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					        Insurance Trends
        Supplement to:

                                                                                    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”
                                                                                                  Executive Editor
                                                                                                  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
                                                                                                  Publisher Emerita
                                                                                                                                   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
                                                                                                     (619) 232-4381
                                                                                                 Web site:
                                                                                                                                          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

Information breach
          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

Employment law
           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
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

Benefits                                                                                       Barile
           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

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