Berkshire Hathaway subsidiary Applied Underwriters will voluntarily halt the selling of a reinsurance-based, loss-sensitive workers’ compensation product in New York under an agreement with the state regulator who first raised questions about the product three years ago.
Applied Underwriters will also pay a fine of $3 million under the consent order worked out with the New York Department of Financial Services.
Applied Underwriters said it agreed to the settlement in order to end the “long and costly contention over the product” but that it is not admitting any wrongdoing.
Berkshire Hathaway is in the process of selling Applied Underwriters, a deal that is currently under review by insurance regulators in a number of states. A spokesperson for Applied Underwriters said this settlement “should remove an obstacle for approval of any transaction” by the state of New York.
According to the NYDFS, the products under scrutiny are guaranteed-cost workers’ compensation policies issued by Applied Underwriters’ subsidiary Continental Indemnity Co., on forms and rates approved by DFS along, with a side agreement titled a “Reinsurance Participation Agreement” that employers bought as part of a bundle. However, the department said that the side agreement, or RPA, was not filed with NYDFS, and as a result the RPA and the program as a whole were not reviewed or approved.
New York regulators also allege that Applied Underwriters overcharged some employers who bought the program that was sold under various names, including SolutionOne and EquityComp.
Under the consent agreement, Applied Underwriters has stopped offering the bundle in New York, will not offer any equivalent side agreements going forward, and will file any future products with the DFS for approval.
Jeffrey Silver, general counsel of Applied, in prepared remarks, expressed “general satisfaction” with the agreement “as it brought to an end to a long and costly process” even while disagreeing with the regulator that separate approval was necessary and noting that the terms of the program were known to the purchasers.
He said the matter involves the company’s loss sensitive program that is “similar to other captive insurance programs operating in New York and which has withstood the scrutiny of DFS and for which New York has a separate captive insurer law.”
He said that Applied Underwriters did nothing wrong but the department thought it should have made additional filings. “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,” Silver stated.
“Through multiple disclosure documents signed by each participating insured, they agreed that their ultimate cost for workers’ compensation insurance would depend on their claims. So the program had the societal benefit of incentivizing employers to increase their safety program to reduce injuries to their employees and thereby reduce the overall cost of their workers’ compensation insurance which is a significant expense for employers,” Silver maintained.
DFS said that its investigation found that the formula the RPA used to calculated costs was “complex and the way in which it was presented to employers was misleading,” with a result being that many New York employers ended up paying more for coverage than they would have paid under the workers’ compensation policies alone, according to the officials.
Loss-sensitive products offer insureds discounted insurance along with the potential to share in any underwriting profits. However, if an insured’s losses are higher-than-average, the insured may be charged additional premium. Some loss-sensitive programs are built using self-retention amounts, or large and small deductibles, or dividends; Applied Underwriters structures its program around reinsurance.
In defending its novel approach, Applied Underwriters noted that it was granted a patent for the reinsurance formula used in the RPA in 2011.
“We are a highly innovative company, known for our creative approaches to solving the needs of clients through the use of well-recognized captive, reinsurance and other vehicles that can be made to realize savings for employers with no loss of benefit to their employees,” Silver said.
Applied Underwriters settled a similar dispute over the marketing of its RPA product with California regulators in 2017.
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