Berkshire’s Applied Underwriters Defends Workers’ Comp Products, Says Brokers Should Not Be at Risk

By and | October 3, 2016

  • October 4, 2016 at 11:25 am
    retired risk manager says:
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    This too funny and ironic. I thought the days of the “retro” policies were long gone. The basic flaw in the sale of these “plans” was the extended time period of the claims. The insured would always be surprised by the additional premium/claims fund demands. If the original decision maker was still employed at the insured, the immediate response was that the policy risks had not been properly explained. Why, because their job was at stake. There were two problems with these plans. One, the broker did not carefully explain and document the risks inherent in these plans and, inadequate claims handling. Overworked or poorly trained adjusters had no idea what was really going on with the claim. It was too easy just to pay rather than adjust/manage the claim. Especially when the ins company had no real exposure. Claims would be reserved at a low amount and then the reserves would be “stepped” up as the bills approached the reserve limit. A good wc adjuster should never have more than 125 assigned claims. The legal term is “violation of the fiduciary duty” that the insurance company owes the insured. I was retained in numerous suits alleging just that. It was like shooting fish in a barrel. The claim files would show months of inaction or,even worse, frequent changes in assigned adjusters. Adjusters with a claim load that prevented any review of the claim status. We always won and not only got relief from any further assessments, but also release of all letters of credit or certificates of deposit.

    • October 5, 2016 at 3:35 pm
      JAMES says:
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      I hope this doesn’t mean you throw all alternative risk financing options out the window.

      • October 7, 2016 at 8:52 am
        retired risk manager says:
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        You missed the point I was trying to make. In many states, there is lifetime medical coverage. How is the insured supposed to account for the on-going exposure? Dodd-Frank and all of the other accounting restrictions are clear in that these exposures must be disclosed in required filings. If the insured is publicly traded, get ready for the stockholder lawsuits. The continuing liabilities are no different than the disclosures required about potential litigation.

        So why does a company still take the risk? A perceived reduction in the present cost of workers comp, with no thought of the continued exposure. An exposure that can continue for YEARS. And, if the insured continues the program, each policy year requires a separate CD or letter-of-credit. That quickly adds up to capital being tied up and not available for expansion etc.

        Also, young agents are keen to look like innovators to their bosses. Make the sale, now. Forget about the tail. It sounds sexy, so sell. It will “impress” the prospect.

        There are ways to protect against the long term liabilities. The simplest is to set the per claim stop loss at a lower level, say $100,000, and buy an aggregate stop loss policy. Problem is, that erodes the initial cost “saving”. Yes, cover is available. There are other options, but are too complicated for discussion here.

        There are few insureds that have the financial strength or the sophistication to enter into these programs.

        In the cases where I served as an expert witness, the claims developments and assessments had reached the point where those alone were going to bankrupt the insured. This usually occurred 5-8 years after the initial “savings”.

  • October 4, 2016 at 1:40 pm
    Scott Strickland says:
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    Alternative risk financing plans have been around at least since mid-1970’s when short term interest rates approached 26% and cash was king. Adverse loss development does not invalidate the prevalent means of risk financing workers compensation, general and auto liability in loss sensative funding plans. Sorry for your loss but don’t frag the industry.

  • October 4, 2016 at 4:20 pm
    Underwriter says:
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    So an insurance agent has no responsibility to what they sell? The lack of fiduciary responsibility allows profit above all mentality to run rampant.

    • October 5, 2016 at 1:43 pm
      mr opinion says:
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      Responsibility for selling something they do not understand…yes, if that’s what they did. Insured have a habit of “forgetting” what is explained to them, even when done so in writing. Not necessarily the case here, we won’t know until later. If the broker really didn’t know what they were selling, or really didn’t communicate the risks – I see an argument for sure. Brokers getting reprimanded or penalized for selling alternative risk financing – total garbage. E&O carriers saying they plan on denying coverage because the reinsurance contract may be an “investment” – total garbage.

  • January 23, 2017 at 11:01 pm
    Craig Kinard says:
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    I can attest definitively that Equity Comp is NOT a “loss-sensitive” program. My company’s experience is “Exhibit A” to this fact.



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