Ny Workers Compensation Statutes

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					                      New York State
        Workers’ Compensation Board
Self-Insurance Re-engineering Project

          Presentation to New York Self-Insurers
                                     Albany, NY


                                July 17, 2007
Introductions

New York State Workers’ Compensation
 Board
    •   Mary Beth Woods
    •   Suzanne Aluise
    •   Trisha Gannon
    •   Kathleen Sniffen
    •   Melissa Stefanko
Maximus/Bickmore Risk Services
    • Mark Priven
    • Jim Elledge
                                       2
Agenda

•   Background of the current system
•   Re-engineering project
•   Goals of the new system
•   Work results to date
•   Solutions being considered
•   Description of solutions considered
•   Next steps
•   Questions
                                          3
Background of the Current System

Current system has limitations
  – WCB administrative burdens
       –   Labor and paper intensive
       –   Timing of annual reporting
       –   Subjective reserving procedures
       –   Disputes over individual deposit requirements
       –   Bank/bond company financial integrity
       –   Expiration dates
       –   System limitations for unique circumstances
       –   Lack of transparency


                                                           4
Background of the Current System

Current system has limitations
  – Employer burdens
     • Labor and paper intensive
     • Conflicting reserving practices
     • Financial statement reserves vs. security deposit
       requirements
     • Difficulty in forecasting security deposit calculation
     • Inefficient use of borrowing capacity
     • Rising cost of surety bonds and letters of credit
     • Additional collateral requirements of sureties and
       banks
                                                           5
Background of the Current System

Current system has limitations
  – Financial implications
     • Annual cost of securing $3 billion in deposits
          – Fees
          – Cost of collateral
     •   All single name instruments
     •   Risk of insufficient security (silo approach)
     •   Surety failures
     •   Administrative/self insurance assessment volatility

                                                          6
Re-engineering Project

WCB Issued Request for Proposal
  – Reviewing all four programs
       –   Individual Self Insurance
       –   Group Self Insurance
       –   Disability Benefits
       –   Political Subdivisions
  – Looking at financial solutions
  – Re-engineering to meet those solutions
  – Incorporating best practices and modern
    technology
                                              7
Re-engineering Project

Vendor Selection

• Maximus, Inc.
  – Business Process Improvement Specialists

• Bickmore Risk Services
  – Risk Management and Self-Insurance Consultants

• Thelen Reid Brown Taysman Steiner, LLP
  – Legal Specialists
                                                     8
Re-engineering Project Phases

Phase I – Solutions Phase


    Phase II – Business Process Re-
    engineering


              Phase III – Implementation
                                           9
Phase I: Solutions

• Develop viable and cost-effective alternatives to
  the funding mechanisms currently used to
  guarantee self-insured claims, including security
  deposits, trust funds, and/or excess insurance.
• Consider any creative options, provided they
  guarantee that any claims due to a default will
  be paid.
• Propose solutions that are fair, equitable, and
  cost effective for both the State and the self-
  insured participants.

                                                10
Phase I: Solutions Tasks

•   Review New York State Self-Insurance Program
•   Obtain Stakeholder Input
•   Review Other State’s Program Best Practices
•   Review Other Funding Models (excluding
    workers’ compensation self-insurance)
•   Conduct Self-Insurer Survey
•   Obtain Stakeholder Input
•   Perform Cost Benefit Analysis
•   Propose Viable Alternatives
•   Select Best Solution

                                              11
Phase II: Business Process
Improvements
• Re-engineer the existing self-insurance
  programs incorporating the financial
  solution selected in the first phase.
• Re-engineering will encompass significant
  procedural, organizational, and
  technological changes and will provide a
  solution consisting of streamlined policies
  and procedures with supporting
  technologies and services.
                                           12
Phase II: Business Process
Improvements Tasks
• Document current process
• Develop conceptual design
  – Funding methodology
  – Acceptance criteria
  – Financial reporting/integrity
  – Excess requirements
  – Automation/streamlining
  – Addressing issues/concerns
• Draft rules & regulations
                                    13
Phase III: Implementation

• Build Phase II design (RFP?)
• Establish effective dates
• Finalize regulatory changes




                                 14
Goals of the New System

• Ensure continuation of benefits to injured workers of
  defaulted self-insured employers;
• Ensure self-insurance remains a viable alternative;
• Ensure cost of self-insurance is predictable,
  understandable, and equitably distributed;
• Create a regulatory environment that is efficient and user
  friendly:
   –   Financial qualification
   –   Excess insurance requirements
   –   Annual filing requirements
   –   Active monitoring of self-insurer default risk
• Create work flow efficiencies through streamlined
  processes, technological enhancements and automation.

                                                        15
Phase I Work Status

• Alternative Funding Model Steps
   – Review current methods
   – Input from stakeholders
   – Research other state’s wc self-insurance systems
   – Research other non-wc systems
   – Self-insurer survey
   – Input from self-insurance community
   –   Cost benefit analysis
   –   Propose alternatives
   –   Select best solution
   –   Draft statutes/rules & regulations to support the chosen solution
   –   Re-engineer to accommodate chosen solution
                                                                     16
Phase I Tasks and Findings

• Reviewed current state of regulating self-insurance;
• Examined the following states’ self-insurance programs:
       •Florida                       •Michigan
       •Texas                         •Pennsylvania
       •California                    •North Carolina
       •Minnesota

   – Each state presented best practices to consider:
       •   Creative funding models in California and North Carolina;
       •   Excess insurance alternative in Minnesota;
       •   Annual reporting and security calculation methodology;
       •   Assessments

                                                                       17
Phase I Tasks and Findings

• Examined other funding models in the following
  non self-insurance areas:
       •New York Liquidation Bureau
       •Pension Benefit Guaranty Corporation
       •California Insurance Guaranty Corporation

   – Use of revenue bonds by CIGA to fund a large deficit resulting
     from multiple carrier insolvencies;
   – Use of statutory NPV rates (PBGC)
   – Analysis of credit risk (PBGC)



                                                                 18
Solutions Being Considered
  1. Maintain current approach with
     enhancements;
  2. Implement pooled approach backed by cash
     fund and WCB authority to issue revenue
     bonds;
  3. Implement pooled approach backed by cash
     fund and derivative instruments similar to
     the California Alternative Security Program
     (ASP) and North Carolina’s Association
     Aggregate Security System.
                                             19
Current Method
Diagram of Current System




                            21
Instruments Used by Employers




                                22
Current Method of Arranging Security
Deposits:
• All private self-insured employers are required to
  post security deposit to collateralize their self-
  insured claim obligations.
• Amount of required security deposit is based on
  an annual actuarial calculation.
• Minimum statutory deposit is $624,000.
• Increase in deposit may be required based on
  risk assessment (Dunn & Bradstreet Financial
  Stress Score).
• The WCB allows the use of surety bonds, letters
  of credit, cash, or securities.

                                                 23
Financial Challenges and Risks Under the
Current System
  – Inefficient use of fees paid to obtain security;
  – Inefficient use of borrowing capacity and pledged
    capital;
  – Surety failures;
  – All single name instruments;
  – Difficult to react to employer’s failing financial health;
  – Ongoing administrative burden of managing multiple
    instruments and monitoring individual credit risk;
  – Potential for assessment volatility;
  – Lack of agreement on proper amount of security.


                                                            24
Survey Results

  – Survey sent to 156 active self-insurers;
  – Received responses from 65 employers;
  – Gathered information on cost of security deposits,
    collateral requirements, challenges associated with
    obtaining or renewing deposit, and other data;
  – Data accepted without audit;
  – Cost/benefit analysis assumptions will rely on limited
    survey data and be supplemented by industry or
    market data;
  – Additional survey responses will strengthen
    quantitative analysis and aid in solution identification.

                                                          25
  Survey Results: Security Deposit Cost
  Distribution




• Basis points paid to banks and carriers for letters of credit and
  surety bonds;
• Data limited to survey respondents - 39% response rate (61 of 156);
                                                                    26
Survey Results: Deposit Cost by Rating




•   Ratings Source: Standard & Poor’s Global Ratings Handbook
•   Basis points paid to banks and carriers for letters of credit and surety bonds;
•   Data limited to data provided by survey respondents with published ratings;
•   Further survey responses will improve quantitative analysis.               27
Survey Results: Deposit Cost by Type &
Rating




•   Ratings Source: Standard & Poor’s Global Ratings Handbook
•   Basis points paid to banks and carriers for letters of credit and surety bonds;
•   Data limited to data provided by survey respondents with published ratings;
•   Further survey responses will improve quantitative analysis.               28
Pooled Approach
Pooled Approach: Revenue Bonds




                                 30
Analysis of Alternatives: Limiting Pool
Coverage




•   Ratings Source: Standard & Poor’s Global Ratings Handbook
•   Displays effect of limiting the deposit covered by the pooled portion;
                                                                             31
•   Separate deposit would be required for the uncovered portion.
Key Points on the Revenue Bond Model
  – Employers can be categorized as either participating or
    excluded.
  – Only employers with acceptable credit ratings would be eligible
    to participate.
  – Portfolio would likely be rated upon issuance of revenue bonds;
  – Excluded employers, considered the riskiest credits, may be
    required to post their entire security deposit under the traditional
    method.
  – Large employers participation could be limited to manage
    exposure to credit declines – separate deposit posted for non-
    participating portion.
  – Credit measurement can be monitored frequently;
  – Loss fund contributions could be charged annually to employers
    based on creditworthiness.
  – Program fees could be used to fund existing claim liability of
    prior defaults, to fund the retention layer (future default fund),
    and to cover debt service, if needed.

                                                                    32
Challenges and Risks Under the Revenue
Bond Model
  – Loss fund must be built over time - potential
    for supplemental assessments in the event of
    large default experience in early years;
  – Timing of revenue bond issuance (timely cash
    inflow and interest rate risk);
  – Difficult to obtain replacement security deposit
    for participating employers with mid-year
    credit downgrades (mid-year exclusions)
  – Prior risk could be mitigated by separate
    deposit requirement for large employers.
                                                 33
Pooled Approach: California Type Model




                                         34
Key Points on the CA Type Model
  –   Employers are categorized as either participating or excluded.
  –   Only employers with acceptable credit ratings can participate.
  –   Portfolio of participating employers formally rated annually.
  –   Excluded employers, considered the riskiest credits, must post
      their entire security deposit under the traditional method.
  –   Mix of risk transfer instruments allows for flexibility of coverage
      (i.e. separate instruments for concentrations).
  –   Program fees charged annually to employers based on
      creditworthiness.
  –   Program fees used to pay for arrangement and purchase of risk
      transfer instruments, to fund existing claim liability of prior
      defaults, and to fund the retention layer (future default fund).
  –   Risk transfer instruments must be re-established annually,
      unless longer maturities are negotiated.


                                                                      35
Challenges and Risks Under the CA
Type Model
  – Large retention requires funding of self-funded layer
    over time – potentially leaves the guarantor at risk in
    the event of large defaults of participating employers;
  – Risk transfer instruments must be re-arranged
    annually, unless longer maturities are negotiated;
  – Risk transfer pricing subject to market conditions at
    the time of renewal;
  – Difficult to obtain replacement security deposit for
    participating employers with credit downgrades (i.e.
    mid-year exclusions);
  – Subject to complexities of and changes in derivative
    markets;
  – Depending on structure, derivatives instrument would
    likely only cover defaults that occur very rapidly.

                                                        36
Next Steps

•   Comment period
•   Submit comments to WCB by 8/15/07
•   Cost/benefit analysis
•   Identify chosen solution

• Submit Comments To:
      Kathleen Sniffen
      WCB - Office of Self Insurance
      20 Park Street, Room 202
      Albany, NY 12207
      (518) 408-0312
      Kathleen.Sniffen@wcb.state.ny.us

                                         37
Questions?


 Additional copies of this presentation will be
 made available on the WCB website.
 www.wcb.state.ny.us

				
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