Rhode Island’s largest workers compensation carrier, Beacon Mutual Insurance Co., has engaged in a pattern of favoritism benefiting select clients and agents; won and retained employer accounts by cheating on pricing and regulations, and tolerated sloppy financial and underwriting management, according to a scathing report that Beacon Mutual itself commissioned.
The report, issued by a committee headed by former Gov. Lincoln Almond, paints a picture of a company where certain board directors, VIP accounts and large agents receive favorable pricing and terms on policies and where unearned credits, payroll misclassifications and other pricing gimmicks are utilized to win and retain large accounts.
“It is with profound regret that we must report that we have found instances of abuse, misjudgment and seriously flawed operating systems,” proclaimed Almond at a press conference in Warwick just hours after he and his committee members presented their findings to the Beacon Mutual board of directors.
“Rather than putting the interests of policyholders first, we have discovered a pattern of favoritism that has unfairly benefited the former chairman of the board, certain policyholders due to their relationships with key executives of Beacon and a select group of insurance brokers,” Almond added.
Almond stressed that his committee feels the problems, while serious, could and should be fixed given the important role played by Beacon Mutual in insuring 90 percent of the state’s businesses.
Almond’s report criticizes recently resigned Chairman of the Board Sheldon Sollosy, current CEO Joseph Solomon and Vice President of Underwriting David Clark, however, the former governor stopped short of calling for the firing or prosecution of any Beacon Mutual executives, arguing that was the job instead of Beacon’s board of directors or other public officials.
Almond said the abuses by the company created an uneven playing field that hurt the majority of policyholders to the advantage of large policyholders.
“Beacon Mutual’s 14,500 policyholders must receive fair treatment from their brokers and from Beacon,” Almond said.
“As a mutual insurance company, policyholders legally own the company. About 82 percent of Beacon’s policyholders are small businesses in Rhode Island with premiums below $10,000. They are the backbone of our state’s economy and they deserve a level playing field when it comes to paying insurance premiums.”
Beacon Mutual directors maintained they would take the report seriously.
“We’re not going to hide from this,” commented a spokesman for Beacon’s board of directors after Almond’s press conference. Bill Fischer said the board, which was told about the report’s findings by Almond’s committee just hours before the press conference, vowed to take the report very seriously and has scheduled meetings on Friday and next Wednesday to decide what to do.
Carl Hayes, Jr., current chairman of Beacon’s board, said the board wanted a few days to read the report. “If there are recommendations in the report that will move the company forward and be productive to our policyholders, then by all means we want to adopt and implement those recommendations as soon as possible,” he said in a prepared statement.
“In many ways today is a new day for Beacon Mutual,” Hayes commented.
In late news, Governor Donald L. Carcieri is today demanding that Solomon, the chief executve officer, and Clark, vice president of underwiritng, be immediately terminated. He has also demanded the resignations of some board members. See story on www.insurancejournal.com.
The $1.5 million report, based on findings by Giuliani Security and Safety consulting firm owned by former New York Mayor Rudy Giuliani, describes a Beacon Mutual corporate culture where senior management places such an emphasis on “taking care of agents” that they often bend the rules and permit some larger agencies to influence policy pricing and terms.
It cites a company and regulatory system where personnel have failed since 2001 to file required forms when deviating from approved rates and were instructed to dummy up documents to satisfy state auditors.
Investigators looked at a handful of large accounts where they found unearned credits, misclassifications and other pricing that was not by the books or was otherwise unsupportable. In some cases, the firms had ties to Beacon directors or management; some others were accounts of preferred agents. The firms where pricing was questionable include New England Airlines, Kenneth Castellucci & Associates, Cardi Construction, Lifespan Corporation (Beacon’s largest client), Manpower Temporary Services and Paul Arpin Van Lines.
In the case of New England Airlines, the auditors found that the cost of reinsurance had not been charged to the policyholder but that corrective action has been taken to recoup some of these costs.
The report confirms allegations that Castellucci firm received unearned premium credits (52 and 58 percent despite 322 and 168 percent loss ratios in 2001 and 2004) but said there was insufficient evidence to conclude that this pricing break was in exchange for a discount on work the stone cutting company did at the home of CEO Solomon.
Former Chairman Sollosy, who was asked to resign when an initial internal investigation of allegations began, refused to permit access to the payroll records of his company, Manpower Temporary Services, for a workers compensation audit and senior management took no action to have the company cooperate, according to the report.
In order to lower its premiums, the payroll of Cardi Corporation was apparently misclassified as not involving bridge construction work when it appears the firm does such work. The review found no evidence of any self-dealing by any Beacon employee or director in this case.
On the Lifespan account (the insurer’s largest with $5 million in annual premium), the audit found that Beacon did not verify payroll and claims data used to calculate Lifespan’s experience mod, data that appears to have been “significantly understated.” Also, this insured was given an unusual three-year guaranteed rate. Between 2000 and 2004, Beacon incurred an average loss ratio of 192 percent on this account.
Paul Arpin Van Lines received large credits between 40 to 60 percent and benefited from incorrect workers compensation classification does despite an overall loss ratio of 164 percent between 1997 and 2005. Arpin’s chief financial officer, Edward J. Braks, has been a member of Beacon’s board since 2004.
The auditors uncovered a VIP list of accounts, which they say CEO Solomon denied existed and which the vice president of underwriting says Solomon told him to delete from his computer. Investigators determined that “the accounts listed appear to have received a level of pricing that may not be consistent with comparable companies.”
The report does not name all agents who received pricing accommodations on VIP accounts but cites examples involving Starkweather & Shepley (Ribco Manufacturing account) and The Preston Agency (ADJ, a Dunkin Donuts franchise owner). It alleges that Slater Dye Works Inc. appeared to get its favorable pricing thanks to a close relationship between Beacon’s vice president of underwriting and Slater Dye’s risk manager.
It questions certain entertainment expenses for agents including an extended trip to Scotland by the CEO and three agents and a golf trip to Pinehurst Country Club in North Carolina, for which partial expenses were claimed to be for “agent focus groups.”
The investigation also turned up evidence that several individual directors, including Sollosy, allegedly bought individual workers comp policies after they no longer owned or worked for an insured in order to satisfy the requirement that a director must be a policyholder to remain on the board.
In terms of agent commissions, the report found that Beacon classifies its agents into two categories: those who receive standard commissions of about 6 percent and a second class of 44 contract agents who receive various contingent commissions and perks in addition to the standard commission. The contingent fees are paid at the discretion of the CEO and underwriting vice president but not in accordance with any guidelines or finance approval, investigators said.
Almond’s committee also included Lt. Gen. Reginald A. Centracchio, adjutant general of Rhode Island, emeritus, and Edward M. Mazze, dean of the College of Business Administration at the University of Rhode Island.
The report corroborates certain allegations brought by an anonymous whistleblower last November and appears to substantiate concerns raised by Gov. Donald Carcieri when he made those allegations public in January.
Carcieri has been opposed to attempts by Beacon to reduce the number of his appointees to Beacon’s board. He has argued that companies with near-monopolistic market share like Beacon require more, not less, public oversight.
The report criticizes Beacon Mutual senior management for denying investigators access to several hard drives for attorney-client privilege reasons and suggests that this denial is a “red flag” that those hard drives could contain further evidence of wrongdoing.
The report itself stops short of assigning any legal liability and Almond’s committee members refused to point figures at any individuals. However, in a slap at current senior management, its two chief recommendations are that Beacon “immediately hire an appropriately qualified independent insurance expert” fully empowered by the board to oversee the implementation of its recommendations and also hire a “qualified chief financial officer,” who in turn should hire a director of internal audit.
The Almond committee also urges the hiring of an ethics officer and the adoption of clear guidelines for agent commissions and perks.
In summary, the committee’s findings are:
That the former chairman of board and the CEO and the vice president of underwriting acted in ways that were, at times, contrary to their fiduciary responsibility to policyholders.
That an inappropriate relationship existed between the company and a select group of insurance agents that resulted in the misappropriation of Beacon resources.
That the former chairman, in cooperation with key executives, conducted the affairs of the company in a manner that was not transparent to certain members of the board, the Department of Business Regulation and policyholders.
That management systems involving contracting, ethics, charitable giving, internal auditing, board development and training and corporate governance are weak or non-existent.
That the Finance Department is not exercising sufficient control over cash disbursement approval or processes.
That the consequence of these general findings is that Beacon Mutual was left exposed to potential abuse.
The committee also recommended that the practice of favoritism and discriminatory pricing of policies be ended immediately and that a pricing review be conducted on all of the large policies at Beacon as it is in this class of policy where the review uncovered discriminatory and inappropriate practices.
The Almond commitee recommends:
That the board adopts policies that require transparency in the conduct of all Beacon business.
That the board itself engage the services of experts to train the board in how it must act.
That the board comport itself in a manner that underscores that with the compensation they receive comes the duty of loyalty and care to the company and its policyholders.
That a more substantial code of ethics and conflict of interest policy be adopted that is signed by all members of the board and senior management.
That an office of internal audit be established within Beacon that reviews all corporate operations at Beacon and reports quarterly to the audit committee of the board.
That the whistleblower policy be completely revised so as to encourage employees to openly share their views on corporate practices without fear of retribution.
That an independent industry expert be retained immediately to oversee the implementation of the committee’s recommendations.
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