Robert Raber
Associate Director
+1 908 439 2200, ext. 5696
robert.raber@ambest.com
Christopher Sharkey
Manager, Public Relations
+1 908 439 2200, ext. 5159
christopher.sharkey@ambest.com
Jim Peavy
Director, Public Relations
+1 908 439 2200, ext. 5644
james.peavy@ambest.com
FOR IMMEDIATE RELEASE
OLDWICK – AUGUST 14, 2019 AM Best has assigned a Financial Strength Rating (FSR) of A- (Excellent) and a Long-Term Issuer Credit Rating (Long-Term ICR) of “a-” to Clear Spring Property and Casualty Company (Clear Spring). Concurrently, AM Best has removed from under review with negative implications and downgraded the FSR to A- (Excellent) from A (Excellent) and the Long-Term ICRs to “a-” from “a” of Lackawanna Casualty Company and its subsidiaries, Lackawanna American Insurance Company and Lackawanna National Insurance Company. The outlook assigned to these Credit Ratings (ratings) is stable. Clear Spring is domiciled in Dallas, TX, while the three Lackawanna companies are domiciled in Wilkes-Barre, PA. The companies are collectively referred to as Lackawanna Insurance Group (Lackawanna).
The ratings reflect Lackawanna’s balance sheet strength, which AM Best categorizes as strongest, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.
The ratings assigned to Clear Spring reflect the company’s role as a member of the group. Factors supporting this relationship include common ultimate ownership and management. Explicit support is provided through Clear Spring’s participation in the inter-company pooling agreement.
The rating downgrades reflect a revision in AM Best’s assessment of the group’s operating performance to adequate from strong. This rating action is in response to less favorable comparisons with peer companies assessed as having strong operating performances over the most recent five-year period in metrics such as loss and loss adjustment expense ratio and operating ratio. This places the group more in line with companies in the composite assessed as having adequate operating performances. The assessment also takes into consideration the execution risk associated with the blending of the distinct lines of business and geographic delineation of the member companies, which may affect prospective operating performance.
Negative rating actions would occur with a decline in the group’s risk-adjusted capitalization, operating performance well outside expected ranges, or business profile modifications that fail to gain traction.
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’sRecent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media – Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.
AM Best is a global rating agency and information provider with a unique focus on the insurance industry.
The State regulators continue to clamp down on insurers that use side agreements (aka Program Agreements) for large deductible/loss sensitive programs that are not properly filed with the various Offices of Insurance Regulation. Florida, New York and California have been particularly active in this realm, with Illinois specifically writing a white paper on the overall large deductible topic and PEO that I spoke on a few years ago … https://peocompass.com/role-large-deductible-policies-peos-failures-small-workers-compensation-insurers/ .
Additionally, the National Association of Insurance Commissioners (“NAIC”) has been very active in the enforcement of side agreements… “One significant forms-related issue is that there are sometimes agreements outside of the insurance contract–that is, they are not specifically referenced within or attached to the insurance contract— established between the insurer, the employer and perhaps a TPA or another party. This is an issue because insurance laws typically require the filing of the policy forms and accompanying endorsements used to write workers’ compensation insurance.” This definition from their white paper “Workers’ Compensation Large Deductible Study”, first published in 2006. https://www.naic.org/prod_serv/WCD-OP-06.pdf
Bottom line is that there is a marked increase of enforcement on the state level of non-approved side agreements and I would anticipate more carriers being called out for their lack of proper filings and having approval to use the side agreements applicable to their large deductible/loss sensitive offering(s).
From our friends at workcompcentral.com …
The New York State Department of Financial Services has fined Applied Underwriters $3 million for offering workers’ compensation insurance bundled with side agreements that weren’t filed with or approved by the department.
In announcing the fine on Thursday, DFS said the bundled programs were sold under names including EquityComp and SolutionOne. The products, sold in New York from 2010 through 2016, included guaranteed-cost workers’ comp policies issued by Continental Indemnity Co., an Applied subsidiary, along with a “reinsurance participation agreement” that employers were required to enter into as part of the program, according to the department.
DFS said the RPAs involved complex cost calculations that were presented to employers in a misleading way.
“Under the formula, policy fees could rise rapidly with the first few claims to levels substantially higher than what would have been paid under a typical linear retrospective model,” DFS said.
In fact, the non-linear model was unique enough that Applied received a patent for it in 2011, according to DFS.
Financial Services Superintendent Linda Lacewell said Applied Underwriters had been “illegally operating outside of the department’s oversight to sell a complex product to hundreds of New York small and medium-sized businesses.”
Applied Underwriters on Thursday said it was pleased to have reached a settlement with DFS after the matter had been under review for three years.
But Jeffrey Silver, general counsel for Applied Underwriters, denied any wrongdoing by the company.
“There was no wrongdoing on our part whatsoever, but there were filings that the department thought should have been made,” Silver said in a statement provided to WorkCompCentral. “The nature and structure of the program was disclosed to participants who were large employers, and the participants were advised by their insurance brokers and other professionals.”
In the statement, Silver described Applied’s loss-sensitive program as a captive insurance program, which he said is covered in New York by a separate captive insurer law. The program gave businesses an incentive to improve their safety, he said, and a “significant number” of EquityComp participants did expand their safety programs, leading to lower workers’ comp costs.
The New York DFS launched its investigation of Applied Underwriters in December 2015. The company voluntarily stopped offering the side-agreement program in New York after the probe started. Under a DFS consent order, Applied won’t offer any equivalent side agreements and will file any future products with the department for approval. In addition, Applied won’t enforce any arbitration provisions in contracts with New York employers.
The fine comes as a sale of Applied Underwriters, which is owned by Berkshire Hathaway, is pending. The agreement with DFS removes a possible obstacle to approval of the sale by the state of New York, Applied said through a spokesman.
The New York Post reported last month that the Applied Underwriters buyer was Bahamas-based United Insurance Co., which planned to acquire Berkshire’s 81% stake in the company, along with shares of the company owned by two executives. The Post cited a filing with the California Department of Insurance as the source of its information.
The Applied Underwriters spokesman said on Thursday that the Post’s report was inaccurate and incomplete, but he declined to provide information on the buyer.
A quarterly filing provided by CDI stated that Berkshire Hathaway entered into a stock purchase agreement this year with United Insurance Co. to sell its 81% interest in AU Holding Co., the parent company of Applied Underwriters, and that United had also agreed to acquire Sidney Ferenc’s 7.5% interest in AUH. The stock purchase agreements were assigned to Steven Menzies, who owns 11.5% of the company, according to the filing.
Berkshire Hathaway confirmed in February that it was selling Applied Underwriters, saying at the time that part of the reason for the sale is that AU competes with other workers’ comp insurance companies that Berkshire Hathaway fully owns. A spokesman wouldn’t comment at the time on whether controversy over Applied’s EquityComp program contributed to the decision.
Regulators in New Jersey have also been investigating Applied Underwriters, the New York Business Journal reported. Regulators allege that the company “marketed and sold an unapproved workers’ compensation program with impermissible retrospective rating,” according to a New Jersey Department of Banking and Insurance filing.
Applied Underwriters declined to comment Thursday on whether states other than New York were investigating its EquityComp program, or to say in which states the company still offers the program.
The Applied Underwriters website continues to list EquityComp as one of its programs, “designed for companies with premiums in excess of $250,000 that seek flexible risk financing.”
In a very intriguing announcement, the “gold standard” of insurance company credit rating organizations, AM Best, has decided that how a carrier does or does not invest in areas of technological innovation will impact their long term financial viability and thus potentially their rating.
“AM Best defines innovation as a multistage process whereby an organization transforms ideas into new or significantly improved products, processes, services or business models that have a measurable positive impact over time and enable the organization to remain relevant and successful. These products, processes, services or business models can be created organically or adopted from external sources.” www.ambest.com
While I think this is a fantastic move, other agent peers not so much. My favorite quote of the article is:
“The Council of Insurance Agents and Brokers took a more dubious view of the innovation scoring proposal, in a blog post titled “AM Best Aims to Quantify the Unquantifiable: Innovation.”
What companies spend on innovation as a percentage of surplus/premiums is a pretty black and white measurement and I would think the ability to make innovation actionable and meaningful can also be quantified. Why would agents not want the carriers to be more advanced?
I have a quote of my own to reference on that front…
“If you want something new, you have to stop doing something old.”
-Peter F. Drucker
The insurance industry is arguably the most behind on innovation than any other financial sector – let’s hope this change helps to jump-start a movement of investment in the improvement of the client and agent experience through technological innovation!
By Elaine Goodman and from our friends at workcompcentral.com
Rating agency AM Best has proposed a new scoring system for assessing carriers’ innovation efforts, an idea that is sparking mixed reactions from the insurance industry.
Mike Fitzgerald (Celent photo)
AM Best announced its draft proposal, “Scoring and Assessing Innovation,” in March. A public comment period ran through mid-May. The agency continues to meet with different groups to discuss the proposal, including a presentation this week at the Farm Bureau Insurance Managers Conference in Jackson Hole, Wyoming.
AM Best said it has been capturing innovation indirectly through the “various building blocks” of its rating process. But now, a more direct focus on innovation may be needed.
“Innovation always has been important for the success of an insurance company, but with the increased pace of change in society, climate and technology, it is becoming increasingly critical to the long-term success of all insurers,” AM Best said in announcing the initiative.
Under the proposal, all companies rated by AM Best would be scored and their innovation assessment would be published. In addition, AM Best would “explicitly consider” whether a company’s innovation efforts are impacting its financial strength.
A proposed scoring system would rate companies on their innovation “inputs” — factors such as whether the company has an innovation strategy, and management’s attitudes toward innovation. AM Best would also assess measurable results, or “outputs,” a company is seeing from innovation.
Although some failure is expected when a company is trying new things, AM Best said the lack of productive results may indicate that innovation has become a financial drain on a company.
AM Best noted that not all innovation involves fancy technology such as blockchain or the “Internet of Things.” Innovation can come from outside sources and doesn’t have to be developed within the company, AM Best said.
Mike Fitzgerald, a senior analyst with information technology consulting firm Celent, called the AM Best proposal a positive step that will help ensure that the insurance industry moves forward.
“It’s a fantastic idea,” Fitzgerald said. “I think they’re right on target.”
One of the first results of the innovation assessment will be that insurance executives are more involved in innovation initiatives at their companies, he predicted.
“Senior leaders at all insurance companies are going to have to be a lot more engaged and conversant than they have been in the past,” Fitzgerald said.
One part of the AM Best proposal that could use more fleshing out, Fitzgerald said, is the definition of innovation.
In its proposal, AM Best defined innovation as “a multistage process whereby an organization transforms ideas into new or significantly improved products, processes, services or business models that have a measurable positive impact over time, and enable the organization to remain relevant and successful.”
Although Fitzgerald said innovation is likely to involve technology, he said there could be some cases where it doesn’t.
The Council of Insurance Agents and Brokers took a more dubious view of the innovation scoring proposal, in a blog post titled “AM Best Aims to Quantify the Unquantifiable: Innovation.”
“Market incentives already exist to push companies to innovate — will establishing an innovation rating system encourage companies to invest in new technologies for the right reasons?” CIAB said.
In addition, CIAB said, the scoring could push companies toward investing in risky companies to show their interest in innovation.
“Investing in immature or unnecessary startups presents an opportunity cost that in turn may harm a company’s overall rating if those investments do not result in any created value,” CIAB said.
Paul Carroll, editor-in-chief of the Insurance Thought Leadership website, called the AM Best announcement great news for the insurance industry.
“With this new focus on innovation, AM Best has done the insurance industry a big favor by not only sounding a warning but also offering the industry focus, structure and direction to avoid the danger of inaction,” Carroll wrote in a blog post.
The assessment will force insurance companies to move beyond merely “checking the boxes” when it comes to innovation, Carroll said. He cited as an example companies that go on innovation tours and then claim to be on top of the latest technology.
Shortly after the AM Best announcement, the strategic consulting arm of Insurance Thought Leadership, ITL Advisory, announced it was offering insurance companies a new innovation assessment service. ITL Advisory said its assessment can help insurers determine whether their innovation programs align with best practices and are likely to produce a return on investment, as well as whether the company is prepared for the AM Best review.
“The release of (the AM Best) draft criteria and procedures will create some urgency among insurers to understand the innovation process, and start or accelerate efforts to implement innovation programs,” Wayne Allen, chief executive officer of Insurance Thought Leadership, said in a statement.
Another year and another convergence of the who’s who in the field of workers’ compensation at the Marriott World Center in Orlando this week. Known as the largest insurance conference in the country, the Workers’ Compensation Institute brings together “centers of influence” in law, medicine, claims adjusting, underwriting, brokerage, risk-bearing, managed care, regulation, legislation, staffing and of course coemployment.
Dating back over a decade, the Workers’ Compensation Institute and specifically Jim McConnaughhay and Steve Rissman have granted the PEO community a one day educational track. Shortly thereafter, FAPEO and NAPEO threw their influence and sponsorship behind it. Special thanks to the WCI, FAPEO and NAPEO for making this a success and bringing positive exposure to the PEO industry.
I am proud to participate on a panel Tuesday morning at 9:00 am with Andy Olwert (Next Level), Deb Hetzer (PEMCO), Phil Herron (Continuum HR) and Robert Barrett (Rissman, Barrett, Hurt, Donahue, McLain & Manganese’s, PA) titled “Accountability in the PEO Industry – Posting Wins for PEO’s and Their Claims Teams”. More information on this data-driven session can be found on the WCI 360 site here:
Unfortunately for the PEO industry, there have been cases in the past of payroll tax money not making its proper way to the Internal Revenue Service from a PEO, leaving small employers being forced to repay SUTA and FUTA. A solution to allow PEO’s to be accredited/certified/recognized by the IRS was sought by NAPEO to help the credibility of the industry and ensure proper payments of tax for American business.
As background and straight off the NAPEO website…
www.napeo.org
On December 19, 2014, President Obama signed the Tax Increase Prevention Act of 2014. Included in this legislation was the Small Business Efficiency Act (SBEA), which created a voluntary IRS certification program for professional employer organizations. It was previously approved by the House of Representatives as a provision in the ABLE Act to off-set the costs associated with that proposal, then incorporated into the Tax Increase Prevention Act of 2014 and passed by the Senate.
IRS PEO certification is important because it:
Confirms the certified PEO (CPEO) can pay federal employment taxes under its EIN.
Protects customers through the CPEO’s sole liability on wages paid to WSEs by CPEO.
Provides certainty with respect to when a wage base restart is not necessary for new customers.
Confirms the CPEO’s FUTA credit for all SUTA paid by CPEO or customer.
Offers clear guidance for the CPEO and the customer on pass-through of tax credits and employment tax exclusions.
Gives increased comfort for potential client with use of an IRS-certified PEO.
Lends credibility to PEO business model, especially with investor community and federal regulators.
—–
This is a huge win for the industry in its quest for more market share against the traditional deployment of employment related functions and I believe will become a huge competitive advantage for the current and future participants of this PEO certification.
The initial list is below…Kudos to NAPEO and the 30 or so PEO control groups to take the lead on this initiative. For those looking to certify, Thom Stohler and Farrah Fielder at NAPEO are standing by to help — PRH
California chose to adopt the Workers’ Compensation Insurance Rating Bureau’s (“WCIRB”) recommendation of a -16.5% drop in pure premium rates. It should be noted that these rates are advisory only and so what to watch next is who adopts the pricing decrease and who does not. With over 30% of all US workers’ compensation premiums generated out of California, this will provide an intriguing battleground and opportunity for those carriers that buy into WCIRB’s numbers in regard to lower medical loss development, decreasing indemnity claim frequency, and lower than projected loss adjustment expenses.
It has been a busy month of conventions… NAPEO Legal and Legislative, RIMS and last week the NCCI. On the ground at the PACE conference in New Orleans, a look back at the NCCI AIS.
The National Council of Compensation Insurance (“NCCI”) Annual Issues Symposium is the preeminent conference for understanding all things workers’ compensation. Industry experts in the carrier, reinsurance and brokerage communities converge in Orlando every year in May to better understand the meaningful trends in the workers’ compensation line of insurance. The most meaningful number of this year’s event was 94… the lowest combined ratio of any other year since 1990 with the exception of 2006 (93). It should also be noted that this is a 6 point drop from the 100 of last year and represents one of few years <100.
Based on typical patterns, this is now where capital enters the market… which was illuminated when the NCCI literally sold out of tickets.
With NAPEO’s Legal and Legislative Conference two weeks ago, the NCCI conference last week and PACE in New Orleans this week… it has been a high school reunion of sort – seeing good friends, telling old stories and commiserating on how to make the PEO industry the optimal platform for American business. Health insurance maybe in the news every day but workers’ compensation is the line of business that PEO’s must have.
The origination of the PEO Compass was to provide an executive summary of all things workers’ compensation and how they impact all things PEO. The NCCI is a huge driver of this nationwide and sets rates and rules in 37 states. The document attached is a must read for those like me that are workers’ compensation and data geeks.
For those that are not (or would prefer not going through 57 slides), the highlights below:
The total P/C industry’s 2016 combined ratio (101%) represents a three-point increase versus that for 2015.
Combined ratios increased in all lines of business except workers compensation (slide 4)
Premium for the NCCI-serviced Residual Market Pools has remained stable over the last four policy years, at approximately $1.1 billion. (slide 12)
Between 2015 and 2016, countrywide private carrier direct written premium grew +2.4% (slide 15)
The percentage change in payroll (+4.5%) is approximately equal to the percentage change in the average wage (+2.5%) plus the percentage change in employment (+1.9%). Employment grew at an above-average rate for the Professional and Business Services; Education and Health Services; Construction; and Leisure and Hospitality sectors. Employment in the Manufacturing sector was flat, while the All Other sector posted a decrease primarily due to declines in Natural Resources and Mining employment (slide 17)
NCCI workers’ compensation filings with effective dates in 2017 averaged –6.7%… California and New York are already seeking approval for rate decreases which are not even part of this data set (slide 18)
In 2013, more than 70% of respondents saw an increase in premium at renewal, but by the fourth quarter of 2016, 62% reported seeing a decrease in premium at renewal (slide 23)
The workers compensation 2016 calendar year combined ratio for private carriers was 94%. This is the second consecutive year that the industry has posted a six-point underwriting gain. Consecutive combined ratios at this level have not been seen in at least the last 30 years (slide 24)
What this means is that workers’ compensation has become a very sexy line of insurance risk-bearers. With favorable improvements in operating and investment performance, the median expected rate of return is +20%. Again, it is therefore no surprise that this years NCCI AIS conference was sold out months prior to the event.
For those that happen to be in New Orleans this week for the annual PACE conference, let’s meet up and strategize in person about the great opportunities ahead for the industry.
Mr. Cuomo has committed to a workers’ compensation “business process reengineering” aimed at increased efficiencies in the overall system. This from the Insurance Journal today.
At the same time, improvements in medical delivery is also part of the budget in areas such as:
Expanding the safety net for seriously injured workers, so more are eligible to apply for reconsideration for lifetime benefits when their benefit caps are set to expire.
Ensuring injured workers who are out-of-work and not receiving benefits will get a hearing within 45 days.
Providing relief for first responders exposed to extraordinary stress in emergency situations.
Strengthening the administrative tools available to the Board in its efforts to provide swift and appropriate delivery of benefits to injured workers.
If the recommendation from the New York Compensation Insurance Rating Board is approved (which is likely), the new rates will take effect on 10.1.17.
Paul R. Hughes
New York Board Proposes 4.5% Workers’ Compensation Rate Decrease
New York businesses could soon see some slight relief in workers’ compensation premiums, according to an announcement from Gov. Andrew M. Cuomo.
The governor’s office released a statement Monday saying that the New York Compensation Insurance Rating Board, a non-governmental rate service organization, has submitted an overall workers’ compensation rate decrease of approximately 4.5 percent for rates beginning Oct. 1, 2017. If approved, the premium decrease equates to a savings New York employers about $400 million this year in workers’ compensation premiums.
In its rate filing, CIRB attributed the reduction in premium rates to certain cost savings measures passed as part of the 2018 budget and general system savings spearheaded by the New York State Workers’ Compensation Board, according to the governor’s statement.
“The reforms to the Workers’ Compensation system in this year’s budget will help New York businesses cut costs – enabling them to further reinvest, grow and create more jobs across the state,” Cuomo said. “With this rate decrease, New York is providing real savings to businesses helping to make them more competitive while strengthening protections for injured workers at companies across the state.”
The rate submission must still be reviewed and approved by the Department of Financial Services. If approved it would become effective October 1, 2017.
New York Senate Majority Leader John J. Flanagan said workers’ compensation reforms were part of the budget negotiations earlier this year.
Workers’ compensation premium rates are determined on an annual basis and take into account recent claims experience as well as implementation of any new policies and procedures. The 2018 New York Budget specifically addresses cost by applying limits to temporary disability payments prior to a permanency award, while providing an exemption process for the most seriously injured.
“Governor Cuomo and the Legislature have successfully managed to rebalance the workers’ compensation system to provide better protections for injured workers and provide much needed relief to New York’s businesses,” said Kenneth J. Munnelly, chair of the Workers’ Compensation Board.
The budget also includes better protections for injured workers by:
Expanding the safety net for seriously injured workers, so more are eligible to apply for reconsideration for lifetime benefits when their benefit caps are set to expire.
Ensuring injured workers who are out-of-work and not receiving benefits will get a hearing within 45 days.
Providing relief for first responders exposed to extraordinary stress in emergency situations.
Strengthening the administrative tools available to the Board in its efforts to provide swift and appropriate delivery of benefits to injured workers.
The budget requires the Workers’ Compensation Board to publicize new permanent impairment guidelines to reflect advances in modern medicine that result in better outcomes. Additionally, to ensure that injured workers receive high quality, cost effective medications, the board will establish a prescription drug formulary.
According to the governor’s office, the reforms build on his continued commitment to improve New York’s workers’ compensation system to more effectively serve the needs of injured workers and employers.
Signed by the Cuomo as part of the 2013-14 budget, the Business Relief Act provided hundreds of millions in savings for New York businesses by fundamentally restructuring the way that workers’ compensation assessments were made.
Cuomo also launched a comprehensive “business process re-engineering” to re-imagine the workers’ compensation system. As part of that effort, the Workers’ Compensation Board is close to launching virtual hearings, which will modernize and virtualize the Board’s present hearing environment and allow injured workers to participate in a hearing at a location that is most convenient for them, even their home, the statement said.
In addition, the Workers’ Compensation Board has developed new processes to ensure benefits are delivered more timely by utilizing alternative means to resolve disputes. This allows the board to preserve hearing time for more complex cases with legal disputes. The board has also generated a dramatic decline in inventory of pending workers’ compensation appeals and the length of time it takes for those appeals to be resolved. The prompt processing of appealed claims aids both workers and employers, by making benefits and treatments available more quickly and lowers litigation costs.
