New York State Workers Compensation Board SelfInsurance Reengineering Project

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New York State Workers Compensation
BoardSelf-Insurance Re-engineering Project
Presentation to New York Self-InsurersAlbany, NY

• July 17, 2007

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Introductions

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

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Agenda

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

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Background of the Current System

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

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Background of the Current System

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

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Background of the Current System

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

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Re-engineering Project

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

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Re-engineering Project

• Vendor Selection
• Maximus, Inc.
• Business Process Improvement Specialists
• Bickmore Risk Services
• Risk Management and Self-Insurance Consultants
• Thelen Reid Brown Taysman Steiner, LLP
• Legal Specialists

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Re-engineering Project Phases

• Phase I Solutions Phase
• Phase II Business Process Re- engineering
• Phase III Implementation

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Phase I Solutions

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

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Phase I Solutions Tasks

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

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Phase II Business Process Improvements

• Re-engineer the existing self-insurance programs
  incorporating the financial solution selected in
  the first phase.
• Re-engineering will encompass significant
  procedural, organizational, and technological
  changes and will provide a solution consisting of
  streamlined policies and procedures with
  supporting technologies and services.

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Phase II Business Process Improvements Tasks

• Document current process
• Develop conceptual design
• Funding methodology
• Acceptance criteria
• Financial reporting/integrity
• Excess requirements
• Automation/streamlining
• Addressing issues/concerns
• Draft rules regulations

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Phase III Implementation

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

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Goals of the New System

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

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Phase I Work Status

• Alternative Funding Model Steps
• Review current methods
• Input from stakeholders
• Research other states wc self-insurance systems
• Research other non-wc systems
• Self-insurer survey
• Input from self-insurance community
• Cost benefit analysis
• Propose alternatives
• Select best solution
• Draft statutes/rules regulations to support the
  chosen solution
• Re-engineer to accommodate chosen solution

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Phase I Tasks and Findings

• Reviewed current state of regulating
  self-insurance
• Examined the following states self-insurance
  programs

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

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Phase I Tasks and Findings

• Examined other funding models in the following
  non self-insurance areas

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

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Solutions Being Considered

• Maintain current approach with enhancements
• Implement pooled approach backed by cash fund and
  WCB authority to issue revenue bonds
• Implement pooled approach backed by cash fund and
  derivative instruments similar to the California
  Alternative Security Program (ASP) and North
  Carolinas Association Aggregate Security System.

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Current Method
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Diagram of Current System
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Instruments Used by Employers
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Current Method of Arranging Security Deposits

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

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Financial Challenges and Risks Under the Current
System

• Inefficient use of fees paid to obtain security
• Inefficient use of borrowing capacity and pledged
  capital
• Surety failures
• All single name instruments
• Difficult to react to employers failing
  financial health
• Ongoing administrative burden of managing
  multiple instruments and monitoring individual
  credit risk
• Potential for assessment volatility
• Lack of agreement on proper amount of security.

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Survey Results

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

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Survey Results Security Deposit Cost Distribution

• Basis points paid to banks and carriers for
  letters of credit and surety bonds
• Data limited to survey respondents - 39 response
  rate (61 of 156)

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Survey Results Deposit Cost by Rating

• Ratings Source Standard Poors Global Ratings
  Handbook
• Basis points paid to banks and carriers for
  letters of credit and surety bonds
• Data limited to data provided by survey
  respondents with published ratings
• Further survey responses will improve
  quantitative analysis.

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Survey Results Deposit Cost by Type Rating

• Ratings Source Standard Poors Global Ratings
  Handbook
• Basis points paid to banks and carriers for
  letters of credit and surety bonds
• Data limited to data provided by survey
  respondents with published ratings
• Further survey responses will improve
  quantitative analysis.

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Pooled Approach
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Pooled Approach Revenue Bonds
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Analysis of Alternatives Limiting Pool Coverage

• Ratings Source Standard Poors Global Ratings
  Handbook
• Displays effect of limiting the deposit covered
  by the pooled portion
• Separate deposit would be required for the
  uncovered portion.

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Key Points on the Revenue Bond Model

• Employers can be categorized as either
  participating or excluded.
• Only employers with acceptable credit ratings
  would be eligible to participate.
• Portfolio would likely be rated upon issuance of
  revenue bonds
• Excluded employers, considered the riskiest
  credits, may be required to post their entire
  security deposit under the traditional method.
• Large employers participation could be limited to
  manage exposure to credit declines separate
  deposit posted for non-participating portion.
• Credit measurement can be monitored frequently
• Loss fund contributions could be charged annually
  to employers based on creditworthiness.
• Program fees could be used to fund existing claim
  liability of prior defaults, to fund the
  retention layer (future default fund), and to
  cover debt service, if needed.

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Challenges and Risks Under the Revenue Bond Model

• Loss fund must be built over time - potential
  for supplemental assessments in the event of
  large default experience in early years
• Timing of revenue bond issuance (timely cash
  inflow and interest rate risk)
• Difficult to obtain replacement security deposit
  for participating employers with mid-year credit
  downgrades (mid-year exclusions)
• Prior risk could be mitigated by separate deposit
  requirement for large employers.

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Pooled Approach California Type Model
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Key Points on the CA Type Model

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

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Challenges and Risks Under the CA Type Model

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

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Next Steps

• Comment period
• Submit comments to WCB by 8/15/07
• Cost/benefit analysis
• Identify chosen solution
• Submit Comments To
• Kathleen Sniffen
• WCB - Office of Self Insurance
• 20 Park Street, Room 202
• Albany, NY 12207
• [phone]
• Kathleen.Sniffen_at_wcb.state.ny.us

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Questions?

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