The U.S. Equal Employment Opportunity Commission (EEOC) announced that workplace discrimination charge filings with the federal agency nationwide soared to an unprecedented level of 95,402 during Fiscal Year (FY) 2008, which ended Sept. 30. This level is a 15 percent increase from the previous fiscal year. The FY 2008 enforcement and litigation statistics, which include trend data, are available online at http://www.eeoc.gov/stats/enforcement.html.
“The EEOC has not seen an increase of this magnitude in charges filed for many years. While we do not know if it signifies a trend, it is clear that employment discrimination remains a persistent problem,” said the Commission’s Acting Chairman, Stuart J. Ishimaru. “The EEOC is committed to vigorously enforcing federal laws prohibiting employment discrimination and will continue to invest in programs such as its systemic litigation program to maximize its effectiveness.”
According to the FY 2008 data, all major categories of charge filings in the private sector (which includes charges filed against state and local governments) increased. Charges based on age and retaliation saw the largest annual increases, while allegations based on race, sex and retaliation continued as the most frequently filed charges. The surge in charge filings may be due to multiple factors, including economic conditions, increased diversity and demographic shifts in the labor force, employees’ greater awareness of the law, EEOC’s focus on systemic litigation, and changes to EEOC’s intake practices.
The FY 2008 data also show that the EEOC filed 290 lawsuits, resolved 339 lawsuits, and resolved 81,081 private sector charges. Through its combined enforcement, mediation and litigation programs, the EEOC recovered approximately $376 million in monetary relief for thousands of discrimination victims and obtained significant remedial relief from employers to promote inclusive and discrimination-free workplaces.
Thursday, March 19, 2009
Tuesday, March 03, 2009
D&O Costs for Financials Skyrocket
CHICAGO, March 2 /PRNewswire-FirstCall/ -- Directors' and officers' liability insurance costs for the S&P Financials Sector increased 50 percent in the fourth quarter of 2008 compared to that of 2007 according to the Quarterly D&O Pricing Index released today by Aon Corporation's (NYSE: AOC) Financial Services Group.
Friday, February 27, 2009
Time to Call a Certified Risk Manager?
Today's degenerating business circumstances have forced companies to examine their risk management programs to identify the significant risks that were minimized or overlooked. The financial free fall brought attention to six primary risks: short-term investments, financial firms, business associates, insurance providers, emerging risks, and costs. Short-term investments were revealed to carry high liquidity risks. Financial institutions neglected to limit their exposures only to their capital, entered into agreements that placed credit lines in peril, and enacted policies that placed a concentrated portion of financial risk onto individual institutions. The collapse of Bear Stearns demonstrated why businesses must pay more attention to their business-partner-related exposures and monitor the financial health of affiliated institutions. The near-collapse of American International Group pushed companies to consider alternative means of limiting exposures, such as self-insurance and captives. Sixteen months ago, businesses paid less attention to emerging risks related to changing business conditions, overall economic conditions, and governmental policies. Finally, businesses failed to garner a return-on-investment in risk management spending by drafting policies that were reactive instead of proactive in nature.
Monday, February 23, 2009
Where Were All The Investment Evaluators and Actuaries?
At the height of the Watergate scandal, Judge Scirica was reported asking, "Where were all the lawyers?" Now as we are embroiled in a financial breakdown especially of the America's pension and retirement assets, someone should start asking, "where were those experts who evaluated pension funds about their investments and the actuaries? Bernie Madoff has become a household name, investment advisors are closing shop, and pension trustees are calling lawyers and notifying their fiduciary carriers. Yet the same old crowd is out there advising pension and health and welfare funds offering "one store shopping." "Buy fiduciary insurance from us when we wear one hat, let us evaluate your investment portfolio wearing another hat, and we will also be your actuary and give you assurances of your plan's stability with your insurance carrier and to your members with another hat," they advertise. They even tell the fiduciaries they can "save them a little money if we do it all." Try telling your spouse you have to move out of your home because you saved a few bucks for the Pension Fund you used to sit on their Board.
Reports of over $1 Million dollar losses involving Bernie Madoff are common place these days. Individuals, charities, and pension funds were enticed by someone selling them something that seemed to be "to good to be true." Plan fiduciaries should be looking at those multiple hat firms with the same skepticism as if Bernie Madoff came in their office today offering them a guaranteed return on their investment. We have written for years advising to be careful of "Cowboys wearing multiple hats" regardless of where they are headquartered. As a fiduciary whose personal assets are at risk, we recommend in this time of uncertainty employ a certified risk management expert to do an evaluation of your plan from top to bottom. Listen to them and heed their advise. You will sleep better and so will your plan participants.
Footnote: The author of this is employed by Creative Risk Management and The McLaughlin Company who are both proud to say we did not have one client invest with Madoff. This footnote is more disclosure and transparency then you will ever have received from "the cowboys above described."
Reports of over $1 Million dollar losses involving Bernie Madoff are common place these days. Individuals, charities, and pension funds were enticed by someone selling them something that seemed to be "to good to be true." Plan fiduciaries should be looking at those multiple hat firms with the same skepticism as if Bernie Madoff came in their office today offering them a guaranteed return on their investment. We have written for years advising to be careful of "Cowboys wearing multiple hats" regardless of where they are headquartered. As a fiduciary whose personal assets are at risk, we recommend in this time of uncertainty employ a certified risk management expert to do an evaluation of your plan from top to bottom. Listen to them and heed their advise. You will sleep better and so will your plan participants.
Footnote: The author of this is employed by Creative Risk Management and The McLaughlin Company who are both proud to say we did not have one client invest with Madoff. This footnote is more disclosure and transparency then you will ever have received from "the cowboys above described."
Bad Timing?
401(k) plan sponsors, unable to persuade employees to enter into plans in the 1980s and 1990s, were finally seeing broad participation in 2008, just before the financial markets all but collapsed. Now, employers are in the unenviable position of defending workers' investment in high-return, risky assets. According to Greenwich Associates' new U.S. Defined Contribution (DC) Pension Plan Research Study, enrollment of eligible employees into corporate 401(k) plans was 79 percent in 2008, up several percentage points from 2006. More than four out of 10 large DC programs and almost 50 percent of smaller programs automatically enroll workers into corporate 401(k) plan unless they opt out. As businesses have begun adopting automatic enrollment, they have also been changing default investment options from conservative funds to target retirement date funds that frequently expose the funds' equity to more risk. Participants in these plans are hit particularly hard by recent economic failures, as many employees have a large chunk of their personal equity--and in some cases, their total retirement savings--bound up in a DC plan.
Tuesday, February 03, 2009
Investment Performance Leads to Claims
When investments don't perform well, clients get upset. Here are the professional liability insurance claim ramifications and how to guard against claims.
"The potential for investment-related claims in the current, de-leveraging economy will probably be highest for investments that have significant exposures to leveraged transactions such as real estate deals, hedge fund programs, and collateralized transactions," says Ric Rosario, CEO of CAMICO Mutual Insurance Co. (camico.com). "The more traditional direct exposures would include raw land developments, residential and commercial projects underway, which are always a little risky in the first place. Also, any activity or entity that pools invested funds in an unregulated environment is very problematic."
The current economy spurs some investors to blame the financial planner or investment advisor for having recommended an investment that ended up being disappointing, he adds. "It may be that the general partner or president of an investment entity was reassuring investors through newsletters that the investment was still performing when the investment was actually going south. The client may see the planner or advisor as the trusted professional who was responsible for exercising due diligence over the client's entire financial picture."
Tough Economy's Effects
"In the current economy, it will be very difficult for clients to make successful claims alleging that their investment advisor guided them into bad investments, as opposed to other, safer choices that might have been selected by a more prudent professional," says Michelle Duffett, executive VP for Insight Insurance Services (insightinsurance.com). "Virtually all investments have declined in value and all investment advisors are in the same situation to varying degrees. That said, we expect that claims will increase. Clients are more likely to sue in tough economic times," she adds.
Gary Sutherland, CEO of insurer NAPLIA (naplia.com), likewise believes that the current downturn won't produce "a significant amount" of additional claims against CPA investment professionals. "This obviously assumes that these advisors have advocated a conservative portfolio management strategy and have kept their clients fully informed of market developments," he adds. "There is the possibility of claims arising from the use of non-standard or alternative investments, because of the potential for consumers to allege that they were mislead or poorly informed about the risks involved in such investment vehicles. Additionally, we've encountered situations where claims have arisen because the advisor didn't update the original risk assessment worksheet and failed to reflect appropriate investment strategies or risk tolerance for current market conditions."
Investment fraud is always a problem that can cause claims, says Rosario, and it can encompass: 1) financial statement fraud; 2) fraud perpetrated though other forms of false information (e.g., e-mail, newsletters); and 3) Ponzi, pyramid, and other schemes like the recent headline scandals involving financier Bernard Madoff.
"It can strike in large dollar amounts and affect a variety of engagements such as reviews, audits, tax advice, and investment advice," Rosario adds. "The more time that a CPA has been associated with fraudulent activity before it is uncovered, the more likely the CPA will be perceived by juries to have 'validated' the fraud, unwittingly or not." Jury research, he adds, also shows that the public, including clients, perceive that the CPA's fundamental job is to advise clients of opportunities and warn them about risks.
"Also, looking at a situation in hindsight means that the history of it can be rewritten in a manner that benefits the client and portrays the CPA as having failed to warn the client," Rosario says, adding this can also happen in any financial statement services or even non-attest or consulting engagements.
Bill Thompson, president of CPA Mutual (cpamutual.com), says that so far investment performance-related claims are "no worse than other accountants' claims. Most of our members are sophisticated enough to obtain client agreements with their investment clients, in which the client assumes some responsibility for their investment selections," he says. "Most of their clients also realize that the CPA can't guarantee investment performance and that markets are cyclical. Our folks do a pretty good job educating their clients, and, for the most part, have investment-savvy clientele. A lot of our insureds are fee-for-service, too, so this helps mitigate losses as opposed to commissioned-based investment advisors."
Speaking for CNA (cna.com), assistant VPs Joseph Wolfe (risk control), Jeffrey Day (underwriting), and Melissa Thomas (claims) point out that most accountants don't have investment advisory practices. "Investment advisors will experience some claims to the extent they recommended investment in derivative securities or auction rate securities "which lost substantial value or could not be readily sold in the marketplace." The general dip in the markets, however, "is less likely to result in increased claims activity unless investment advisory clients are retired or close to retirement, and their portfolios incurred significant losses. Risks are elevated for trustees and accountants providing family office services based upon the fiduciary duties assumed in these roles," they say.
Duffett says she anticipates that claims will also arise against the CPA firms involved in the headline Madoff fraud. "Although this situation is extreme in the dollar amounts involved, this type of fraud isn't new," she points out. "When government regulations fail to keep investments safe from criminals, it's typical for investors to sue the directors, officers, lawyers, and accountants who reviewed the company's activities. Already investment advisors who didn't promote the Madoff funds are claiming to have been skeptical of the prospectus. Other experts are stating that the fraud should have been apparent, as the investor statements reflect option transactions beyond the total market activity for the day. With hindsight, clients will find a myriad of small cracks and hints to find fault with the accounting professionals that reviewed the criminal's work."
Typical Claims
Many of these claims allege that the accountant was negligent in referring the client to a specific investment advisor, and in many cases allege that while the accountant wasn't the primary investment advisor, they should have recognized that a particular investment wasn't suitable for that client and advised the client of that. Additionally, when an accountant mentions a particular investment opportunity to a client, the client generally will assume that this is equivalent to a recommendation.
One typical claims scenario, Rosario says, involves an older client who has a lot of funds to invest but does not want to be bothered with details. The client is successful in his or her own profession, is demanding, but has little patience for, or understanding of, financial concepts, rather just wanting the financial planner to handle all of the decisions. "The planner recommends a significant portfolio shift from fixed income to equity at a time when equity investments are doing well. The planner also recommends an investment advisor," Rosario says. "The client is so pleased with the returns first produced by the equity investments that they invests even more of the fixed income funds into equity. When the next economic downturn comes along, the client's portfolio loses over one-third of its value, and the client is extremely disappointed. The planner's engagement letter mentions investment risks, but it was never signed or acknowledged by the client, whose files only include the planner's recommendation to invest more aggressively. The client sues the planner, alleging that the planner had a total responsibility for his overall financial well-being and should have warned him of all the risks he had taken. A good risk management technique is to refer the client to more than one investment advisor, thus avoiding the appearance that the planner made the decision for the client."
Thompson likewise says he's seen several types of investment-related claims based on:
1. Allegations of "churning," or recommending allegedly inappropriate investments which generate commission income;
2. Allegations of lack of appropriate investment diversification;
3. Alleged failure to identify or follow (often perhaps more a failure to properly document than follow) a client's risk tolerance; and
4. Alleged confusion regarding how independent entities are affiliated and the services the client thinks they are providing.
A common cause of financial planning and investment management claims is the allegation of a conflict of interest, Duffett says, which "will arise from the referral fee or commission collected by the CPA firm for sending a client to a particular investment advisor. We've found these types of conflicts to be nearly impossible to defend. Once a CPA is paid in any form by an investment firm, 'independence' is a myth. A conflict of interest may also arise from directing the client into a private investment managed by another client, or in which the CPA has invested personally. Even with disclosures, clients and third parties have a tendency to disown knowledge of the conflict, deny their understanding of the conflict, or claim they were unduly persuaded by their professional accountant's involvement.
"It's difficult to be a competent CPA and an accomplished securities broker," Duffett adds. "The body of knowledge is simply too great. Many CPA firms have hired investment professionals to help bridge the knowledge gap. But compared to standard investment advisors, CPAs have more professional liability risk. It's common for professional liability claims against CPAs to include an allegation that the accountant's personal knowledge of the client's finances should have required the CPA to take additional precautions to protect the client's assets. A full-time securities broker on staff or in a wholly-owned subsidiary doesn't protect the CPA firm from claims that there was a need for the firm to analyze the client's ability to absorb risk and guide their investments."
Impact on Premiums?
While voicing no current plans to raise premiums, insurers hold out the right to bump up rates if claims from the down economy escalate. "A key factor is that the largest 'cost of goods' for an insurance company is claims and the related defense costs, which will usually be 70 to 80 cents on the premium dollar collected," Rosario points out. "If claims tick up significantly further than we have currently planned for, it's inevitable that carriers will have to raise rates. The wild card is the loss prevention activity that CPA firms have taken in advance of the recession. A CPA firm may not be able to stop clients from filing lawsuits to cover their own losses, but if the firms have taken the right actions, the overall severity (cost of claims) could be significantly reduced, taking some pressure off rates."
Adds Sutherland, "There's a move by the more forward-thinking firms to purchase separate coverage for financial planning to isolate the potential of claims from this area of activity from eroding coverage for the traditional practice areas. The trigger seems to be about 15 percent of revenue from PFP. The advantage over adding coverage by endorsement to an accountants' professional liability policy is the separate limit of coverage, and any claims won't adversely impact the core practice."
Encouraging Feedback During a Downturn
Advisors often let fear rather than client feedback take hold during uncertain markets, says Julie Littlechild, president of Advisor Impact, a New York-based consultancy to financial advisors and accountants. "Market downturns," she says, "are when advisors need to step up and identify opportunities that result from gathering feedback from clients. The recent downturn has created an environment in which many investors need and want more frequent and reassuring contact with their advisors." Pinpointing what is most important personally to clients often occurs only when times are tough, she claims, and "client feedback" means more than asking clients to rate satisfaction. It's also a chance to understand what's most important to them and the additional services they need.
Best Practice Tips
Insurers offer these tips in a troubled investment landscape:
* Monitor clients and make sure investment allocations are as agreed in the client file (Bill Thompson, CPA Mutual).
* Don't make unusual offers or "sell away" from your broker/dealer's standard menu of investments. No private offerings or derivatives, for instance (Thompson).
* Obtain signed engagement letters yearly for all financial planning and investment advisory engagements. These letters should clearly define the timing and scope of services and client responsibilities, and include loss-limitation and alternative-dispute resolution clauses and disclaimers regarding investment performance and the volatility of market conditions (Joseph Wolfe, Jeffrey Day, and Melissa Thomas, CNA).
* Document all client conversations, even "casual" inquiries that may come up in social contact with clients. Respond to ad hoc requests for financial planning or investment advice by recommending that the client or prospect contact your office to set up an in-office consultation (Wolfe, Day, Thomas).
* Document who's authorized to provide instruction to you on behalf of the client. If you don't have discretionary authority over the investment of client funds but transmit instructions to others on the client's behalf concerning investments, create a form the client is required to complete and convey to you containing their instructions and approval to request the completion of the transaction. Conveying investment instructions to others on behalf of clients creates a fiduciary duty to the client (Wolfe, Day, Thomas).
* Accountants who perform administrative services for employer-sponsored benefit plans should avoid providing investment advice to plan participants (Wolfe, Day, Thomas).
* Regarding state and federal licensing rules applicable to investment advisory services, consider situations wherein services may be rendered in jurisdictions other than where your firm is domiciled, and research applicable state securities laws (Wolfe, Day, Thomas).
* Background, credit, and reference checks should be obtained before accepting any significant engagements. Risk factors can be determined in interviews or by checking with the client's prior accountant. If the CPA doesn't perform due diligence work regarding the investments, he or she should determine who's taking responsibility for performing the work (Ric Rosario, CAMICO).
* Meet with clients quarterly to make sure they understand new developments impacting their financial and investment plans. Periodic re-balancing of asset allocation also can be conducted. Update the documents to reflect changes and obtain client signatures (Rosario).
* Insist that any professionals involved in related financial planning functions have errors and omissions insurance to help insure the client against losses and help protect you from claims directly related to their work. Some accountants' professional liability policies don't provide coverage if a commission is involved, so additional coverage may be needed. When dealing with a high-value trust, consider higher limits. In any event, ask for coverage clarification in writing from your carrier to avoid misunderstandings (Rosario).
* Don't provide referrals to relatives, to financial advisors with whom you have personal investments, or from one client to another. Refer at least three fully independent options to your client and document that you aren't recommending any one of them specifically. Never accept any type of remuneration from any investment firm (Michelle Duffett, Insight).
* Utilize a strongly worded contract that specifically identifies out the services, costs and administrative items, and utilize a risk-tolerance worksheet and update it annually or when a customer's personal circumstances change (Gary Sutherland, NAPLIA).
"The potential for investment-related claims in the current, de-leveraging economy will probably be highest for investments that have significant exposures to leveraged transactions such as real estate deals, hedge fund programs, and collateralized transactions," says Ric Rosario, CEO of CAMICO Mutual Insurance Co. (camico.com). "The more traditional direct exposures would include raw land developments, residential and commercial projects underway, which are always a little risky in the first place. Also, any activity or entity that pools invested funds in an unregulated environment is very problematic."
The current economy spurs some investors to blame the financial planner or investment advisor for having recommended an investment that ended up being disappointing, he adds. "It may be that the general partner or president of an investment entity was reassuring investors through newsletters that the investment was still performing when the investment was actually going south. The client may see the planner or advisor as the trusted professional who was responsible for exercising due diligence over the client's entire financial picture."
Tough Economy's Effects
"In the current economy, it will be very difficult for clients to make successful claims alleging that their investment advisor guided them into bad investments, as opposed to other, safer choices that might have been selected by a more prudent professional," says Michelle Duffett, executive VP for Insight Insurance Services (insightinsurance.com). "Virtually all investments have declined in value and all investment advisors are in the same situation to varying degrees. That said, we expect that claims will increase. Clients are more likely to sue in tough economic times," she adds.
Gary Sutherland, CEO of insurer NAPLIA (naplia.com), likewise believes that the current downturn won't produce "a significant amount" of additional claims against CPA investment professionals. "This obviously assumes that these advisors have advocated a conservative portfolio management strategy and have kept their clients fully informed of market developments," he adds. "There is the possibility of claims arising from the use of non-standard or alternative investments, because of the potential for consumers to allege that they were mislead or poorly informed about the risks involved in such investment vehicles. Additionally, we've encountered situations where claims have arisen because the advisor didn't update the original risk assessment worksheet and failed to reflect appropriate investment strategies or risk tolerance for current market conditions."
Investment fraud is always a problem that can cause claims, says Rosario, and it can encompass: 1) financial statement fraud; 2) fraud perpetrated though other forms of false information (e.g., e-mail, newsletters); and 3) Ponzi, pyramid, and other schemes like the recent headline scandals involving financier Bernard Madoff.
"It can strike in large dollar amounts and affect a variety of engagements such as reviews, audits, tax advice, and investment advice," Rosario adds. "The more time that a CPA has been associated with fraudulent activity before it is uncovered, the more likely the CPA will be perceived by juries to have 'validated' the fraud, unwittingly or not." Jury research, he adds, also shows that the public, including clients, perceive that the CPA's fundamental job is to advise clients of opportunities and warn them about risks.
"Also, looking at a situation in hindsight means that the history of it can be rewritten in a manner that benefits the client and portrays the CPA as having failed to warn the client," Rosario says, adding this can also happen in any financial statement services or even non-attest or consulting engagements.
Bill Thompson, president of CPA Mutual (cpamutual.com), says that so far investment performance-related claims are "no worse than other accountants' claims. Most of our members are sophisticated enough to obtain client agreements with their investment clients, in which the client assumes some responsibility for their investment selections," he says. "Most of their clients also realize that the CPA can't guarantee investment performance and that markets are cyclical. Our folks do a pretty good job educating their clients, and, for the most part, have investment-savvy clientele. A lot of our insureds are fee-for-service, too, so this helps mitigate losses as opposed to commissioned-based investment advisors."
Speaking for CNA (cna.com), assistant VPs Joseph Wolfe (risk control), Jeffrey Day (underwriting), and Melissa Thomas (claims) point out that most accountants don't have investment advisory practices. "Investment advisors will experience some claims to the extent they recommended investment in derivative securities or auction rate securities "which lost substantial value or could not be readily sold in the marketplace." The general dip in the markets, however, "is less likely to result in increased claims activity unless investment advisory clients are retired or close to retirement, and their portfolios incurred significant losses. Risks are elevated for trustees and accountants providing family office services based upon the fiduciary duties assumed in these roles," they say.
Duffett says she anticipates that claims will also arise against the CPA firms involved in the headline Madoff fraud. "Although this situation is extreme in the dollar amounts involved, this type of fraud isn't new," she points out. "When government regulations fail to keep investments safe from criminals, it's typical for investors to sue the directors, officers, lawyers, and accountants who reviewed the company's activities. Already investment advisors who didn't promote the Madoff funds are claiming to have been skeptical of the prospectus. Other experts are stating that the fraud should have been apparent, as the investor statements reflect option transactions beyond the total market activity for the day. With hindsight, clients will find a myriad of small cracks and hints to find fault with the accounting professionals that reviewed the criminal's work."
Typical Claims
Many of these claims allege that the accountant was negligent in referring the client to a specific investment advisor, and in many cases allege that while the accountant wasn't the primary investment advisor, they should have recognized that a particular investment wasn't suitable for that client and advised the client of that. Additionally, when an accountant mentions a particular investment opportunity to a client, the client generally will assume that this is equivalent to a recommendation.
One typical claims scenario, Rosario says, involves an older client who has a lot of funds to invest but does not want to be bothered with details. The client is successful in his or her own profession, is demanding, but has little patience for, or understanding of, financial concepts, rather just wanting the financial planner to handle all of the decisions. "The planner recommends a significant portfolio shift from fixed income to equity at a time when equity investments are doing well. The planner also recommends an investment advisor," Rosario says. "The client is so pleased with the returns first produced by the equity investments that they invests even more of the fixed income funds into equity. When the next economic downturn comes along, the client's portfolio loses over one-third of its value, and the client is extremely disappointed. The planner's engagement letter mentions investment risks, but it was never signed or acknowledged by the client, whose files only include the planner's recommendation to invest more aggressively. The client sues the planner, alleging that the planner had a total responsibility for his overall financial well-being and should have warned him of all the risks he had taken. A good risk management technique is to refer the client to more than one investment advisor, thus avoiding the appearance that the planner made the decision for the client."
Thompson likewise says he's seen several types of investment-related claims based on:
1. Allegations of "churning," or recommending allegedly inappropriate investments which generate commission income;
2. Allegations of lack of appropriate investment diversification;
3. Alleged failure to identify or follow (often perhaps more a failure to properly document than follow) a client's risk tolerance; and
4. Alleged confusion regarding how independent entities are affiliated and the services the client thinks they are providing.
A common cause of financial planning and investment management claims is the allegation of a conflict of interest, Duffett says, which "will arise from the referral fee or commission collected by the CPA firm for sending a client to a particular investment advisor. We've found these types of conflicts to be nearly impossible to defend. Once a CPA is paid in any form by an investment firm, 'independence' is a myth. A conflict of interest may also arise from directing the client into a private investment managed by another client, or in which the CPA has invested personally. Even with disclosures, clients and third parties have a tendency to disown knowledge of the conflict, deny their understanding of the conflict, or claim they were unduly persuaded by their professional accountant's involvement.
"It's difficult to be a competent CPA and an accomplished securities broker," Duffett adds. "The body of knowledge is simply too great. Many CPA firms have hired investment professionals to help bridge the knowledge gap. But compared to standard investment advisors, CPAs have more professional liability risk. It's common for professional liability claims against CPAs to include an allegation that the accountant's personal knowledge of the client's finances should have required the CPA to take additional precautions to protect the client's assets. A full-time securities broker on staff or in a wholly-owned subsidiary doesn't protect the CPA firm from claims that there was a need for the firm to analyze the client's ability to absorb risk and guide their investments."
Impact on Premiums?
While voicing no current plans to raise premiums, insurers hold out the right to bump up rates if claims from the down economy escalate. "A key factor is that the largest 'cost of goods' for an insurance company is claims and the related defense costs, which will usually be 70 to 80 cents on the premium dollar collected," Rosario points out. "If claims tick up significantly further than we have currently planned for, it's inevitable that carriers will have to raise rates. The wild card is the loss prevention activity that CPA firms have taken in advance of the recession. A CPA firm may not be able to stop clients from filing lawsuits to cover their own losses, but if the firms have taken the right actions, the overall severity (cost of claims) could be significantly reduced, taking some pressure off rates."
Adds Sutherland, "There's a move by the more forward-thinking firms to purchase separate coverage for financial planning to isolate the potential of claims from this area of activity from eroding coverage for the traditional practice areas. The trigger seems to be about 15 percent of revenue from PFP. The advantage over adding coverage by endorsement to an accountants' professional liability policy is the separate limit of coverage, and any claims won't adversely impact the core practice."
Encouraging Feedback During a Downturn
Advisors often let fear rather than client feedback take hold during uncertain markets, says Julie Littlechild, president of Advisor Impact, a New York-based consultancy to financial advisors and accountants. "Market downturns," she says, "are when advisors need to step up and identify opportunities that result from gathering feedback from clients. The recent downturn has created an environment in which many investors need and want more frequent and reassuring contact with their advisors." Pinpointing what is most important personally to clients often occurs only when times are tough, she claims, and "client feedback" means more than asking clients to rate satisfaction. It's also a chance to understand what's most important to them and the additional services they need.
Best Practice Tips
Insurers offer these tips in a troubled investment landscape:
* Monitor clients and make sure investment allocations are as agreed in the client file (Bill Thompson, CPA Mutual).
* Don't make unusual offers or "sell away" from your broker/dealer's standard menu of investments. No private offerings or derivatives, for instance (Thompson).
* Obtain signed engagement letters yearly for all financial planning and investment advisory engagements. These letters should clearly define the timing and scope of services and client responsibilities, and include loss-limitation and alternative-dispute resolution clauses and disclaimers regarding investment performance and the volatility of market conditions (Joseph Wolfe, Jeffrey Day, and Melissa Thomas, CNA).
* Document all client conversations, even "casual" inquiries that may come up in social contact with clients. Respond to ad hoc requests for financial planning or investment advice by recommending that the client or prospect contact your office to set up an in-office consultation (Wolfe, Day, Thomas).
* Document who's authorized to provide instruction to you on behalf of the client. If you don't have discretionary authority over the investment of client funds but transmit instructions to others on the client's behalf concerning investments, create a form the client is required to complete and convey to you containing their instructions and approval to request the completion of the transaction. Conveying investment instructions to others on behalf of clients creates a fiduciary duty to the client (Wolfe, Day, Thomas).
* Accountants who perform administrative services for employer-sponsored benefit plans should avoid providing investment advice to plan participants (Wolfe, Day, Thomas).
* Regarding state and federal licensing rules applicable to investment advisory services, consider situations wherein services may be rendered in jurisdictions other than where your firm is domiciled, and research applicable state securities laws (Wolfe, Day, Thomas).
* Background, credit, and reference checks should be obtained before accepting any significant engagements. Risk factors can be determined in interviews or by checking with the client's prior accountant. If the CPA doesn't perform due diligence work regarding the investments, he or she should determine who's taking responsibility for performing the work (Ric Rosario, CAMICO).
* Meet with clients quarterly to make sure they understand new developments impacting their financial and investment plans. Periodic re-balancing of asset allocation also can be conducted. Update the documents to reflect changes and obtain client signatures (Rosario).
* Insist that any professionals involved in related financial planning functions have errors and omissions insurance to help insure the client against losses and help protect you from claims directly related to their work. Some accountants' professional liability policies don't provide coverage if a commission is involved, so additional coverage may be needed. When dealing with a high-value trust, consider higher limits. In any event, ask for coverage clarification in writing from your carrier to avoid misunderstandings (Rosario).
* Don't provide referrals to relatives, to financial advisors with whom you have personal investments, or from one client to another. Refer at least three fully independent options to your client and document that you aren't recommending any one of them specifically. Never accept any type of remuneration from any investment firm (Michelle Duffett, Insight).
* Utilize a strongly worded contract that specifically identifies out the services, costs and administrative items, and utilize a risk-tolerance worksheet and update it annually or when a customer's personal circumstances change (Gary Sutherland, NAPLIA).
Tuesday, January 13, 2009
Washington DC Water and Sewer Back up Claims
Washington DC's water and sewer utility has put out the following notice:
We're reviewing our claims program as it relates to water main breaks and sewer back ups. Our current policy is we generally do not pay for cleanup costs or damages that result from sewer backups or main breaks. We seek to determine the cause of the backup, if we had prior notice of a problem and whether we failed to timely fix the problem before WASA can consider payment of any claims. The property owner is also required to maintain and remove any clog in the sewer service line that extends from the building to the main sewer line.
We're reviewing our claims program as it relates to water main breaks and sewer back ups. Our current policy is we generally do not pay for cleanup costs or damages that result from sewer backups or main breaks. We seek to determine the cause of the backup, if we had prior notice of a problem and whether we failed to timely fix the problem before WASA can consider payment of any claims. The property owner is also required to maintain and remove any clog in the sewer service line that extends from the building to the main sewer line.
Stringfellow Decision
On January 5, 2009, the California Court of Appeal issued its long-awaited decision in the Stringfellow insurance coverage case. The court held that a policyholder facing long-term property damage or personal injury claims may be entitled to indemnity under all years of insurance policies that were in effect while the damage took place. State of California v. Continental Ins. Co., 09 Cal. Daily Op. Serv. 161. The court also disapproved precedents in California and elsewhere that have limited policyholders to collecting only one year's policy limits for continuing injury claims.
This landmark decision, which is likely to influence courts around the country, potentially multiplies the amount of insurance that policyholders can use to pay for claims under standard general liability policies. It is especially significant for policyholders (such as manufacturing, chemical, pharmaceutical, construction, and waste disposal companies) that routinely face claims for progressive property damage or personal injuries that might have started years ago.
The case started in 1993, when the State of California sought indemnity from its insurers for its estimated $700 million cost to clean up industrial waste near the Stringfellow acid pits in Riverside County, California. The State demanded coverage up to the combined limits of all its liability policies that were in effect during all the years when the contamination took place and continued to migrate offsite. Following an earlier Court of Appeal decision in FMC Corp. v. Plaisted & Cos., 61 Cal. App. 4th 1132 (1998), the trial court finally ruled in 2004 that the State could not "stack" or combine its successive years of policy limits as it sought to do, but instead had to pick one year's policies and demand payment under them. This ruling meant that the State could not collect more than the maximum ($48 million) in insurance limits it had purchased in any one policy year.
The Court of Appeal reversed the trial court's ruling on the "stacking" issue, and held that the State could collect the combined limits of all policies in effect when the contamination occurred and while it continued to migrate offsite. Noting that the standard language in each of the State's liability policies promised to pay "all sums" for any "occurrence" that caused property damage or bodily injury during the policy period, the court held that each policy had an independent contractual liability to pay regardless of whether the State had purchased similar policies in other years that might also be obligated to pay. In so holding, the court disapproved of FMC and other "anti-stacking" cases, in which courts have ignored the literal language of the standard liability policies and tried to impose limits on the number of policies under which an insured can collect.
This landmark decision, which is likely to influence courts around the country, potentially multiplies the amount of insurance that policyholders can use to pay for claims under standard general liability policies. It is especially significant for policyholders (such as manufacturing, chemical, pharmaceutical, construction, and waste disposal companies) that routinely face claims for progressive property damage or personal injuries that might have started years ago.
The case started in 1993, when the State of California sought indemnity from its insurers for its estimated $700 million cost to clean up industrial waste near the Stringfellow acid pits in Riverside County, California. The State demanded coverage up to the combined limits of all its liability policies that were in effect during all the years when the contamination took place and continued to migrate offsite. Following an earlier Court of Appeal decision in FMC Corp. v. Plaisted & Cos., 61 Cal. App. 4th 1132 (1998), the trial court finally ruled in 2004 that the State could not "stack" or combine its successive years of policy limits as it sought to do, but instead had to pick one year's policies and demand payment under them. This ruling meant that the State could not collect more than the maximum ($48 million) in insurance limits it had purchased in any one policy year.
The Court of Appeal reversed the trial court's ruling on the "stacking" issue, and held that the State could collect the combined limits of all policies in effect when the contamination occurred and while it continued to migrate offsite. Noting that the standard language in each of the State's liability policies promised to pay "all sums" for any "occurrence" that caused property damage or bodily injury during the policy period, the court held that each policy had an independent contractual liability to pay regardless of whether the State had purchased similar policies in other years that might also be obligated to pay. In so holding, the court disapproved of FMC and other "anti-stacking" cases, in which courts have ignored the literal language of the standard liability policies and tried to impose limits on the number of policies under which an insured can collect.
Thursday, December 11, 2008
Mental Health Change May Hit Insurance Rates Hard
With the national spotlight on Congress' bailout of financial institutions, little notice has been paid to another part of the law passed last month that could affect smaller businesses -- the Mental Health Parity and Addiction Equity Act.
For more than a decade, mental health and addiction treatment advocates have lobbied to bring employers' mental health insurance benefits on par with other medical benefits. In the interim, many large employers took that step on their own.
That's not necessarily the case with smaller employers.
When it goes into effect January 2010, the Mental Health Parity Act will exempt businesses with fewer than 50 employees, but those just above that level may be facing a Hobson's Choice -- either significantly upgrade their mental health and substance abuse coverage, or drop it altogether.
"For people who need mental health treatment, it [the new law] is definitely a win because it will be easier to get appropriate care," said Steven Wojcik, vice president for public policy for the National Business Group on Health in Washington, D.C. "But for those smaller employers, it's definitely going to make health-care costs more expensive, so those employers operating at the margins may have a hard time continuing to offer those benefits."
Here's why: While it's not unusual for a small- to medium-size employer to offer unlimited outpatient visits for a physical ailment, doing the same for mental health and addiction treatment can add significantly to a company's health premium. The same may hold true for inpatient hospitalizations.
For a large employer, many of whom self-insure, the risks and costs are spread out enough to be manageable. For a small-to-medium size business, both risk and cost can look daunting.
"Probably what's going to happen is that the substance abuse treatment benefit will become more generous," said Mr. Wojcik. "I can't imagine you would have limits on outpatient services for conditions like stroke, diabetes or asthma."
Under the new law, he said, if you don't limit rehabilitation services for a stroke, you can't limit them for mental health or substance abuse either.
"The timing is certainly not good, and it's ironic that this was attached to the bailout bill. The last thing you want to do is to raise labor costs at a time of rising unemployment."
Covering treatment for mental health and addiction problems is a good investment for employers if it means they retain a good employee.
As addiction treatment expert Michael T. Flaherty noted, "The positive implications of this law will by far exceed any good achieved by the economic 'bailout' over the years. Medicine can now work on finding the true origins of mental illness and empower the patient in each cure."
He added that insurance companies should welcome the change because millions more people would be added to the rolls of the insured, and conditions will be treated before they become catastrophes.
But the impact can differ depending on the size of a company, both in cost to the employee and the company.
A new Kaiser Family Foundation found that the smallest firms "are about half as likely to offer coverage to their employees" -- about 62 percent of businesses with less than 200 employees -- compared with 99 percent of firms with 200 or more employees. The study also found that employees at smaller firms generally pay higher deductibles.
But smaller businesses already have been facing up to 20 percent annual increases in their health-care costs the past three years, so any further add-on becomes a worry.
How much might premiums go up? Highmark spokesman Michael Weinstein says that "there are so many variables unknown yet on this mental health parity law that, at this point, for any insurance company not just Highmark, it's very difficult to calculate the exact impact on health benefit premiums."
Scott Lammie, chief financial officer for UPMC Health Plan, said it already offers mental health coverage as a standard benefit so the new law "is expected to have only a modest impact on premium levels, which we believe over time could also have a favorable premium impact by helping to reduce overall physical health costs."
So far, the issue apparently has not generated much discussion among small to midsize businesses.
"My suspicion is that they're not as aware [of the new law] as they should be," said Lee Taddonio of SMC Business Councils, whose 2,500 members typically have up to 150 employees. Mr. Taddonio said Pennsylvania has had mental health parity laws since 2006, and also noted that the new federal law offers an out if health-care costs increase more than 2 percent the first year, and 1 percent after that.
"My gut feeling is that I don't think it will be a that significant."
For more than a decade, mental health and addiction treatment advocates have lobbied to bring employers' mental health insurance benefits on par with other medical benefits. In the interim, many large employers took that step on their own.
That's not necessarily the case with smaller employers.
When it goes into effect January 2010, the Mental Health Parity Act will exempt businesses with fewer than 50 employees, but those just above that level may be facing a Hobson's Choice -- either significantly upgrade their mental health and substance abuse coverage, or drop it altogether.
"For people who need mental health treatment, it [the new law] is definitely a win because it will be easier to get appropriate care," said Steven Wojcik, vice president for public policy for the National Business Group on Health in Washington, D.C. "But for those smaller employers, it's definitely going to make health-care costs more expensive, so those employers operating at the margins may have a hard time continuing to offer those benefits."
Here's why: While it's not unusual for a small- to medium-size employer to offer unlimited outpatient visits for a physical ailment, doing the same for mental health and addiction treatment can add significantly to a company's health premium. The same may hold true for inpatient hospitalizations.
For a large employer, many of whom self-insure, the risks and costs are spread out enough to be manageable. For a small-to-medium size business, both risk and cost can look daunting.
"Probably what's going to happen is that the substance abuse treatment benefit will become more generous," said Mr. Wojcik. "I can't imagine you would have limits on outpatient services for conditions like stroke, diabetes or asthma."
Under the new law, he said, if you don't limit rehabilitation services for a stroke, you can't limit them for mental health or substance abuse either.
"The timing is certainly not good, and it's ironic that this was attached to the bailout bill. The last thing you want to do is to raise labor costs at a time of rising unemployment."
Covering treatment for mental health and addiction problems is a good investment for employers if it means they retain a good employee.
As addiction treatment expert Michael T. Flaherty noted, "The positive implications of this law will by far exceed any good achieved by the economic 'bailout' over the years. Medicine can now work on finding the true origins of mental illness and empower the patient in each cure."
He added that insurance companies should welcome the change because millions more people would be added to the rolls of the insured, and conditions will be treated before they become catastrophes.
But the impact can differ depending on the size of a company, both in cost to the employee and the company.
A new Kaiser Family Foundation found that the smallest firms "are about half as likely to offer coverage to their employees" -- about 62 percent of businesses with less than 200 employees -- compared with 99 percent of firms with 200 or more employees. The study also found that employees at smaller firms generally pay higher deductibles.
But smaller businesses already have been facing up to 20 percent annual increases in their health-care costs the past three years, so any further add-on becomes a worry.
How much might premiums go up? Highmark spokesman Michael Weinstein says that "there are so many variables unknown yet on this mental health parity law that, at this point, for any insurance company not just Highmark, it's very difficult to calculate the exact impact on health benefit premiums."
Scott Lammie, chief financial officer for UPMC Health Plan, said it already offers mental health coverage as a standard benefit so the new law "is expected to have only a modest impact on premium levels, which we believe over time could also have a favorable premium impact by helping to reduce overall physical health costs."
So far, the issue apparently has not generated much discussion among small to midsize businesses.
"My suspicion is that they're not as aware [of the new law] as they should be," said Lee Taddonio of SMC Business Councils, whose 2,500 members typically have up to 150 employees. Mr. Taddonio said Pennsylvania has had mental health parity laws since 2006, and also noted that the new federal law offers an out if health-care costs increase more than 2 percent the first year, and 1 percent after that.
"My gut feeling is that I don't think it will be a that significant."
Hard Markets are on their way.
Economists at Swiss Reinsurance Co. are predicting that current financial market uncertainty is likely to continue well into 2010, and will lead to premium rate increases for insurance and reinsurance for several years to come.
Swiss Re predicted that there was a 70% chance of a deep global recession that would last until mid-2009, with continued volatility in credit and equity markets through to 2010, said Kurt Karl, the reinsurer's chief economist in the United States.
There is also a 25% chance that a severe recession—a mini depression that just falls short of the 1930s Great Depression—will last well into 2010, he added. Insurers are not immune from the crisis, according to Thomas Hess, Swiss Re’s chief economist in Zurich, Switzerland.
The insurance industry had combined $18 trillion invested assets worldwide at the end of 2007, but by September this year, nonlife insurers alone had lost 10%-15% of their shareholder equity. They also account for some $200 billion of the financial market’s total $40 trillion loss from subprime structured products, he added.
Should an insurer need to raise capital, the credit crunch would also be an issue, as it would prove difficult and expensive to raise capital and hedge against financial risks, Mr, Hess said.
Mr. Hess predicted that nonlife premium rates will rise in 2009, first for reinsurance and then for insurance. Price increases for reinsurance would result from higher demand for reinsurance at a time of reduced capacity, he added.
“There is a scarcity of risk capital, and so naturally the price of risk increases, including the price of reinsurance,” he said. “I expect prices in reinsurance to rise. It will take longer for primary insurance rates to increase, but they will also rise.”
Nonlife insurers could also take steps to improve their underwriting results, to compensate for lower investment returns, Mr. Hess said.
In a special report published Tuesday “Global Insura
nce Review 2008 and Outlook for 2009: Weathering the Storm,” Swiss Re said that refocusing on underwriting profitability was likely to lead to rate increases in lines where losses have been highest—including directors and officers, aviation, U.S. catastrophe and credit. In other lines, there will be an end to the decline on rates, it added.
“A general hardening of rates across all lines will be slow to emerge in the poor macroeconomic environment. However, the expectation for rate changes will be a shift away from softening to hardening in 2009, reflecting the increased cost of insurance production due to higher capital costs and lower investment returns
Swiss Re predicted that there was a 70% chance of a deep global recession that would last until mid-2009, with continued volatility in credit and equity markets through to 2010, said Kurt Karl, the reinsurer's chief economist in the United States.
There is also a 25% chance that a severe recession—a mini depression that just falls short of the 1930s Great Depression—will last well into 2010, he added. Insurers are not immune from the crisis, according to Thomas Hess, Swiss Re’s chief economist in Zurich, Switzerland.
The insurance industry had combined $18 trillion invested assets worldwide at the end of 2007, but by September this year, nonlife insurers alone had lost 10%-15% of their shareholder equity. They also account for some $200 billion of the financial market’s total $40 trillion loss from subprime structured products, he added.
Should an insurer need to raise capital, the credit crunch would also be an issue, as it would prove difficult and expensive to raise capital and hedge against financial risks, Mr, Hess said.
Mr. Hess predicted that nonlife premium rates will rise in 2009, first for reinsurance and then for insurance. Price increases for reinsurance would result from higher demand for reinsurance at a time of reduced capacity, he added.
“There is a scarcity of risk capital, and so naturally the price of risk increases, including the price of reinsurance,” he said. “I expect prices in reinsurance to rise. It will take longer for primary insurance rates to increase, but they will also rise.”
Nonlife insurers could also take steps to improve their underwriting results, to compensate for lower investment returns, Mr. Hess said.
In a special report published Tuesday “Global Insura
nce Review 2008 and Outlook for 2009: Weathering the Storm,” Swiss Re said that refocusing on underwriting profitability was likely to lead to rate increases in lines where losses have been highest—including directors and officers, aviation, U.S. catastrophe and credit. In other lines, there will be an end to the decline on rates, it added.
“A general hardening of rates across all lines will be slow to emerge in the poor macroeconomic environment. However, the expectation for rate changes will be a shift away from softening to hardening in 2009, reflecting the increased cost of insurance production due to higher capital costs and lower investment returns
Friday, December 05, 2008
Complex Property Coverages
Sadly, a lot of times clients only ask one thing about property coverages -- How much does it cost? The next few blogs are meant to highlight issues that when there is a claim the client is asking --How much is your Errors and Omission coverage.
Debris Removal
Debris removal usually only applies to insured's property covered by the policy. There is going to be property owned by the insured that is customarily not insured by the property policy, they will have to clean it up and it is not covered unless an exception is made for this property under Debris removal. ( i.e. concrete blocks, driveways, curbs, walkways are not covered and trees, shrubs and lawns are commonly excluded for wind losses).
Debris removal owned by others is not covered if it is not insured under the policy. You must get debris removal changed to include insured's property and others including outdoor property.
Most policies have very low removal limits. Always increase these limits. It is not expensive and absolutely essential coverage in a loss. It is not uncommon to have greater debris removal costs than reconstruction costs.
Debris Removal
Debris removal usually only applies to insured's property covered by the policy. There is going to be property owned by the insured that is customarily not insured by the property policy, they will have to clean it up and it is not covered unless an exception is made for this property under Debris removal. ( i.e. concrete blocks, driveways, curbs, walkways are not covered and trees, shrubs and lawns are commonly excluded for wind losses).
Debris removal owned by others is not covered if it is not insured under the policy. You must get debris removal changed to include insured's property and others including outdoor property.
Most policies have very low removal limits. Always increase these limits. It is not expensive and absolutely essential coverage in a loss. It is not uncommon to have greater debris removal costs than reconstruction costs.
Wednesday, December 03, 2008
Secret Questions
Knowledge based authentication (KBA), or the use of secret questions to verify a person's identity, is generally safe. The most frequently used KBA questions are ones with unchanging answers, such as what is your mother's maiden name or the name of your favorite pet. The consumer selects a secret question and provides an answer himself, which the company stores in its database. These types of questions are implemented only after a relationship has been established with the consumer. However, some risk exists if an identification thief were to know the answers from common knowledge or a data breach. Another type of KBA question is the dynamic type, which is intuitive and is created spontaneously using data from a consumer's data record that is accessed in real-time. This type of question does not require a prior relationship with the consumer and can be used for such things as account origination or requesting account changes.
Tuesday, December 02, 2008
Successful Construction Claims
Massive documentation is par for the course in large construction projects, and lawyers can use the paper trail as evidence to aid in the defense or prosecution of a construction claim. There is a wide array of project documents, including contract documents, drawings, applications for payment and payment certificates, a bar chart and electronic schedules, minutes of site meetings, site superintendent reports, deficiency lists, handwritten notes of meetings or telephone conversations, inspection and testing reports, and contemplated change notices, site instructions, price quotations, and change orders. Organizing documents in chronological order reveals a project history that can be related in an understandable and revealing way. That narrative frequently traces the history of construction problems that may become the basis for construction claims, and the way the story is communicated may play a decisive role in the claim's success or defeat. A paper trail can determine a problem's causes, suggest ways to correct the problem, and establish which parties are responsible or contributory to the problem.
Monday, December 01, 2008
Florida Catastrophe Fund
Insurance industry groups recently warned Florida legislators that the state's underfunded Catastrophe Fund must be reformed, especially since the state is in the midst of a 20-year increased hurricane activity cycle, according to Florida Insurance Council Executive Vice President Sam Miller. The fund currently needs up to $15 billion to meet its current obligations, but bond issues are unlikely to raise enough money in this economic climate. Miller suggests legislators reduce the fund's obligations from $28 billion to $16.5 billion, which would prompt insurers to purchase additional reinsurance. He also suggests allowing insurers to increase premiums to cover the additional reinsurance costs.
Monday, October 27, 2008
Reinsurance Contracts, Insurer Solvency And Reinsurer Solvency - A Reinsurance Primer
Reinsurance in the simplest terms is insurance for insurance companies. Primary insurance carriers "cede" (place with) some portion of the risks they agree to underwrite (based on the design of the reinsurance contract) to a reinsurance carrier which is known as the "cedant." Primary insurers and reinsurers negotiate and re-negotiate these contracts based on market conditions, trends and loss history.
Negotiated reinsurance contracts influence the breadth of or even the limit on risks primary insurance carriers can and are willing to underwrite. The primary insurer's capacity and "appetite" is proportional to the availability and use of reinsurance: the lower the reinsurer's capacity, the lower the primary insurer's capacity; and the narrower the reinsurer's appetite, the narrower the appetite of the primary insurer.
Retrocession is reinsurance for the reinsurer. The reinsurer has agreed to take on risks from several primary insurers and they, in turn, place some of their financial risks in other reinsurance carriers. The number of insurance carriers, primary, reinsurers and retrocessionaires (the reinsurer of the reinsurer) on a block of risks may be surprising.
Reinsurance is vital to the entire insurance mechanism, especially in light of the global insurance economy. Reinsurance accomplishes five functions/goals:
1. Stabilizes the earnings of the primary insurer in the event of catastrophic losses;2. Increases the primary insurer's capacity by limiting its liability on individual risks;3. Provides liquidity and protects against swings in business cycles; 4. Provides underwriting expertise to the primary insurer; and5. Can partially protect the insured in the event of a primary insurer's insolvency.
Conclusion
Reinsurance is vital to the insurance mechanism as it exists today. Capacity and risk appetite are based on the capital provided by reinsurers and the contractual agreements between primary insurers and reinsurers.
Negotiated reinsurance contracts influence the breadth of or even the limit on risks primary insurance carriers can and are willing to underwrite. The primary insurer's capacity and "appetite" is proportional to the availability and use of reinsurance: the lower the reinsurer's capacity, the lower the primary insurer's capacity; and the narrower the reinsurer's appetite, the narrower the appetite of the primary insurer.
Retrocession is reinsurance for the reinsurer. The reinsurer has agreed to take on risks from several primary insurers and they, in turn, place some of their financial risks in other reinsurance carriers. The number of insurance carriers, primary, reinsurers and retrocessionaires (the reinsurer of the reinsurer) on a block of risks may be surprising.
Reinsurance is vital to the entire insurance mechanism, especially in light of the global insurance economy. Reinsurance accomplishes five functions/goals:
1. Stabilizes the earnings of the primary insurer in the event of catastrophic losses;2. Increases the primary insurer's capacity by limiting its liability on individual risks;3. Provides liquidity and protects against swings in business cycles; 4. Provides underwriting expertise to the primary insurer; and5. Can partially protect the insured in the event of a primary insurer's insolvency.
Conclusion
Reinsurance is vital to the insurance mechanism as it exists today. Capacity and risk appetite are based on the capital provided by reinsurers and the contractual agreements between primary insurers and reinsurers.
Monday, October 20, 2008
Emerging Trends in Workers Compensation
The elephant in the room in Workers Compensation Costs is healthcare's rising costs. The two snakes hiding under the bed are aging in the workplace and obesity. Consider the following:
- In 1986 Medical costs represented 45% of Workers Compensation claims. It is projected that by 2016 Medical costs will represent 70% of claims. Remember health care costs are borne by the employer through premiums and experience mods.
- Workers over 65 median lost time is 50% more than younger workers.
- Indemnity costs are 11 times higher for obese workers than healthy weight workers.
Monday, September 22, 2008
Don't think you need Umbrella Coverage?
Many customers think they shouldn't "waste" money on higher limits or umbrella coverage. if you are one of them consider the following:
- 40% of companies in the annual Fulbright & Jaworski report said they had at least one lawsuit filed against them for $20 Million or more in damages.
- Having company cars is one of the most dangerous areas of exposure. 13% of the top 100 lawsuit awards last year were attributable to automobile cases. In 2006, the largest automobile award was $30.6 Million with multiple injury cases routinely settling for between $3 to $5 Million.
- Median awards in cases resulting in paralysis are more than $7 Million.
How many doughnuts does your company have to sell to have an extra $5 Million after-tax to satisfy a judgment?
Monday, August 25, 2008
New York Reforms Late Notice Law
New York Amends Late Notice Law.
For policies issued or delivered in New York on or after January 19, 2009 the Insurance Company must prove Material Prejudice caused by late notice. key provisions based on recent literature include:
Applies to all policies except "claims made policies.
Claims cannot be denied based on late notice unless the insurance company suffered material prejudice.
Burden is on the insurance company to prove prejudice for claims where notice was late by less than two years.
For policies issued or delivered in New York on or after January 19, 2009 the Insurance Company must prove Material Prejudice caused by late notice. key provisions based on recent literature include:
Applies to all policies except "claims made policies.
Claims cannot be denied based on late notice unless the insurance company suffered material prejudice.
Burden is on the insurance company to prove prejudice for claims where notice was late by less than two years.
Wednesday, July 30, 2008
Interesting Tidbits
- Since 2001, premiums for PPO and indemnity plans have risen as much as 56%, according to the National Association of Dental Plans.
- Buying Long term care insurance soooner is better. Up to 33% of applicants over 60 are denied coverage.
- Dog bites now account for one-third of all homeowners claims costing over $350 Million annually.
Friday, July 18, 2008
Cyber Risk Increasing as Stolen Data Becomes a Commodity
Prices charged by cybercriminals selling hacked bank and credit card details have fallen sharply as the volume of data on offer has soared, forcing them to look elsewhere to boost profit margins, a new report says.
Researchers for Finjan, a Web security firm, said the high volumes traded had led to bank and credit card information becoming "commoditised" -- account details with PIN codes that once fetched $100 or more each might now go for $10 or $20.
In its latest quarterly survey of Web trends, the California-based company said cybercrime had evolved into "a major shadow economy ruled by business rules and logic that closely mimics the legitimate business world".
Finjan's Israel-based chief technology officer, Yuval Ben-Itzhak, said in a telephone interview that new types of stolen data were now commanding a premium, such as patient healthcare information that can be used for insurance fraud or to illicitly acquire and sell medicines.
Other premium data includes business information, company personnel files, and intercepted commercial e-mails.
MAFIA STRUCTURE
The Finjan report, partly based on contacts the company established with five groups trading online in stolen data, described a Mafia-type cybercrime hierarchy in which bosses operate as business entrepreneurs and typically leave the actual online attacks to underlings.
An "underboss", or second-in-command, provides the Trojaninfiltration software for launching attacks. The workforce that carries these out is paid according to the rate of infections achieved and the country of origin of the infected computers.
"Resellers" then trade the hacked financial data, in the same way that a criminal "fence" disposes of stolen goods.
In online exchanges with resellers, Finjan researchers were offered a menu of stolen data, with platinum, gold, and corporate card details commanding the highest prices.
Sellers promised the data was "fresh" and one even offered a 48-hour guarantee to supply new details if those originally bought were rejected by payment systems as stolen cards.
"It's like in the regular business world -- when you buy a good and it doesn't work, you go back and you want to replace it," Ben-Itzhak said.
"It indicates a competitive environment. ... They need to build reputation, they want to show they're providing high quality data for your money so you can go back and buy from them rather than go to the other groups."
Ben-Itzhak predicted banks, which until now have shouldered the burden of compensating people whose data are hacked, would seek to put some of the onus for security on the customer.
"So far the banks are not mandating the end-user to have some sort of security on their desktop. They're taking the risk, better to say they're paying the risk, when your account has been compromised," he said.
"However what we noticed recently is the volume increased significantly and the banks are starting to ask the question: did you install something or do you have something running on your desktop. ... The banks will start to ask questions of the end-users and put some responsibility at least on them."
By: Mark Trevelyan
Copyright 2008 Reuters. Click for Restrictions
Researchers for Finjan, a Web security firm, said the high volumes traded had led to bank and credit card information becoming "commoditised" -- account details with PIN codes that once fetched $100 or more each might now go for $10 or $20.
In its latest quarterly survey of Web trends, the California-based company said cybercrime had evolved into "a major shadow economy ruled by business rules and logic that closely mimics the legitimate business world".
Finjan's Israel-based chief technology officer, Yuval Ben-Itzhak, said in a telephone interview that new types of stolen data were now commanding a premium, such as patient healthcare information that can be used for insurance fraud or to illicitly acquire and sell medicines.
Other premium data includes business information, company personnel files, and intercepted commercial e-mails.
MAFIA STRUCTURE
The Finjan report, partly based on contacts the company established with five groups trading online in stolen data, described a Mafia-type cybercrime hierarchy in which bosses operate as business entrepreneurs and typically leave the actual online attacks to underlings.
An "underboss", or second-in-command, provides the Trojaninfiltration software for launching attacks. The workforce that carries these out is paid according to the rate of infections achieved and the country of origin of the infected computers.
"Resellers" then trade the hacked financial data, in the same way that a criminal "fence" disposes of stolen goods.
In online exchanges with resellers, Finjan researchers were offered a menu of stolen data, with platinum, gold, and corporate card details commanding the highest prices.
Sellers promised the data was "fresh" and one even offered a 48-hour guarantee to supply new details if those originally bought were rejected by payment systems as stolen cards.
"It's like in the regular business world -- when you buy a good and it doesn't work, you go back and you want to replace it," Ben-Itzhak said.
"It indicates a competitive environment. ... They need to build reputation, they want to show they're providing high quality data for your money so you can go back and buy from them rather than go to the other groups."
Ben-Itzhak predicted banks, which until now have shouldered the burden of compensating people whose data are hacked, would seek to put some of the onus for security on the customer.
"So far the banks are not mandating the end-user to have some sort of security on their desktop. They're taking the risk, better to say they're paying the risk, when your account has been compromised," he said.
"However what we noticed recently is the volume increased significantly and the banks are starting to ask the question: did you install something or do you have something running on your desktop. ... The banks will start to ask questions of the end-users and put some responsibility at least on them."
By: Mark Trevelyan
Copyright 2008 Reuters. Click for Restrictions
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