Top 3 Leading Topics in the Risk Management Industry: A RIMS 2022 Recap

For the first time since 2019, the Risk Management Society (RIMS) was able to host their annual conference in-person in San Francisco earlier in April. The conference brings together thousands of risk experts from around the world to share their thoughts on current trends and innovations in the industry of risk management. As COVID-19 rates have been declining, we were happy to have Spring present and exhibit at RiskWorld 2022.

Now that we’re back from the conference and settled into our normal routines, we want to take time to reflect on the main priorities of the industry that were touched on during RIMS 2022. So, if you weren’t able to attend in-person or virtually, here are some of the main takeaways and themes this year.

  1. Climate Change

Sustainability and building climate resilience has been a primary concern for many employers worldwide. With the unpredictability of natural disasters and other climate related risks, it is essential employers enact climate-related precautions in their organizations. Below we have included some of the groundbreaking sessions related to climate change and how to build climate risk strategy.

  • John Merkovsky explained how beyond property and causality damage, climate change can impact supply chains, workers’ compensation, and product liability in his “The Missing Role of the Risk Professional in Climate Resilience” event.
  • In a session titled “Climate Resilience,” Jim Boccher illustrates how employers can define disasters and emergencies and reflect on disaster recovery efforts to better prepare for future climate crises.
  • Spring’s Managing Partner, Karin Landry reviews some of the top current climate risks and how organizations can better prepare physically and financially for future climate threats. Her session also included Hyatt Hotels as a primary case study on how to approach climate risk as well as how to recover quickly from disasters when they happen.
  1. Cyber and Technological Risk

For years cyber and tech have been at the forefront of risk management and previous RIMS conferences. As technological innovations have improved our evaluations of risk, cyber threats and attacks have had the opposite effect.  This year presenters touched on many different facets of cyber and tech risks including:

a)  Artificial Intelligence

Artificial Intelligence has great potential in evaluating risks and is being used to optimize insurance assessment strategies. But AI is still fairly new and is only recently becoming more normalized in risk management. Check out what some of the speakers had to say about AI in the industry below.

  • Brijesh Kumar explained how AI is being implemented into claims management systems to reduce costs and improve efficiency in a very competitive market.
  • Tresa Stephens highlighted how although AI can benefit economic outcomes, it also poses many risk factors for both business and consumers.
  • In a session titled, “How Is AI Going to Disrupt Commercial Insurance?” Sandip Chatterjee outlines how the increasing presence of AI and the vast collection of public and client data can precisely and accurately quantify risk like we’ve never seen before.

b)  Cyber Resilience/Cyber Attacks

Cyber resilience has been key during the COVID-19 era, where many organizations have had to move towards remote and hybrid work. This transition has left employers prone to cyber threats and attacks their pre-COVID model did not protect them against. During RIMS 2022 cyber related risks were the most talked about topic and some of the highlights include:

  • During the “Your Money or Your Data: The New Game Plan for the Escalating Risk of Cyber Crime,” panelists explained how in just one month in 2021, companies paid upwards of $400 million in data ransoms.
  • Mark Hoffman outlines how to build back and streamline communication after a cyber attack, and how to adapt and prepare for the next cyber threat.
  • Steve Tomeo and Joshua Gold dive into regulatory changes in cyber insurance (on a local, state, federal and global level), and how privacy laws can force organizations to pay unwanted legal fees, fines and more.
  1. Diversity, Equity and Inclusion

In recent years, diversity and inclusion has been a top priority for employers around the world, and this was no different at RIMS 2022. Many panels focused on the current landscape of DE&I and how we can better implement equity and understand bias in insurance and benefits. Some insightful sessions included:

  • During the “DE&I in 2022: Have We Moved the Needle?” session, panelists discussed current DE&I risks and opportunities facing the industry and how we can better popularize the insurance and risk management industry amongst future generations.
  • Speakers at the “Culture as a Hedge Against Risk” session outline the importance of fostering company culture with a focus on workplace flexibility, health & wellbeing and professional development.
  • Presenters tackled the role systematic racism has played in the insurance industry during their “Defining Bias and Discrimination in Insurance: What Risk Professionals Need to Know” session.

 

We were delighted to finally be back at RIMS in person. The conference never lets us down in terms of learning more about different facets of the industry and providing great networking opportunities. We are looking forward to seeing many of you again during next year’s event in Atlanta!

Self-Insuring a Medical Benefit Program

In the United States, over 155 million people received medical and health-related benefits through some form of employer-sponsored program in 2021, according to the Kaiser Family Foundation. As healthcare costs continue to increase year over year, it should not come as a surprise to learn that after compensation-related expenses, healthcare costs are usually the second highest expense for most employers.

Employers are beginning to ask important questions about the future of their health care offerings and turning over every stone in an effort to control these ever-increasing costs. For employers that are currently leveraging fully insured plans, a prime opportunity to lower the total cost of healthcare exists through self-funding. By transitioning to a self-funded program, employers can achieve savings of anywhere from 5% to 15% depending on their program design and cost structure.

Self-insurance has become the most prevalent way to fund for healthcare benefits. Of those employers offering employer-sponsored programs, 67% choose to do so through a self-funded program.[1]

What is Self-Insurance?self insurance

Self-insurance, also known as self-funding, is a strategy used by employers to gain control over healthcare costs. In addition to control, the significant savings achieved through self-insuring is exactly why so many are considering a transition, as a viable alternative to manage and lower costs.

Self-insurance is the process of unbundling a fully insured plan, where employers use a third-party administrator to operate the plan from a benefits and claims processing perspective. This ensures that employees are not impacted by the change. The most significant difference pertains to how the program is funded; instead of paying a fixed premium amount, employers take a portion of the financial risk associated with the claims of the program, in exchange for lower overall costs.

The incentive for incurring this additional risk directly relates to the hefty charge carriers typically add on to their fully insured premiums. By taking on this extra risk, employers strip away these insurance carrier profits and are able to reduce their healthcare spending. To protect against the catastrophic losses that may occur due to higher-than-expected claims frequency or severity, employers typically take advantage of medical stop-loss coverage.

Groups looking to move to self-insurance should focus on understanding the financial and qualitative impact of this move. For this reason, we usually recommend groups that are larger (over 100 enrolled lives) to contemplate this strategy. The reason for this threshold is that most states regulations allow companies with over 100 enrolled employees (50 enrolled employees in some states) can request the insurance carriers for their historic claims information. This can then be reviewed by actuaries to help understand and outline the financial implications of potentially taking on some of the risk associated with moving to self-insurance.

Managing Risk – Stop Loss Insurance

The largest concern when considering a self-funded program relates to the risk of the program being impacted by unexpectedly high claims – be it due to the volume of claims or due to the exposure to a handful of large loss claims. One very sick individual or a series of unanticipated smaller claims could lead to a higher-than-expected claims level in a self-insured plan. Stop-loss insurance minimizes or eliminates this risk as well as dramatic fluctuations in claim costs over time, creating a level of predictability.

Aggregate Stop-Loss – Provides employer protection for the risk of catastrophic loss by providing insurance coverage for total group claims over a certain dollar amount. Stop-loss carriers issue policies that pay when the aggregate claims amount exceed a pre-determined percentage of expected claims levels.   Aggregate stop loss is usually expressed as percentage of expected claims like 125%.

Specific Stop-Loss – Provides employer protection for individual catastrophic claims. Similar to aggregate stop-loss, financial protection is provided when the claim exceeds the pre-determined deductible or attachment point. Specific stop loss is usually expressed as a deductible amount like $25,000 per individual. For both specific and aggregate stop-loss, all claims exceeding the attachment point are covered by the stop-loss carrier and not the responsibility of the employer.

Benefits

Additional benefits to self-funding include design flexibility, cost transparency, and increased savings. Further, increased insight into the actual cost of care, administrative costs, and any loaded fees or additional expenses to the plan allow for more informed decision making.

  • Full Transparency & Increased Access to Data

Many fully insured employers don’t understand the true cost of their program or areas of claims concentration, or using a broker or advisor, as commissions are often loaded into premium rates. Additionally, obtaining claim information in a fully insured environment is challenging. Increased transparency and data with self-funding allows employers to analyze cost drivers and implement targeted programs to lower utilization costs, while increasing employee health and satisfaction. In a self-insured plan this information is easily available on a timely basis, thereby allowing employers to better understand their programs and make changes to cater to their unique demographic of employees before their next renewal.

  • Program & Design Flexibility

Every state has a unique list of mandated coverages that can add significant costs for both employers and their employees. Because self-insured plans are governed by ERISA and generally pre-empt state law, employers avoid these additional costs by allowing them to design plans that meet both employer and employee needs, increasing satisfaction for all stakeholders.advantages of self insurance

  • Financial Control

Better-than-expected claims in one year can offset next year’s expenses or reduce program contribution levels. In addition, employers may choose to purchase medical stop-loss insurance or a level funding arrangement to provide additional security and create consistency from a cash flow perspective.

  • Cost Savings

Typically, premiums paid in fully insured programs include loaded fees and industry loss trends. In a self-funded program, employers not only minimize or avoid paying these additional charges, but their costs are directly correlated to their specific experience, and not that of their peers. Tools such as consumer-directed health care, price transparency tools, specialty networks, value-based plan designs, and wellness programs all can be built seamlessly into a self-funded plan and help drive down utilization costs and the total cost of healthcare.

 

Learn More

Self-insurance remains a powerful tool in an HR team’s arsenal to control and potentially reduce the burgeoning healthcare costs, as well as provide benefits that are targeted to their population. Employers who make the change can reap immediate advantages and avoid, or at least slow down, inevitable cost increases. Our client, edHEALTH, is a prime example of self-insurance done right, where their members were able to gain savings, offer enhanced coverage, and take a more targeted approach to employee benefits. Our Consulting Team is made up of highly trained risk funding professionals with years of experience. We help employers navigate the self-funding waters and to develop the best funding strategy to meet their individual needs.

[1] (2021).  2021 Employer Health Benefits Survey. kff.org. https://www.kff.org/report-section/ehbs-2021-section-1-cost-of-health-insurance/.

Business, Interrupted: Post-Pandemic Policy Lessons

A recap of a presentation by Peter Johnson of Spring, Deyna Feng of Cummins, and Melissa Updike of KMRRG at the VCIA 2021 annual conference.

 

Black Swan Events and Market Capacityblack swan events

Over the last year and a half, the world as we know it has been flipped on its head. Not only did everyone’s day-to-day processes change completely, but the COVID-19 pandemic also stressed the insurance system significantly and resulted in a number of changes across various lines. “Black Swan” events are those that are unexpected, severe and affect a large number of companies and individuals which is exactly what happened with the COVID-19 pandemic. While the healthcare industry faced increasing premiums and alterations to mental health coverage, the property-casualty (P&C) market also was affected in an unpredictable way.

Rewinding back to prior to March 2020, the P&C market was experiencing an all-time high surplus, and was in a 10-year trend of suppressed rates. Therefore, when the “Black Swan” event of a pandemic hit, insurance companies were forced to significantly reduce capacity to mitigate social inflation and high-cost claim issues. In some cases this drop down insured limits by 75 percent or more of their prior year policy limits. This was evident particularly for cyber liability and umbrella coverage. Additionally, rates across lines were seeing double and triple previous years’ numbers.

On the other hand, some P&C lines actually saw improvement in their combined ratio during 2020. This means that where some lines saw increases in cost, other lines saw a drop in utilization, which “evened out” the overall market. This improvement can be seen in commercial and personal lines auto lines over the last year. The auto industry saw a dramatic downturn in utilization due to reoccurring “Stay at Home” executive orders hindering travel as well as other related changes to the industry.

Needless to say, this all yielded a difficult environment for employees and employers. In order to appropriately mitigate these new or changed risks, companies have been turning to policy exclusions as well as captive financing to better protect themselves and their employees from high-cost claims.

 

Policy Exclusions and How They Impact Your Business

During the pandemic, no insurance company or insured was truly prepared for the changes that were to come, and many insureds were faced with unexpected coverage exclusions and were left with potentially catastrophic payments. Some examples of policy exclusions include pandemic situations, interrupted business, long-term care, and others. However, employers who had a captive insurance company set up were sometimes safeguarded from policy exclusions, and companies without a captive increasingly flocked to establish one.insurance policy exclusions

To illustrate the advantages, one captive held their policy exclusions to the standard of COVID-19 claims and were able to mitigate those costs through their reinsurance retention. As another example, the Kentuckiana Medical Reciprocal Risk Retention Group (KMRRG), a captive, was able to flip their exclusion around long-term care, a move which, although it was only a small component of their business, significantly minimized costly losses. The framing of this exclusion allows employers to wrap reinsurance around this risk, specifically if they utilize a captive funding vehicle.

Captives offer more flexibility around policy language and terms, which can be adjusted according to the specific risks of the parent company. It is generally the responsibility of the brokers to let their insureds know which reinsurance renewals were at risk during the pandemic. Most commonly these lines were workers compensation, healthcare programs, and other P&C lines, which can be written into a captive or an RRG solution. Note RRG’s cannot write workers’ comp and can only insure liability lines.

 

Maximizing Captive/RRG Solutions

Captive insurance is not a new concept; however, it is often overlooked as a method for employers to protect themselves against risk. Captives not only better reflect underwriting records but also allow insureds to recoup investment incomes that would normally have been lost to insurance companies.

Captives support the parent company’s risk management overall and provide financial protection and long-term savings, both necessary for any business in ordinary and extraordinary times. Generally, our team sees that, for every $1 of premium that a client converts from a commercial reinsurer to a captive, 10 percent to 40 percent of long-term savings in the form of investment income and underwriting profits are yielded.

captive insurance solution

A captive can step in to help when commercial market rates are unreasonable, such as the 200 percent to 300 percent rate increases, we have seen recently, which of course are impossible for CFOs to plan for. This happened with many insureds’ umbrella coverage. Many companies over the last 20 months were forced to significantly lower their limits and increase their retention levels simultaneously. With changing premiums (mainly increasing) on top of this reduced market capacity, more and more often companies are utilizing captives to get control over these types of high costs and expand coverage.

Additional benefits of a captive or RRG solution include transparency and improved claims management. For example, if COVID-19 claims do develop, with a captive you can react with a very specific claims management strategy instead of relying on a commercial carrier to do so. This allows you to hand select your partners such as attorneys and other advisors. You can also be sure that your discovery responses are consistent. Additionally, group aggregates have hardened even more in the market which has forced captive managers to become more creative than before. An illustration of that creativity can be seen in the example below.

Hospital Professional Liability in a Captive: Many entities were trying to get their mitigation placed, and by increasing primary levels they were able to provide some protection and increase their claims control.

 

Bracing for the Future

In order to be properly prepared for the next “Black Swan” event, employers and employees should consider the major lessons learned from the past year:Captive insurance pandemic

  • Risk Diversification—This is not unique to a pandemic situation. When leveraging a captive, it is imperative to have a wide range of exposures. Our actuaries know that, in line with the law of large numbers, the more risks and more exposures, adverse financial outcomes become less likely and more manageable. Considering the correlation between the risks is equally critical as one risk could lead to a domino effect of triggering another high-cost risk. A general rule of thumb for captives is adding low correlating risk to a captive will lead to more stable year-to-year financial results.
  • Speed to Market—What is your process to quickly adapt to changing market conditions?
  • Analyze Current Structure—Can you withstand another “black swan” event? What are the coverage improvements that can be made internally?
  • Financials—What is your cots of risk and risk tolerance? Do you need an improved insurance/reinsurance strategy?
  • Supply Chain—Has an appropriate strategy been considered?
  • Other—Do you have uninsured/underinsured risks? Is there sufficient market capacity for your exposure?

If there is a positive we can take from COVID-19, it should be that we learned important lessons and won’t be as blind sighted in the future. Looking ahead, companies should ascertain whether they have the right tools in place to better manage risk and financial losses. In addition to the risk structures and their advantages outlined above, considering cross exposures and diversified risks is the best and easiest way for companies to protect themselves and their employees in the event of another “Black Swan” event. Lastly, having an aggregate view of risks across the organization often leads to creating the most efficient and cost effective risk funding programs.

In a World of Uncertainty, a Captive Can Be Your Constant

As seen in the Captive Review Group Captive Report, September 2021.

With the rapid spread of the Delta variant, the Covid-19 pandemic continues to leave employers with a series of unpredictable risks directly related to the pandemic. Among these risks is the potential higher cost of healthcare benefits offered to employees, a factor which must be built into any long-term risk management or cost-containment strategy. Covid-19’s impact on healthcare costs Based on tracking data across multiple employers, the future impact of Covid-19 on high cost claims will directly impact health insurance. Key factors include:Healthcare cost management

  • Direct costs related to Covid-19: Costs associated with testing, treatment and vaccines remain a primary source of plan costs. The most direct impact on captives is the high cost treatment tied to severe hospitalizations, particularly due to potent strains of Covid-19 like the Delta variant. There may also be ongoing health needs for members who recover from Covid-19 or are long-haulers.
  • Deferral of care: Plan members have chosen to defer elective treatments. While some of this care was eventually incurred over the course of the last year, many plan members continue to hold back on care, whether because of discomfort in a hospital setting or difficulty in finding care due to bandwidth issues. This influences future costs, particularly with unpredictable costly surgeries.
  • Missed preventative care: Client data across industries also showed a significant reduction in preventative care visits, and lower test numbers in areas such as labs, CT scans and MRIs. As a result, many employers are concerned because if certain health issues are not identified and treated early, the severity of the case and corresponding cost of care may be higher down the road.
  • Behavioral health: Covid-19 propelled behavioral health issues into crisis levels. While it may seem indirectly related to broader healthcare, consider this: the national Alliance on Mental Illness reports that cardiometabolic disease rates are twice as high in adults with serious mental illness, and that depression and anxiety disorders cost the global economy $1 trillion annually in lost productivity. We are sure to see the repercussions of this in claims costs to come.

Health insurer risk premium margins built into insurance pricing have been increasing in light of all this uncertainty, as well as broader trends such increased prevalence of high cost specialty drugs and increasing hospital costs. In fact, the most prevalent specialty medications are increasing in price at 10%-15% annually, further contributing to unpredictability of future claims.

Employer Considerations

During the pandemic, employers have needed to confront their organizational philosophy on the employee value proposition and balancing the investment in employee benefits with the impact on the company’s stakeholders. The impact of Covid-19 has made employers more acutely aware of the need for sufficient healthcare coverage for employees and their families.

In order to provide attractive benefits in an environment of rising costs and volatility, employers must rethink the programs they offer and how they are funded. Many organizations have also revisited benefit program governance structures, how decisions are made, and how programs are monitored.

Perhaps your remote workforce has different needs than they did in 2019, or the pandemic has triggered new problem areas that can be addressed through wellness solutions or advocacy tools.

No matter your path, employers seeking to ensure that they offer comprehensive healthcare benefits to employees at an affordable cost need to consider the financial management benefit of potential long-term cost savings and mitigation of volatility associated with captive structures.

Captive Arrangements for Employee Benefits

As employers look at the impact of the pandemic, organizational planning requires balancing the increasing cost of healthcare with the risk associated with solutions that reduce the total cost of the program. At its simplest form, health insurance can be expensive if a fully insured program is purchased, as organizations pay a risk margin, often 20% to 40%, for transfer of the risk to an insurer. Small to mid-sized organizations typically mitigate this cost by self-insuring a portion of their healthcare risk with medical stop-loss to cover higher cost claims. However, the higher risk premiums required by health insurance, including stop-loss insurance, lead to steep healthcare plan costs and/or, in some cases, being forced to take on higher-than-optimal risk.

A captive arrangement is a strategic way for employers to benefit from self-insurance while creating a sustainable solution to partner with commercial markets. Captives provide substantial competitive advantages over traditional self-insurance, such as:captive insurance

  • Reduced total cost of insurance: Insurance carriers develop premiums by heavily weighing on industry averages, state rates and, to some degree, on an employer’s individual loss experience. This may lead to pricing that may not accurately reflect an organization’s actual loss experience. Insurance carriers usually price to include substantial overheads, including risk and profit margins. A captive provides employers an opportunity to recapture premiums from the commercial market and build a sustainable long-term model for their insurance needs.
  • Insulation from market fluctuations: Conventional commercial insurance is vulnerable to market fluctuations. This has never been more evident than today, with hard insurance markets and premiums that are increasing substantially with almost no change in coverage level. As a member in a captive program, employers are less susceptible to unpredictable rising costs imposed by conventional insurers every renewal season, as a balanced funding approach can smooth the cyclical volatility of the commercial insurance markets.
  • Protection from cashflow volatility: Leveraging a captive to fund medical stop loss can lower the cashflow volatility often faced by self-insured programs on a monthly basis. Having a captive cover claims at a substantially lower stop-loss level allows employers to smooth out plan funding and mitigate cashflow risk to the company.

For employers that may not have their own captive or the resources to form one, there are a variety of group captive solutions in the medical stop-loss space. These solutions are turnkey in nature and simple to implement. Most well-structured group captive programs aim for a seamless transition for employers where there is almost no disruption. In other words, from an employee’s perspective, the claims process is entirely the same. With group captives in particular, all the mechanical aspects are handled by the group captive management team, with minimal effort required for an employer.

There are several group captive arrangements that employers can tap into. In selecting the most appropriate arrangement, you need to consider factors such as the upfront cost of the program, the extent to which customization will be available, the flexibility you will have for your organization within the group captive model, and how renewals will work.

Looking Beyond the Pandemic

As we look forward beyond the pandemic, employers should consider ongoing healthcare program effectiveness. Healthcare costs will continue to increase and become a larger portion of organizational budgets, but it is not too late to start leveraging innovative solutions to mitigate these costs. You can proactively adjust your tactics today and be better prepared for tomorrow, and with a captive you are truly in the driver’s seat.