Thinking Outside the Box

July 2003

Sometimes insurance in its fundamental form is not the answer to clients' problems, for miscellaneous reasons. Other more interesting methods helped to solve the risk problem. Whether it's turning to another market or developing an alternative risk funding approach, it pays to look at other less conventional ways to get the job done.

by Peter M. Polstein

One of the fun “things” to do in this rather interesting and professional business we’re in is to create different ways to accomplish the placement of an insurance program. This is especially true when the risk is either difficult or multifaceted. For the most part, what we do is repetitive, at times boring, and only once in a while exciting. In a way it’s like the average golfer who swears the game is miserable, and wonders why he should continue to bother, when he makes that one shot that keeps him coming back for more.

Let’s take a look at three examples of having fun, in a business where professionalism is always tested, and the responsibility for the protection of other guy’s assets falls squarely on your shoulders.

Decent Program—No Takers

Quite a few years ago, I had the dubious pleasure of having to put together a workers compensation program where the majority of the risk involved United States Longshore and Harbor Workers (USL&H). To make matters worse, the experience left much to be desired, and there was a significant spread of risk. The plus side was that the insured had a substantial audited statement, with a large amount of liquidity, and the experience could be partially engineered under the right circumstances.

The actual analysis of the risk was straightforward, and we had an accurate loss picture which had minute detail for over 10 years, which enabled us to run an actuarial projection.

The marketplace was somewhat similar to today’s: it was hard, and USL&H was a tough class to negotiate irrespective of deductibles or self-insured retentions which required some rather tricky functional administration in order to become a multistate self insurer with federal guidelines. Despite what was considered by a number of potential insurers as a quality submission, no one would bite.

It’s in those situations that you need to think of something which mirrors the insurance needs, and what we came up with was submitting the risk to a single multifaceted life insurance carrier, who could, and did, provide a competitive program, utilizing various retentions (which they classified in-house as deductibles) which mirrored the USL&H overall requirements. How did we have qualified paper issued? Simple, the life insurer owned a large property/casualty insurer licensed in all states who issued the paper, and was reinsured by the parent. The casualty insurer also picked up any attendant liability provisions on a net basis—reinsurance by the life company included the following.

• Life insurance
• Long-term income disability
• Medical insurance, including a separate schedule for loss of limb, etc.

Because of their overall administration costs, the insured—who had no desire to maintain a claims department per se—saved over 3 points in non-risk costs and the potential of excess charges. Additionally, we had negotiated a dividend which was substantial predicated upon their overall loss picture and ultimate experience.

Turning to Marine

Awhile back I had two multinational clients, each of which manufactured what could only be considered as hazardous products, each having multiple locations, where the risk assessment covered about the entire insurance arena. In both bases, the client had a limited amount of personnel who could be allocated to the so-called risk management segment of their financial department, and their goal was to find a methodology which would simplify their insurance program. Each, while unique in their product, did have commonality to the degree that they mirrored each other in need, despite a substantial size differential.

Both owned real property, had significant contents, production equipment, improvements and betterments, a huge potential for loss of income, transit risks including warehousing and redistribution, and potential for theft. Irrespective of size differential, both had substantial balance sheets with excellent cash flow, and were extremely conscious of their potential for loss, and had in place a superb engineering program.

The answer was really fairly straightforward: we simply put together a well-organized submission to two major marine underwriters who we knew could underwrite, utilizing a wide variety of deductibles, the entire risk. In both cases, we delivered a single policy, world wide in scope, covering the following.

• All real and personal property
• Business interruption
• Boiler and machinery (including production equipment, and off-premises failure)
• Inland transit
• Ocean transit
• Warehousing

And all were covered on an all risk of physical loss or damage form, most of which was manuscript, with significantly broader terms and conditions than the usual so-called package forms available.

By the way, both contracts contained all the “bells and whistles” including one which I always like to get in, “control of damaged merchandise.” The wording provides the insured with the absolute control of the merchandise damaged without insurer interference. Obviously, some insureds could care less, but in these two cases, they did care.

As a side light, both of their commercial liability contracts were underwritten containing substantial retentions, with the insured having control over their own claims destinies, including the use of their own counsel who were experts in the defense of the insured’s potential claims.

Alternative Risk Funding

Fairly recently, I was given the opportunity to think about an alternative method of insuring a fairly significant medical program, where the generated costs had been climbing with the attendant non-risk costs, causing real concern for the insured. Interestingly, the average aggregate annual claims were fairly constant, and despite their current program which included a fairly substantial retention, and the purchase of a stop loss cover, costs—both risk and non-risk—were climbing.

The insured had excellent records, which indicated occasional heavy hits, but for the most part, claims were the usual low- to mid-range medical procedural costs.

I suggested that the insured contemplate leaving their lower retention and accept what would be their annual aggregate, thereby driving the attachment point for the stop loss to a higher level. At the same time, I suggested that they might want to enter into an alternative risk transfer program, or ART, and place some bulk dollars with a reinsurer, on a fully tax deductible basis as a hedge against “blowing” the average aggregate. The so called ART program would either fund losses over the average aggregate, simply be left as an occurring hedge, or used at some point to pay stop loss premium.

The non-risk costs were cut dramatically because they were in a location with adequate hospital and medical facilities, and had in place a “clinic” for handling minor to moderate medical situations, prompting them to consider a local third-party administrator for their overall claims administration excess of their “clinic claims.”

Obviously, the “up-front” monthly premium which the insured had been paying to the current stop loss provider was dramatically reduced due to the insured’s increased participation, not to mention their savings in use of money, which they now held until specific claims needed funding, which had a substantial lag time.

Conclusion

Sometimes, insurance in its fundamental form isn’t necessarily the answer. The key to having some fun is to think outside of the box, where on varied occasions you may well find another more interesting way to solve the risk problem.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author’s employer or IRMI. This article does not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.