The Future for Self Insurance

MASI – September 29, 2011

Billy Roberts, (Recent Grandfather) Independent Observer

How can we know what to expect in the future?

Understanding the past Understanding the dynamics of our environment Identifying & quantifying the potential conditions

& events that are game changers

This process becomes complicated because each of us, depending on our personality type and background, interpret the facts through the lens of our own bias.

Myers & Briggs – Personality Types

4 Preferences

Extraversion (E) or Introversion (I)

Sensing (S) or Intuition (N) Thinking (T) or Feeling (F) Judging (J) or Perceiving (P)

All types are equal

ISTJ ISFJ INFJ INTJ

ISTP ISFP INFP INTP

ESTP ESFP ENFP ENTP

ESTJ ESFJ ENFJ ENTJ

Background for my perspective

INTJ(2% of the population)

Have original minds and great drive for implementing their ideas and achieving their goals. Quickly see patterns in external events and develop long range explanatory perspectives. When committed, organize a job and carry it through. Skeptical and independent, have high standards of competence and performance – for themselves and others.

History

Workers’ Compensation prior to the late 1980’s Insurance & single qualified self-insurance were the only

options. Consistently profitable line of business for insurance

companies. Rates were virtually identical for all insurance

companies. Catastrophic claims were those in the $100,000 range. Claimants got medical treatment and bills were paid. Almost all injured workers would rather return to work

than stay home and live on state indemnity benefits. Illegal drugs were not as potent and pervasive.

History

Things began to change Medical cost inflation

Bill review, fee schedules, PPO’s, etc Cost shifting

Medical case management

More liberal interpretation of the law More litigated case costs Increased threat of bad faith Litigation Management

Illegal & prescription drug abuse became rampant Contributing to both cause & cost

History

By the early 1990’s Rising costs lead to WC becoming an unprofitable line

Severe underwriting restrictions by companies Massive growth of the Assigned Risk Plan (50%)

NCCI administered plan National reinsurance pool 9 Servicing carriers (one had office in Miss.) Generously compensated Incorrect economic incentives (Poorly administered)

Public outcry for: Cost controls Alternative coverage options (group self-insurance)

Consideration of 24 hour coverage options

Self-Insurance

Under the right circumstances and administered properly, self-insurance should always be economically advantageous over an adequately priced insurance product.

Potential benefits Greater emphasis on loss prevention Individualized claim management techniques Retain controllable costs & transfer volatility Choice of best vendors for unbundled services Retain investment income on unpaid claim costs

Two types of self-insurance

Single Qualified Self-Insurance

Group Self-Insurance

(There are distinct differences as discovered through the guaranty association process)

Single Qualified Self-Insurance

Longer term strategic commitment

Individual regulatory oversight Financial responsibility

Decision not generally current cost oriented

Significant initial cash flow benefits Negative upon exit

Multi state complexity

Group Self-Insurance

Once established, participation is individual decision

Participants are joint & severability bound for their part

Regulatory oversight at the group level

Members share in profits

Greater potential for conflict if results are not good Private groups more difficult than public groups

Multi-state complexity

Initial Strategy at AmFed

Assumed that state WC law was here to stay

Provide products & services for the full spectrum of the WC marketplace, at a local level, where it can be most effectively managed A/R Plan --- Voluntary Insurance --- Group Self-Ins. --- Single Self-Ins.

Over time and depending on market conditions, customers might move from one coverage alternative to another, but as long as they stayed in business they could potentially remain a customer. One thing that must be done

Provide the best service in the marketplace Two things that must not be done

Compete against our self‑insurance customers Assume insurance risk at an inadequate price

Predicting the Future

The key to predicting the future lies in our ability to foresee the potential collision of conditions and events, along with the direction and magnitude of change that such collisions might make to the current trajectory.

The better we are at identifying all of these potential conditions or events, the better our predictions of what might occur will be.

The better we are at evaluating the likelihood of these conditions or events, the better we will be at actually predicting the future.

Conditions & Events that will shape our future

The Economy

Interest Rates

Inflation

Insurance Market Capacity

Conditions & Events that will shape our future

Politics Obama Care Cost Shifting Federalization Regulation Energy

Black Swans

Helpful Hints

Never make fun of anyone for something they can’t help; everything else is fair game.

Opportunities usually present themselves as problems.

When the reward is too big, something is wrong or it is temporary.

Be willing to admit mistakes and receive their value.

Helpful Hints

Always assume that you are the dumbest person in the room. You may well be right, but even if you aren’t, it will be an advantage to think so.

Whenever you think that nothing else can go wrong, you have probably overlooked something.

Everyone lives their life in stages. Difficult times are the transitions between stages.

Helpful Hints

Experience is one of those things in life you get right after you really need it. Never be afraid to admit you don’t know something but be ashamed of yourself if you don’t know it the second time around. (no excuses in the internet age)

Conduct yourself as though everyone will find out all of the details.

Helpful Hints

Be eager to apologize and quick to forgive. It just makes life easier.

Thank You !