×

Warning

JUser: :_load: Unable to load user with ID: 2549

Saturday, 30 April 2011 20:01

Bob Grote makes J.E. Grote Co. Inc. unique

Bob Grote knew what the next morning was going to bring and it was eating him up inside. The recession had taken a toll on business at J.E. Grote Co. Inc. and now he had no choice but to lay off employees.

Or so he thought.

“I went into a restaurant, a little watering hole where I sometimes have a bite to eat,” says Grote, president at the 170-employee food slicing equipment manufacturer. “A guy I kind of half know came up to me and said, ‘Man, you look depressed.’ I said, ‘Yeah, I am. I think I’m going to have to lay some people off.’ He poked me in the chest and said, ‘Come on Bob, you can do better than that. You don’t have to do what everybody else does. Be creative.’”

Grote began to ponder what this casual acquaintance had just said to him and the wheels began to turn in his head.

“A good portion of our staff, be it engineering or in the shop itself, is really dedicated to the manufacturing of new equipment,” Grote says. “So when your equipment dries up, you have nothing for a lot of people to do. I came in and said, ‘What if I force vacation and go down to a four-day workweek for everybody in new equipment?’ You’re going to take vacation in the first half of the year until you run out of vacation. It doesn’t help my cash flow, but it reallocates my resources to later in the year.”

The response from his management team was shock.

“They all kind of looked at me like, ‘What?’” Grote says. “I got challenged by them saying, ‘Are we just wimping out? Are we just afraid to make the right decision because we’re fortunate to have the cash flow to support doing this? Are we just delaying the inevitable?’”

Grote had pondered those same questions. He decided it was worth the risk to try something a little different.

“Leaders truly underestimate the cost of retraining,” Grote says. “In an environment of unemployment, you can hire really quick and you can hire really good people. But at least in my business, because this is very customized work, it’s hard for a guy to contribute in some of these areas for a minimum of six months, sometimes up to a year. As I look at it, I’ve got to hang on to that core muscle.”

One of the land mines Grote had to navigate around was, “How do you do something that only inflicts pain on one segment of your work force?”

“I went to the departments that were going to be affected and spent a lot of time talking to them and trying to get them to complain and be OK with complaining to me,” Grote says. “I was constantly focusing on the future and reminding them that this is what it is. What’s paying our bills right now, guys, is all these parts and all this stuff that these other guys are doing. You want us to pay our bills so we can keep you around, too.”

Grote also spent time with those who weren’t being forced into February vacations.

“I reminded people that you better look busy,” Grote says. “I know you’re busy, but you better look that way.”

So the vacations were taken, and while there were a few nervous moments, business did begin to pick up in the summer, and Grote’s plan ended up working out.

“There was fear every day,” Grote says. “I ultimately have to answer to the shareholders of the company. I look foolish and wasteful if it doesn’t work out. But if you’re truly a leader at that point and you’re in that position to make that decision, if you think about what’s going to happen to you at that point, maybe you shouldn’t be the leader.”

Take time to listen

Bob Grote could have shoved his idea to avoid layoffs at J.E. Grote Co. Inc. down everyone’s throat and ignored the concerns of his management team. But he knew that wouldn’t do much for his stock as their leader.

“If you have a past experience of going back and changing your mind because they have a logical reason why you shouldn’t do your idea and you’re not just being stubborn, they will talk to you and explain their reasoning,” says Grote, president at the food slicing equipment manufacturer.

He wanted to hear their feedback because he himself had fear that maybe it wasn’t the right thing to do.

“I’ll either say, ‘Maybe you’re right, let’s go back and explore this,’ or, ‘I still think I want to do it this way, and I’m going to do it, but I see where you’re coming from,’” Grote says.

Either way, you show yourself to be open-minded when you make the effort to listen.

Unfortunately for Grote, he faced the same dilemma again in early 2010.

“My mantra was, ‘If this keeps up, I can’t do that again guys,’” Grote says. “Fortunately, it turned a lot quicker.”

Grote adds that his confidence in foreseeing the future in today’s world is pretty much gone.

“I don’t believe anything until I’ve got the contract with dripping ink on it and the smell of money in my office before I believe an order is here,” Grote says.

HOW TO REACH: J.E. Grote Co. Inc., (888) 534-7683 or www.grotecompany.com

Published in Columbus

Things could have turned out much different for Ali Brown had she not taken control of her life.

“Ten years ago, I was working as an employee in a tiny company in New York,” says Brown, founder and CEO of Ali International, a multimedia company that provides online marketing tools and strategies, coaching, seminars and instructional literature for more than 50,000 women entrepreneurs worldwide. “I was continually frustrated in all the jobs I had, which made me realize I was unemployable.”

Brown saw only two viable options: “I could be unemployed or self-employed, so I started a little freelance writing business, marketing myself online with an e-mail newsletter.”

That newsletter began to grow and Brown started to gain a following online.

“People started asking all kinds of questions about marketing and how I was growing my little business and asking for all this small business advice,” Brown explains. “So I started writing e-books and selling them to the people who were asking the questions.”

Today, that little business has become a multimillion-dollar operation and an Inc. 500 company. Brown publishes a high-end magazine, is regularly featured on TV and radio talk shows, and last year, she was named one of Ernst & Young’s Entrepreneurial Winning Women.

Smart Business sat down with Brown to discuss her passion for helping other women entrepreneurs reach their own goals.

Q: Ali, what drives you?

A: The best part is my job is helping other women succeed through starting their own businesses. I offer products, resources, coaching programs and a community that’s dedicated to helping women entrepreneurs. These range from online marketing basics to one called Business Building Blocks.

When people go to start a business, they don’t often know what they should be thinking about in the legal department, marketing department or financial department. So this is Business 101 in a box. You start thinking differently when you’re an entrepreneur, and if you want to be wealthy, you have to learn how to take risks and do it in a smart way.

Q: What makes Ali International’s value proposition unique?

A: My clients and customers say they love following me because they get business advice in a fun, real way. I talk with women who may be running a business from their kitchen table. They’ve got kids running around and they’re juggling their lives. Unfortunately, there are very few role models out there, so I’m able to fill a need in the marketplace.

Q: Speaking of role models, what’s the best advice you’ve ever received?

A: It came from one of my mentors:  Aim for the top because there’s more room. There’s actually less competition at the top, so I’ve not looked at the people around me in my industry but at the people who are at the top of the industry. Then, I ask how I can get there and position myself to stay there.

Q: As you’ve worked with women entrepreneurs, what are some of the different challenges you’ve found that they face?

A: There are two that stand out. One is the often-talked about family and work balance. For women who may traditionally be in the home, they feel pulled in different directions. But on a more personal and human level the other challenge is learning how to take risks and believe in themselves. Women are often programmed for safety. It’s in our DNA. We want to be safe and secure, and it’s really scary for women to put themselves out there. They’re often thinking, ‘What will people think of me? Can I really do this?’

So for many women, I see the personal journey even more rewarding than the financial journey because the person they become in the process is priceless. They become this incredible role model for their family and for the women around them. It’s a ripple effect, and it’s really going to change the world.

Q: What’s the first step toward learning how to take risks?

A: Surround yourself with risk takers. You’ll begin to realize that in order to become successful, you have to become comfortable at being uncomfortable. You are often the average of the people who you are around the most, so seek out a network, come to a conference or join a coaching group where people come together and exchange ideas. Figure out the level that you want to be at, and seek out people who are already there.

Q: Where do you find opportunities for your own growth?

One key to growing any business is listening to your customers and clients, but you also need to keep a long-term vision of what you want. I have my path, which is helping women entrepreneurs. But at the same time, I keep an ear to the ground and listen to the topics that they’re interested in and the needs they have. That’s where the coaching came from. I was publishing courses and books, and women still said, ‘I want to talk to you. Can you coach me one on one?’

My events started because they wanted to get together in person. Now, I have a conference every year called SHINE, which has become the premier conference for women entrepreneurs. This past year, it was in Las Vegas. In 2011, it will be in Dallas. It’s a three-day event, and we bring together hundreds of women entrepreneurs.

Even my magazine is about business, life and style for women entrepreneurs. I heard the things they were talking about and created something around it. That’s something you need to keep in mind when you’re looking for ways to grow a company: When you hear ideas respond to them, but you also have to figure out a way that those ideas will make money.

It’s a constant journey of evolving your business model. Match the path you want and the passion you want to get out to the world with what they will be willing to take out their wallets and pay for. You also must figure out how to provide value.

Q: What advice would you offer a woman who is unhappy with her current situation and looking for a change?

A: The first step for any woman who has an idea for a business or any woman who just wants to start a business is to start paying attention. Start paying attention to ideas that you have and write them down. Listen to ideas that people are talking about, then get out immediately to start networking to make it happen because that’s going to change your life.

Q: So what does the future hold for Ali Brown and Ali International?

A: In the next few years, you’ll see me doing a lot more media and television, expanding internationally and having more events, reaching women in developing countries and helping them develop how entrepreneurship can help them.

How to reach: Ali International, www.alibrown.com.

Published in Los Angeles

When an employer moves from a fully insured health care plan to a self-funded plan, it becomes responsible for 100 percent of the claims risk. That transition can be frightening, especially as medical costs continually increase. But purchasing stop-loss coverage from reinsurance carriers can help mitigate some of that risk.

“Stop loss allows an employer to transfer a portion of the claims risk to the reinsurance carrier in exchange for a monthly premium,” says Donna Cowden, senior vice president with Aon Hewitt Health & Benefits.

Smart Business spoke with Cowden and Gary Cumpata, senior vice president, Aon Hewitt Health & Benefits, about how stop-loss coverage can help protect your business.

How can an employer limit risk with stop-loss coverage?

The employer can limit risk by purchasing aggregate coverage, which insures against an employer’s total annual claims exceeding an estimated dollar amount (with a corridor of 20 to 25 percent added), or specific coverage, which insures against a single, large, catastrophic claim that exceeds selected dollar amount (deductible) during the plan year.  They work well together by protecting the employer if the year’s claims have exceeded the carrier’s claims estimate plus margin, and monthly by limiting the loss of a large, unexpected claim. Aggregate claim reimbursement occurs at the end of the contract period, while specific claim reimbursements take place as they occur during the plan year.

How can an employer determine which type of coverage is the best fit?

Employers need to determine what risk they are trying to protect against. Are they concerned about overall claims exceeding a budgeted amount and feel comfortable absorbing large losses that might occur during the year, or are they only concerned about a hit if a large, unexpected claim occurs?

Aggregate stop-loss coverage protects an employer against claim volatility, if annual claims exceed what is budgeted. Smaller employers have a more difficult time absorbing the claim fluctuations, so they will purchase aggregate coverage.

Most employers will purchase specific coverage but the level of the specific deductible will depend on their size and risk tolerance. Specific-only coverage is typically for employers with more than 5,000 covered lives.

How does stop-loss coverage work with a self-funded benefit plan?

Self-funded employers that purchase stop-loss coverage have the benefit plan document and the stop-loss contract. The employer’s plan document outlines benefit provisions and how benefits are paid. Ideally, a stop-loss contract will overlay the provisions in the employer’s benefit plan. The employer does not want the stop-loss contract to have exclusions or limitations that contradict or add to the employer’s benefit plan.

How can an employer determine whether it should purchase stop-loss coverage?

It is critical for employers to understand their risk tolerance and determine how much they can tolerate paying out without creating a cash flow issue. How easy is it to fund a $500,000 claim month when claims generally run $100,000 per month? Once that is determined, they can purchase the contract that provides them the appropriate protection.

In what other ways within the contract can employers share risk to keep the premium down?

One way is an ‘aggregating-specific,’ or ‘split-funded specific,’ contract and the other is a ‘tiered,’ or ‘coinsurance,’ contract. With an aggregating-specific/split-funded contract, the employer shares in the risk for a reduction in premium. The employer will accept claims up to the specific deductible and will accept additional claim liability generally equal to a 20 to 30 percent premium reduction. If the employer has no claims over its specific deductible during the year, it saves the amount of the aggregating deductible. If there is a claim in excess of the specific deductible, it is paid by the employer until the aggregating deductible is exhausted and the carrier pays the remainder. With a tiered/coinsurance contract, the employer agrees to share in more risk after the specific deductible has been exceeded for a reduction in premium. Once the specific has been exceeded, the employer may take on a reduced percentage of claims above the deductible up to a specified dollar amount, after which the carrier accepts all risk.

What potential pitfalls should employers be aware of when switching plans?

The first year an employer switches to a self-funded plan, claims incurred but not paid when it moved are the responsibility of the fully insured carrier. So instead of 12 months of claims for that first self-funded plan year, the employer has only nine to 10 months. The stop-loss rates and contract are referred to as immature and are discounted up to 20 percent. The second-year rate increase will look very high because the rate is increasing by trend and the additional 20 percent because of a full claim year. Employers should purchase complementary contracts to prevent gaps in coverage.

How is health care reform affecting stop-loss coverage?

The most immediate impact is the change requiring benefit plans to have unlimited lifetime maximums. The stop-loss contract generally duplicates the benefit plan maximum, so when unlimited lifetime maximums were implemented, carriers struggled to determine the financial impact on their rates.  Stop-loss contracts should be reviewed to make sure the maximum reimbursement matches the employer’s maximum and the carrier hasn’t put a cap on the maximum. That would leave the employer at risk once the reimbursement maximum has been exceeded. We are also finding large employers that never had stop loss request very high specific deductibles because of the unlimited lifetime maximum.

Donna Cowden is senior vice president, Aon Hewitt Health & Benefits. Reach her at (336) 728-2316 or Donna.Cowden@aonhewitt.com.

Gary Cumpata is senior vice president, Aon Hewitt Health & Benefits. Reach him at (248) 936-5399 or Gary.Cumpata@aon.com.

Published in Detroit

The Fair Labor Standards Act was enacted in 1930 to regulate wage and workplace abuses. While the act is not new, the number of lawsuits and regulatory actions based on alleged violations is increasing. This can result in very expensive litigation that isn’t covered by any of your insurance policies, says Gloria D. Forbes, executive vice president with ECBM Insurance Brokers and Consultants.

Smart Business spoke with Forbes about how to reduce your business’s exposure to FLSA claims.

What types of actions might result in these claims?

These claims come in a variety of allegations but the most common are from misclassification, failure to pay overtime and other similar wage and hour claims.

One of the most common is wrongfully misclassifying individuals as independent contractors instead of employees. Claims can come from regulatory agencies, individuals or groups of individuals. Individuals or groups of individuals will often file claims because they are seeking access to benefits offered to those classified as employees. This could be medical or disability benefits, paid time off or sometimes pension benefits. These claims may start as an issue asserted by one employee, but others will join the suit and the claim my end up with class action status and a number of claimants. This makes these type of actions very costly and dangerous.

Regulatory agencies may bring actions if they feel, through an investigation, that there have been abuses of the system. There are federal regulations to consider and state laws that sometimes call for a more stringent adherence to status. Pennsylvania, for example, passed the Construction Workplace Misclassification Act on Oct. 13, 2010.

What does CWMA require?

The act is aimed at misuse of independent contractors in the construction industry and makes the intentional misclassification of employees a third-degree felony. CWMA states that an individual who performs services in the construction industry can only be classified as an independent contractor if the following three conditions are met: The individual has a written contract to perform the service; the individual is free from control or direction while performing the services; and the individual is customarily engaged in an independent trade, occupation, business or profession.

In addition to the fines the secretary of the Department of Labor and Industry can issue, it can petition the courts to issue a stop-work order. While the bill was aimed at abuse in the construction field, it is thought to be a precursor for judgments in other industries.

Is this the only type of misclassification?

No, often employees will allege wrongful classification of their job status as exempt employees. Because there are regulations related to overtime pay for hourly employees, there are situations when employees assert that they are wrongfully classified as exempt when, in fact, they are hourly or nonexempt. Like claims involving independent contractor status, these actions can end up with many claimants and take on a life of their own.

You mentioned other wage and hour issues. Can you expand on this?

We’ve talked about failure to pay overtime based upon misclassification, but failure to pay overtime or recognize other ‘paid time’ is asserted for other reasons as well. One recent suit under a collective bargaining agreement stated that the employer owed employees for the time they took to dress for work after arrival at the company facility. They were granted this time and back pay was ordered.

The retail and hospitality industries are particularly hard hit with these claims. Employees will claim that they work through breaks or often miss time off for meals. Sometimes these situations start as employees wanting to do a little more to get recognized but can end up later in a suit for back wages.

As a matter of fact, the Department of Labor reported in fiscal 2008 that 197,000 employees received a total of more than $140 million in minimum wage and overtime back wages as a result of violations pursued by the Wage & Hour Division.

Aren’t these claims covered under an employment practices policy or similar insurance?

Most directors’ and officers,’ and employment practices policies exclude claims that violate laws and regulations, and most specifically mention the Fair Labor Standards Act. They will often include language that the exclusion applies to ‘similar or related federal, state or local law or regulation.’ Policies with less specific language can result in some limited coverage based upon circumstances.

There has been a trend to provide some sublimit for defense only of these allegations, but those limits are generally between $100,000 and $250,000. There remains no coverage for any back wages, overtime pay or similar judgments that the employer might become obligated to pay.  This is typically very inadequate for most of the cases and awards that we’ve seen in the last couple of years.

What can an employer do to reduce its exposure to uncovered claims?

The most important action an employer can take is to review all of its employment processes and procedures and be certain that it is not violating laws related to minimum wage, breaks, and overtime. Be sure that you have reviewed the classification of employees and that any employee who is considered ‘exempt’ truly fits within the parameters of that definition within the act. Human resource consultants and employment attorneys may be needed to review company policies.

Finally, have an insurance representative with the expertise and knowledge to review the fine points of your insurance contract before making a decision as to which insurance product is the best product for you.

Gloria D. Forbes is executive vice president with ECBM Insurance Brokers and Consultants. Reach her at (610) 668-7100 or gforbes@ecbm.com.

Published in Philadelphia

Lending standards are tough and not getting easier.

Even though insurance terms have softened over the last few years, the amount of capital a company has tied up in collateral with its insurer can be a threat to working capital and a barrier to growth, says Edward X. McNamara, senior vice president, regional sales director — East Central Region, Aon Risk Solutions.

“Collateral, especially in this credit market, can be a material component of an insurance program’s costs,” says McNamara. “To meet collateral obligations, companies often have to tap existing credit lines or cash reserves, each representing a drain on the company’s available capital or borrowing capacity.”

Smart Business spoke with McNamara about how re-examining your risks and insurance programs can help free up capital and increase borrowing capacity.

Why is collateral necessary for a business?

Insurance companies or carriers typically require collateral for deductible insurance programs because the insurer is obligated to pay all claims up front. Subsequently, the insurer goes back to the client to be reimbursed for claims that fell under the deductible limit, creating a credit exposure for the carrier. Insurers have credit officers to evaluate these, yet the analysis carries a high level of uncertainty due to the long-term nature of the underlying claims.

To protect themselves from failure to repay deductible losses, insurance companies require clients to put up collateral. Only certain instruments are acceptable as collateral, such as letters of credit, cash and marketable securities.

And while surety bonds have historically been accepted on an exception basis for a portion of collateral requirements, these are not an approved form of collateral by many state regulators. Furthermore, the values of these items are often discounted when the carrier assesses the amount of collateral held with an insured.

Does the collateral requirement pose a burden for companies when purchasing insurance?

Posting collateral for insurance requirements can pose a serious burden for many companies. Letters of credit can diminish borrowing capacity and require substantial fees to procure. Cash that is dedicated toward the collateral requirement is money that is not being used by the business to pay down its debt or to reinvest in the company.

Collateral requirements can also limit a company’s ability to switch insurance carriers. If a company’s carrier is holding redundant collateral — which is more collateral than is warranted based on the remaining liability of the policy — it can be used as leverage for keeping a company from switching to another insurer.

Rather than adjusting the collateral requirement downward, the carrier will use that redundancy to offset the new collateral needed for the following policy year.

How does that prevent a company from seeking a new insurer?

While a prospective new carrier may offer advantageous pricing, its collateral requirement for the first year and the prospect of stacking that requirement for future years can overshadow cost-saving benefits, especially for a company with limited capital availability.

As a result of these factors, corporate risk managers should evaluate current insurance programs in conjunction with their financial objectives. Given the impact of collateral requirements on a company’s cash flow and available borrowing capacity, risk managers might do well to make some changes to the terms of deductible insurance programs.

In this environment, however, buyers should recognize that insurance companies have pressures, too. With tightening credit markets and a weak economy, insurance companies are at increased risk that clients might fail to reimburse deductible payments.

These defaults can range anywhere from a delay of payment to an actual bankruptcy resulting in a default on obligations owed to the insurance company.

How can companies benefit by pursuing a zero-collateral policy?

Property and casualty insurance brokers have watched premiums shrink and stagnate for the past five or more years. They understand that growth isn’t happening unless their clients grow, and collateral burdens hurt their clients’ ability to reinvest in new projects. Recognizing this axiom, brokerages are now offering zero-collateral deductible insurance programs that eliminate collateral requirements, freeing these funds in the form of cash or lines of credit for capital investments by their clients.

These insurance programs may still carry deductibles that allow customers to benefit from the cost and cash flow advantages. But rather than require collateral, the credit exposure is insured by an additional policy. As a result, there is no requirement to post collateral, which would otherwise be in place until all claims are closed, a process which can take many years from the program’s inception.

The value of these programs for clients can be tremendous, as it allows them to invest available cash and credit in the business and avoid tying it up with insurance companies.

With the help of an adviser, companies would be well-advised to look into the zero-collateral option.

Edward X. McNamara is senior vice president, regional sales director — East Central Region, at Aon Risk Solutions, a risk management and insurance brokerage firm with regional headquarters in Cleveland. Reach him at (216) 623-4146 or edward.mcnamara@aon.com.

Published in Cleveland

Lending standards are tough and not getting easier.

Even though insurance terms have softened over the last few years, the amount of capital a company has tied up in collateral with its insurer can be a threat to working capital and a barrier to growth, says Keith DeCoster, senior vice president, managing director, Aon Risk Solutions.

“Collateral, especially in this credit market, can be a material component of an insurance program’s costs,” says DeCoster. “To meet collateral obligations, companies often have to tap existing credit lines or cash reserves, each representing a drain on the company’s available capital or borrowing capacity.”

Smart Business spoke with DeCoster about how re-examining your risks and insurance programs can help free up capital and increase borrowing capacity.

Why is collateral necessary for a business?

Insurance companies or carriers typically require collateral for deductible insurance programs because the insurer is obligated to pay all claims up front. Subsequently, the insurer goes back to the client to be reimbursed for claims that fell under the deductible limit, creating a credit exposure for the carrier. Insurers have credit officers to evaluate these, yet the analysis carries a high level of uncertainty due to the long-term nature of the underlying claims.

To protect themselves from failure to repay deductible losses, insurance companies require clients to put up collateral. Only certain instruments are acceptable as collateral, such as letters of credit, cash and marketable securities.

And while surety bonds have historically been accepted on an exception basis for a portion of collateral requirements, these are not an approved form of collateral by many state regulators. Furthermore, the values of these items are often discounted when the carrier assesses the amount of collateral held with an insured.

Does the collateral requirement pose a burden for companies when purchasing insurance?

Posting collateral for insurance requirements can pose a serious burden for many companies. Letters of credit can diminish borrowing capacity and require substantial fees to procure. Cash that is dedicated toward the collateral requirement is money that is not being used by the business to pay down its debt or to reinvest in the company.

Collateral requirements can also limit a company’s ability to switch insurance carriers. If a company’s carrier is holding redundant collateral — which is more collateral than is warranted based on the remaining liability of the policy — it can be used as leverage for keeping a company from switching to another insurer.

Rather than adjusting the collateral requirement downward, the carrier will use that redundancy to offset the new collateral needed for the following policy year.

How does that prevent a company from seeking a new insurer?

While a prospective new carrier may offer advantageous pricing, its collateral requirement for the first year and the prospect of stacking that requirement for future years can overshadow cost-saving benefits, especially for a company with limited capital availability.

As a result of these factors, corporate risk managers should evaluate current insurance programs in conjunction with their financial objectives. Given the impact of collateral requirements on a company’s cash flow and available borrowing capacity, risk managers might do well to make some changes to the terms of deductible insurance programs.

In this environment, however, buyers should recognize that insurance companies have pressures, too. With tightening credit markets and a weak economy, insurance companies are at increased risk that clients might fail to reimburse deductible payments.

These defaults can range anywhere from a delay of payment to an actual bankruptcy resulting in a default on obligations owed to the insurance company.

How can companies benefit by pursuing a zero-collateral policy?

Property and casualty insurance brokers have watched premiums shrink and stagnate for the past five or more years. They understand that growth isn’t happening unless their clients grow, and collateral burdens hurt their clients’ ability to reinvest in new projects. Recognizing this axiom, brokerages are now offering zero-collateral deductible insurance programs that eliminate collateral requirements, freeing these funds in the form of cash or lines of credit for capital investments by their clients.

These insurance programs may still carry deductibles that allow customers to benefit from the cost and cash flow advantages. But rather than require collateral, the credit exposure is insured by an additional policy. As a result, there is no requirement to post collateral, which would otherwise be in place until all claims are closed, a process which can take many years from the program’s inception.

The value of these programs for clients can be tremendous, as it allows them to invest available cash and credit in the business and avoid tying it up with insurance companies.

With the help of an adviser, companies would be well-advised to look into the zero-collateral option.

Keith DeCoster is senior vice president, managing director, Aon Risk Services. Reach him at Keith_Decoster@aon.com or (317) 237-2400.

Published in Indianapolis

When an employer moves from a fully insured health care plan to a self-funded plan, it becomes responsible for 100 percent of the claims risk. That transition can be frightening, especially as medical costs continually increase. But purchasing stop-loss coverage from reinsurance carriers can help mitigate some of that risk.

“Stop loss allows an employer to transfer a portion of the claims risk to the reinsurance carrier in exchange for a monthly premium,” says Donna Cowden, senior vice president with Aon Hewitt, Health & Benefits.

Smart Business spoke with Cowden and Jim Gloriod, resident managing director, Aon Risk Solutions, about how stop-loss coverage can help protect your business.

How can an employer limit risk with stop-loss coverage?

The employer can limit risk by purchasing aggregate coverage, which insures against an employer’s total annual claims exceeding an estimated dollar amount (with a corridor of 20 to 25 percent added), or specific coverage, which insures against a single, large, catastrophic claim that exceeds a selected dollar amount (deductible) during the plan year.  They work well together by protecting the employer if the year’s claims have exceeded the carrier’s claims estimate plus margin, and monthly by limiting the loss of a large, unexpected claim. Aggregate claim reimbursement occurs at the end of the contract period, while specific claim reimbursements take place as they occur during the plan year.

How can an employer determine which type of coverage is the best fit?

Employers need to determine what risk they are trying to protect against. Are they concerned about overall claims exceeding a budgeted amount and feel comfortable absorbing large losses that might occur during the year, or are they only concerned about a hit if a large, unexpected claim occurs?

Aggregate stop-loss coverage protects an employer against claim volatility, if annual claims exceed what is budgeted. Smaller employers have a more difficult time absorbing the claim fluctuations, so they will purchase aggregate coverage.

Most employers will purchase specific coverage but the level of the specific deductible will depend on their size and risk tolerance. Specific-only coverage is typically for employers with more than 5,000 covered lives.

How does stop-loss coverage work with a self-funded benefit plan?

Self-funded employers that purchase stop-loss coverage have the benefit plan document and the stop-loss contract. The employer’s plan document outlines benefit provisions and how benefits are paid. Ideally, a stop-loss contract will overlay the provisions in the employer’s benefit plan. The employer does not want the stop-loss contract to have exclusions or limitations that contradict or add to the employer’s benefit plan.

How can an employer determine whether it should purchase stop-loss coverage?

It is critical for employers to understand their risk tolerance and determine how much they can tolerate paying out without creating a cash flow issue. How easy is it to fund a $500,000 claim month when claims generally run $100,000 per month? Once that is determined, they can purchase the contract that provides them the appropriate protection.

In what other ways within the contract can employers share risk to keep the premium down?

One way is an ‘aggregating-specific,’ or ‘split-funded specific,’ contract and the other is a ‘tiered,’ or ‘coinsurance,’ contract. With an aggregating-specific/split-funded contract, the employer shares in the risk for a reduction in premium. The employer will accept claims up to the specific deductible and will accept additional claim liability generally equal to a 20 to 30 percent premium reduction. If the employer has no claims over its specific deductible during the year, it saves the amount of the aggregating deductible. If there is a claim in excess of the specific deductible, it is paid by the employer until the aggregating deductible is exhausted and the carrier pays the remainder. With a tiered/coinsurance contract, the employer agrees to share in more risk after the specific deductible has been exceeded for a reduction in premium. Once the specific has been exceeded, the employer may take on a reduced percentage of claims above the deductible up to a specified dollar amount, after which the carrier accepts all risk.

What potential pitfalls should employers be aware of when switching plans?

The first year an employer switches to a self-funded plan, claims incurred but not paid when it moved are the responsibility of the fully insured carrier. So instead of 12 months of claims for that first self-funded plan year, the employer has only nine to 10 months. The stop-loss rates and contract are referred to as immature and are discounted up to 20 percent. The second-year rate increase will look very high because not only is the rate increasing by trend but by the additional 20 percent because of a full claim year. An employer should purchase complementary contracts to prevent gaps in coverage.

How is health care reform affecting stop-loss coverage?

The most immediate impact is the change requiring benefit plans to have unlimited lifetime maximums. The stop-loss contract generally duplicates the benefit plan maximum, so when unlimited lifetime maximums were implemented, carriers struggled to determine the financial impact on their rates.  Stop-loss contracts should be reviewed to make sure the maximum reimbursement matches the employer’s maximum and the carrier hasn’t put a cap on the maximum. That would leave the employer at risk once the reimbursement maximum has been exceeded. We are also finding large employers that never had stop loss request very high specific deductibles because of the unlimited lifetime maximum.

Donna Cowden is senior vice president, Aon Hewitt, Health & Benefits. Reach her at (336) 728-2316 or Donna.Cowden@aonhewitt.com. Jim Gloriod is resident managing director at Aon Risk Solutions. Reach him at (314) 719-5148 or jim.gloriod@aon.com.

Published in St. Louis

When an employer moves from a fully insured health care plan to a self-funded plan, it becomes responsible for 100 percent of the claims risk. That transition can be frightening, especially as medical costs continually increase. But purchasing stop-loss coverage from reinsurance carriers can help mitigate some of that risk.

“Stop loss allows an employer to transfer a portion of the claims risk to the reinsurance carrier in exchange for a monthly premium,” says Donna Cowden, Senior Vice President with Aon Hewitt Health & Benefits.

Smart Business spoke with Cowden, Candice Mill, Senior Vice President, Aon Risk Solutions Health & Benefits, and Daniel D’Alessandro, Regional Managing Director, Aon Risk Solutions, about how stop-loss coverage can help protect your business.

How can an employer limit risk with stop-loss coverage?

The employer can limit risk by purchasing aggregate coverage, which insures against an employer’s total annual claims exceeding an estimated dollar amount (with a corridor of 20 to 25 percent added), or specific coverage, which insures against a single, large, catastrophic claim that exceeds selected dollar amount (deductible) during the plan year.  They work well together by protecting the employer if the year’s claims have exceeded the carrier’s claims estimate plus margin, and monthly by limiting the loss of a large, unexpected claim. Aggregate claim reimbursement occurs at the end of the contract period, while specific claim reimbursements take place as they occur during the plan year.

How can an employer determine which type of coverage is the best fit?

Employers need to determine what risk they are trying to protect against. Are they concerned about overall claims exceeding a budgeted amount and feel comfortable absorbing large losses that might occur during the year, or are they only concerned about a hit if a large, unexpected claim occurs?

Aggregate stop-loss coverage protects an employer against claim volatility, if annual claims exceed what is budgeted. Smaller employers have a more difficult time absorbing the claim fluctuations, so they will purchase aggregate coverage.

Most employers will purchase specific coverage but the level of the specific deductible will depend on their size and risk tolerance. Specific-only coverage is typically for employers with more than 5,000 covered lives.

How does stop-loss coverage work with a self-funded benefit plan?

Self-funded employers that purchase stop-loss coverage have the benefit plan document and the stop-loss contract. The employer’s plan document outlines benefit provisions and how benefits are paid. Ideally, a stop-loss contract will overlay the provisions in the employer’s benefit plan. The employer does not want the stop-loss contract to have exclusions or limitations that contradict or add to the employer’s benefit plan.

How can an employer determine whether it should purchase stop-loss coverage?

It is critical for employers to understand their risk tolerance and determine how much they can tolerate paying out without creating a cash flow issue. How easy is it to fund a $500,000 claim month when claims generally run $100,000 per month? Once that is determined, they can purchase the contract that provides them the appropriate protection.

In what other ways within the contract can employers share risk to keep the premium down?

One way is an ‘aggregating-specific,’ or ‘split-funded specific,’ contract and the other is a ‘tiered,’ or ‘coinsurance,’ contract. With an aggregating-specific/split-funded contract, the employer shares in the risk for a reduction in premium. The employer will accept claims up to the specific deductible and will accept additional claim liability generally equal to a 20 to 30 percent premium reduction. If the employer has no claims over its specific deductible during the year, it saves the amount of the aggregating deductible. If there is a claim in excess of the specific deductible, it is paid by the employer until the aggregating deductible is exhausted and the carrier pays the remainder. With a tiered/coinsurance contract, the employer agrees to share in more risk after the specific deductible has been exceeded for a reduction in premium. Once the specific has been exceeded, the employer may take on a reduced percentage of claims above the deductible up to a specified dollar amount, after which the carrier accepts all risk.

What potential pitfalls should employers be aware of when switching plans?

The first year an employer switches to a self-funded plan, claims incurred but not paid when it moved are the responsibility of the fully insured carrier. So instead of 12 months of claims for that first self-funded plan year, the employer has only nine to 10 months. The stop-loss rates and contract are referred to as immature and are discounted up to 20 percent. The second-year rate increase will look very high because the rate is increasing by trend and the additional 20 percent because of a full claim year. Employers should purchase complementary contracts to prevent gaps in coverage.

How is health care reform affecting stop-loss coverage?

The most immediate impact is the change requiring benefit plans to have unlimited lifetime maximums. The stop-loss contract generally duplicates the benefit plan maximum, so when unlimited lifetime maximums were implemented, carriers struggled to determine the financial impact on their rates.  Stop-loss contracts should be reviewed to make sure the maximum reimbursement matches the employer’s maximum and the carrier hasn’t put a cap on the maximum. That would leave the employer at risk once the reimbursement maximum has been exceeded. We are also finding large employers that never had stop loss request very high specific deductibles because of the unlimited lifetime maximum.

Donna Cowden is Senior Vice President, Aon Hewitt Health & Benefits. Reach her at (336) 728-2316 or donna.cowden@aonhewitt.com.

Candice Mill is the Senior Vice President of Aon Risk Solutions, Health & Benefits. Reach her at candice.mill@aon.com or (412) 263-6387.

Daniel D’Alessandro is the Regional Managing Director of Aon Risk Solutions. Reach him at  daniel.dalessandro@aon.com or (412) 594-7515.

Published in Pittsburgh

Risk is present in every phase of business, but is not always self-evident. The creation, effective implementation and maintenance of a risk management program can significantly reduce and in some cases eliminate the possibility of a claim against a company, says Michael J. Lucas, CIC, CRM, a partner with Millennium Corporate Solutions.

“Risk management is important to protect the company’s assets from lawsuits and claims,” Lucas says. “Taking a systematic approach to a risk management program will make the process go more smoothly.”

Smart Business spoke with Lucas about how to make the risk management process more effective in your organization.

What are the steps in the process?

The risk management process can be expressed in five general steps: risk identification, risk analysis and prioritization, risk control and loss prevention, risk financing, and risk implementation/administration. Many companies focus on one or two of these and fail to effectively use all of the steps in considering operational, strategic and financial risks that can impact the company at many levels.

Are there keys to effective risk management?

Some of the keys include identifying the company’s hazards/exposures, incorporating all levels of the organization into the process, and elevating the importance of risk management companywide.

There are six general classes of risk that an organization must consider when developing and implementing its own risk management program: economic, legal, political, social, physical and juridical risks. Within these general classes, risks can come from many sources. To make matters worse, risks are changing faster than companies can keep up with ways to manage them.

There are several tactics that risk management professionals can use to help companies stay ahead of the curve. Identifying the company’s corporate culture is a good start. Next, it is very important to establish the company’s risk appetite and tolerance level. This helps determine just how much risk an organization is comfortable allowing. Risk management projects such as installing risk control programs, advanced engineering techniques, and increasing or decreasing deductibles should be strongly considered if the potential benefits outweigh the projects’ costs on a short-term and/or long-term basis.

How does corporate culture affect risk management?

Some corporations are willing to retain more risk than others. Through a risk analysis and by identifying the corporate culture, you can identify whether a specific exposure coincides with the culture relative to the organization’s tolerable risk levels. For example, if a company’s corporate culture is to have high retention on its programs, as far as deductibles are concerned, then it is going to be more comfortable taking on risk because it has controls in place. The company will put more emphasis on and funding into risk management and will elevate its importance in an effort to coincide with its corporate culture and ultimately control its exposures.

Why is it important to elevate the importance of risk management companywide?

Due to the catastrophic effect some exposures can have on an organization, it’s important for the risk management to be implemented consistently companywide. Risk retention can and may vary from department to department within an organization outside of the normal company culture, but only after a thorough risk analysis has been performed on the specific hazard/exposure. Corporate culture may dictate that the organization carry higher retentions, but if the organization is unable to control frequency, higher retentions become cost prohibitive.

How does a company’s level of risk tolerance impact risk management?

Identifying the company’s risk tolerance zone is important and will be considered when determining what solution best fits the organization for each exposure identified.

As different projects, changes in operations, exposures or hazards arise, a risk analysis should be performed to completely understand and identify the potential impact of the exposure to the organization. If the risk analysis falls within the tolerance corridor and is deemed acceptable to the organization, it can move forward with the appropriate risk management tool. Insurance is just one solution to risk management. Once the hazard or exposure is identified, the company will choose to eliminate, retain, reduce, transfer, minimize, avoid or control the risk.

How do you evaluate the data?

Data will be gathered at various stages of the risk management process based on historical data, industry data, flowcharts, inspections, compliance review, surveys or policy/procedure review. There are several ways to evaluate the data. This can be done by determining the likelihood and impact of the event occurring. When determining the likelihood, loss analysis, risk mapping, forecasting or probability analysis can be used. When determining the impact on the organization, cost benefit, payback analysis, net present value analysis or internal rate of return analysis can be used. Understanding the importance of the administration phase of the risk management program is critical and requires an organization to look at loss trends, or a trend in certain other factors. This is when the organization will use the data and make changes from an implementation or procedural standpoint to mitigate future losses. Many companies will effectively identify an exposure and will put a policy or procedure in place, but fail to monitor or revisit this exposure from time to time to measure the effectiveness of the program.

Exposures and hazards to an organization appear and change quickly, forcing companies to be reactive instead of proactive through their risk management program. Again, this is why it’s crucial to elevate the importance of risk management companywide.

Michael J. Lucas, CIC, CRM, is a partner with Millennium Corporate Solutions. Reach him at (909) 456-8911 or mikel@mcsins.com.

Published in Los Angeles
Wednesday, 02 March 2011 12:06

Mark Davis

The risk of potential failure is ever-present in the life of a startup, especially one that is located in Silicon Valley. As a senior leader, your goal is to maximize the possibility of success by assessing risks and taking advantage of the opportunities that they can present.

Break new ground

Several years ago, my Virsto co-founders and I set out to secure funding for our startup and spent many days visiting venture capital firms along Sand Hill Road, home to many Silicon Valley venture capitalists. Time and again, those VCs would assume that as a startup in the virtualization space, we naturally would develop our first product to support VMware, which was essentially a monopolist in that market at the time.

They were wrong.

On the contrary, we made a conscious decision to build our first solution supporting Microsoft’s yet-to-be-announced competing technology platform. The reason was simple: It was the green field. Many of the companies that were developing products for the market-leading platform had been around for years, giving them ample time to establish themselves and crowd the market. We made a bet that Microsoft would rapidly take market share. We knew that by choosing the alternative path, Virsto would have the opportunity for faster growth with many new users who would need a product to support their brand-new platform.

It was a carefully calculated, strategic risk that we took, and along the way, it taught us several valuable lessons about the keys to going after the green field.

Plan growth wisely

The first order of business was to establish our beachhead. To set ourselves up for success, part of our plan was to grow the company strategically. The first two years were spent developing the technology, determining the product specifics and mapping how the company should grow. We did not outsource quickly or hire with abandon. Instead, we opted to manage our cash reserves carefully before turning on the growth, once we had proven what we had was truly viable.

Focus

Too often, startups get overeager and try to “focus” on too much. It is a classic mistake: Right out of the gate, you get excited and want to chase every opportunity in your field of vision. Instead, Virsto took the tack of securing only the capital we needed to start the company and to support our research and development. Determined not to waste a penny or squander a moment of our headstart in the market, we became experts in a specific area that promised great potential growth.

Build a passionate team

A CEO interacts daily with a staggering amount of people in numerous ways — customers, employees, channel partners, board members, strategic partners, investors, lawyers, bankers, prospects and so on. To keep the business running smoothly, it is vital to be team-oriented and assemble a talented group of individuals, interacting with each person in different ways so that each gives you his or her very best.

It is necessary to bring passion to your role, and this is particularly relevant when you are all focused on one goal. At Virsto, our team is defined by its determined optimism. This is a team of people who are very excited about what we are doing and who enjoy working with each other and with our customers and partners. The gang has a strong desire to make a difference, to build something significant. <<

Mark Davis is the CEO and co-founder of Virsto Software. He has been at the center of the networked storage and virtualization revolutions since their inception. He launched the first Fibre Channel disk array in 1994 and was instrumental in growing Sun Microsystems from a nonplayer to the largest Unix storage vendor within five years. Before co-founding Virsto, he was CEO of storage resource management vendor Creekpath Systems, engineering its acquisition by Opsware (now HP), and also repositioned ConvergeNet as the inventor of SAN-based storage virtualization, resulting in a $340M acquisition by Dell.

Published in Northern California