4 The Self-Insurer | www.sipconline.net

In a post-health care reform marketplace, it’s easy to lose sight of any oversight concerns beyond group medical plans, but the workers’ comp

area is ripe for closer examination.

SIIA’s Workers’ Compensation Committee recently completed a high level presentation for self-insurance group (SIG) trustees in the form of a webinar. Several key learning objectives include an overview of group self insurance, the causes of SIG failures, fiduciary responsibilities, plan administrator and vendor management, financial statements and fund management strategy.

Written by Bruce Shutan

Self-Insurance Group (SIG)

Trustee Training 101 New Effort Helps Board Members Develop Deeper Expertise

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TRUSTEE TRAINING | FEATURE

When a SIG runs into financial trouble or must dissolve, it’s often because trustees who wear multiple hats at work agreed to inadequate insurance coverage, ignored certified actuarial reports, or made other errors in judgment, according to Stu Thompson, a fund manager of the Builders Group who chairs the committee.

Within the construction industry that Thompson is a part of, he notes that his peers may not be all that familiar with the inner workings of reinsurance, investments and employee safety programs. “Being a home builder or electrician or whatever is so much different than overseeing the running of a commercial self-insurance group,” he observes. “That’s one of the biggest reasons to make sure that when you have these new board members they understand what they are getting involved with.”

Baseline EducationThe aim was to develop rock-

solid standards by which to monitor the health of SIGs and keep this tool a viable option for employers to serve their workers’ compensation requirements, according to Shelly Brotzge, a member of the committee and senior client advisor at the Midwest Employers Casualty Company, a W. R. Berkley Company.

“What we were trying to do is get some real basic training together for trustees,” she says. The reason is simple: Many trustees are business owners who lack expertise or meaningful knowledge of how to handle plan oversight or various issues that arise.

Depending on whether there are the bylaws of a particular group, as well as term limits or other reasons for rotating leadership, Brotzge says it may be difficult to find people to serve as trustees on a board. “Primarily for those that are new to

the responsibilities of being a trustee, we felt like this initial training would give them at least an overview of things that they do need to be aware of,” she reports. “It may not serve as the be-all, end-all training [for everyone]. It covers a lot of material in a short period of time. Each one of these sections in this training could probably be pulled apart for a whole separate training event.”

New trustees may not fully understand the inner-workings of a SIG and lack formal training, adds Carol DiPietro, another member of the committee and regional VP of Meadowbrook TPA Associates. “In order for a fund to be well run and well managed, you need to have a board of trustees that’s informed and engaged,” she says.

Duke Niedringhaus, a SIIA director, member of the committee and senior VP at JW Terrill Inc., says “people were really looking for SIIA to take the lead on trustee training and proper governance.”

A roundtable discussion on SIGs at SIIA’s annual conference in Phoenix last October saw a consensus emerge about the need for industry action. Among the suggestions made: a need to institute trustee training and a national SIG manager accreditation program, as well as standards of conduct for brokers, administrators and members of boards of directors with meaningful consequences for violations.

Noting that “different companies join self-insurance groups for different reasons,” Brotzge says some may join a SIG just for loss control or to have more of a say in how claims are mitigated.

Boards of trustees have a significant number of responsibilities as part of a SIG that they may not have as an individual business owner, according to Brotzge. “As I go across the country and meet with boards of trustees in my regular, nine-to-five job, I do find varying

levels of experience and interest,” she says. “I think some standardization would be good.”

Coast-to-coast Insolvency

SIIA’s Workers’ Compensation Committee is attempting to start a dialogue with the National Association of Insurance Commissioners to address lax regulation at the state level that has been blamed for various SIG failures, but also avoid an “overreaction” to certain market conditions, Thompson reports. “There were a lot of good groups in New York, but they were brought down by some of the bad ones,” he says.

The webinar noted that New York regulators in 2008 shut down eight “trusts” that were managed by the same administrator, whose state license was revoked – leaving behind a deficit of $500 million. It also addressed conflicts of interest involving group administrators and TPAs seeking to grow their business by keeping rates artificially low and understating losses.

“As a trustee, you must focus exclusively on the best interest of the fund,” according to the presentation. When voting on SIG premiums, for instance, it’s verboten to “consider the negative impact the rate increase will have on your own company.” In California, Niedringhaus notes that regulators significantly increased the collateral requirements of SIGs.

But he also points to several fairly high-profile SIG insolvencies in Kentucky, Tennessee and Illinois. Many of the large cases are driven by a difficulty tracking the development and changes in workers’ comp systems, as well as adverse loss development being significantly higher than anticipated, he explains.

“Our general attitude is that a problem anywhere in the country

6 The Self-Insurer | www.sipconline.net

TRUSTEE TRAINING | FEATURE

is a potential problem for any SIG,” according to Niedringhaus. “When you have an insolvency, whether it’s in California or New York, it impacts the entire industry.”

In some states, he notes that the regulatory focus is on high-hazard industries such as timber or electric cooperatives whose challenging workers’ comp exposures inherently endure market cycles in the SIGs.

“If I look broadly across the country at things that are happening with self-insurance groups, part of the concern is how they are regulated,” Brotzge says. “It varies by jurisdiction. Every state is going to have different rules to the point where in some states the Department of Insurance regulates self-insurance groups. So they’re watching them fairly similarly to how they would look at the solvency of an insurance company like a Hartford or a Travelers or a Liberty Mutual.”

In other states, she notes that SIGs are regulated by either a department of

workers’ claims or industrial commission whose oversight may be significantly

different, while another key geographic difference is the existence of guarantee funds

to prevent SIG failures.

Brotzge lives in Kentucky, where she recalls a large, heterogeneous fund failure in

the early 2000s sparked a regulatory shift to the state’s Department of Insurance from

the Department of Workers’ Claims. Thompson credits a large collateral requirement

in Minnesota where he’s based for having prevented SIG failures.

Deeper TrainingOnce SIG trustees master the remedial issues, Brotzge says they’ll be given

access to other training sessions a deeper focus to improve their effectiveness.

Another aspect SIIA’s Workers’ Compensation Committee hopes to develop is

best-practice standards.

Devising best practices for trustees can be a very valuable tool from a claims

management perspective in helping know how to measure the performance of

insurance carriers and administrators, according to DiPietro.

Brotzge believes that establishing a national accreditation program that holds

trustees accountable could prove to be a serious challenge, especially for an

organization like SIIA. Her concerns involve reaching a consensus on the level of

training and expectation of individuals. Thompson also worries about potential

liabilities associated with a SIG trustee accreditation if poor decisions are made and

which entity would be responsible for any financial difficulty or insolvency.

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Somewhere down the road, DiPietro believes there will be many opportunities for SIGs to branch out into other lines of coverage, such as captives, as well as a combined focus on medical case management between group insurance and workers’ comp.

Looking ahead, Niedringhaus notices one key trend will be devising a solution for out-state exposure, which for some SIGs is a critical part of their success.

Despite growing concern about SIG solvency, he believes the industry is still on solid footing. “There’s certainly not any kind of noticeable growth in the sector as far as new SIGs being created, but the ones that are out there and have been doing what they’ve been doing for a number of years,” Niedringhaus says. “We continue to see that they’re going to be very solid work comp alternatives that will, in general, outperform the traditional market.”

Acknowledging a reduction in SIGs in recent years, Thompson believes the ones that survived the Great Recession “are doing well and have become stronger,” having learned critical lessons through difficult times.

Brotzge doubts that there will be much growth in SIGs and predicts more fund failures unless better solutions are developed to help SIGs manage their solvency. “It’s difficult to start a group now,” she observes. “Most states require that a particular amount of money be made available. You could have a member that has a very large claim on the first day that the coverage is effective. So I think from that standpoint, it may be a challenge to start new groups.” ■

Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee benefi ts industry for more than 25 years.

TRUSTEE TRAINING | FEATURE

SIIA has produced a multi-media presentation focused on helpingSIG trustees better understand self-insured workers’compensation programs and their specific governance role.

Entitled “The Essential Trustee,” this is a PowerPoint presentation with recorded voice-over that can now be accessed through the Resources (other resources category) section of www.siia.org.

Specifi c presentation topics include:

• Overview of group self-insurance

• Causes of self insurance group failures

• Fiduciary responsibilities

• Plan administrator and vendor management

• Financial statements

• Fund management strategy