diagnose or misdiagnose some condition. On the other hand, they may form more personal relations with patients, and that has been shown to reduce the likelihood of a lawsuit.

Under collateral-source payment rules, the ACA may result in lower awards, since the cost of future medical care would no longer be included in awards, thereby limiting MPL insurers’ exposure to the cost to future health insurance payments in an award, or it might have only a negligible impact, depending on how it is administered and the courts’ decisions.

These scenarios are actually less than a handful of the dozens of possibilities that can arise from the ACA. Any one of the ACA’s provisions is unlikely to upend MPL insurers’ cost structure, but in tandem, the layers and layers of issues stated or implied in the ACA could tip costs in a direction that might prove difficult to absorb.

The ACA, however, is only one of the uncertainties facing MPL insurers.

The California question
In November, California voters will decide whether the state’s landmark statute, which caps non-economic MPL damages at $250,000, will remain intact, as written. Enacted nearly 40 years ago, California’s Medical Injury Compensation Reform Act (MICRA) has withstood a series of constitutional challenges, the last of which was in 1985.

…But MICRA is now being challenged in a ballot proposal [Proposition 46] that would raise the cap on non-economic damages to more than $1 million.

If enacted, the proposal would raise the cap on any claim that is outstanding as of January 1, 2015. MPL insurers and self-insured entities would see their liability increase for any unsettled claim on their books, as well as future claims. In all likelihood, claim severity would increase, but the frequency of claims would almost certainly rise if litigation were viewed as a more attractive means of compensation than it now is.

This development has far-ranging consequences, given the size of the California market, but it could also signal a change in sentiment if other states decide to follow California’s lead—since California has long been a state that’s a bellwether for social and economic change.

According to the National Conference of State Legislatures, 35 states have some type of cap on medical professional awards. How many states might again follow California’s lead and challenge reforms?

These two articles detail the influence that Proposition 46 will have on the future of MPL insurers and healthcare providers:

CA Proposition 46: The end of an era for noneconomic caps?
CA Proposition 46: Undoing tort reform?

Lawyers professional liability update: Insurers’ string of strong financial results continues

October 13th, 2014 No comments

Financial results for 2013 are strong for specialty writers of lawyers professional liability (LPL), with operating ratios at the lowest levels in more than 10 years, insurers returning 30% of their net income to policyholders in the form of dividends, and an all-time high in industry surplus, among other measures.

This issue of P&C Perspectives, authored by Susan Forray and Andy Kline, analyzes the financial results of a composite of 14 specialty writers of LPL coverage for solo practitioners and small firms. The article examines operating results, reserve releases, claim frequency, capitalization, and net retentions.

The Baseball Rule: A hot dog cannot replace a ball

October 10th, 2014 No comments

Carbone-WilliamThe rules of baseball have been under review quite often during the 2014 season. With the introduction of instant replay, pace of play concerns, and the protection of the catcher becoming hot topics, Major League Baseball (MLB) has had its hands full. However the issue of fan protection has also been a hot topic in the insurance world, and is commonly known as the “Baseball Rule.” Could a single flying hot dog have changed this rule, and the fan experience, forever?

The Baseball Rule is an oft referenced defense by landowners (i.e., stadium or arena owners) which limits their legal duty to protect spectators. The landowner’s liability is limited from injuries caused by risks inherent to the game as long as they have provided reasonable protection for fans in the most dangerous areas. This basic protection is usually in the form of protective mesh netting behind home plate and slightly up each baseline. This rule has commonly been applied to protect stadium owners from liability for injuries that are due to foul balls, broken bats, and errant throws into the stands. In a logical extension, the Baseball Rule has likewise been applied to other sports, most notably pucks leaving the ice at hockey games. While a majority of jurisdictions have accepted this tenet, recent cases and court decisions have challenged the standard assumptions. While most challenges have been regarding what areas need higher levels of protection, including farther up the baselines and concession areas in the stadium, the more interesting challenge has involved what constitutes a risk inherent to the game.

While fans in decent seats can expect balls to come their way during the course of a game, promotional items launched into the stands during breaks in play are another story. Flying t-shirts and hot dogs are not risks of the game of baseball, but court decisions to date have extended the Baseball Rule to limit the liability of landowners for injuries. The rationale is that they are not risks associated with the game, but with the ballpark experience. The most notable case to date involves the injuries sustained by John Coomer by a hot dog tossed by the Kansas City Royals mascot Sluggerrr.

Coomer was attending a Royals game in 2009 when he was struck in the head by a foil-wrapped hot dog during a break in play. Coomer suffered a detached retina and has decreased vision, but his case was initially denied under the grounds Coomer was unaware of the risks around him. Coomer was aware of the hot dog toss, a Royals tradition since 2000, but turned away from the mascot. However, in 2014, Missouri Supreme Court Judge Paul Wilson overturned the ruling, stating that the application of the Baseball Rule to promotional items, namely hot dogs, was a matter of law and should have been decided by a judge, not a jury. He also stated that hot dog tosses were not part of enjoying a baseball game like “hearing the crack of 42 inches of solid ash meeting a 95 mile per hour fastball.” While the judge’s familiarity with professional baseball games is questionable (no regular player has ever used a bat over 38 inches), his opinion has sent the case back to the lower court for reconsideration.

This ruling could have a far-reaching impact on the fan experience. If projectile promotional items are no longer covered under the Baseball Rule, the more powerful delivery methods may be scaled back to more traditional methods. Luckily for Sluggerrr, he has a few extra games this October to take his mind off his legal problems.

Moving ahead with ERM, Part 7: ERM action items

October 7th, 2014 No comments

Stephens-Mark (2)In the recent survey conducted by the Milliman Risk Institute of 125 North American risk executives on the current state of their enterprise risk management (ERM) efforts, it was clear that few if any companies have reached perfection in ERM value creation—at least, so far. Even Trendsetters have significant weaknesses to address, and Transitionals and Beginners must improve their executions of basic ERM functions (see part 3 of this blog series for information about the Beginners, Transitionals, and Trendsetters levels).

To achieve ERM that is fully embedded in their operating plans, budgeting and capital requests, and strategic processes, companies need to look at the following action items:

Go back to basics: Most companies still need to improve ERM processes and corporate-wide execution, and sharpen their ability to anticipate the cost of key risk events. Companies should consider enhancing collection of top-down and bottom-up data on risk exposure and improve risk-related communication between divisions and the corporate level. Those that have not done so should create and implement an ERM procedures guide, and explore ways to make workflow for ERM governance more efficient. Doing so will also improve companies’ ability to measure ERM value.
Get the ERM metrics right: Creating value from ERM hinges on translating the analysis of risk exposures into financial and operational goals. This requires developing formulas, calculations, and structures that relate to the key performance indicators the company applies to each of its divisions. It can also include establishing a process for rapid scenario development/
Upgrade quantitative tools for analyzing and managing risk: Companies must be able to make far more rapid decisions about how to address specific risks and combinations of risks, based on more reliable and comprehensive analysis. To do so, they must transition from qualitative to quantitative risk assessment methods, including a high-quality risk metrics framework, risk correlation mapping, economic capital modeling, risk reporting and dashboards, and early-warning systems.
Give ERM a stronger role in budgeting and capital allocation: High-return activities are usually associated with high risk exposure or potential downside impact. Risk-adjusted analysis and ERM collaboration in budgeting and capital allocation assure the soundness of highest-level decisions.
Integrate ERM with performance management: ERM activities support the company’s current business goals, help executives understand any potential variation from objectives, and help link risk-taking activities to risk appetites and tolerance ranges.
Make third-party and supply-chain risk a priority: Even Trendsetters are lagging in these two areas, which are both increasingly critical in a more interconnected, global economy. Global companies in particular must extend their ERM processes to their broader networks of partners and suppliers.

The payoff from these efforts is an ERM framework that creates measurable value while making enterprise-wide risk management much more effective at responding to a rapidly changing risk environment.

To download a copy of the full report, click here.

For more information, please contact Mark Stephens.

What are the latest developments within Indonesia’s life insurance industry?

October 3rd, 2014 No comments

Now that Indonesia’s recent presidential election is over, the country is turning its attention back to the economy. According to the Jakarta Post, unweighted new business premium collections in the first half of 2014 totaled IDR 30.57 trillion, which is equivalent to a 16.3% drop from the IDR 36.52 trillion of unweighted new business premiums collected during the same period in 2013.

The Indonesia Life Insurance Association (AAJI) attributed this slowdown to the recent political activity prior to and after the election and a “wait and see” attitude among the general public. The AAJI also reported a slowdown in single premium sales. Despite the slowdown in performance during the first six months of the year, the director of the AAJI was quoted as saying that he expects the life insurance industry to achieve 15% to 16% growth in total premium by the end of the year, citing stronger growth trends in the second half of the year.

The September issue of Milliman’s Indonesia Life Insurance Newsletter, authored by Amar Mehta and Richard Holloway, provides more details on Indonesian market performance, as well as an overview of recent market news, regulatory developments, and other industry activity.

Moving ahead with ERM, Part 6: Trendsetter case study

October 2nd, 2014 No comments

Stephens-Mark (2)Market-price risk is a top enterprise concern at World Fuel Services (WFS), a Miami-based Fortune 500 company with a global presence in the price-volatile fuel products market. WFS was identified as a Trendsetter in the recent survey conducted by the Milliman Risk Institute of 125 North American risk executives on the state of their companies’ ERM efforts (see part 3 for information about the Beginners, Transitionals, and Trendsetters levels).

WFS provides marketing, sales, and distribution of a wide range of marine, aviation, and land fuels through more than 3,000 service locations worldwide, and has traditionally made extensive use of derivative products to provide hedging for customers and suppliers as well as its own positions.

“I think of ERM as managing enterprise price risk across all our many lines of business,” says Aftab Saleem, vice president, enterprises and derivative risk at WFS. “It may be price risk inherent in contracts, inventory, or trading activity.”

Management of price risk begins in the early stages of any new business. The company has a vetting committee that looks at each new commercial opportunity, identifying a risk range and risk appetite that it can translate into numbers and manage. This includes factors such as market value at risk, the stop-loss limit, and other restrictions that the team might want to put in place.

This proactive approach applies at the everyday trading level as well. WFS’s trading book has a stop-loss limit set for each quarter. This triggers discussions to manage the book’s exposure to market-price risk.

Managing enterprise risk is evolving at WFS, however, particularly in how it supplies management with data that enable forward-looking decisions—a defining quality of companies that create value through ERM.

WFS has two initiatives to push the program to the next level.

The company is taking a more fine-grained approach to risk as an element of strategic planning. WFS has divided its business into multiple units and assessed each for its embedded risks, measured against returns. It looks at historical performances as well as forecasts over three years. The results are overlaid on a risk/return framework, forming a basis for management decisions.

Mr. Saleem is also developing a cash-flow-at-risk model that will show the net position at risk across a broad range of commodities and allow simulations showing the impact on the cash position. “Each type of fuel has different units of measurement and different prices,” he says. “We translate these into one common unit of measure and price, using an underlying conversion factor, and we use that number for simulations.”

In the concluding Part 7 of this blog series, we present a list of action items for Beginners and Transitionals interested in moving along the spectrum of ERM to become a Trendsetter.

To download a copy of the full report, click here.

For more information, please contact Mark Stephens.

Moving ahead with ERM, Part 5: Best practices among Trendsetters

September 25th, 2014 No comments

Stephens-Mark (2)The effect of a fuller adoption of enterprise risk management (ERM) on value creation has been borne out in several prominent studies in recent years. A 2011 study by Robert E. Hoyt and Andre P. Liebenberg of 275 insurance companies found that those implementing ERM programs over an 11-year period enjoyed a 20% premium in firm value over those that didn’t. Standard & Poor’s five-year-old “ERM opinion” rating program for North American and Bermudian insurance companies likewise has reported a stronger positive change in equity prices and lower stock volatility in most years for insurers that it rates as being “excellent” or “strong” ERM programs.

The recent survey conducted by the Milliman Risk Institute of 125 North American risk executives on the state of their companies’ ERM efforts showed that Trendsetters are far more willing to get value out of ERM in the following ways (see part 3 for information about the Beginners, Transitionals, and Trendsetters levels):

Enhanced board oversight: 81% of Trendsetters create value in this area versus 57%, collectively, of Beginners and Transitionals. This ensures that the board is not only more closely attuned to the company’s risk profile, but also better prepared to act on suggested improvements to the ERM framework and processes.
Higher-quality strategic planning: 75% of Trendsetters versus 50% of Beginners and Transitionals. An efficient economic capital model makes for better strategic planning, improving the company’s ability to evaluate strategic initiatives such as mergers and acquisitions.
Better capital efficiency: 81% of Trendsetters versus 55% of Beginners and Transitionals. Better risk-based decisions lead to improved capital efficiency, yielding better return on assets.
Improved performance management: 100% of Trendsetters versus 53% of Beginners and Transitionals. A clearly defined risk appetite statement sharpens performance management, both at the company and business-unit levels.
Stronger brand reputation: 63% of Trendsetters versus 48% of Beginners and Transitionals. A robust ERM system is more likely to prevent negative incidents that could damage a company in the eyes of investors and other stakeholders. Further, it enhances the company’s reputation for grasping the risks and rewards in new opportunities.

In Part 6 of this blog series, we will look at an illustrative case study of a Trendsetter company.

To download a copy of the full report, click here.

For more information, please contact Mark Stephens.