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Editorial Staff PUBLISHING DIRECTOR Erica Massey SENIOR EDITOR Gretchen Grote CONTRIBUTING EDITOR Mike Ferguson DIRECTOR OF OPERATIONS Justin Miller DIRECTOR OF ADVERTISING Shane Byars

Teaming Up

Tame PROPERTY&

INside the Beltway Members Take SIPA Support Message to Congress

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OUTside the Beltway Association Stays Engaged in Ongoing Self-Insurance Legislative Developments in Multiple States

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Cyber Security, Cyber Liability and Captives

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PPACA, HIPAA and Federal Health Benefit Mandates New EEOC Proposed Rules Require a Gut Check for Wellness Programs

CASUALTY Bruce Shutan

EDITORIAL ADVISORS Bruce Shutan Karrie Hyatt

Volume 80

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to

Insurance Costs

June 2015

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The Road to Recovery: Subrogation Gets Its Day in Court... Again

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TEAMING UP TO TAME | FEATURE included the necessity of an initial capital requirement for ownership and the need to establish collateral for the program, as well as the idea of a captive being domiciled offshore with semiannual meetings, to take full advantage of membership benefits. “It offers a great opportunity to reduce your accidents, which typically results in reduction of your claims cost, which ultimately lowers the premium the captive charges on an annual basis,” observes Garnett, who employs 92 people. “The result is that we’ve seen lower claim dollars and lower premiums.”

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Sandra Duncan, VP of operations at Captive Resources, LLC, an industry pioneer that assists Silbrico, has seen group captive programs really take off with smaller and midsize employers that lack the critical mass, internal resources and expertise to maintain their own captive. She says they feature state-of-the-art safety, risk management and claims services and support for members, adding that several have an ongoing membership to the National Safety Council. Since July 2012, total premium among Captive Resources’ client captives grew $700 million and now totals approximately $1.7 billion. She says the reasons include an improving economy, loosening of credit, an increasing number of brokers wanting to educate their clients about the group captive concept and a snowball effect from group captive memberowners recommending other companies they do business with explore this option. While single-parent captives date back to the 1950s and even

earlier, Duncan says they gained popularity in the late ’70s, with group captives surfacing in the ’80s mainly as association-sponsored programs. Member-owned group captives also date back more than 30 years, which is when Captive Resources formed its first client captive, now the world’s largest heterogeneous group captive. At that time, she explains it could be a challenge to secure the required fronting and reinsurance for group captives given that they were a relatively new captive form. Today, with several large casualty insurers interested in group captives, she says that’s no longer the case. While most of the 30 captives with nearly 3,300 member companies that Captive Resources works with are workers’ comp driven, they also include general liability, auto liability and auto physical damage.

Group Captives vs. Self-funding Mindful that workers’ comp is very state specific in comparison to a captive, which can combine general liability coverage across several lines of business, Freda Bacon of the Alabama Self-Insured Worker’s Compensation Fund prefers a funding mechanism that focuses solely on workers’ comp. A captive wouldn’t make sense for her fund because the group self-funding mechanism accomplishes the same objective, which is using a group fund and coverage liability. Bacon points to a long and reliable track record for group self-insured funding in the comp area with joint and several liability – from underwriting and claims management. “There is one particular group fund in the state that is celebrating their 50th anniversary,” she says, adding that the fund she administers has been around for 38 years.

“It is a very good avenue to pool your liability if managed and operated properly,” she continues. That means having a strong board of trustees to oversee the program, responsible administrator and aggressive focus on claims management. One potential downside to this arrangement is that group self-insured funds are subject to competition in terms of pricing the coverage, according to Bacon. “I think captives probably run into that same situation,” she surmises. “If you look at the definition of captive, you’re captive. You’re there forever. You have that exposure or liability for the period of time that you’re in that captive.” Bacon has noticed that the brokerage market is bullish about captive programs because it’s an additional product that they can sell. As such, she believes due diligence is especially important


TEAMING UP TO TAME | FEATURE for captives because they involve a longterm commitment unlike, say, shopping for homeowners’ or automobile insurance coverage every two or three years. Her larger point is that employers need to be vigilant about whatever arrangement they pursue, which would include vetting the strength of the fronting company for captives or excess carrier for group self-funding.

Lasting Control of Claims Costs The true value of group captives is that they’re part of a mechanism that allows employers to control their workers’ comp costs longterm, explains Joe Herbers, managing principle with Pinnacle Actuarial Resources, Inc., which has served this market for more than 25 years and is currently working with between four and five dozen group captives. “The control element is so important to middle-market type companies because they don’t want to be susceptible to the ups and downs of the commercial casualty market, where they can have their premiums whipsawed at whim,” he says. But that’s exactly what has happened repeatedly across the U.S., including California where he says rates can change dramatically from one year to the next without any regard for an individual risk’s claim experience. His point is that premiums should reflect actual claims experience. From an actuarial standpoint, Herbers opines that it’s easier to project forward with group captives because the data becomes much more consistent from year to year. 6

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Paying Dividends To the extent that employers are able to control their frequency layer type claims, Herbers says they’re able to obtain a return from the loss fund that they paid into “by virtue of the dividend policy of those group captives. “That’s money that you get returned back into your pocket that you would otherwise have paid to a third-party insurance company,” he explains. Silbrico is able to track its loss ratio relative to loss funding and return of dividends on an annual basis, as well as delve into specific incident categories causing losses in the company. Results for Silbrico have been impressive during the 10 years it has participated in the group captive. There have been policy years with zero claims that saw Silbrico receiving dividends and a year with catastrophic loss which required Silbrico to pay additional loss funding to the captive. Captive Resources’ client captives have the option to invest in The Captive Investors Fund (CIF), a Cayman Islands Mutual Fund. The CIF was established by Captive Resources in 1994 to address the specific investment needs of group captives. “The investment structure is spread among many different levels of risk and it helps alleviate some of the peaks and valleys of investment,” Garnett says. “It’s been very worthwhile to have that investors fund [CIF] available for us to put our funds into and earn the return.” The average blended return of the CIF has been solid at between 6% and 6.5%. Joining the captive also enabled Silbrico to identify a variety of areas where it was deficient in safety. “We have not only tightened up many of our policies and procedures,” he explains, “but also hired a safety manager and structured our company to take advantage of knowledge and expertise that’s available for us to tap into.”


June 2015 | The Self-Insurer

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TEAMING UP TO TAME | FEATURE

Equal Access to Information All captive members have equal voting rights and no other parties, including brokers/agents and service providers, have any ownership interest in the captive, according to Duncan, whose firm also falls into that category. She says all members also contribute an equal, but modest initial capital investment.

three times a year featuring detailed discussions about claims-handling strategies, dealing with attorneys and other service providers and cost control on the medical side. “As a self-insurer, you don’t necessarily have access to the body of knowledge that these group captives can bring to bear just by virtue of their size and their access to resources,” he adds.

Captive Resources developed a funding formula that has become an industry standard for member-owned group captives. It features two layers: one that provides for losses up to a specified amount such as $100,000 – the “A” fund layer; and another for larger losses, which covers the next $100,001 to $350,000 for example – the “B” fund layer.

The actuarial process of group captives focuses heavily on an experience-rating approach. “We forecast future loss funds based upon their prior experience,” Herbers explains. “And while they’ve been members of these group captives, the claims data that emerges has generally been much more consistent from one year to the next.”

“Over and above that,” Duncan explains, “the captive purchases reinsurance, typically up to $1 million for GL and Auto and up to statutory limits for WC and then aggregate excess coverage, basket coverage, clash coverage and so forth.The captive’s well protected. That’s essentially how it works.”

One noteworthy dynamic is that the aggregate claims experience for the group as a whole improves considerably when its members have been together for a half-dozen or so years, Herbers observes. “It’s largely because many of these members of the group captives are middle-market businesses,” he says. “They don’t know much about the business of insurance at all. By joining a group captive and becoming an owner of a group captive insurance company, they embark on that journey that sometimes takes several years of learning the fundamentals of the insurance process.”

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Group captives that use the A/B Fund formula developed by Captive Resources aren’t for everyone. For example, they won’t work for employers that are prone to large catastrophic losses because the model is frequency driven, according to Duncan. The best candidates are those committed to controlling their losses through solid risk management and safety strategies. Group captives provide members with tools they may not have as a self-insured entity, Herbers notes. They include risk scoring, an objective view of risk levels relative to some industry norms and access to best-practices that can be used for each company, as well as the industry in which they operate. He says group captives usually offer risk-control workshops two or

Once members of the group captive improve their learning curve, Herbers says they have a better understanding about the nature of the business, claim lags, steps that exacerbate or influence claims and strategies to control their claims long-term.

Addressing Total Health Expenses Captive Resources also introduced a group captive five years ago that provides employers a unique option

for their self-insured medical stop-loss coverage, which has been very popular. In the late ’80s and early ’90s, Duncan recalls how many workers’ comp practitioners borrowed managed care techniques from the non-occupational health care arena and successfully applied them to occupational injuries and disease management. “Now we see more and more employers working to manage health care costs through the introduction of wellness programs,” she says, “which is something that this captive focuses on in an effort to help employers manage their total health care expenditures, including costs below their specific retentions, where the bulk of their health care dollar is spent. It will be interesting to see if wellness initiatives are in some way now specifically tailored to occupational risks, as in the past.” With workers’ comp medical costs continuing to increase substantially, Bacon says there’s a very long “tail” associated with benefits paid. “Employers in any program where there is long-term liability should be mindful of the potential increase in their exposure,” she says. Forward-looking executives view group captives as a long-term financing mechanism that will pay them dividends over the long run, according to Herbers. He says these programs not only help control costs, but also leverage investment income generated from investing premium funds in a vehicle large enough that it provides diversification. Herbers spots a potential for the emergence of more heterogeneous group captives that bring together “likeminded people who are all trying to manage their risk using best practices.” ■ Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee benefits industry for more than 25 years. June 2015 | The Self-Insurer

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INSIDE

the Beltway Written by Dave Kirby

Members Take SIPA Support Message to Congress Continuing the series of articles on SIIA government relations initiatives on federal matters “Inside the Beltway” and state legislative and regulatory issues “Outside the Beltway.”

A

delegation of SIIA Board of Directors and Government Relations Committee members spent two days in Washington, DC, visiting Congressional offices to express their support for the Self-Insurance Protection Act (SIPA), S. 775/ H.R. 1423, currently being considered in Senate and House committees. The series of meetings was intended to strengthen bipartisan support of SIPA, particularly among Democratic members of both the House Energy and Commerce and the Education and Workforce Committee. SIPA was drafted with SIIA input to clarify existing laws ensuring that federal regulators cannot redefine stop-loss insurance as traditional “health insurance” under the law. Such a designation could effectively force discontinuation of many ERISA employee health plans serving nearly 100 million Americans. SIIA was represented by Chairman Don Drelich, Chairman and CEO of DW VanDyke & Co.; Directors Andrew Cavenagh, Managing Director of Pareto Captive Services; Bob Clemente, Chairman and Founder, Specialty CM; and Jay Ritchie, Senior Vice President, HCC Life Insurance Company; Government Relations Committee Chairman Jerry Castelloe, President, Castelloe Partners; and GR Committee members Catherine Bresler, Vice President, Trustmark Companies; and Matt Kirk, President, The BENECON Group, Inc. The series of Congressional meetings was organized by SIIA lobbyist Bart Stupak, former Democratic Congressman representing Michigan and SIIA staff. SIIA counsel/ advisor Chris Condelucci joined in on several meetings.

Government Relations Committee Chair Castelloe said that the goal of the meetings was to clarify how important self-insured ERISA plans are to the nation’s health care profile.

“We told members of Congress and their staffs that the number one reason to support SIPA is to protect a viable employer option for providing essential health benefits to their employees,” he said. 10

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Castelloe reported a gratifying number of positive responses among the House visits. “We felt we were welcome to share up-to-date comments, details and statistics on the current self-funding marketplace,” he said, noting that many members of Congress and their staffs appeared to appreciate the knowledgeable perspectives of SIIA members. “One Congressional staff member recalled hearing (SIIA CEO) Mike Ferguson’s committee testimony and had several clarifying questions along with an invitation to contact him for further discussion,” Castelloe noted. Catherine Bresler of the Government Relations Committee said that such meetings are valuable because “continued education is important” for members of Congress and their staffs. “While the importance of their employer constituents is top of mind for all members of Congress, the level of awareness about health care and insurance issues varies from office to office,” she said. “In one House office, in particular, the legislative aide told our story for us. She recited occasions where her representative’s constituents have come to them very concerned about rising health insurance premiums. Her focus is to ensure that all options remain open for employers of all sizes.”


SIIA continues to urge all members and self-insuring employers to express their support of SIPA to their federal representatives in personal meetings, phone calls, emails and letters. Briefing materials and talking points are readily available from SIIA Senior Director of Government Relations Ryan Work at rwork@siia.org or (201) 463-8161.

SIIA Members Engage to Shape Captive Tax Legislation Some might call it lucky that SIIA was able to identify and positively respond to a Congressional threat within a few days earlier this year. Legislative text surfaced from the Senate Finance Committee that could have decimated much of the small business captive insurance market.

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“If lucky means being prepared for threatening events, then we were lucky,” said Jeff Simpson, chair of SIIA’s Alternative Risk Transfer Committee. “We anticipated federal movement against the enterprise risk captive (ERC) market, we just didn’t know it would come so abruptly. But we had a structure in place for a coordinated response and it worked out well so far.”

have restricted ERCs from using reinsurance and limited to 20 percent the allowable premium from related parties – making many small business captives unfeasible for operation and preventing others from being formed. The text also allowed for an increase of ERC allowable premiums from $1.2 to $2.2 million. The day SIIA learned of the threatening Senate text, SIIA CEO Mike Ferguson led a phone conference with members of the ERC subcommittee to discuss how to respond. Plans were made for a delegation of SIIA members to visit key Senate offices on February 12 – just two days after the initial legislative draft surfaced. “It was like being on an emergency response team,” said Sandra Fenters, Managing Director and Principal of Captera Risk Solutions of Pittsburgh. “We cleared our calendars, grabbed our briefcases and took the next plane to Washington. We knew the only way we could defend against this threat was in a united, personal appeal from industry members representing thousands of small captives. Letters or

calls just wouldn’t have worked as well.” She was joined in that first wave of personal advocacy by Park Eddy and Dana Sheridan of Active Captive Management of Irvine, California; the late Dick Goff of the Taft Companies of Baltimore; Kevin Myers of Oxford Risk Management Group of Berlin, Maryland; and committee chair Simpson, attorney with Gordon, Fournaris & Mammarella of Wilmington, Delaware, in a series of Senate meetings orchestrated by Ryan Work, SIIA senior director, government relations and Chris Condeluci, advisor and counsel to SIIA. Within days, SIIA learned that the onerous restrictions of reinsurance and related party premium were provisionally removed – but not forgotten. After the concerning provisions were removed by the Senate Finance Committee SIIA was asked to draft language on behalf of the ERC industry that would serve the purposes of both sides. Subsequent meetings of SIIA staff and members with Senate Finance Committee staff members clarified the need to craft new language that would

SIIA last fall formed an ART subcommittee that would serve as an industry voice to support the ERC market – specifically, small captive insurance companies that operate under IRC 831(b) rules that allow tax deductions for paid premiums. SIIA was aware of concerns raised by the IRS and other elements of the Treasury Department claiming that some small captives were being marketed only to accomplish estate planning and were abusing the IRS provisions intended to encourage companies to build reserves to protect against losses. The original legislative text from the Senate Finance Committee would June 2015 | The Self-Insurer

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limit any abusive use of the 831(b) tax provisions while enabling continued operation by ERCs. “It was helpful for us to get clarity to develop language for a Senate bill,” said Rick Eldridge, president of The Intuitive Companies of Greenwood Village, Colorado, who was among the SIIA members meeting with Senate Finance Committee staff. “It’s vitally important for members of our industry to help educate members of our government. If we don’t present the reality of how our business works then shame on us, we’ll deserve the laws we have to live with.” SIIA subsequently drafted a document, “Alternative Legislative Proposals for IRS 831(b) Electing Companies” that was circulated to the industry and presented to Senate staff as a resource.

Jeremy Huish, Director of Artex Risk Solutions in Mesa, Arizona, was among ERC subcommittee members who drafted the proposed language. “This is a broad group of industry participants including captive managers, attorneys and CPAs that are working together to set workable industry standards that accomplish the regulators’ goals. “We created a two-prong approach to answer the government’s expressed concern that estate planning was improperly motivating people to form captives, being careful not to unduly restrict other kinds of appropriate ownership structures,” Huish added. “That prompted the passages that would set limits on ownership of the captive by an irrevocable trust and prohibiting investment in life insurance on individuals who are related to the company.” ART Committee chairman Simpson recognizes that Congressional legislation affecting the ERC industry would be a typically drawn-out process that could stretch over months or years and that – so far – SIIA is the only source of industry advocacy on the issue. “State captive associations, CICA, the NAIC and others are all watching the tone and substance of our response and I think we are establishing our credibility as the source of advocacy for our industry while helping to create standards for proper use of the 831(b) provisions,” he said. SIIA has circulated its proposed alternative language within the ERC industry and will continue in discussions with Senate staff. The path of further action in the Senate and then the House will be reported in future editions of The Self-Insurer. ■

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OUTSIDE

the Beltway Written by Dave Kirby

Association Stays Engaged in Ongoing Self-Insurance Legislative Developments in Multiple States NEW YORK

S

IIA continues to press for passage of a bill (A. 1154/S. 2366) that would extend the availability of stoploss insurance to 51-100 employee groups beyond the 2016 cutoff that the state established earlier as part of its ACA compliance. Following the Albany lobby day this spring when 26 SIIA members and staff visited offices of many legislators, SIIA worked with the Department of Financial Services (DFS) to gain its support of the bill. DFS agreed to survey New York employers to learn the extent that cutting off stop-loss contracts to an estimated 1,500 employers would disrupt the marketplace and the health care coverage of thousands of employees and dependents. SIIA alerted members to encourage employer participation in the study with responses required by April 27. No word of DFS findings has yet become available. One aspect of the possible ban of stop-loss contracts for employee groups of 51-100 was raised by SIIA member Robert P. Madden, benefit consultant of broker Lawley Service Inc. of Buffalo, who said, “This ban on groups of 51-100 could also affect

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larger groups. If a significant number of employees are dropped from the self-insured pool it would adversely impact the remaining employer groups. That’s why it’s important for all selfinsured employers to communicate to legislators the importance of maintaining employee health plans as they now exist and as President Obama promised earlier.” Background materials on the New York bill and model communications to legislators are available in SIIA’s Washington, D.C., legislative office. Contact Adam Brackemyre at (202) 595-0641 or abrackemyre@siia.org.

MICHIGAN

A broad spectrum of the business community including SIIA successfully beat back the near doubling of the state’s health claims tax that was proposed in the budget of Governor Rick Snyder. Strong pushback from business interests convinced the legislature to eliminate the proposed increase from .75 -1.3%. Of course, SIIA believes any state tax on self-insured employee health claims is a violation of the federal ERISA law and continues to fight the tax passed under Governor Snyder in 2012. SIIA lost the first round of

federal litigation in the Sixth Circuit and appealed that finding to the U.S. Supreme Court in a filing last December. SIIA’s litigation counsel John Eggertsen of Ann Arbor, Michigan, notes that the Sixth Circuit’s ruling conflicts with the broader earlier interpretation of ERISA federal preemption by the Second Circuit and the Supreme Court’s own interpretation of ERISA preemption as it found in favor of SIIA’s position in an earlier case (Egelhoff). The Sixth Circuit’s ruling in SIIA vs. Snyder “Sets a very bad precedent for all ERISA plans, not just self-funded medical plans,” Eggertsen said. “To let this decision go final will undoubtedly encourage more states to act (against self-funding).” Eggertsen said SIIA has not been notified by the Supreme Court that the case has been accepted for appeal. “If they do accept it, a decision could be a year away or more.”

NEW HAMPSHIRE A bill (HB 390) to increase the stop-loss insurance aggregate attachment point from 110 120% of expected claims for groups of 51-100 was found to be “inexpedient to legislate” by the House Commerce


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and Consumer Affairs Committee and quietly sunk from sight. SIIA member Phil Healy, president of the Automobile Wholesaler’s Association of New England, was among the bill’s opponents. “Self-insurance is under broad pressure currently,” he said, “and any legislation that limits how risk is managed can be a vicegrip on employers’ health care options.” Healy cited the 106 member companies in New Hampshire belonging to the AWANE self-insured group in his letter to the House Commerce and Consumer Affairs Committee that helped head off the legislation. “We believe that the legislation, if enacted, would make it more difficult to maintain existing self-insurance arrangements in New Hampshire,” he wrote. He said the new restraint on stop-loss insurance “may have a disruptive impact and will further restrict economic choice.”

Apparently, the House committee members got the point. Sometimes one strong voice in defense of self-insurance is all it takes.

MARYLAND

The General Assembly waited until the last day of the session to pass a bill that raises stop-loss attachment points on new contracts after June 1, 2015, to $22,500 and an aggregate 120% of expected claims. The individual attachment point was actually a compromise down from the original $40,000 legislative proposal. Existing contracts may be maintained or coverage may be changed at the earlier $10,000 and 115%. Two elements of the law offer some hope for the future: it has a sunset provision of 2018, meaning that mandated survey reports of the Maryland Insurance Administration that to be released by 2016 could affect future legislation. The stop-loss insurance study by MIA is required to solicit information from TPAs, stop-loss carriers, brokers and employers. Keith Lemer, president of WellNet Healthcare, who advocated in opposition of the law to legislators and Governor Larry Hogan, believes this provides an opportunity for the self-insurance industry to build on the advocacy SIIA spearheaded this year. “We can continue to have a seat at the table by building stronger relationships with our legislators,” he said. He noted that it is vitally important for all involved to submit their information to the MIA survey process. SIIA’s Maryland lobbyist Gerard Evans continues to meet with the governor’s staff and MIA officials to assure that SIIA members have the opportunity to participate in the stop-loss survey. SIIA members will continue to be updated by periodic State Legislative/Regulatory News bulletins. ■

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Cyber Security, Cyber Liability and Captives Where computer networks and systems are vulnerable, cyber liability insurance is a key factor in mitigating risk.

W

ith the advent of a more connected world comes the increasing threat to data and cyber security. In recent years data breaches have progressed in sophistication, going from the relatively small exposure of a stolen laptop a decade ago to the more malicious attacks today made by hackers with the primary purpose of stealing data. Cyber liability insurance products were created to counter these new risks and have been on the market for many years, but are still vastly underutilized. With the increase in the possibility of a cybercrime being committed, the associated costs go up too. Just a few of the possible exposures a company faces if their systems become compromised are legal costs, business interruption and reputational risk. The majority of states in the U.S. now require businesses to inform their customers and affiliates if a breach has occurred. While the policies are good for the consumer, it leaves businesses with further exposures.

Cyber Liability Insurance

Written by Karrie Hyatt 18

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The insurance sector has responded to the threat by introducing products to help businesses recover from some of the exposures created by a computer or electronic breach. Even as the industry adds new and more comprehensive products, most U.S. businesses have not yet added cyber liability to their insurance


policies. This holds true for captive insurance companies as well. In Aon Risk Solutions’s 2014 Captive Benchmarking Study, only one percent of captive owners were “funding cyber risk through their captives.” While few companies are including cyber in the policies, on the whole large companies are more likely to purchase cyber liability insurance products. One reason may be that large companies are more likely to have risk management policies or even staff dedicated to risk management while medium to small companies do not. Risk managers are more focused on the interconnectedness of a business’s operations and can better understand how a cyber-breach can affect the overall well-being of the company. Medium-sized to small companies may not be looking at their overall business in this way and may not be able to see where the threat lays.

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Companies that don’t have a lot of consumer data are less likely to seek this type of coverage, according to Joe Holahan, an attorney with Morris, Manning & Martin, LLP. “Every company, large and small, have employee data that is at risk but smaller companies that don’t do direct to consumer business may feel that their risk is lower and that the coverage is not priced at a point where they feel it’s worthwhile.” A Department of Homeland Security Report, “Insurance Industry Working Session Readout Report,” published in July 2014, stated that chief reasons company are slow to adopt cyber liability are “a lack of actuarial data, aggregation concerns and the unknowable nature of all potential cyber threat vectors.” Cybercrimes are still relatively new, in terms of the type of historical data that actuaries use to price insurance coverages. It’s a little known product

insuring a hard to price liability, in terms of cost and magnitude. Costing the effects of a cybersecurity breach is not straightforward and can change frequently. While everyone, at this point has heard of cybercrimes, many managers have a hard time realigning their thinking to this new type of exposure and taking the steps to make sure that they are covered. “It may come down to simple inertia,” said Holahan, “Or difficulty evaluating the risk. Risk managers are more and more aware of cyber risk, but there are still some having trouble evaluating and quantifying it. In other instances, some companies may feel they still have limited exposure and may have concluded they don’t need the coverage, at least not at current rates.”

Healthcare Arena Healthcare is one business area that has been steadily obtaining cyber liability coverage. With huge amounts of protected patient information, the healthcare industry is one of the most exposed. The theft of patient information, whether traditionally or through a cybercrime, has been a focus of healthcare providers since the Health Insurance Portability and Accountability Act of 1996 (HIPAA) went into effect. HIPAA has strict requirements regarding how a patient’s personal information is used and stored and levies heavy penalties on companies or individuals that misuse or fail to protect that information. According to Holahan, “[Healthcare providers] already have a focus on cyber security and the legal consequences of a data breach. HIPAA spells out very specific things that need to be done if there is a data breach. And we’ve seen in the last few years the Department of Health and Human Services have ratcheted up in this area and have levied some

pretty heavy penalties for health care providers for failing to comply with the HIPAA security rules.” There have also been a number of serious breaches in the area of healthcare providers. Patient medical information is particularly attractive to security thieves as it can be used to perpetrate insurance fraud and used to fill fake drug prescriptions. Holahan continued, “Security guys will tell you that financial information in the online markets for black market information trade for a few dollars while medical records will trade for upwards of twenty dollars, so it’s very valuable information. It’s more of a target – the greater the risk the more you need the insurance.”

How Captives Fit Into the Picture Captives have been a testing ground for developing coverages over the years, but so far that has not been the case for cyber liability. While there are companies insuring cyber liability through their captives, the sector is following the same lag as in the traditional market – companies are slow to pick up this coverage. The best reason a company should insure cyber through their captive is the same reason for insuring any liability through a captive. “If you have a captive, adding coverage for your cyber exposure makes sense,” said Holahan, “for the same reasons it makes sense to have a captive in the first place. All the benefits of the captive would attach to any cyber risk you might place in it. You can take advantage of your own risk management and self-insure through the captive. The captive gives the company direct access to the reinsurance market. All the other various advantages of captives would apply here as well.” June 2015 | The Self-Insurer

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One thing that a captive can provide better than a traditional insurer is risk management services. On the front end this can help companies avoid cybercrimes and can be an important cost saving tool. In the Department of Homeland Security’s report, enterprise risk management was said to be a “tremendous value... to organizations seeking to assess their business risks more holistically and to prioritize their risk management investments more effectively against areas of greatest perceived peril.” Some companies are using their captives as a testing ground for cyber security. According to a white paper from Aon Risk Solutions, titled “Cyber risk and the captive market - a match made in the cloud?”, their data indicates that captive owners are writing cyber in an effort to better understand their cyber exposure and the overall risks. There have been a small number of captives created to cover only cyber liabilities, but this product is being added primarily by existing captives. Many captives, especially group captives, are adding cyber liability as an enhancement to existing coverages available to members. According to Holahan, “The captive clients I’ve worked with... see this as another product they can offer to their members and which they see is in demand. They also see their competitors on the traditional side offering it, so their members are anxious to have this type of insurance available to them through the captive.”

Traditional Market vs. Captives Traditional insurance companies are offering more and more cyber liabilityrelated products and, at this time, are able to price them very competitively. However, these products tend to be of the “off the shelf,” generic variety that include some broad exclusions in the scope of coverage. As Holahan described it, “There is not a lot of standardization yet and the exclusions can be, in some cases, broad. You have to look over the coverage closely and be sure you understand the scope of it before you buy. So there is unfamiliarity of the product, there aren’t many standards for it, not like traditional lines and it’s not easy to evaluate and purchase.”

for cyber can be wildly different, so being able to tailor coverage is a bonus to many captive owners. “Working with our group captive clients, we tried to fashion coverage that was reasonable in scope and clear as to what is and is not covered,” said Holahan. “Our goal was to create coverage that is clear and a good value to the member. The clients also wanted to tailor the coverage to the risks that their members might be facing.” While still a relatively new product, cyber security liability insurance is one that will be growing exponentially in the coming years. Until computer and Wi-Fi networks are made absolutely secure, companies will need to insure their exposures. Increasingly, companies are beginning to understand that there is no such thing as absolute cyber security. ■ Karrie Hyatt is a freelance writer who has been involved in the captive industry for nearly ten years. More information about her work can be found at: www.karriehyatt.com.

Captives can customize coverages for their members and even include coverages that may not be available in traditional markets. The exposures that companies face

NJ Office: (609) 275-6550

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PPACA, HIPAA and Federal Health Benefit Mandates:

Practical

Q&A

New EEOC Proposed Rules Require a Gut Check for Wellness Programs1

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ellness program sponsors and vendors have long struggled with the application of the provision in the Americans with Disabilities Act (ADA) that generally prevents employers from making disability-related inquiries or requiring medical examinations unless the inquiry or exam is a voluntary part of an employee health program available to employees at that worksite. The Equal Employment Opportunity Commission (EEOC) has previously done little to clarify the application of this rule to wellness programs – in particular, incentive-based wellness programs. On April 20, 2015, the EEOC issued long-awaited proposed regulations that not only clarify the application of the ADA to wellness-based programs – in particular, when incentive-based programs are considered “voluntary” – but also 22

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address the intersection between HIPAA’s nondiscrimination rules and the ADA.2 Compliance with HIPAA’s nondiscrimination rules does not ensure compliance with the ADA since the ADA and HIPAA strive to achieve different goals; however, the EEOC attempts in these proposed regulations to align the two sets of requirements as much as possible. While the proposed regulations do not have an effective date, FAQs published by the EEOC suggest that employers may rely on the proposed regulations until the EEOC issues final regulations.3

examinations or inquiries that are part of an employee health program that are set forth in the proposed regulations.

Practice Pointer: With this shot across the bow, the EEOC has made it clear that it does not agree with courts – such as the court in Seff – that have applied the bona fide benefit plan safe harbor to incentivebased wellness programs. How a court would weigh this guidance, in view of contrary precedent in some federal circuits, remains to be seen. What is clear, however, is that the EEOC has not ceded the litigation position taken in Seff and Honeywell. In addition to the ADA, the EEOC also administers Title II of the Genetic Information Nondiscrimination Act (GINA), which impacts wellness program design and administration. While these proposed regulations are limited to the ADA, the EEOC indicates that separate regulations on GINA are expected in the future.

Details of Regulations

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Scope of Regulations The ADA prohibits post-hire disability-related inquiries and/or medical exams that are not jobrelated or consistent with business necessity except for “voluntary” medical examinations or inquiries which are part of an employee health program available to employees. These regulations address only the requirements for employee health programs and whether such programs that provide incentives in connection with disability-related inquiries and/or medical exams are voluntary. There is, however, another exception from the ADA’s limitations that is not addressed in these regulations – the bona fide benefit plan safe harbor. The bona fide benefit plan safe harbor has been the primary issue in recent EEOC litigation (for example, Seff v. Broward4 County and EEOC v. Honeywell5). The EEOC stated in Footnote 24 of the proposed regulations that it “does not believe” that the bona fide benefit plan safe harbor “is the proper basis for finding wellness program incentives permissible.” Instead, the EEOC would have wellness plans comply with the requirements for “voluntary” medical

While the proposed regulations are not necessarily complicated on their face, the interaction with the HIPAA wellness regulations can be complexand not every potential situation will be addressed below. In addition, note that not all provisions will apply to all wellness programs. For example, some of the provisions discussed in the proposed regulations apply to all wellness programs; others only apply to wellness programs incorporating disability-related inquiries or medical examinations and/or wellness programs that are part of group health plans. Plan sponsors and wellness program vendors should pay careful attention to such distinctions and consult experienced counsel in case of any questions. 1. Wellness programs must be reasonably designed to promote health and prevent disease In order to meet this standard, wellness programs, including disability-related inquiries and medical examinations that are part of such programs, must not be overly burdensome, a subterfuge for violating the ADA or other discrimination laws or highly suspect in the method chosen to promote health or prevent disease. The proposed regulations provide examples of what constitutes a reasonable design and what does not. For example: Good

Conducting a health risk assessment or screening for the purpose of alerting participants to health risks

Good

Developing disease management programs based on assessments and screenings

Bad

Collecting information without providing any follow-up information, advice or tools

Bad

Requiring an overly burdensome amount of time to participate in a program as a condition to obtaining a reward

Bad

Requiring participants to go through intrusive procedures as a condition to obtaining a reward June 2015 | The Self-Insurer

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This rule applies without regard to whether incentives are offered or whether the program is offered as part of an employer’s group health plan.

Practice Pointer: HIPAA’s nondiscrimination rules impose a similar requirement; however, HIPAA only imposes this requirement on wellness programs with health outcome or activity-based incentives.The EEOC imposes this requirement on all wellness programs, including participation-based programs. II.Wellness programs must comply with the ADA’s confidentiality provisions. The proposed regulations clarify that employers may only receive aggregate, unidentified information unless identifiable information is necessary for health plan administration purposes.

Practice Pointer: If the

Practice Pointer: It has

program is part of a group health plan, HIPAA’s privacy rules would apply and would impose similar restrictions.

been a common practice for employers to deny access to those who fail to complete a health risk assessment or to limit those employees to a less generous health plan option. This guidance clarifies that such practices are prohibited.

III. Participation in a wellness program that includes disabilityrelated inquiries or requires medical examinations must be “voluntary.” Whether a wellness program is “voluntary” has been one of the hottest debates surrounding the application of the ADA to wellness programs. The proposed regulations attempt to answer that question by identifying the following elements of a voluntary program: • The employer doesn’t require participation in the program; • The employer doesn’t deny employees who choose not to participate in the program access to health coverage under any of its group health plans or benefit package options;

• The employer doesn’t limit the coverage under the health plan for employees who choose not to participate (except to the extent the limitation is the result of forgoing an otherwise permissible financial incentive); • The employer does not retaliate or take employment action against those who fail to participate; and • If the wellness program is part of a group health plan, the employer must provide notice

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that clearly explains what information will be obtained, how the medical information will be used, who will receive it, restrictions on its disclosure and the methods used to prevent improper disclosure of the information.

Practice Pointer: The proposed regulations do not indicate the detail with which the employer must explain the steps it takes to prevent the improper disclosure of information. IV. Any incentives offered as part of a wellness program that is part of a group health plan and that includes disability-related inquiries or requires a medical exam must be limited to 30% of the total cost of employee-only health coverage. A. General Rule This incentive limitation is similar to the limitation imposed under HIPAA’s nondiscrimination rules on incentive-based health outcome and activity-based wellness programs; however, this rule applies to any wellness program that is part of a group health plan and includes disability-related inquiries or requires a medical exam. Thus, if an employer sponsors an incentive-based participation-only program (e.g., a $25 premium reduction for completing a health risk assessment) and a health-contingent program (e.g., a $25 premium reduction for employees who meet three of five benchmarks in a biometric screening), the total incentive for both the participation-only and the health outcomes program cannot exceed 30% of the total cost of employee-only health coverage.

Practice Pointer: Under HIPAA’s nondiscrimination rules, only healthcontingent programs (other than tobacco cessation programs) are subject to the 30% limit; however, the proposed regulations would also include participatory programs. This may require employers to make adjustments to the collective incentives offered under their wellness programs.

necessary points for the reward without answering questions related to a disability or taking a medical exam. Albeit informal, this position makes logical sense because employees can obtain the incentive without responding to disability-based inquiries. Last, incentive-based wellness programs that include disability-related inquiries and/or medical exams must make reasonable accommodations where necessary. For example, if an employer offers financial incentives to attend a nutrition class, regardless of whether the employees reach a healthy weight, the employer would have to provide a sign language interpreter to deaf employees or provide written materials in large print format to visually impaired employees. Also, if a reward is provided for those who complete a biometric screening that includes a blood draw, the employer must provide an alternative test for those for whom a blood draw is medically dangerous.

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Practice Pointer: This Note that the 30% limit only applies if the wellness program is part of a group health plan and includes disability-related inquiries or requires a medical exam. For example, if the wellness program is part of a group health plan, but involves no disability-related inquiries or medical exams, it would be subject to the HIPAA wellness regulations, but not the EEOC’s proposed rules. Also, the EEOC’s proposed 30% limitation appears limited to the total cost of employee-only coverage. Under HIPAA, a plan may provide a reward up to 30% of the total cost of family coverage if family members are permitted to participate. The proposed regulations do not indicate how an incentive-based wellness program that allows family members to participate in the program complies with the ADA’s 30% limitation. However, this issue may be addressed in the EEOC’s future GINA regulations, which may restrict the extent to which an employee can benefit from a family member’s participation in a wellness program that conducts medical inquiries.

Practice Pointer: The EEOC has infrmally indicated that if a wellness program provides multiple methods of earning points to reach a reward, some of which are connected with disability-related inquiries and/or medical examsand some of which are not, the program as a whole will not be subject to the 30% threshold as long as the employees can acquire the

requirement applies even when HIPAA’s nondiscrimination rules would not require a reasonable alternative standard, for example, participatory programs and activity-only health contingent programs that are not unreasonably difficult or medically inadvisable for a participant to complete. B. Tobacco Cessation What about programs that offer incentives for compliance with a tobacco cessation program? Under HIPAA, programs that include tobacco cessation may impose a reward up to 50% of the total cost of employee-only coverage. Compliance with HIPAA’s 50% limitation would run afoul of the ADA’s 30% June 2015 | The Self-Insurer

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limitation (which does not carve out tobacco cessation). Fortunately, the regulations clarify that programs that merely ask whether an employee uses tobacco is not a disabilityrelated inquiry; therefore, the incentive for compliance with tobacco cessation programs would not be subject to the ADA’s 30% limitation.

Practice Pointer: Tobacco cessation programs that obtain tobacco use information through a blood test or other medical exam would be subject to the 30% limitation. In addition to modifications to the tobacco cessation reward, employers that previously incorporated a 50% tobacco reward into their affordability calculations for IRC § 4980H(b) purposes may need to adjust the premiums charged to employees. ■ The Affordable Care Act (ACA), the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and other federal health benefit mandates (e.g., the Mental Health Parity Act, the Newborns and Mothers Health Protection Act and the Women’s Health and Cancer Rights Act) dramatically impact the administration of self-insured health plans. This monthly column provides practical answers to administration questions and current guidance on ACA, HIPAA and other federal benefit mandates. Attorneys John R. Hickman, Ashley Gillihan, Johann Lee, Carolyn Smith and Dan Taylor provide the answers in this column. Mr. Hickman is partner in charge of the Health Benefits Practice with Alston & Bird, LLP, an Atlanta, New York, Los Angeles, Charlotte and Washington, D.C. law firm. Ashley Gillihan, Carolyn Smith and Johann Lee are members of the Health Benefits Practice. Answers are provided as general guidance on the

subjects covered in the question and are not provided as legal advice to the questioner’s situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. Readers are encouraged to send questions by email to Mr. Hickman at john.hickman@alston.com. References Stacy Clark, Esq. an associate with Alston & Bird assisted with the drafting of this article.

1

2 For an in-depth discussion of the HIPAA wellness program rules, see Alston & Bird’s prior advisory on the topic: www.alston.com/files/Publication/f88638f79114-4d35-b0ac-b8247b4a0da3/Presentation/ PublicationAttachment/eff6f36f-eab1-40f0-a024ca20ace1b11c/13-801%20ACA%20Update.pdf.

See “Questions and Answers about EEOC’s Notice of Proposed Rulemaking on Employer Wellness Programs,” available at www.eeoc.gov/laws/regulations/qanda_nprm_ wellness.cfm (“While employers do not have to comply with the proposed rule, they may certainly do so. It is unlikely that a court or the EEOC would find that an employer violated the ADA if the employer complied with the NPRM until a final rule is issued.”) 3

691 F.3d 1221 (11th Cir. 2012).

4

2014 WL 5795481 (D. Minn. 2014).

5

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The Implications

Marijuana Legalization of

to

EMPLOYERS

T

he legalization of marijuana use creates intended and unintended consequences to society, as Colorado learned in 2014. The consequences to self-insured employers, the workplace and workers’ compensation could be just as dramatic.

Written by Mark Pew, Senior Vice President of PRIUM 28

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Government surveys indicate that 25 million Americans used marijuana within the past year, with more than 14 million doing so regularly. “Real Sports with Bryant Gumbel” reported that 50-60% of NFL players use marijuana even though the league (employer) and player’s union (employees) agreed on a zero tolerance policy. The ubiquity of use despite its illegal status, the uniqueness of its properties and the current dissonance between federal and state laws complicates workplace policies.


MARIJUANA LEGALIZATION | FEATURE Whenever a subject is complicated there is an increased possibility of misunderstandings and mistakes – or paralysis by analysis. Given the momentum of cannabis legalization around the country, employers ignore the issue at their peril. Impairment or intoxication on the job is an issue regardless of the intoxicating agent – marijuana, alcohol, cocaine, heroin and oxycodone. Setting aside the societal question as to whether legalizing marijuana is a good or bad thing, every time a substance is legalized its use increases. Typically legalization brings new users who are more apt to try something no longer illegal. Given the widespread belief that marijuana use is relatively benign, its perceived low risk will further fuel increased use. Three primary issues can impact employers and are the sources of cascading complications:

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1. Marijuana is Illegal at the Federal Level, but Legal within Some States. Marijuana is classified as a Schedule I drug by the FDA, along with heroin, ecstasy and LSD. Per the earlier statistics on marijuana use, Schedule 1 status obviously does not hinder use, but it certainly hinders involvement by businesses. For example, drug companies are not interested in the time and dollar investment needed to bring a drug to market if the FDA cannot approve it. Banks that could be accused of money laundering do not offer their services to the marijuana industry. In contrast, 23 states and the District of Columbia have legalized medical use of cannabis with another 11 states providing limited medical access. Colorado, Washington, Alaska, Oregon and the District of Columbia have legalized recreational use of

weed. Until the states reverse course and make it illegal again – a long shot – or the FDA or Congress legalizes it at the federal level – a very distinct possibility – this dissonance creates issues for employers, such as: • How explicit do you need to be about recreational and/or medical marijuana use in your drug free workplace policies? • Are pot policies different than existing policies about alcohol or other drugs? What does “zero tolerance” actually mean at your workplace? • If you have locations in multiple states, do you need different policies in each state to take into account the unique parameters of legality? • What happens if marijuana use in a bordering state is legal but not in your state and employees cross the borders? • If an applicant tests positive for THC in a pre-screen drug test, can you hire them? Should you? • What level of education do your executive team, risk management team, Medical Review Officer, managers and supervisors and employees have on your policies and their respective obligations?

2. Cognitive Impairment is Difficult to Measure. A urine drug test can detect the presence of THC (the psychoactive ingredient of the marijuana plant) for three to seven days, up to 30 days for a heavy user or user with high body fat. Yet intoxication only lasts a few hours. Development of THC breathalyzers is underway, but currently it is very difficult to detect whether someone is cognitively impaired. According to the Marijuana in the Workplace: Guidance for Occupational Health Professionals and

Employers whitepaper published in the April 2015 issue of the Journal of Occupational and Environmental Medicine, impairment peaks in about one hour and lasts up to four hours after smoking. If ingested orally in high doses, it could impair driving for up to 10 hours. Please note, these are likely outdated statistics because today’s marijuana can be as much as three times more potent than when the studies were done. Current science can accurately detect whether a person has used marijuana at some point in the recent past, but cannot reliably detect whether he or she is impaired. The same whitepaper outlines studies based on blood levels in vehicular crashes that show a plasma level of 2 ng/mL indicated impairment with any reading above 5 ng/mL indicating acute impairment. This creates questions for employers, such as: • When employees hurt themselves at the workplace, was it because they were impaired or just inattentive or careless? In other words, how do you confirm or deny causality due to intoxication? • If a drug test is positive, how do your policies outline other ways to confirm impairment, i.e., slurred speech, glassy or bloodshot eyes and unusual statements? • Can you test “for cause” based on behavior? • Since amotivational syndrome is a probable byproduct of ingesting weed, how do you deal with absenteeism and presenteeism? • Are there certain jobs that someone using THC-based medical marijuana should be precluded from doing for safety reasons? Are there roles in which it is ok to be intoxicated, perhaps the accountant, the cashier or programmer? June 2015 | The Self-Insurer

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MARIJUANA LEGALIZATION | FEATURE

3. Marijuana May Have Some Medical Value. By some estimates, 90% of marijuana studies were born from the desire to identify risks, not benefits, from its use. So it isn’t surprising that most of the studies find issues like an increased possibility of psychosis and schizophrenia and higher risks for depression and suicidal ideation. Other studies show 10% of adults and 16% of adolescents become addicted, that there is a 6-8 point decline in IQ when use begins in adolescence and continues into adulthood and that marijuana use doubles the chance of a driving accident. According to the National Institute on Drug Abuse, higher frequency of use of marijuana from ages 14-21 impacts adulthood by increasing the possibility of welfare dependence and unemployment and dramatically reducing the probability of gaining a university degree.

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On the other hand, there are a multitude of anecdotal stories about how cannabis can help treat glaucoma, soothe tremors from Parkinson’s disease, protect the brain from stroke, ease the pain of multiple sclerosis and even stop the spread of cancer cells. The most publicized – and emotional – medical application of marijuana is the low THC/high cannabidiol or CBD oil, nicknamed “Charlotte’s Web,” that can dramatically reduce the number of seizures related to Dravet’s Syndrome and other forms of epilepsy. The marijuana plant is complex with 483 known compounds. It does appear there are some medical applications for some conditions. Yet studies are conflicting, providing fodder for both proponents and opponents. The American Society of Addiction Medicine states, “For every disease and disorder for which marijuana has been recommended, there is a better, FDA-approved medication,” but what does this all mean to an employer? • Since physicians cannot “prescribe” marijuana because it is a Schedule I drug, by what process do they certify marijuana use for medical purposes that would deem it “reasonable and necessary,” thereby making it a part of a legitimate workers’ compensation treatment plan? • Could you, as the employer, be responsible for reimbursing the medical use of marijuana even if your policies prohibit its use? According to PRIUM’s The Sentinel quarterly newsletter published in April 2015, only Michigan, Montana, Vermont and Washington explicitly restrict payment or reimbursement by work comp payers. • If the injured worker is a registered medical marijuana patient and tests positive for marijuana, can you terminate him or her?


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MARIJUANA LEGALIZATION | FEATURE • What are your liabilities if an employee hurts himself, herself or others in the workplace due to cognitive impairment related to approved medical marijuana use? Are those liabilities different than if that same employee was hungover or taking prescription pain pills? If you are an employer, legal counsel is the key to understanding the explicit, implicit and nuanced affects that marijuana legalization could have on your organization. It is entirely possible that your existing policies are sufficient. It is equally possible they are not. The only way to truly know is to research and assess. The Marijuana in the Workplace: Guidance for Occupational Health Professionals and Employers whitepaper should be required reading. This has gone beyond sophomoric jokes and academic exercises. If there are gaps in your workplace policies, they need to be filled quickly before they become gaping holes in your ability to do business. ■ Mark Pew is senior vice president of PRIUM. He is a member of the Self-Insurance Institute of America (SIIA) Workers’ Compensation Committee and can be reached at mpew@prium.net.

MEDICAL MARIJUANA facts & figures

• According to the Tennessee Department of Labor and Workforce Development, 38-50% of all workers’ compensation claims are related to substance abuse in the workplace. • Targeted “for cause” testing is not random so be careful in the terminology you use. Who is responsible for proving impairment or lack of impairment in each state, you or the employee?

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• According to medical marijuana diversion and associated problems in adolescent substance treatment by Thurstone C, Lieberman SA & Schmiege SJ, 48.8% of adolescents in Colorado admitted to substance abuse treatment, obtained their marijuana from someone registered to use medically.

June 2015 | The Self-Insurer

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The Road to Recovery: Subrogation Gets Its Day in Court… Again

I

n a country with a seemingly infinite amount of regulation and concerns regarding benefit plan compliance following the passage of the Affordable Care Act in 2010, one would expect much attention from courts in the employee sponsored health benefits arena. Most might be surprised when they realize the amount of attention that subrogation has received in The Supreme Court of the United States, the highest court in the land, over the last 25 years. Subrogation, a concept few truly understand and even fewer recognize, has been reviewed by The Supreme Court several times since 1990. Even legal practitioners unfamiliar with the world of insurance law might struggle to provide a satisfactory explanation of it. Many an industry practitioner can tell tales of their encounters with even subrogation professionals with questionable understanding of the concept. In the 226 years of The Supreme Court’s existence, It has reviewed approximately 1,742 cases, or eight cases per year. Most courts in America review more than that per day. With such limited volume, it is surprising that the issue of subrogation has been directly dealt with four times since 1993 (i.e. 4 of the last 469 cases). While two applications for review have been denied, a fifth case, Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, case #14-723, is now slated to be heard by The Supreme Court in 2015.

Written by Christopher Aguiar 34

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To be clear, it is somewhat disingenuous to say that subrogation, specifically, has merited so much attention. To understand why subrogation has been reviewed so


often, one must understand the legal framework that is actually being implicated. The issues The Court is really tackling are the circumstances under which a plan can enforce a right to be reimbursed from the injury settlement of plan participants and if so, to what extent. The Employee Retirement Income Security Act of 1974, better known as ERISA, allows a plan to seek “appropriate equitable relief ” and The Court is being asked to define the framework to be applied. Stated more simply, whose definition of equity, or fairness, is more appropriate – the states, or the benefit plans providing benefits to employees of companies in America? Therein lies the crux of the problem – words and phrases like “fair” or “appropriate equitable relief ” - as utilized in ERISA – lack any definite meaning. Certainly, definitions for them exist, but they are relative terms, the actual meaning of which reasonable people can (and will) disagree upon. They are the kind of terms that allow lawyers to make a living, those that lend themselves to disagreement, advocacy and, ultimately, the opinions of an appointed arbiter. So what exactly is the issue? In layman’s terms, The Court is trying to answer a simple question; when is it fair for a benefit plan that provides health benefits, with the explicit understanding that if those benefits arise due to the acts of a third party and the beneficiary receives a settlement from a third party to the health benefits arrangement, to expect those funds to be returned to the health plan? Most reasonable minds will agree that, theoretically, it is fair for a benefit plan to recoup those funds because a person who causes damages should be held responsible for them. As a practical matter, however, the persons who cause these injuries rarely have the means to atone for them financially and those who suffer the injuries are often the ones left feeling undercompensated for their losses. For that reason, The Court has stepped in repeatedly to try to resolve this issue

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The Court has, for the most part, sided with the employee benefit plans. As set forth in Great West Life & Annuity Insurance Co. et al. v. Knudson, 534 U.S. 204 (2002) and then reaffirmed in Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S 356 (2006), a benefit plan that establishes an equitable right of reimbursement can enforce that right in equity as long as the fund is 1) identifiable, 2) traceable and 3) in the possession of the party against whom the claim is made. Indeed, the benefit plan in Great West Life lost its case because the plan brought action against the plan participant, Knudson, but the funds were being held in a trust on her behalf. Since the Plan failed to bring suit against the party in possession of the funds, i.e. the trust, The Court held the Plan had not protected its rights and could not enforce its action in equity. What followed were misinterpretations and overstatements, leading to substantial unrest in the world of subrogation and a concern that a benefit plan could not enforce its equitable rights on the whole. In 2006, The Court clarified much of the confusion that arose from Its decision in Great West Life when it reviewed Sereboff. Essentially, The Court ruled in Sereboff that when a benefit plan follows the blueprint laid out in Great West Life, it can enforce an equitable remedy against the plan participant. Unfortunately, The Court left one issue unresolved and to the interpretation of lower courts: when a plan seeks to enforce an equitable remedy, will that remedy be limited by traditional rules of equity, i.e. the Common Fund and Made Whole Doctrine? While most jurisdictions were in support of the enforcement of clear language in favor of preemption of equitable limitations, a few still sought to avoid application of the plan terms. Such was the status of the law until 2013 when The Court once again granted review of a subrogation case, U.S. Airways, Inc. v. McCutchen, 133 S. Ct. 1537.

In McCutchen, The Court finally resolved this very prevalent issue. Most reasonable people can agree that a plan should be able to recover funds from a party who causes injuries to a plan participant – it is when the available funds are lacking that disagreements arise. Naturally, nearly everyone believes the injured person deserves to be compensated. Thanks to The Supreme Court and Its decision in McCutchen, however, a benefit plan can craft its provisions such that the plan is reimbursed first, in full, regardless of the impact that reimbursement has on the patient’s situation. Many a plaintiff ’s attorney will argue incredulously that an outcome wherein the participant is not made whole, or the plan benefits from the efforts of the injured person and their attorney to secure a recovery without having to pay for that benefit, is not fair. The Supreme Court, as ultimate arbiter establishing the supreme law of the land, has decided that it is fair for a benefit plan to provide for and enforce reimbursement without equitable limitations. With all the attention in the last 25 years, one might think that The Supreme Court has had Its fill of subrogation and resolved the disputes around the law... enter Montanile. In Montanile, The Court will tackle yet another pivotal issue – when exactly does a benefit plan’s right attach to recovered funds? Stated even more simply, can a benefit plan’s right be defeated if the plan participant spends all the money? In Montanile, the plan participant was involved in an accident with a drunk driver and incurred over $121,000.00 in medical claims that were paid by the plan. As a result of that accident, the plan participant brought a lawsuit against the driver and received a settlement of $500,000.00, which he claims he then spent on everyday living expenses. Since he spent the money, he argued, the plan could no longer enforce its reimbursement June 2015 | The Self-Insurer

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right. Both the trial court and the Eleventh Circuit ruled that the plan can still enforce its right. Eight federal jurisdictions have now ruled on this issue, six of them agree that simply spending the money does not defeat a plan’s interest. This split in authority has laid the groundwork for The Supreme Court’s review of Montanile. If The Court rules in favor of Montanile, plaintiff ’s lawyers will unquestionably threaten to spend settlement proceeds unless the plan takes action to protect the recovery. Benefit plans can take some solace in the overwhelming nature in which The Court has previously ruled in favor of the plan. In Sereboff, for example, The Court ruled unanimously their favor. In McCutchen, five justices ruled against the plan, however, in that case the benefit plan lacked the necessary language to avoid equitable limitations, but the opinion made clear that the terms of the language create a valid contract

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and therefore should govern the rights of the parties. If those cases are any indication and The Court continues with its theme of strict enforcement of established plan terms, we should see another favorable decision.

there are a few more issues that could use some clarification from The High Court, I am guessing It gets Its hands dirty on some subrogation cases a few more times in the next few years. ■

Regardless of the outcome of this case, though, benefit plans should always look to follow established best practices. A plan can put itself in the best position to succeed by ensuring it has clear language that establishes automatic attachment of its lien. Great language is not always enough, though. Early intervention and follow through on the status of the case provides the plan with the opportunity to monitor the case and, if necessary, intervene to protect its interest. By taking these relatively simple actions, the plan can maximize its chance of recovery – and maybe, plans will get a little bit of help from The Supreme Court in Montanile. Oh and for all you subrogation enthusiasts out there, do not fret –

Christopher Aguiar is an attorney with the Phia Group, LLC. Beginning his career in 2005 and specializing primarily in subrogation recovery, Chris has managed thousands of cases nationwide and spearheaded negotiations between plan participants, plaintiffs’ counsel and plan administrators on matters of State and Federal Law as well as ERISA Preemption, recovering millions of dollars on behalf of benefit plans. Since receiving his license to practice law in the State of Massachusetts in 2014, Chris has also handled plan drafting and plan consulting matters ranging from plan language analysis, claims appeal assistance, balance billing defense, prepayment claim negotiations, overpayment recovery, stop loss, PPO and administrative service agreements.


June 2015 | The Self-Insurer

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RRGs Report Financially Stable Results Through Year-End 2014 This article originally appeared in “Analysis of Risk Retention Groups – Year End 2014”

Written by Douglas A Powell Senior Financial Analyst, Demotech, Inc. 38

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A

review of the reported financial results of risk retention groups (RRGs) reveals insurers that continue to collectively provide specialized coverage to their insureds. Based on reported financial information, RRGs have a great deal of financial stability and remain committed to maintaining adequate capital to handle losses. It is important to note that ownership of RRGs is restricted to the policyholders of the RRG. This unique ownership structure required of RRGs may be a driving force in their strengthened capital position. The financial metrics and ratios presented have been materially impacted by a Contribution Agreement and a merger made by separate companies. First, a Contribution Agreement of an RRG that transpired in the first quarter 2014. On January 1, 2014, Attorney’s Liability Assurance Society Inc., RRG (ALAS) entered into a Contribution Agreement with its parent, ALAS Investment Services Limited (AISL). ALAS assumed significant assets and liabilities of the parent. According to the filed first quarter 2014 statement of ALAS, as a result of the transaction, “loss reserves historically ceded by (ALAS) to the parent... were reassumed by the company.” More than $2 billion in total assets and more than $1.5 billion in total liabilities were contributed to ALAS. The most significant liability assumed by ALAS was $1.2 billion of loss reserves. The net capital contribution of this transaction


was more than $513 million.

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The second item materially impacting the financial metrics and ratios of RRGs occurred on May 1, 2014, as MCIC Vermont Inc. (A Risk Retention Group) executed two mergers. According to information found in its 2014 MD&A, “on May 1st, a series of transactions occurred which resulted in the merger of MCIC Ltd., MCIC Vermont and MCIC Vermont Holding, Inc. with MCIC Vermont as the surviving entity. Also on May 1st, [MCIC Vermont] reorganized itself as a reciprocal risk retention group,” thus changing its name to MCIC Vermont (A Reciprocal Risk Retention Group). Further, according to note 25 in the company’s filed year-end statement, due to the merger, “reserves previously reflected as recoverable from MCIC Bermuda are now part of the gross reserves. Bermuda reserves totaled $934,541,838 as of December 31, 2013, and now have been included in the beginning balance in the roll forward.” For 2014, MCIC Vermont reported adverse one-year loss reserve development of $955.3 million (9,286.9% of prior year-end surplus) and adverse two-year loss reserve development of $705.6 million (6,273.4% of second prior yearend surplus) on Schedule P – Part 2 Summary. These amounts were directly impacted by the mergers described above and as such the financial information for MCIC Vermont was not included in the summary information that follows.

Balance Sheet Analysis During the last five years, cash and invested assets, total admitted assets and policyholders’ surplus have increased at a faster rate than total liabilities (figure 1). The level of policyholders’ surplus

Figure 1

becomes increasingly important in times of difficult economic conditions by allowing an insurer to remain solvent when facing uncertain economic conditions. Since year-end 2010, cash and invested assets increased 51.1% and total admitted assets increased 41.1%. More importantly, over a five year period from year-end 2010 through year-end 2014, RRGs collectively increased policyholders’ surplus 44.4%. This increase represents the addition of nearly $1.3 billion to policyholders’ surplus. During this same time period, liabilities have increased 38.8%. These reported results indicate that RRGs are adequately capitalized in aggregate and able to remain solvent if faced with adverse economic conditions or increased losses. Liquidity, as measured by liabilities to cash and invested assets, for yearend 2014 was approximately 65.5%. A value less than 100% is considered favorable as it indicates that there was more than a dollar of net liquid assets for each dollar of total liabilities. This also indicates a diminishment for RRGs collectively as liquidity was reported at 62.3% at year-end 2013. This ratio had improved steadily in each of the previous five years.

Loss and loss adjustment expense (LAE) reserves represent the total reserves for unpaid losses and LAE. This includes reserves for any incurred but not reported losses as well as supplemental reserves established by the company. The cash and invested assets to loss and LAE reserves ratio measures liquidity in terms of the carried reserves. The cash and invested assets to loss and LAE reserves ratio for year-end 2014 was 233.8% and indicates an improvement over year-end 2013, as this ratio was 248.7%. These results indicate that RRGs remain conservative in terms of liquidity. In evaluating individual RRGs, Demotech, Inc. prefers companies to report leverage of less than 300%. Leverage for all RRGs combined, as measured by total liabilities to policyholders’ surplus, for year-end 2014 was 137.9% and indicates a diminishment compared to year-end 2013, as this ratio was 118%. The loss and LAE reserves to policyholders’ surplus ratio for yearend 2014 was 90% and indicates a diminishment compared to yearend 2013, as this ratio was 76.2%. The higher the ratio of loss reserves to surplus, the more an insurer’s stability is dependent on having and maintaining reserve adequacy. June 2015 | The Self-Insurer

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Regarding RRGs collectively, the ratios pertaining to the balance sheet appear to be appropriate and conservative.

Premium Written Analysis Since RRGs are restricted to liability coverage, they tend to insure medical providers, product manufacturers, law enforcement officials and contractors, as well as other professional industries. RRGs reported direct premium written in eleven lines of business through year-end 2014. RRGs collectively reported nearly $2.6 billion of direct premium written (DPW) through year-end 2014, an increase of 3.7% over 2013. RRGs reported over $1.5 billion of net premium written (NPW) through year-end 2014, an increase of 18.3% over 2013. The DPW to policyholders’ surplus ratio for RRGs collectively through yearend 2014 was 62.6%, down from 69.9% in 2013. The NPW to policyholders’ surplus ratio for RRGs through year-end 2014 was 36.5% and indicates an increase over 2013, as this ratio was 35.7%. An insurer’s DPW to surplus ratio is indicative of its policyholders’ surplus leverage on a direct basis, without consideration for the effect of reinsurance. An insurer’s NPW to surplus ratio is indicative of its policyholders’ surplus leverage on a net basis. An insurer relying heavily on reinsurance will have a large disparity in these two ratios. A DPW to surplus ratio in excess of 600% would subject an individual RRG to greater scrutiny during the financial review process. Likewise, a NPW to surplus ratio greater than 300% would subject an individual RRG to greater scrutiny. In certain cases, premium to surplus ratios in excess of those listed would be deemed appropriate if the RRG had demonstrated that a contributing factor to the higher ratio is relative improvement in rate adequacy. In regards to RRGs collectively, the ratios pertaining to premium written appear to be conservative.

Loss and Loss Adjustment Expense Reserve Analysis A key indicator of management’s commitment to financial stability, solvency and capital adequacy is their desire and ability to record adequate loss and loss adjustment expense reserves (loss reserves) on a consistent basis. Adequate loss

reserves meet a higher standard than reasonable loss reserves. Demotech views adverse loss reserve development as an impediment to the acceptance of the reported value of current and future, surplus and that any amount of adverse loss reserve development on a consistent basis is unacceptable. Consistent adverse loss development may be indicative of management’s inability or unwillingness to properly estimate ultimate incurred losses. RRGs collectively reported adequate loss reserves at year-end 2014 as exhibited by the one-year and two-year loss development results. The loss reserve development to policyholders’ surplus ratio measures reserve deficiency or redundancy in relation to policyholder surplus and the degree to which surplus was either overstated, exhibited by a percentage greater than zero, or understated, exhibited by a percentage less than zero. The one-year loss reserve development to prior year’s policyholders’ surplus for 2014 was -3.7% and was slightly more favorable than 2013, when this ratio was reported at -3.3%. The two-year loss reserve development to second prior year-end policyholders’ surplus for 2014 was -6.5% and was less favorable than 2013, when this ratio was reported at -11.3%.

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In regards to RRGs collectively, the ratios pertaining to loss reserve development are favorable.

Income Statement Analysis

Figure 2

The profitability of RRG operations remains positive. RRGs reported an aggregate underwriting gain for 2014 of $51.9 million, a decrease of 41.7% over 2013 and a net investment gain of $224.9 million, an increase of 4.9% over 2013. RRGs collectively reported June 2015 | The Self-Insurer

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net income of $224.2 million, a decrease of 7.5% over 2013. Looking further back, RRGs have collectively reported an annual underwriting gain since 2004 and positive net income at each year-end since 1996. The loss ratio for RRGs collectively, as measured by losses and loss adjustment expenses incurred to net premiums earned, through year-end 2014 was 70.4%, an increase over 2013, as the loss ratio was 64.8%. This ratio is a measure of an insurer’s underlying profitability on its book of business. The expense ratio, as measured by other underwriting expenses incurred to net premiums written, through year-end 2014 was 24.7% and indicates a decrease compared to 2013, as the expense ratio was reported at 26.9%.This ratio measurers an insurer’s operational efficiency in underwriting its book of business. The combined ratio, loss ratio plus expense ratio, through year-end 2014

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was 95.1% and indicates an increase compared to 2013, as the combined ratio was reported at 91.7%. This ratio measures an insurer’s overall underwriting profitability. A combined ratio of less than 100% indicates an underwriting profit (figure 2). Regarding RRGs collectively, the ratios pertaining to income statement analysis appear to be appropriate. Moreover, these ratios have remained within a profitable range.

Conclusions Based on 2014 Results Despite political and economic uncertainty, RRGs remain financially stable and continue to provide specialized coverage to their insureds. The financial ratios calculated based on the reported results of RRGs appear to be reasonable, keeping in mind that it is typical and expected that insurers’ financial ratios tend to fluctuate over time. The results of RRGs indicate that these specialty insurers continue to exhibit financial stability. It is important to note again that while RRGs have reported net income, they have also continued to maintain adequate loss reserves while increasing premium written year over year. RRGs continue to exhibit a great deal of financial stability. ■ Douglas A Powell is a Senior Financial Analyst at Demotech, Inc. Email your questions or comments to dpowell@demotech.com. For more information about Demotech visit www.demotech.com.


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QBE and the links logo are registered service marks of QBE Insurance Group Limited. Coverages underwritten by member companies of QBE. © 2015 QBE Holdings, Inc.

June 2015 | The Self-Insurer

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SIIA Endeavors Workers’ Comp Education in The Crescent City

S

IIA held its annual Workers Compensation Executive Forum May 12-13th at the Windsor Court Hotel in New Orleans, Louisiana.

The Forum featured a solid educational program focusing on such topics as excess insurance and risk management strategies. Speakers included: Kimberly George, Senior Vice President, Senior Healthcare; Freda Bacon, Fund Administrator for the Alabama Self Insured Workers’ Compensation Fund; Steven J. Link, Executive Vice President of Midwest Employers Casualty Company; Stan Smith, Predictive Analytics Consultant for Milliman, Inc.; Stu Thompson, Fund Manager of The Builders Group; Scott Keller, Senior Vice President of Arch Insurance Company; Stuart Presson, Vice President of Marketing of US Specialty Underwriters; Seth Smith, Senior Vice President Workers’ Compensation Underwriting, Safety National; Dave Mitchell, Founder/President of the Leadership

Difference, Inc.; Kevin Confetti, Director of Workers’ Compensation Program at the University of California; Albert B. Randall, Jr., Esq. of Franklin & Prokopik, P.C.; Mark Pew, Senior Vice President of Prium; Mark Walls, Vice President Communications and Strategic Analysis for Safety National; Michael Coupland, CPsych, RPsych, CRC, CEO, Network Medical Director for Integrated Medical Case Solutions (IMCS Group); Becky Curtis, Pain Management Coach and Founder, Take Courage Coaching; Jim Donelon, Commissioner of Louisiana Department of Insurance and Duke Niedringhaus, Senior Vice President of J.W. Terrill, Inc.

We would like to thank all of the attendees and the sponsors for their continued support of SIIA: -

Carr, Riggs & Ingram, LLC Franco Signor LLC Helios IPMG Medical Consultants Network Midlands Management Corp.

- Midwest Employers Casualty Company - Pay-Plus Solutions, Inc. - POMCO Group - Safety National Casualty Corporation

For more information on SIIA conferences, including registration forms, hotel information and sponsorship opportunities, please visit www.siia.org or call 800-851-7789. ■ 44

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Risk Claims Policy

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HIGH PERFORMANCE QUALITY SERVICE PROVEN RESULTS June 2015 | The Self-Insurer

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SIIA would like to recognize our leadership and welcome new members Full SIIA Committee listings can be found at www.siia.org

2015 Board of Directors CHAIRMAN OF THE BOARD* Donald K. Drelich Chairman & CEO D.W. Van Dyke & Co. Wilton, CT CHAIRMAN ELECT* Steven J. Link Executive Vice President Midwest Employers Casualty Co. Chesterfield, MO PRESIDENT* Mike Ferguson SIIA Simpsonville, SC TREASURER & CORPORATE SECRETARY* Ronald K. Dewsnup President & General Manager Allegiance Benefit Plan Management, Inc. Missoula, MT

Directors Andrew Cavenagh President Pareto Captive Services, LLC Philadelphia, PA Robert A. Clemente CEO Specialty Care Management, LLC Bridgewater, NJ Duke Niedringhaus Vice President J.W. Terrill, Inc. Chesterfield, MO

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Jay Ritchie Senior Vice President HCC Life Insurance Company Kennesaw, GA Adam Russo Chief Executive Officer The Phia Group, LLC Braintree, MA

Committee Chairs ART COMMITTEE Jeffrey K. Simpson Attorney Gordon, Fournaris & Mammarella, PA Wilmington, DE GOVERNMENT RELATIONS COMMITTEE Jerry Castelloe Castelloe Partners, LLC Charlotte, NC

SIIA New Members Regular Members Company Name/ Voting Representative

Dennis Cahill Director of Business Development BlueCross BlueShield of Vermont Montpelier, VT Sandra Fenters Managing Director - Principal Capterra Risk Solutions Pittsburgh, PA Kimberly Holcomb President/CEO Texas Ag Benefit Administrators Amarillo, TX

Silver Members Rodger Bayne President Benefit Indemnity Corporation Towson, MD

HEALTH CARE COMMITTEE Robert J. Melillo 2nd VP & Head of Stop Loss Guardian Life Insurance Company Meriden, CT

Jim O’Connor President CBIZ Benefits & Insurance Services Inc. Manasquan, NJ

INTERNATIONAL COMMITTEE Robert Repke President Global Medical Conexions, Inc. Novato, CA

Employer Member

WORKERS’ COMP COMMITTEE Stu Thompson Fund Manager The Builders Group Eagan, MN *Also serves as Director

Joe La Mantia Partner L&F Distributors McAllen, TX


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CAQH CORE®, the CORE-certification/Endorser Seals and logo are registered trademarks of CAQH® Copyright 2010-2014, Council For Affordable Quality Healthcare®. All rights reserved.

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