The Future for Self Insurance

1. The Future for Self Insurance MASI – September 29, 2011 Billy Roberts, (Recent Grandfather) Independent Observer

2. How can we know what to expect in the future? • Understanding the past • Understanding the dynamics of our environment • Identifying & quantifying the potential conditions & events that are game changers • This process becomes complicated because each of us, depending on our personality type and background, interpret the facts through the lens of our own bias.

3. Myers & Briggs – Personality Types • 4 Preferences • Extraversion (E) or Introversion (I) • Sensing (S) or Intuition (N) • Thinking (T) or Feeling (F) • Judging (J) or Perceiving (P) All types are equal

4. Background for my perspective INTJ (2% of the population) Have original minds and great drive for implementing their ideas and achieving their goals. Quickly see patterns in external events and develop long range explanatory perspectives. When committed, organize a job and carry it through. Skeptical and independent, have high standards of competence and performance – for themselves and others.

5. History Workers’ Compensation prior to the late 1980’s • Insurance & single qualified self-insurance were the only options. • Consistently profitable line of business for insurance companies. • Rates were virtually identical for all insurance companies. • Catastrophic claims were those in the $100,000 range. • Claimants got medical treatment and bills were paid. • Almost all injured workers would rather return to work than stay home and live on state indemnity benefits. • Illegal drugs were not as potent and pervasive.

6. History Things began to change • Medical cost inflation • Bill review, fee schedules, PPO’s, etc • Cost shifting • Medical case management • More liberal interpretation of the law • More litigated case costs • Increased threat of bad faith • Litigation Management • Illegal & prescription drug abuse became rampant • Contributing to both cause & cost

7. History By the early 1990’s • Rising costs lead to WC becoming an unprofitable line • Severe underwriting restrictions by companies • Massive growth of the Assigned Risk Plan (50%) • NCCI administered plan • National reinsurance pool • 9 Servicing carriers (one had office in Miss.) • Generously compensated • Incorrect economic incentives • (Poorly administered) • Public outcry for: • Cost controls • Alternative coverage options (group self-insurance) • Consideration of 24 hour coverage options

8. Self-Insurance • Under the right circumstances and administered properly, self-insurance should always be economically advantageous over an adequately priced insurance product. • Potential benefits • Greater emphasis on loss prevention • Individualized claim management techniques • Retain controllable costs & transfer volatility • Choice of best vendors for unbundled services • Retain investment income on unpaid claim costs

9. Two types of self-insurance • Single Qualified Self-Insurance • Group Self-Insurance (There are distinct differences as discovered through the guaranty association process)

10. Single Qualified Self-Insurance • Longer term strategic commitment • Individual regulatory oversight • Financial responsibility • Decision not generally current cost oriented • Significant initial cash flow benefits • Negative upon exit • Multi state complexity

11. Group Self-Insurance • Once established, participation is individual decision • Participants are joint & severability bound for their part • Regulatory oversight at the group level • Members share in profits • Greater potential for conflict if results are not good • Private groups more difficult than public groups • Multi-state complexity

12. Initial Strategy at AmFed • Assumed that state WC law was here to stay • Provide products & services for the full spectrum of the WC marketplace, at a local level, where it can be most effectively managed • A/R Plan --- Voluntary Insurance --- Group Self-Ins. --- Single Self-Ins. • Over time and depending on market conditions, customers might move from one coverage alternative to another, but as long as they stayed in business they could potentially remain a customer. • One thing that must be done • Provide the best service in the marketplace • Two things that must not be done • Compete against our self‑insurance customers • Assume insurance risk at an inadequate price

13. Predicting the Future • The key to predicting the future lies in our ability to foresee the potential collision of conditions and events, along with the direction and magnitude of change that such collisions might make to the current trajectory. • The better we are at identifying all of these potential conditions or events, the better our predictions of what might occur will be. • The better we are at evaluating the likelihood of these conditions or events, the better we will be at actually predicting the future.

14. Conditions & Events that will shape our future • The Economy • Interest Rates • Inflation • Insurance Market Capacity

15. Conditions & Events that will shape our future • Politics • Obama Care • Cost Shifting • Federalization • Regulation • Energy • Black Swans

16. Helpful Hints Never make fun of anyone for something they can’t help; everything else is fair game. Opportunities usually present themselves as problems. When the reward is too big, something is wrong or it is temporary. Be willing to admit mistakes and receive their value.

17. Helpful Hints Always assume that you are the dumbest person in the room. You may well be right, but even if you aren’t, it will be an advantage to think so. Whenever you think that nothing else can go wrong, you have probably overlooked something. Everyone lives their life in stages. Difficult times are the transitions between stages.

18. Helpful Hints Experience is one of those things in life you get right after you really need it. Never be afraid to admit you don’t know something but be ashamed of yourself if you don’t know it the second time around. (no excuses in the internet age) Conduct yourself as though everyone will find out all of the details.

19. Helpful Hints Be eager to apologize and quick to forgive. It just makes life easier.

20. Thank You !