www.sddt.com/insurancetrends08 Thursday, October 2, 2008 / Vol. 123, No. 198
Staying on top of employment law: Taking
care of employees while avoiding lawsuits
By MARC PANNIER and LISA NELSON into the human resource director’s office ment laws and regulations need to be Labor pushes for fee disclosures
Barney & Barney LLC because said employee had lodged a for- understood by an employer, implement- The Department of Labor revealed
Imagine this: A manager at a nation- mal complaint against the manager ed and communicated to employees. proposed rules meant to lay out fees and
wide health care organization asks one because she felt pressured to participate So what’s been happening lately with expenses tacked onto 401(k) costs. If
of her employees to help get ready for a in a birthday celebration, and doing so employment law? Below is a rundown of adopted, these regulations would be
fellow employee’s birthday by decorat- ran counter to her religious beliefs. hot topics that have been addressed by effective for plan years beginning on or
ing her cubicle with balloons. The man- While this may seem like an extreme the courts and legislature that could after Jan. 1, 2009.
ager, knowing some employees don’t example, lawsuits are filed all the time affect employment law in the coming The proposed rules would require
celebrate birthdays or holidays due to against employers over scenarios such year. companies offering 401(k) to disclose
religious reasons, specifically tells the as this. to participants the investment options
employee, “You don’t have to do this, From administering benefits to mak- Flexible rules on meal breaks available, fee and expense information,
only do it if you want to,” to which the ing sure your employees take lunch On July 23, the 4th District Court of past performance data, comparable
employee responds, “No, it’s fine, I don’t breaks, staying on top of the ever-chang- Appeals in California found that benchmark returns and a Web site
mind doing it at all.” ing landscape of employment law is a employers aren’t required to ensure address. Retirement plan providers
A few days later, the manager is called challenge. Each year, changing employ- employees take their meal and rest would be required to describe the fees
breaks (see Brinker Restaurant Corp.). and expenses charged to participants
California motorists soon to have Rather, employers are only required to
make available such breaks. Appeal of
this decision is likely.
for plan administrative services, as well
as how the fees are allocated to the
individual accounts. Such disclosures
Pursuant to California law, employees would be required when the participant
pay-as-you-drive insurance option are entitled to at least one half-hour
meal period for every five hours worked,
becomes eligible to participate in the
plan, and then annually thereafter. In
By CAMERON LEIGH JAMES According to a July study released and a 10-minute rest period for every
Special to the Daily Transcript by Washington, D.C.-based Brookings four hours worked. See Employment law on 6
In 1988, Proposition 103’s sweeping Institution, 64 percent of California
insurance reforms required insurance
companies use actual miles driven as
the second mandatory factor to set
households would have lower premi-
ums under PAYD and save an average
of $276 per vehicle annually. The
Could your organization survive the
rates. After nearly two decades of
appeals, California motorists will
finally have the option of choosing a
study indicates low-wage earners, who
typically drive less, would benefit
more; however, even in higher income
disclosure of private information?
pay-as-you-drive (PAYD) plan under groups, a majority of households The catastrophic cost of ferred among multiple organizations,
new regulations proposed by would save money. mitigating the risk of data loss and an
California Insurance Commissioner Environmental groups also support information breach organization’s cyber liability is para-
Steve Poizner in July. the proposed regulations. The mount.
PAYD insurance allows motorists to Environmental Defense Fund esti- By ARTURO PEREZ-REYES and For a long time, the government
link their premium to the actual num- mates that if 30 percent of drivers par- BILL BUCHANAN looked the other way despite banking
ber of miles they drive, which would ticipate, the state could reduce CO2 Barney & Barney LLC and health care-related privacy-pro-
be verified through odometer read- emissions by 55 million tons between Most organizations promise to care tection laws. Recently, however, gov-
ings, maintenance records or the use 2009 and 2020, the equivalent of tak- for their customers, patients and part- ernment has stepped up enforcement.
of a technological device. ing 10 million cars off the road. The ners; however, evidence suggests oth- Earlier this year, the U.S. Department
Harvey Rosenfield, author of California Air Resources Board has erwise when it comes to the unautho- of Health and Human Services
Proposition 103 and founder of recommended the adoption of PAYD rized disclosure of confidential infor- imposed its first medical-privacy fine
Consumer Watchdog, the Santa as one way to save fuel and meet emis- mation. under the Health Insurance
Monica, Calif.-based insurance advo- sion reduction targets. Businesses in all industries that Portability and Accountability Act
cacy group, said the regulations “will “I am thrilled to pave the way for aggregate and maintain third-party (HIPAA) when it hit Providence
lower auto insurance premiums, par- California drivers to obtain insurance data are particular targets of informa- Health & Services, a Seattle-based
ticularly when the high cost of gaso- that is more environmentally friendly tion theft and network security not-for-profit health system, with its
line is encouraging people to drive breaches. In the health care industry,
less. See Motorists on 7 where patient data is regularly trans- See Information breach on 4
2 THURSDAY, OCTOBER 2, 2008 • Insurance Trends • THE DAILY TRANSCRIPT
401(k) fee disclosure is coming — are you prepared?
408(b)(2) goes plan fiduciaries don’t fully under- stand the direct fees associated with by a fiduciary; and
stand. the plan, but if an indirect fee isn’t dis- • procedures in place to address any
into effect Jan. 1 This is a problem because according closed, how can the plan fiduciary potential conflicts of interest that may
to the Employee Retirement Income understand and thus make a prudent arise.
By BILL PEARTREE Security Act (ERISA), a plan fiduciary decision whether the fee is reason- One requirement of the proposed
Barney & Barney LLC is obligated to understand this com- able? regulations is that in order to comply
The good plicated matrix and ensure that only Much of the aim of 408(b)(2) is to with ERISA reporting and disclosure
In the retirement world of today, the reasonable compensation is paid for require disclosure of both the direct, requirements, service providers must
various plan designs, adviser classifi- services related to the plan. and especially the indirect, costs asso- disclose compensation or related
cations, types of providers, products This is compounded further when ciated with administering certain information concerning the contract
and compensation structures come the issue of direct fees versus indirect types of qualified plans. A plan fiduci- that is requested by a plan fiduciary or
together to create a complex matrix of fees is taken into consideration. A ary must have full and correct infor- plan administrator. If a plan fiduciary
possible fee arrangements that many plan fiduciary may see and under- mation regarding plan fees and com- asks, the service provider must pro-
pensation paid to make a reasonable vide the information. This kind of
decision. “catch-all” provision always seems to
The proposed regulation applies to get used in unique ways as people
fees and compensation in conjunction become more familiar with it, so the
with: future should be interesting.
• fiduciary service providers; Finally, all the information, con-
• providers of banking, consulting, tracts, disclosures, fees, compensation
custodial, insurance, investment advi- and anything else requested within
sory or management, recordkeeping, the scope of 408(b)(2) must be in lan-
securities brokerage or third party guage easily understood by the aver-
administration services; or age plan participant. Another simple
• providers who receive indirect concept that is often unique in its
compensation for accounting, actuari- application.
al, appraisal, auditing, legal or valua-
tion services. The (possible) bad
Among other things, the proposed Another part of the proposed regu-
disclosure requirements include that lations deals with getting investment
the contract must be written and most option fee disclosure information not
service providers must disclose all just to plan fiduciaries, but to plan
specific services to be performed, all participants. Starting Jan. 1, partici-
specific compensation that will be pants must also get the full fee disclo-
received for each specific service sure on their investment options just
respectively and show if the compen- like plan fiduciaries.
sation is received directly or indirectly. This topic has raised enough con-
Service providers must also disclose troversy that one of the writers for
all conflicts of interest to include: PlanSponsor, Nevin Adams, conduct-
• interest the service provider has in ed his own small survey of
transactions entered into by the plan PlanSponsor readers in the
pursuant to the contract; September issue.
• material relationships with other The most obvious, and perhaps
parties that may create a conflict of foretelling, result of the survey was
interest; that nearly half the respondents (45.1
• compensation the service provider percent) hadn’t even read the pro-
can adjust or change without approval posed regulations. A fact that resem-
bles the overriding concern raised by
many: Making more information
The Daily available isn’t always a good thing.
Overwhelmingly, the responses
Transcript were in the less-than-positive to
downright negative direction. Many
Founded April 3, 1886
seemed to feel that making all this
ROBERT L. LOOMIS, Publisher
new fee disclosure available to partici-
pants will only confuse them more,
George Chamberlin, creating more “paralysis by analysis”
Joseph Guerin, Editor
than is already the bane of the retire-
Richard Spaulding, Real Estate Editor ment plan industry.
Jennifer Chung Klam, It is well known that currently, only
Special Sections Editor
a small percentage of plan partici-
Tracye Grimes, Web Editor
pants use the information available to
Ellen C. Revelle, them and many are confused to the
point of inaction. Will making more
San Diego Daily Transcript information available help or hurt the
P.O. Box 85469 participants who aren’t using the
San Diego, CA 92186–5469 information currently available to
Web site: www.sddt.com
See Fee disclosure on 7
THURSDAY, OCTOBER 2, 2008 • Insurance Trends • THE DAILY TRANSCRIPT 3
The insurance you’re most likely to need
By MARK ERWIN of your needing some form of assisted they provide. Because of this, facilities in ery should you run out of benefits and
Erwin Financial living that will be paid for out of pocket, premium locations with a high standard have to pay out of pocket.
Paying for insurance is something we by the state, or by long-term care insur- of care find Medi-Cal patients are subsi- Having a professional advocate to
do to transfer risk from ourselves to an ance. According to The California dized by non-Medi-Cal patients. Faced ensure you are getting the most for your
insurance company. The insurance com- Partnership for Long Term Care, the with the choice of lowering the overall money is perhaps the most valuable
pany collects premiums from many and approximate average cost for long-term standard of care and accepting Medi- aspect of a California Partnership policy.
expects to pay claims to a few, making a care in San Diego in 2005 was about Cal patients or having a higher standard At a time when you are not capable of
profit in the process. We pay to have the $220 a day, or $80,300 a year. The rate of care and not accepting Medi-Cal looking out for yourself and your chil-
peace of mind that comes from transfer- of inflation for long-term care has been patients, many opt for the latter and dren are juggling their lives while help-
ring the risk of loss to the insurance about 5.9 percent annually. would rather have open beds than take ing you, this is extraordinarily valuable.
company. Long-term care insurance could be on Medi-Cal patients, whose reimburse- The price stability comes from all the
We have homeowners insurance in renamed “stay out of nursing home ment doesn’t cover their costs. California Long Term Care policies
case of a fire. The odds of a fire in your insurance.” Many people don’t realize In California, we have the Partnership being pooled together so that any
home are about 1 in 1,200. that it can be more expensive to stay at for Long Term Care. Companies that are requests for future rate increases are
We have auto insurance in case of an home with some assistance than moving part of the California Partnership for based on the entire pool of partnership
accident. The risk of a major loss due to into an assisted living facility. Medicare Long Term Care are required to provide policies as well as having rate caps in
an auto accident is about 1 in 240. does not pay for long-term care, custodi- additional benefits for policy holders at place.
The odds of needing some form of al care or home health care. Medi-Cal is no additional cost. The three most The asset protection from a California
long-term care if we live to age 75 or a welfare program for those with little or important advantages of buying a Partnership policy is worth close consid-
older, which more and more of us are, is no assets. It does not pay for custodial California partnership policy are: asset eration. Imagine two families with the
3 in 5, or about a 60 percent chance. The care or home health care. It pays for care protection, the services of an advocate same net worth of $1 million. Both fam-
statistics are clear: long-term care insur- in nursing homes that accept Medi-Cal. not associated with an insurance com- ilies bought policies from the same com-
ance planning is an important part of The funds received by nursing homes pany or the state, and rate stability. As pany with the same cost and same bene-
estate planning and should be consid- from Medi-Cal are barely enough to pay long as you live in the state of California, fits. One bought California partnership
ered in every family’s financial plan. for the care in many cases. if you were to buy a long-term care poli- policies and the other did not. Thirty
Many of those who have long-term Medi-Cal reimbursement continues cy and use up all of its benefits, you years later, one person in each family
care insurance have first-hand experi- to be cut from the state budget while it would have asset protection from Medi- utilized the insurance after their spous-
ence with parents who needed it and remains among the largest and fastest Cal recovering costs. For every dollar es passed away. The cost of care for each
didn’t have it or, in some cases had it and growing parts of the state budget. The paid of long-term care benefit, you person exceeded the benefits by two
saw the benefits. Not so many years ago, economic result: Many nursing homes receive one dollar of asset protection. years. The family with the California
people retired at 65 and died in six or that accept Medi-Cal are reducing the Inflating an annual 2005 benefit of partnership policy inherited the entire
seven years. The 100-plus age group is number of beds for Medi-Cal patients. $80,300 by 5 percent for 30 years $1 million dollars because more than $1
now the largest growing age group in the Many of the best facilities do not accept amounts to $358,759 a year. For three million in long-term care benefits were
United States. The healthier you are, the Medi-Cal because reimbursement does years of care you would exclude nearly
longer you live, the greater the chances not cover their overhead for the care $1.08 million from Medi-Cal cost recov- See Insurance on 4
The changing landscape of employee benefits
How consumerism-driven plans can be implemented successfully
By KEVIN MUNKHOLM with changes to employee benefit pro- health care utilization now and into the results in actions that may bring health
Barney & Barney LLC grams. future. care costs down:
“Even the best vision in the world will Increasingly, employers are seeing the To do it right, senior management • There is a reduction in needless
not make a difference unless the leader financial connection between employee needs to understand and embrace the medical care.
can achieve the buy-in and motivation health and their bottom line, while initiative. • People with chronic illness are more
of the rest of the organization to imple- employees are also beginning to recog- Let’s start with understanding what likely to follow treatment regimens.
ment it,” Jay Conger wrote in his nize the link between their personal consumer health care is. • Healthy people have the incentive to
“Leader’s Change Handbook.” While health and their health care costs. The concept of consumer-driven stay healthy and utilize their annual pre-
this could be said of any industry, it cer- Awareness and vision are just the health care generally combines a high ventive check-up benefit.
tainly rings true in the employee bene- beginning of the solution. How do we deductible health plan with an ade- Consumer-driven health care has
fits industry, where, considering the ris- get the buy-in and motivation needed to quately funded consumer spending shown a lot of promise for companies
ing costs of health care, real change is make this vision a reality? account for employees and families to willing to take the step. Companies that
needed. Gaining awareness on the part of spend on health care services as neces- have implemented a consumer-driven
Health care cost increases are not just employers and employees presents an sary. These accounts are known as health care strategy have seen their
a Southern California phenomena. opportunity in employee benefits pro- health reimbursement arrangements, or medical cost increases reduced to the
Throughout the United States, employ- grams to help combat skyrocketing costs health savings accounts. They have low single digits on a percentage basis
ers are challenged by medical insurance and make possible affordable care in the some differences, but both allow unused compared with their prior 9 percent to
rates rising at more than twice the rate future. To that end, there is a way to funds to roll over from year to year — 12 percent medical claims trend.
of inflation. align both companies and employees by helping employees save for future However, despite these figures, con-
The good news is that there is a engaging them in the costs and spend- expenses. Done right, preventive servic- sumer-driven plans have not been
“vision” to significantly lower employer ing associated with the services they es are covered at 100 percent. Done widely adopted by organizations in
health care costs and improve employee receive. right, these plans are not a cost shift of Southern California. We live in an area
health. This vision, a change afoot in the The approach is consumer-driven expenses to employees. Done right, dominated by HMOs and their familiar
industry, is helping employees look at health care done right, combined with these plans create health care cost co-pays. While most companies have
their personal health and health care personal and effective wellness initia- awareness within employees and not adopted consumerism, they have
purchasing differently. It’s about real, tives. Combined correctly, this approach empower them to make financially pru- employed strategies that increase
resonate consumer engagement. Yes, it’s provides meaningful financial incen- dent decisions about how and where
about behavior change — made possible tives to employees, leading to lower they seek services. This awareness See Benefits on 6
4 THURSDAY, OCTOBER 2, 2008 • Insurance Trends • THE DAILY TRANSCRIPT
Continued from Page 1 and — adding insult to injury — regu- the recent breach at TJX led 300 that do not meet recognized standards
maximum penalty of $100,000 for latory fines. banks to cancel and reissue credit cannot purchase insurance to cover
losing unencrypted patient records Notification: In most states, busi- cards. information-security breaches. Other
five times between 2005 and 2006. nesses will have to pay to notify vic- Other costs: The largest costs are important standards include HIPAA,
Health care seems to be a particu- tims, via the media, by mail, e-mail the most difficult to calculate: lost COBIT, PCI/DSS and the recently
larly vulnerable industry group. and other methods. These expenses business, lost opportunities, defection approved ISF standard.
The most vulnerable, however, are are the smallest part of a larger cate- of customers, damage to a brand, lost • Explicitly specify in vendor con-
small- to medium-sized businesses gory of first-response costs that will management time, lost strategic tracts who is liable in the event an
and home computers. Their machines include forensic analysis and crisis- focus, tactical distraction and the information breach occurs. Because
lack specialized defenses or dedicated management expenses. Businesses implementation of costly new security many companies are in an extended
security personnel. Hence, they do not will need to find and close breached infrastructure required by regulators. value chain, it is often unclear who has
remain intact for long. The SANS systems. They will also have to defend The Ponemon Institute conducts an ultimate responsibility if a breach
Internet Security Center has found themselves immediately and publicly annual data-breach-cost survey that occurs. With surprising regularity,
that on average, an unprotected com- when dragged before the bar of shows these lost business costs con- vendors will convince companies to
puter is penetrated within an hour of national opinion by regulators, media tribute $128 to the average $198 cost sign contracts to transfer that risk to
being connected to the Internet. Even and plaintiff ’s counsel. of a lost record. their partners. Companies would be
well-defended computers are routine- Credit-report monitoring: Increas- Regulatory fines: On top of it all, well served to review their vendor
ly compromised via Web site scripting, ingly, companies that breach data are businesses often face fines and penal- contracts to assess their potential
“free software,” e-mail attachments, either volunteering or are being ties. For example, after consumer- exposure.
P2P sharing, wireless networks and ordered by courts to pay victims for data broker ChoicePoint compro- • Ensure that all of the costs of a
“social-engineering” (artful imperson- credit-report monitoring from one to mised 163,000 customers, the Federal security breach are covered by insur-
ation). three years. The expense can quickly Trade Commission made it pay $10 ance. Many organizations have weak
become astronomical. When individu- million in fines. The FTC also com- liability protection for privacy breach-
So what’s to be done? als buy this service, it costs $10 to $30 pelled the company to remediate its es and next to none for information
Organizations large and small must per month. When businesses buy it in systems, costing an additional $5 mil- security liabilities or the attending
recognize that the game has changed volume blocks of 100,000 licenses, it lion. first-party expenses of a breach-like
fundamentally. Any breach of confi- costs $32 per individual per year. notification, monitoring and fines.
dential information will produce Shareholder losses: A University of Changing business practices Businesses can do better. Insurance
enormous costs and liabilities as well Virginia study found publicly traded To minimize the liability, organiza- products exist today that cover, not
as fines and customer churn. Thus, companies that disclose an informa- tions need to continually implement only legal costs, awards and settle-
organizations need to review policies tion breach often see an immediate the best technology solutions avail- ments, but also pay for notification
and practices to strengthen informa- share-price reduction of 5 percent to able. At the same time, they need to and remediation as well as business
tion security and eliminate any chance 10 percent. Although the hit eased update their business practices to interruption, ransom and crime. Few
of inadvertent error or exposure. over time, a drop of 5 percent or more reflect the new environment in which insurance brokers can currently evalu-
Finally, since no defense is perfect, typically triggers shareholder lawsuits a disclosure of consumer information ate gaps in traditional programs,
prudence dictates that firms minimize — an expense that continues long could have catastrophic implications. understand and place new policies, or
the public-relation and financial fall- after the stock price has recovered. In By focusing on the following three help with risk evaluation, quantifica-
out of a breach by developing crisis- one such action, Oxford Health Plans areas, organizations can go a long way tion or management. Do not settle for
management plans and buying spe- lost $280 million and ended up being to protect themselves and the public: less.
cialized insurance. acquired. • Implement procedures that meet Particularly for small- to mid-tier
Class-action suits: In SEC filings, recognized security standards such as organizations, which do not have the
The cost of security breaches TJX, parent of TJ Maxx, Marshalls the international standard ISO 27002 deep pockets of the Fortune 1000, the
Security breaches are costly because and HomeGoods, reported class- (also known as ISO 17799). This stan- price of inaction could have dire con-
they produce business interruptions, action settlements of $130 million. dard underlies many others and is sequences. The time to act is now.
require forensic discovery, lead to sub- These payments cost shareholders 28 used by insurers to underwrite the
stantial remedies and often result in cents per share, or 10 times manage- Fortune 1000. Many insurers will pay Perez-Reyes and Buchanan work
lost secrets or tarnished reputations. ment’s first estimates. Despite these to have this or another type of compli- for Barney & Barney LLC.
However, the cost of a breach has outlays, the total losses will be higher. ance audit done because companies Source Code: 20081002crc
grown exponentially over the past few The firm has had to pay for customer
years for two reasons.
First, federal regulations now hold
notification, forensic analysis, remedi-
ation, 300 banking-related suits,
directors and officers personally security upgrades and the lifetime Continued from Page 3 agents who have met the additional
accountable for breaches of medical or value of lost customers. Forrester paid, and thus protected from Medi-Cal continuing education requirements by
financial privacy, leading to fines and Research estimates these losses at recovery. The other family inherited the state of California to sell California
lawsuits. Second, 47 states now emu- $1.3 billion; the Ponemon Institute about $282,482 because Medi-Cal Partnership Policies.
late California’s law that mandates puts them at $1 billion. recovered two years cost of $717,518. You wouldn’t be without fire insur-
potential victims be warned when Credit-card reimbursement: Over The California Partnership policy had ance even though there is only a 1 in
confidential information has been dis- the past few years, business-to-busi- asset protection and the non-partner- 1,200 chance of your home burning
closed. The goal is to notify victims so ness lawsuits among banks and retail- ship policy did not. The premiums were down, or auto insurance when there is
that they might take precautions ers have become one of the most exactly the same. only a 1 in 240 chance of being in a
against identify theft and fraud. expensive components of data breach- With increasing longevity and a 60 major accident. Long-term care insur-
As a practical matter, both federal es. Financial services companies have percent chance of needing some form ance for many families is an integral
and state laws will be triggered in the been suing to recoup the expense of of assisted living if you live past age 75, aspect of estate planning and should be
event of a breach. In addition, busi- re-issuing credit cards, which cost $10 having long-term care insurance included in most families’ financial
nesses will lose money to the seven to $25 per card. For example, in 2005, makes sense. Buying a California plans.
horses of the cyber apocalypse: notifi- BJ’s Wholesale Club, big-box retailer, Partnership for Long Term Care policy
cation, monitoring, share-price loss, said in its SEC filings that it had paid is generally the best option for most Erwin, ChFC, is president of Erwin
class-action lawsuits, reimbursement $25 million to 22 banks that canceled people. These policies need to be Financial in Carmel Valley.
of banks, lost time and reputation, and re-issued credit cards. Similarly, acquired from licensed insurance Source Code: 20081002crf
THURSDAY, OCTOBER 2, 2008 • Insurance Trends • THE DAILY TRANSCRIPT 5
Close-up: Andrew Barile
Industry veteran, outsourcing consultant stays one step ahead
By PADMA NAGAPPAN received a fellowship to Lloyds of
Special to the Daily Transcript London, to learn about their underwrit-
Andrew Barile moved to Rancho ing. This was an enormous awakening
Santa Fe from the Big Apple in 1997, but for me, when I realized that there was
has retained his New York accent, his far more to insurance than just home-
cache of entertaining insider stories and owners’ policies,” Barile said.
an irreverent attitude that springs from This opportunity opened up a whole
having been in the insurance industry new world for Barile, who learned about
since 1960, traveling in the same circles international insurance issues, terror-
as the movers and shakers and advising ism, political risk, financial guarantees
them on key issues. and more. Following this stint, he was
He has two consulting companies — hired by the Swiss Reinsurance Co.,
Fairbanks Consulting Group focuses on which sent him to Zurich and then to
consulting services for business process Paris.
outsourcing (BPO), both for insurance He was still under 30 when Howden
carriers here in the United States and Reinsurance Co., which was Lloyds’
for outsourcing vendors in Asia; largest broker, recruited him as presi-
Andrew Barile Consulting offers expert- dent and made him a director. The com-
ise to law firms and insurance carriers pany asked him to set up its U.S. opera-
that retain Barile as a “hired gun” for tions.
insurance-related court cases. “They provided the capital and I pro-
“I was born in the Bronx, right next to vided the intellectual capital,” Barile
Colin Powell, but we never met when we explained.
were young,” said Barile, who began his He built up the company, but five Photo: J. Kat Woronowicz
career in the insurance industry at the years later received a severe blow when Andrew Barile, founder of Fairbanks Consulting Group and Andrew Barile
age of 17, as an underwriter for the top brass told him to sell it and run Consulting, he said he believes the insurance industry is heading in the direc -
Commercial Union Insurance, writing another company they were looking to tion of completely outsourced firms.
insurance for clients such as Brinks, the start.
armored truck company. “That’s when I decided to start my idea to create a Bermuda reinsurance From the policy holders’ stand point,
He went to night school and received own company, because you can break company. Bermuda offers the opportunity to
his B.B.A. in insurance and later an your back building up a firm and then For the insurance carriers, Bermuda reduce insurance costs and provides
M.B.A. in international finance from the next morning the board decides to provides a tax haven, a place to raise broader coverage, according to Barile.
New York University, where he was sell out. You have to own your own firm capital, accumulate income and defer He and his partners did a public offer-
taught by the likes of management guru if you want control,” Barile said. taxes. Many real estate developers and ing of the very first Bermuda reinsur-
Peter Drucker. With investment support from the big corporations have captive insurance ance company, ANECO, which would
“Back then, to make more money, I former general counsel of CV Starr & companies that specialize in covering help these captive companies comply
moved every two to three years from one Co., Barile started a reinsurance broker- the risks of their non-insurance parent with IRS requirements to insure clients
insurance company to another. Then I age firm in 1977. A year later, he got the companies. other than their parent companies.
“The prospectus was worth $6 but
the information in the prospectus was
Work wellness: A real solution to mitigate increasing costs worth $250. As Warren Buffet said,
ideas are worth money, so don’t be too
By CHUCK COTTER If the desire is simply to help employ- play a significant role in the mission of free with them,” said Barile, explain-
Barney & Barney LLC ees become more aware of health issues controlling health care costs. ing how new the concept was back
For the last five years, corporate well- and any health concerns they may have, From the get-go, we saw two big prob- then. Today, with experience, he
ness has come to mean a host of differ- then the voluntary, event-based activi- lems when employers attempted to knows he should have placed a higher
ent things. For some, it’s an article about ties described above may accomplish accomplish this result. value on it.
sunscreen in the company newsletter. To this goal. 1. Human resource professionals, “So we showed everybody how to start
others, it means offering employees gym However, if you’re seeking a wellness while having the desire to run a wellness a Bermuda reinsurance company. Then
memberships at a discount. While to program as a tool to manage rising program, often do not have the experi- the smart people take your idea and
others still, it is a group of employees health care costs, such passive programs ence, expertise, or, most important, time improve on it. Today, a lot of companies
that get together on a regular basis to will fall short in achieving this goal. to implement one. In turn, many pro- have utilized the information in that
walk around the parking lot at lunch. For wellness to spawn real change grams are constantly in a start or stop prospectus to build some of the biggest
While each of these things is good, that could result in lowered health care mode. A company will have a big kickoff, reinsurance companies. Bermuda has
none of them in and of themselves will costs, it must involve the following com- but six months later, no one remembers become (a mecca) for reinsurance com-
result in changing the risk profile of an ponents: it. panies — there are over a thousand
employee group or doing anything to • Executive buy-in and support We also see many employers buying there,” Barile said.
effectively lower the cost of rising health • An active wellness committee programs from venders only to see 5 He parted ways with this company
care insurance. • Incentives percent to 10 percent participation. In within a year, when his investors decid-
If you’re a human resource profes- • Consistent, well-developed commu- these cases, it is not that the program ed to buy him out, and moved on to
sional who has implemented a corporate nication itself was not of value, but the absence of working for insurance agencies.
wellness program or is thinking of doing • Accountability any infrastructure to communicate, pro- He moved to San Diego in 1997 to
so, there are two questions that must be • Measurable return on investment mote and successfully promote change consult for the Arrowhead General
answered: Why is your company engag- Years ago, Barney & Barney set out to within the organization. We caution Insurance Agency, which retained him
ing in a wellness program? What is to be build a different model of wellness, one employers against spending significant as a behind-the-scenes consultant. The
accomplished by the implementation of that would not only assist employees in
a program? living healthier, but one that would also See Work wellness on 7 See Barile on 6
6 THURSDAY, OCTOBER 2, 2008 • Insurance Trends • THE DAILY TRANSCRIPT
Continued from Page 1 in military service. The HEART Act AB 2716 would have granted employ- from $5.85 to $6.55 per hour effective
addition, a quarterly accounting of builds upon the Uniformed Services ees of California small businesses up to July 24, 2008. The Fair Minimum Wage
actual dollar amounts charged to the Employment and Re-employment five days of paid sick leave annually, and Act of 2007 provides for phased-in
accounts must be disclosed by the plan Rights Act (USERRA). nine days annually for employees of increases ultimately reaching $7.25 per
fiduciaries. Effective June 17, 2008, cafeteria large businesses. Small businesses suc- hour effective July 24, 2009.
plans allow reservists called to active cessfully fought against the bill. Note that this increase in the federal
Reporting requirements increased duty to receive distribution of unused This issue may be raised on the feder- minimum wage will not affect the wages
Sponsors of 403(b) plans have only flexible spending account (FSA) funds al level, as both presidential candidates of California employees, who are enti-
been required to complete a limited to prevent the “use it or lose it” rule from have weighed in on the matter. tled to a minimum wage of $8 per hour.
number of line items on the annual form forcing the reservist to forfeit his or her
5500. But, as of Jan. 1, 2009, 403(b) FSA funds. This rule is permissive but Medical leave coverage for Labor offers ‘elaw’ assistance
plan sponsors have enhanced reporting not required. This distribution must be college students may be extended The Department of Labor (DOL) has
and audit requirements. a “qualified reservist distribution”: On July 30, 2008, the U.S. House enacted a new “elaw” (Employment Law
403(b) plans for churches, schools, • an individual who is a member of a approved bill HR 2851 that would allow Advisor) interactive site to assist
hospitals or other nonprofit organiza- military service unit called to active duty college students to continue their med- employers with federal recordkeeping,
tion will be required to operate in accor- for a period in excess of 179 days or for ical leave on the their parent’s health reporting and notice requirements. The
dance with a written plan document an indefinite period; and insurance policies. DOL’s elaw advisers can be found on the
containing all material terms and condi- • distribution occurs no later than the Many health insurers allow children Web at www.dol.gov/elaws/firststep/.
tions for eligibility, benefits, limitations, end of the plan year. of covered parents to receive coverage Are you ready for changes in employ-
contracts available under the plan, and Effective Jan. 1, 2009, a tax-qualified under their parents’ policies until age 25 ment law in 2009? A good employee
the time and form under which benefits plan may permit a participating active if they remain enrolled in college. benefits insurance adviser can assist you
are distributed. military duty person for more than 30 However, there is no current federal reg- with understanding what laws you need
Additionally, 403(b) plans must file days to receive distribution of elective ulation requiring this practice. to implement and communicate to your
the full form 5500 return. If the plan deferrals. The right to deferrals will be If this bill were to pass the Senate and employees. With your broker as your
also has 100 or more eligible partici- suspended for six months following dis- become law, college students would be partner, you can adhere to the employ-
pants, it must also comply with the form tribution. able to continue receiving medical cov- ment laws that help keep your company
5500 annual audit requirements. erage under their parents’ policy for one protected.
Mandated paid sick leave too costly year while on medical leave from col-
Enhanced benefits for military On Aug. 7, 2008, the California bill lege. Pannier is a senior client executive
The Heroes Earnings and Assistance that passed the House vote and threat- and Nelson is the director of regulato-
and Relief Tax Act of 2008 (HEART ened to mandate paid sick leave if it Federal minimum wage increases ry affairs for Barney & Barney LLC.
Act) provides enhanced benefits to those passed the Senate was killed. The federal minimum wage increased Source Code: 20081002cra
Continued from Page 3 cate about your consumerism plan. Continued from Page 5 comes up, which of these will out-
deductibles and co-pays with little 4. Real behavior change: How to build company sold nearly a billion dollars in source and which (areas will the ven-
effect on the underlying causes of rising consumers once you have a plan in premiums before it was sold to a private dor serve) — claims or billing or cus-
expenses. As a result, employees who place. equity firm. tomer service,” Barile said.
are paying more each year out of pock- Integral to the success of the In 2001, he formed Andrew Barile Speaking on industry trends, he said
et for their insurance are quickly losing Consumerism Readiness Initiative has Consulting and appeared in court as an he thinks the industry will grow much
sight of why medical insurance is called been the participation of nationally rec- insurance expert for his clients. Finding faster, thanks to better technology. He
a “benefit.” ognized consumerism expert John him through his Web site, outsourcing also believes the industry is heading in
Because the notion of changing from Young from CIGNA health care. Having companies in India who wanted to offer the direction of completely outsourced
something familiar to this new vision worked with consumer-driven plans for BPO services for insurers began calling firms.
can be overwhelming, advisers should more than a decade, he knows what him. This led him to form Fairbanks “I sit on the board of a New York com-
guide their clients through this process works and what doesn’t. Together, we Consulting Group as a strategic firm pany that has outsourced everything —
every step of way. It is not enough to designed a curriculum to educate and that helps outsourcing vendors identify from selling the policies to writing them,
introduce and then hand-off the imple- engage clients on the practices and target companies here, and domestic as well as billing and other functions.
mentation of this solution to the strategies to mitigate escalating costs insurance carriers to find vendors Clients who think out of the box like this
employer-client. An employee benefits and instill a comfort level when imple- abroad. are usually very young entrepreneurs,”
specialist needs to educate employers menting these plans. Services include educating offshore he said.
and assist with a successful implemen- The result has been that clients have vendors and bringing them up to speed Barile is frequently called upon for
tation plan. gained enough knowledge to feel com- with how the insurance industry works. input by the press for insurance-related
As employee benefits specialists, fortable implementing a consumer- Barile did not disclose client names, cit- issues. He writes for industry Web sites
Barney & Barney designed the driven plan when it makes sense for ing the nondisclosure agreements he and publications about the intricacies of
Consumerism Readiness Initiative to their organization. has with both vendors and carriers. complex issues. With a lifetime of
properly prepare clients to implement a Now, the vision is in sight with the Vendors from Australia, China and knowledge to share, he is interested in
consumer-driven plan, including a sem- collective efforts of employees to make even Dubai have approached him for teaching in San Diego.
inar series that takes clients through the better choices around not only their help. Consulting for both sides, Barile is “I’ve tried to teach here, I’ve always
value proposition of consumerism and health care, but how they live their lives able to see the deficiencies in the system been interested, but nobody retained
breaking down the four key program every day. and offer strategies to correct course. me,” he said. The reason, he jokingly
components: “The weakest part of the vendor’s speculates, may be that he’s too impa-
1. What is consumerism; types of con- Munkholm specializes in employee system is that they don’t have a budget tient to deal with the preliminary vet-
sumer-driven plans; how they work. benefits solutions at Barney & Barney for marketing and they underestimate ting process.
2. How to design a consumer-driven LLC, one of the largest and oldest risk the magnitude of our industry.
plan for your organization and employ- management and employee benefits California alone has a thousand insur- Nagappan is a San Diego-based
ees. insurance brokerages in California. ance companies and over 15,000 freelance business writer.
3. How to implement and communi- Source Code: 20081002crg insurance agencies. But the question Source Code: 20081002crd
THURSDAY, OCTOBER 2, 2008 • Insurance Trends • THE DAILY TRANSCRIPT 7
Continued from Page 1 ing safety record, miles driven annual- Spring. company supports the proposed regu-
and more accurately reflects driving ly and years of driving experience. Progressive Casualty Insurance Co. lations if mileage-based rates are an
habits,” said Commissioner Poizner. Insurers may consider 16 additional is already using a device to collect option and not mandatory for cus-
“As a strong advocate of healthy mar- factors; however, quality of miles driv- characteristic data and set rates for its tomers.
ket competition and a healthy envi- en is not one of them. MyRate insurance plan in seven “I don’t think we’re very excited
ronment, I am especially pleased to Some insurers, including the Auto states. Progressive’s “behavior-based” about an electronic device,” DeMarco
encourage this kind of innovation and Club Enterprise Insurance Group plan is designed primarily for low-risk said. “It could be that annual verifica-
additional options for consumers.” (AAA) and State Farm Mutual Auto drivers. Company spokeswoman Leah tion seems to be a better approach.
Thirty-four states offer various Insurance Co., two of California’s five Knapp said Progressive is studying We’re more inclined to go that way.”
forms of mileage-based insurance, as biggest auto insurance providers, are California’s new regulations. The public has 45 days to comment
does Canada, Japan and parts of pushing for technological devices that “From our experience, mileage by on the new regulations and a hearing
Europe. GMAC Insurance Group , would allow them to collect mileage itself is a moderate predictor of risk. has been scheduled for October.
which runs a mileage-based plan characteristics including time of day, But how you drive (driving behavior) Poizner will have up to a year to
through General Motor’s (NYSE: GM) day of the week, speed, acceleration is even more predictive,” Knapp said. approve the final regulations, after
OnStar system has reduced premiums and braking habits, and aggressive Progressive, in the early stages of which insurers can apply to offer the
in other states by 13 percent to 54 per- maneuvers in addition to actual miles testing new pricing models, antici- PAYD option to consumers.
cent. driven. pates current plan participants will “We’re strong supporters of
PAYD may give California con- Jeffrey Spring, spokesman for the save 10 percent to 15 percent, accord- mileage-based insurance,” said
sumers an incentive to go green while Automobile Club of Southern ing to Knapp. Carmen Balber, Consumer Watchdog
driving less and saving money, but if California, said he didn’t know if the State Farm public affairs specialist advocate. “The real question is
some insurance companies and indus- company would be offering a PAYD Mike Rossman said, “Our primary whether or not the insurance commis-
try groups have their way, that savings option to its members. concern is how to figure out verifiable sioner is going to allow them to collect
could come at the expense of the con- “We’re looking at the possibility — miles. An easier option may be check- additional data.”
sumer’s privacy. we don’t really know how it’s going to ing in to an office. It doesn’t have to be
Current and new regulations specify be enacted. We’re interested in any- GPS.” James is a Carlsbad-based freelance
three mandatory factors for setting thing that will help us provide more Allstate Insurance Group writer.
car insurance rates in California: driv- accurate rates for our members,” said spokesman Peter DeMarco said the Source Code: 20081002crb
Work wellness Fee disclosure
Continued from Page 5 The wellness coordinator provides the Continued from Page 2 provider is assessed a penalty excise
amounts of money for programs that expertise, energy and focus that is criti- them? Will this extra information tax.
just a few employees will use. Employers cal to the success of a program. History confuse those that are actually using If the plan fiduciary is aware of the
are better off having high participation has taught us that if we turn over a well- the information available to them to non-disclosure (and does nothing to
in a modest program than modest par- ness program to our clients to run, the the point they join the ranks of those rectify the situation) and/or is
ticipation in a large program. lifespan of that program decreases dra- sitting on the sideline due to confu- involved in the non-disclosure in some
2. Some companies that have imple- matically. Our wellness coordinator sion? way, the fiduciary could be liable for
mented a successful wellness program takes the program to the people for you. Which leads to the question: How any losses attributable to the arrange-
did not see the return in lowered insur- 2. The second unique component is is this fee disclosure information ment and/or transaction.
ance premiums. In these cases, because the establishment of negotiated under- going to be passed along to partici-
much of the cost of insurance is dictated writing credits from health, life and dis- pants? The concept is that fee infor- What it means
by an insurance company’s “trend,” there ability. These are provided under an mation will be included on partici- One thing is certain; service
was no correlation between their well- exclusive five-year pilot program pant statements. Very few providers providers, advisers and plan fiduciar-
ness initiatives and rising insurance between Barney & Barney and several currently provide this level of fee dis- ies are all going to be pushed to come
costs. insurance companies. Now, return on closure information, or have the up with new and innovative ways to
It is typical that insurance renewals investment in a wellness program can be technological capabilities to provide educate participants on understand-
each year come with double-digit rate real. We can show our client specifically this information on participant state- ing plan fees. Whether the service
increases, even before a group’s claims what a wellness program can do to lower ments. providers and advisers see this as a
are considered. If this is the model, how not only claims, but the trend number necessary evil or an opportunity will
does a wellness program combat rate that all quotes start with. The ugly be a deciding factor on which service
increases? Without a change in how As an employer or human resources So what happens if a plan fiduciary providers and advisers get the busi-
renewals are computed and credits professional, you shouldn’t be satis- and/or a service provider doesn’t com- ness.
given, there is no opportunity. fied with sitting back and accepting ply with the proposed regulations? Sources: Principal Financial Group,
Seeking to solve these core challenges, trend increases year after year. There The arrangement between the service Compliance News July 2008; Reish
earlier this year Barney & Barney began is a program out there that has shown provider and the plan becomes a pro- Luftman Reicher & Cohen, Advisor
providing a wellness solution to our that taking a long-term wellness strat- hibited transaction. Report May 2008 and August 2008;
clients that addresses these issues and egy can make a difference. There is an A plan fiduciary is entitled to a class US DOL EBSA, Fact Sheet December
takes wellness from a good idea to some- opportunity, through wellness and exemption providing relief if the fidu- 2007; JP Morgan Chase & Co., JP
thing that results in real change. other strategies, to take control of ciary enters into a contract that is not Morgan Compensation and Benefit
These efforts are gaining recognition escalating health care cost and have a “reasonable” because, unknown to the Strategies Jan. 30, 2008;
in the industry as groundbreaking, and positive effect on both employees’ and plan fiduciary, the service provider Plansponsor, September 2008.
are why we have been recognized by employers’ health. failed to comply with its disclosure
Insurance and Risk Magazine and the obligations. Peartree is a principal and director
Mental Health Association of America. Cotter is a principal at Barney & In simple terms, if the service of Retirement Services at Barney &
The program is this: Barney LLC, one of the largest and provider fails to disclose to the plan or Barney LLC, a California-based com-
1. First, Barney & Barney provides our oldest risk management and employee the plan fiduciary the required disclo- pany that provides a wide range of
clients a wellness coordinator; an expe- benefits insurance brokerages in sure information, the fiduciary is enti- insurance and risk-management solu-
rienced wellness professional that steers California. tled to a refund of all associated serv- tions.
and implements our client’s initiatives. Source Code: 20081002cri ice costs and additionally, the service Source Code: 20081002cre
8 THURSDAY, OCTOBER 2, 2008 • Insurance Trends • THE DAILY TRANSCRIPT