California has seen a significant workers’ compensation rate drop over the past five years. Legislation passed in 2004 had a favorable effect on insurers’ loss experience, which in turn led to a decrease in rates of approximately 65% over four years. In 2008, we witnessed rates stabilizing after they reached their lowest levels in 2007. Finishing the first quarter in 2009, rates, on average, have been 2-3 percent higher than 2008.  Overall, business has experienced significantly lower rates and there has been healthy competition by insurance companies to retain and win new business.

Recently there have been announcements suggesting a change to this stability. The Workers’ Compensation Insurance Rating Bureau (WCIRB) announced in April 2009 a recommended 23.7% increase to the ‘pure premium’ rate level. Public hearings on the WCIRB report begin on April 28. Any changes to the pure premium rates will take effect on July 1, 2009.

It is helpful to understand how workers’ compensation rates are established and when changes affect businesses. A primer follows:

The WCIRB provides statistical analysis to the CA Department of Insurance (DOI).  The DOI uses the statistical analysis to develop pure premium rates for approximately 500 job classifications (Class Codes) in California. California’s elected Insurance Commissioner is the head of DOI. The Insurance Commissioner advises the insurance companies of the DOI’s recommended ‘pure premium’ rates for all of the Class Codes.

Insurance companies use the pure premium rates as a component to their rating plans. These rating plans will include base rates for each class code and additional modification factors that apply to each policyholder. The pure premium rates are a significant part of the overall rate developed for each class code.  If an insurance company is going to change its rates, they start the process by filing the plans with the DOI.

Once insurance companies file their rate plans with the DOI, the Insurance Commissioner reviews the filings to determine if the rates would be unfairly discriminatory, threaten the insurance company’s solvency, or create a monopoly in California. Unless the Commissioner challenges the rates, the insurance company can start using the new rates thirty days after filing on new and renewal policies. The rates for new and renewal policies will remain in place for the term of the policy, which is usually twelve months.

As previously mentioned, the WCIRB has suggested a 23.7 percent increase to the pure premium rates. A few factors that may assist in moderating the suggested increase may be considered:

• Historically the Insurance Commissioner has reduced the WCIRB’s recommendations
• Our economy is facing financial challenges that will be compounded by increased insurance costs
• The Insurance Commissioner is an elected official with 2010 just around the corner

It is too early at this time to predict how insurance companies will react to the advised pure premium rate changes. Businesses and the financial sectors in California will watch closely to see what enfolds.

Regardless of the outcome, Riviera Insurance Services is well positioned to access insurance companies willing to offer competitive pricing along with offering advice to help keep the cost of coverage lower than market average over the long run.

You can see her picture and bio in the website.

Rental car agencies offer coverage for “Liability” and for “Comprehensive and Collision.”  Riviera Insurance Services recommends including rental car liability on your Business Auto Policy (BAP) and purchasing rental car comprehensive and collision from the rental agency.

I am aware of a tragic auto accident in which an intoxicated employee killed several people while operating a rented vehicle. Rental companies simply do not sell high enough limits to protect a business for such an extreme event, however a business with a properly endorsed BAP, plus an Excess/Umbrella policy, will be better prepared to meet the full liability of such a costly accident.

For several reasons, RIS recommends purchasing the rental agencies “Comp and Collision.” A BAP may not provide some coverage the rental agencies require, such as loss of use and replacement cost. Coverage purchased through the rental agency will match up with the requirements to protect the rented vehicle.   In addition, a claim for even minor vehicle damages will appear on the business’ claims experience and loss report, thus negatively affecting their future BAP coverage and premium over the next five years. If the claim is covered through the rental agency insurance, it will not affect the BAP. Should damage occur to the vehicle, the “Comp and Collision” coverage purchased through the rental agency will allow the driver to ‘walk away’ from the time consuming hassle of the claim and paper work he/she may otherwise need to endure with the rental agency.

Many businesses that frequently use rental vehicles find it convenient and economical to prearrange rates and coverage with one or more favored rental agencies. The agencies may be willing to lower the rates when they are assured of repeat business. Maintaining a prearranged contract with a rental agency will eliminate the possibility of an employee making an incorrect choice when signing the rental agreement and will provided consistency in coverage.

The above advice applies to travel within the United States. For companies with travels outside of the US, we recommend purchasing all the insurance offered by the rental agency in addition to independently purchasing excess liability insurance to provide higher liability limits. As with other international business activities, there are often unique insurance features to consider when insuring your business and employees. Riviera Insurance Services is here to help you with all your insurance needs!

• Contact your insurance agent/broker.  If you do not have a complete copy of your policy, ask them to provide it.  The agent/broker will submit the claim to the insurance carrier and then the insurance company will contact you.   Keep a diary of all correspondence.
• If your home is not completely destroyed, then make reasonable temporary repairs to protect against further damage to the home. Keep receipts for all temporary repairs.
• Prepare for the meeting with the insurance company claims adjuster.  Do not expect your claim to be resolved in the first meeting.  Settling a claim is a process.  The claims adjuster should help you understand the process.  If you feel this is not happening, contact your agent/broker.  .
• Be wary of contractors, attorneys, and public adjusters who solicit you to hire them and sign documents.  Check them out.  Hiring an attorney or public adjuster will remove you from communication with your insurance company and agent/broker.  The first course of action is to work directly with the insurance company and the agent/broker.  If there are material issues you cannot resolve favorably, then a public adjuster or attorney may be a resource to help you.

One of the best resources is the California Department of Insurance.  By going to www.insurance.ca.gov , then clicking on Wildfires Consumer Information, you will find a number of helpful sections to review.

The Insurance Information Network of California at www.iinc.org  provides another great website.  The website has many helpful hints including how to create an inventory to present your claim.

Those who have been spared from the recent fires should take this opportunity to review their policies and update as necessary to prepare for any future disasters.  Reviewing construction costs and personal property values and re-evaluating your current insurance coverage may be in order.  Taking the time to do this will better prepare you for the next disaster. Your insurance agent/broker is ready and willing to help you.  If you are the next victim, the time invested will be well worth the effort.

Most people associate AIG with the insurance industry.  However, AIG is much more than an insurance company.  The best description of AIG’s business model is that they are an international financial conglomerate. AIG’s product line falls into two categories; insurance and financial services.  These products are available to businesses, individuals and families.  AIG operates in more than 130 countries and its stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo

A business unit, separate from AIG’s insurance business, has been heavily invested in a financial instrument called a credit default swap (CDS) issued by AIG Financial Services.  The CDS product provides protection against a default tied to corporate debt and mortgage securities.  The CDS product requires AIG to post cash collateral if the value of the corporate debt or mortgage securities deteriorate.  It is well known that the housing market has deteriorated; much of AIG’s CDS exposure is tied to sub prime mortgages.  Mid-September AIG was required to post $14.5 billion in cash to meet the collateral obligation.  They were unable to do this, in part, because the insurance company regulators would not allow AIG to shift cash from AIG’s insurance companies to shore-up AIG Financial Services.

Faced with the inability to meet the collateral cash obligations, AIG was facing Chapter 11(reorganization) bankruptcy.  The Federal Reserve decided that this could hurt the U.S. economy, which was already reeling from sub prime mortgage losses.  The federal government announced it would provide AIG with an $85 billion loan.  In return for the loan, the federal government receives 80% control of AIG stock.

AIG’s insurance operations are very healthy.  AIG’s U.S. commercial insurance operations have $26.7 billion in policyholder surplus with additional surplus from U.S. personal insurance operations and international subsidiaries.  As cited earlier, AIG could not shift this surplus to meet the collateral cash obligations of the CDS portfolio.  This protection is a savior for policyholders relying on AIG’s insurance policies to respond to current and future claims  

The future for AIG is starting to take shape.  The new CEO will lead the effort to sell parts of the conglomerate to pay off the $85 billion loan and bring AIG back to a financially sound entity.  Given the profitability of the insurance operations, it appears some of these entities will be sold.  In the U.S., AIG has 71 insurance company subsidiaries.  Already, several other major insurance companies have expressed interest in acquiring portions of AIG’s insurance operations.

Setting aside the financial service operations of AIG and focusing on the insurance operation, it appears the regulatory practices and oversight has successfully protected policyholders.  Key provisions have sheltered the insurance operations so that AIG could not strip-away policyholder surplus to correct the mistake they made in the financial service business.

The damage we see to AIG’s insurance sector is the negative perception of AIG’s image.  The insurance companies left in the AIG conglomerate will have an uphill battle to turn their image around.  Potential challenges include:

• Current policyholders may decide to leave mid-term.  At the very least, policyholders may seek alternatives at renewal.
• The new CEO has the task of stabilizing the conglomerate.  Accomplishing this may include selling some or all of these insurance companies. 
• Insurance brokers may steer policyholders away from AIG.
• AIG employees may seek employment elsewhere.

One final editorial question for thought: What can be done to persuade corporate executives to improve performance and stay within risk tolerance that keeps the corporation out of harms way?  I bet we will hear more on this topic!

Successfully managing risk requires following a process. Business leaders need to protect their businesses from financial disasters. Years of hard work building a company can be wiped out by one event.

The reality for business leaders is that day-to-day operations take precedence. Deadlines, delays, hiring, firing, new opportunities, and surprises are challenges that all businesses face. Planning is a hard task to find the time to do. The phrase “some day I will do that” is a term we have all used when it comes to risk management.

When given the opportunity, Riviera Insurance Services helps businesses focus on risk management. We provide this guidance as part of our overall service that includes the placement of insurance. Insurance happens to be an excellent tool for managing critical risks. However, before insurance is purchased, business leaders should go through the risk management process.

The art of developing a risk management plan includes four distinct areas:

• Risk Identification
• Risk Quantification
• Risk Treatment
• Risk Monitoring

“Risk Identification” requires reviewing all aspects of the business and identifying what threats are lurking. Each business has risks associated with the operations, assets, employees, and vendors. The risk of an event should be broken into two parts. First, can the event cause a financial loss? For example, a fire can cause a financial loss if it destroys property. The second part is the consequence of the event. The consequences of a fire include damage or destruction of property, slow down or shut down of operations, failure to meet customer expectations, injury or worse for employees and other individuals. Putting it all together and using the example of a fire, the risk to a business can be summarized as follows, “A fire can destroy our building, all of our contents, shut down our operations, and cause bodily injury to employees and bodily injury and property damage to third parties for which we will/can be held accountable.”

“Risk Quantification” of each identified risk is the next step. The financial consequence of the risk needs to be assessed along with the event occurring. Below is a simple matrix for prioritization of risks:

Impact

Risks with significant financial consequence (3 or 4) and high probability (3 or 4) are “Critical” events to manage. The next priority “High” is for risks with significant financial consequence (3 or 4) and little probability (1 or 2). The next priority “Medium” is for risks with little financial impact (1 or 2) and high probability (3 or 4). Risks with “Low” rating are those with little financial impact (1 or 2) and little probability (1or 2).

Using an example, let’s explore this concept.

ABC Manufacturing Company is a publicly traded company with 100 employees and sales of $100 million. ABC manufactures high-end lighting fixtures for residential and commercial customers. ABC boasts a strong balance sheet, increasing gross revenue and a pretax profit of 15%. Future expansion plans include possible acquisition of competitors and expanding to the European market.

Applying the impact grid, the following financial consequences are assigned:

After a brainstorming session and further refinement, the following risks are identified as Low, Medium, High, and Critical by the management team.

Risk Treatment is the decision of what to do with the risk. The four optional actions are:

1. Avoidance
2. Transfer
3. Mitigate
4. Accept

Looking at three of the risks identified in the brainstorming session, below are some thoughts on using the risk treatment options.

Looking at the risk “one supplier of a key component” the potential consequence is that the supplier is unable to produce the key component, thus interrupting the production of the final product. Since the rating of this risk is “low,” management has decided to accept the risk. To mitigate the risk, management has identified two other potential suppliers and has increased the inventory of this component.

The “key employees leaving the company” risk is rated medium by management. The potential consequences include loss of leadership and uncertainty of future success. If the event is because of death, then the financial consequence can be transferred using life insurance. To mitigate, the board of directors will look for potential candidates, both within and outside the company to fill future leadership needs. When a key employee leaves the company, there is often a chance that one or more clients will follow the employee or move to another competitor. Management has decided the best approach to mitigate this risk is through semi-annual review of client relations with a focus on team relations. In addition, management will review its employee handbook and other communications related to ABC’s clients’ intellectual property to discourage exiting employees of wrongfully using information to solicit clients.

The “destruction of ABC’s facility” is rated high because it could cause the business to collapse. Causes leading up to this potential event include fire, earthquake, terrorism, and even an aircraft crashing into the building. Management has developed an extensive Disaster Recovery Plan with several mitigating processes and plans ABC purchased insurance to transfer the consequences caused by fire, terrorism, and aircraft; however, ABC is accepting the first $25,000 of any loss. Insurance is purchased to transfer 50% of the maximum possible loss due to earthquake.

Risk Monitoring is the ongoing process of identification, quantification, and treatment. Some businesses go through rapid changes while others remain more stable. Risk monitoring includes setting dates and times to review the current plan. Setting a schedule to review risks helps prevent the negative consequences of risk from catching everyone by surprise.

At Riviera Insurance Services, we enjoy working with businesses that want to manage their risks. Our job is rewarding when we are able to participate with the business owner and key decision makers who are the risk takers. Deciding where to allocate our clients’ precious dollars is one of the ways we successfully retain our clients for the long run.

Your team at Riviera Insurance Services

Many employers spend a considerable amount of money providing a competitive employee benefits program.  Studies confirm that employee benefits play a major role when it comes to attracting and retaining talent. It can safely be said that most employers would like to find ways to lower the cost of those benefits while still offering an excellent benefits program for their valued employees. 

Creative large companies (200+ employees) are able to find savings through partially self-insuring the employees’ medical benefits.  Using a scaled down version, Riviera Insurance Services is working with smaller employers that have less than 50 employees so they may have an affordable program that emulates some of the traits of the partially self-insured medical benefits programs.

Please keep in mind two recent studies as we further explore a new structure of group medical insurance for employers with less than 50 employees:

• A Watson Wyatt study states that 72% of plan participants incur only 11% of total healthcare spending, while 4% with chronic or catastrophic illnesses incur over 50% of all healthcare costs.
• Another study from Pacific Business Group on Health cites 50% of employees account for less than 3% of costs and 85% spend less that $1,000 per year.

With this information in mind, one option to consider is the Employer Driven Health Plan™ (EDHP) cost model developed through Ben-E-LECT. The EDHP model starts with a PPO low premium/high deductible ($2,500-3,000 range) insurance product.  The employer structures the high deductible so that the employee’s deductible and out of pocket maximum is similar to the cost of the traditional small deductible PPO plans typically offered by businesses, thus the cost to the employee remains fairly level.  The employer assumes responsibility for the majority of the high deductible for any plan participant who incurs medical expenses beyond $250-$500. 

When our Riviera team meets with a potential client, we assist management in determining if an EDHP plan is practical for that particular company. We review pricing with various premium and deductible structures, possible claim scenarios, and the cost of the Third Party Administrator (the TPA assists with claims, deductibles, and payments to insurance companies). Comparing these costs to a traditional PPO will assist in the decision making process.

The EDHP model becomes a compelling choice when the savings for expected claims usage produces a savings of 30% or more and the worst case scenario produces no more than a 5-10% cost over the traditional small deductible PPO model.

Cost, plan structure, and doctor network are also important from the employee’s perspective.  Designing the EDHP model needs to take into consideration the following for each plan member:

• monthly premium
• deductibles
• co-pays
• out-of- pocket maximum
• network of physicians and facilities

When changing to the EDHP model, employers want to make sure there is clear and timely communication with all plan participants. Both employers and employees will want to be educated on the new benefits program. At Riviera Insurance Services we work with management to assist in this communication process. Communication will include the following items:

• monthly premium
• deductibles
• co-pays
• out-of- pocket maximum
• how to process a claim
• contact information for individual assistance

The EDHP model is a creative way to combat escalating costs.  There is an immediate benefit of significant savings on the monthly premiums; a benefit that the employer may chose to share with the employees in one or more ways. (Ask us how!) Understanding that the usage of healthcare services has traditionally been low for a large percentage of plan members allows the employer to consider assuming some of the risk of a large deductible model.

Quality and affordable healthcare insurance is everyone’s goal.  At Riviera, we truly enjoy working with clients to find the right solution for each individual business.

¹Source: Watson Wyatt Worldwide, “Financial Incentives Alone Unlikely Curb Health Care Costs, Watson Says,” April 24, 2006
²Source: “PBGH Member Benefit Strategies Promoting Quality, Value and Access,” February 2005.

From a risk management perspective, cell phones and vehicle usage occur in the following three scenarios.
                        1. Company owned vehicles
                        2. Employee owned vehicles used in the business
                        3. Rented vehicles used in the business

   Depending on your business, all three scenarios may apply.  Below are some ideas to consider implementing to control the risk of vehicles and cell phone usage.  In addition, insurance is an important tool we use to help our client’s manage the financial consequences when an accident happens.

1. Require Hands-Free Devices Only

This is the law, so this is a “must policy”.  You may want to go so far as to provide the hands-free equipment for the employee.  Hands-free operation does not guarantee 100% safety but will provide remote workers with less distraction if they must use their cell phone on the road.

2. Warnings in Company Vehicles

Putting notices in all company vehicles reminds employees that the main function of the vehicle operator is to arrive safely at a destination.  Options to the hands-free policy could require either passengers being responsible for handling the cell phone or the driver pulling off the road before using their cell phone.

3. Provide an Answering Service or Forwarding Option

This option gives remote workers the ability to have calls forwarded to another individual or to an answering service.

4. Shut It Off

It may be that you do not want any cell phone usage while operating a vehicle.  To some, this may not seem practical, but, from a risk management standpoint, it is the best policy.    

Whatever you decide, now is the time to do something about this exposure.  In-vehicle cell phone usage does increase the chance of an accident.  If you do not have a written company policy addressing the use of cell phones while operating a vehicle on behalf of the business, now is a good time to change your company’s handbook.  Businesses operating in more than one state, or outside the United States, should be aware of the local laws. 

Changing the way of using your cell phone will become habit over time.  Not changing opens up a host of problems.  Get on board with this early, so when July 1st rolls around, everyone in your business has new habits when using their cell phone.

Historically, the reaction from the insurance companies has been the tightening of underwriting, and the pricing process. Inevitably, some insurance companies are unwilling to write new policies, or decide not to renew existing policies. Fortunately, there have always been some other insurance companies willing to jump into the market place to offer coverage and fill this void.

From a political and regulatory perspective, all eyes will be on how the insurance industry responds to claims, renewals and future pricing of homeowners insurance in the stricken areas. Insurance Commissioner Steve Poizner has assured homeowners that rates will not increase and insurers will not leave the market. He stated that insurers in California are healthy and have the money to pay out claims. There are numerous press reports stating that Allstate Insurance Company stopped writing new homeowners insurance policies this summer, citing financial risks from natural disasters like wildfires and earthquakes. These reports raise concerns that other insurers may follow suit.

Commissioner Poizner will have his hands full with balancing the needs of homeowners, while the insurance companies push to recover from the payouts. Backing up the insurance companies are the reinsurance companies who typically are hard hit in a catastrophe. With increasing cost of reinsurance, insurance companies will be hard pressed not to pass this cost on to the homeowner.

As we move into the 2008 legislative session, legislators and Commissioner Poizner are expected to examine whether the legislation responding to the 2003 wildfires in San Diego and Southern California has worked as intended in simplifying the claims and settlement process, or whether additional measures need to be enacted to assist the response to the 2007 wildfires.

Commissioner Poizner is responding to the challenge of timely settlements for homeowner claims. To assist with the prompt processing of insurance claims, Poizner has issued a declaration to allow California Department of Insurance (CDI-licensed insurance adjusters) and insurance companies to use the services of non-CDI licensed adjusters, such as those from out-of-state, to assist with the processing of the multitude of insurance claims arising from the firestorms. However, the work performed by the non-CDI licensed adjusters must be under the active direction, control, charge, and/or management of a CDI-licensed insurance company or adjuster.  In addition, insurance companies and insurance trade associations are coordinating with the Governor’s Office of Energy Services to establish additional claims and assistance centers in order to make it convenient for homeowners to file claims.

In conclusion, the recent wildfires have placed a strain on insurance companies providing home insurance in Southern California.  Insurance Commissioner Poizner is actively working to provide prompt and fair claims services and keeping watch over how insurance companies react.