There are more than 17,000 environmental laws and regulations worldwide. How sure are you that your business operations are in compliance?

Environmental insurance has become a hot topic the last several years, mainly because even though most companies have environmental exposures, those risks are excluded from most liability and property policies, creating a major gap in coverage.

“An experienced, specialized  broker can help you recognize exposures, understand the regulatory climate and provide solutions, whether it is insurance or other risk mitigation options to satisfy coverage needs or financial assurance requirements,” says Michael R. Szot, Executive Vice President, Global Practice Leader, Environmental Service Group, Aon Risk Solutions.

Smart Business spoke with Szot, Gregory E. Schilz, Managing Director, Environmental Service Group, Aon Risk Solutions, and Anne Sherwin, Vice President and Senior Account Executive, Aon Risk Solutions, about how to protect your company from environmental risk.

Why should businesses be concerned about environmental risk?

Many companies are unaware that they do not have proper protection against environmental risk, but virtually any company that owns or leases property has exposure to environmental risk. If a company transports potentially harmful materials, it has environmental exposure. An experienced environmental broker can point where exposure exists and whether companies have coverage for it in their current program. Companies may have some limited environmental coverage built into their current policies, but a broker can identify if they have a gap.

How can businesses assess whether they have a gap in their environmental coverage?

Companies may not  understand their environmental risk. The starting point is a coverage gap analysis, in which a broker reviews current policies to determine if their insurance program provides any environmental coverage. The answer generally depends on the company and the country in which the company operates, but usually, coverage for environmental exposures is limited, at best.

Next, the broker will make a site inspection and perform a policy review highlighting  where the company has exposures and its gaps in coverage to environmental risk. Then, the company will receive solution sets showing how to fill any gaps with an environmental insurance product or other mechanism.

In many cases, they may choose not to buy insurance; they may intentionally self-insure risk. But to not know the risk level would be a mistake for any organization.

What types of problems are covered with environmental insurance?

The biggest issue is pre-existing, unknown conditions. Whenever a business considers buying a property, whether it is an undeveloped or currently developed piece of land, there is always a question about the historical use of that property. Even an undeveloped piece of land with grass growing on top of it could have been used 30 years ago as a plating facility, with lead, zinc or toxic minerals in the ground. That is the single largest driver that causes businesses to consider environmental insurance — what they don’t know about a property they are buying.

How does environmental insurance handle new issues?

Typically, this coverage focuses on insuring unknown issues that may be associated with a site. But there are also insurance policies for situations in which you have existing contamination on a site and you are trying to cap the potential cost of that risk.

You may think the risk is a $5 million problem and you don’t want it to end up being a $30 million problem. By capping that cost, businesses know if a risk becomes a larger problem than anticipated, additional insurance can protect them from that worst-case scenario. Also, most pollution policies are written on a ‘claims-made’ basis — a claim has to be reported during the policy term. However, environmental insurance policies, if crafted correctly, can have full pre-existing coverage conditions applying, with no retroactive limitation. So if the policy is placed today, it covers everything that happened in the past but that you don’t know about yet.

Why is environmental insurance growing in popularity?

It is a very advantageous market for companies considering environmental insurance for the first time or renewing their coverage. Conditions are favorable primarily due to the fact that the market has grown. Three years ago, only a few major insurance carriers offered environmental products or coverage. Today, more than 20 active markets offer some form of pollution liability coverage.

Current events — the Gulf Oil Spill and the Japanese earthquake and tsunami — cause people to think about the environment. Those are dramatic events, but smaller issues happen every day. Awareness is augmented by public and government regulators and the number of laws in place — more than 17,000 worldwide — many of which are conflicting and very complex. Companies require individuals who are staying on top of those issues to advise them on their potential liability and how best to mitigate that liability.

The market is also growing in response to major regulatory changes in the European Union. The regulatory framework of the EU’s Environmental Liability Directive creates new liability — a ‘polluter pays’ model. It also requires financial assurance, which can usually be satisfied by insurance, bonds, surety, escrow accounts, trust funds or cash.

Assurance is voluntary, but several countries have committed to moving to compulsory financial security, and there is pressure for others to do so in the name of consistency.

For affected companies, specific pollution legal liability coverage is a solution. It can be modified  to match ELD requirements and exposure for environmental liability.

Michael R. Szot, CPCU, ARM, is Executive Vice President and Global Practice Leader, Environmental Service Group, Aon Risk Solutions. Reach him at michael.szot@aon.com or (213) 630-3253. Gregory E. Schilz is Managing Director, Environmental Service Group with Aon Risk Solutions. Reach him at gregory.schilz@aon.com or (415) 486-7652. Anne Sherwin is a Vice President and Senior Account Executive for Aon Risk Solutions. Reach her at anne.sherwin@aon.com or (412) 594-7534.

Published in Pittsburgh

There are more than 17,000 environmental laws and regulations worldwide. How sure are you that your business operations are in compliance?

Environmental insurance has become a hot topic the last several years, mainly because even though most companies have environmental exposures, those risks are excluded from most liability and property policies, creating a major gap in coverage.

“An experienced, specialized broker can help you recognize exposures, understand the regulatory climate and provide solutions, whether it is insurance or other risk mitigation options to satisfy coverage needs or financial assurance requirements,” says Michael R. Szot, executive vice president, global practice leader, Environmental Service Group, Aon Risk Solutions.

Smart Business spoke with Szot, Gregory E. Schilz, managing director, Environmental Service Group, Aon Risk Solutions, and Edward X. McNamara, a senior vice president at Aon Risk Solutions, about how to protect your company from environmental risk.

Why should businesses be concerned about environmental risk?

Many companies are unaware that they do not have proper protection against environmental risk, but virtually any company that owns or leases property has exposure to environmental risk. If a company transports potentially harmful materials, it has environmental exposure. An experienced environmental broker can point where exposure exists and whether companies have coverage for it in their current program. Companies may have some limited environmental coverage built into their current policies, but a broker can identify if they have a gap.

How can businesses assess whether they have a gap in their environmental coverage?

Companies may not  understand their environmental risk. The starting point is a coverage gap analysis, in which a broker reviews current policies to determine if their insurance program provides any environmental coverage. The answer generally depends on the company and the country in which the company operates, but usually, coverage for environmental exposures is limited, at best.

Next, the broker will make a site inspection and perform a policy review highlighting  where the company has exposures and its gaps in coverage to environmental risk. Then, the company will receive solution sets showing how to fill any gaps with an environmental insurance product or other mechanism.

In many cases, they may choose not to buy insurance; they may intentionally self-insure risk. But to not know the risk level would be a mistake for any organization.

What types of problems are covered with environmental insurance?

The biggest issue is pre-existing, unknown conditions. Whenever a business considers buying a property, whether it is an undeveloped or currently developed piece of land, there is always a question about the historical use of that property. Even an undeveloped piece of land with grass growing on top of it could have been used 30 years ago as a plating facility, with lead, zinc or toxic minerals in the ground. That is the single largest driver that causes businesses to consider environmental insurance — what they don’t know about a property they are buying.

How does environmental insurance handle new issues?

Typically, this coverage focuses on insuring unknown issues that may be associated with a site. But there are also insurance policies for situations in which you have existing contamination on a site and you are trying to cap the potential cost of that risk.

You may think the risk is a $5 million problem and you don’t want it to end up being a $30 million problem. By capping that cost, businesses know if a risk becomes a larger problem than anticipated, additional insurance can protect them from that worst-case scenario. Also, most pollution policies are written on a ‘claims-made’ basis — a claim has to be reported during the policy term. However, environmental insurance policies, if crafted correctly, can have full pre-existing coverage conditions applying, with no retroactive limitation. So if the policy is placed today, it covers everything that happened in the past but that you don’t know about yet.

Why is environmental insurance growing in popularity?

It is a very advantageous market for companies considering environmental insurance for the first time or renewing their coverage. Conditions are favorable primarily due to the fact that the market has grown. Three years ago, only a few major insurance carriers offered environmental products or coverage. Today, more than 20 active markets offer some form of pollution liability coverage.

Current events — the Gulf Oil Spill and the Japanese earthquake and tsunami — cause people to think about the environment. Those are dramatic events, but smaller issues happen every day. Awareness is augmented by public and government regulators and the number of laws in place — more than 17,000 worldwide — many of which are conflicting and very complex. Companies require individuals who are staying on top of those issues to advise them on their potential liability and how best to mitigate that liability.

The market is also growing in response to major regulatory changes in the European Union. The regulatory framework of the EU’s Environmental Liability Directive creates new liability — a ‘polluter pays’ model. It also requires financial assurance, which can usually be satisfied by insurance, bonds, surety, escrow accounts, trust funds or cash.

Assurance is voluntary, but several countries have committed to moving to compulsory financial security, and there is pressure for others to do so in the name of consistency.

For affected companies, specific pollution legal liability coverage is a solution. It can be modified  to match ELD requirements and exposure for environmental liability.

Michael R. Szot, CPCU, ARM, is executive vice president and global practice leader, Environmental Service Group, Aon Risk Solutions. Reach him at michael.szot@aon.com or (213) 630-3253. Gregory E. Schilz is managing director, Environmental Service Group with Aon Risk Solutions. Reach him at gregory.schilz@aon.com or (415) 486-7652. EDWARD X. MCNAMARA is a senior vice president at Aon Risk Solutions. Reach him at edward.mcnamara@aon.com or (216) 623-4146.

Published in Cleveland

Now more than ever, companies are under the microscope, as federal investigators are beefing up the enforcement of regulations.

For instance, although the anti-bribery and public company accounting statutes in the Foreign Corrupt Practices Act were established nearly 40 years ago, enforcement has exploded in recent years. In 2004, the U.S. Securities and Exchange Commission and the Department of Justice brought a combined five FCPA enforcement actions. That number rose to 33 in 2008 and 66 in 2009, as reported by Corporate Secretary, a news service for general counsel and governance professionals.

In addition to increased regulatory scrutiny, the recent passing of The Wall Street Reform and Consumer Protection Act (commonly referred to as the Dodd-Frank Act) is resulting in increased enforcement of a federal anti-bribery law, as reported by Compliance Week, a corporate governance news service.

Created with the intent of preventing another financial crisis, the new law contains financial incentives for whistle blowers to bypass internal corporate compliance protocols and go directly to authorities. The new legislation adds to the risk exposures associated with the decisions made by corporate directors and officers, especially as they act on issues of governance and executive compensation.

“A number of silver-bullet remedies — audits, policies in a box, even software — have been on the market well before the Sarbanes-Oxley Act, which declared specific awards for employees to notify government agencies of any tax fraud committed by their employers,” says Edward X. McNamara, a senior vice president at Aon Risk Solutions. “The conflict is that these solutions are mostly reactive or after the fact, doing little to directly avoid or prevent legal or ethical violations.”

Smart Business spoke with McNamara about the rise in enforcement actions and why establishing a culture of compliance is so important.

Why is an effective compliance program so vital?

Several studies reveal that employers with credible, proactive compliance programs that encourage employees to speak up are most effective at discouraging bad behaviors before they manifest into irreversible actions.

The Association of Certified Fraud Examiners studied 508 companies that had experienced occupational fraud and discovered companies that unearthed troubling activity were more likely to have learned of it from a coworker’s tip than from any internal or external audit. Moreover, organizations that had anonymous reporting systems in place suffered less than half the financial losses from fraud sustained by companies without such systems.

Building a culture of compliance empowers a company to easily mitigate risks and be vigilant about regulatory requirements. It fundamentally influences and shapes decisions made involving the attraction and retention of ethical people. The byproduct of such a culture is an operational framework that is effective, measurable and delivers long-term results.

What are the risks of false accusations?

Increased regulatory enforcement leads to increased claims. Even historically good companies that have invested considerable time and resources establishing robust compliance programs are at risk when incentives to serve as a whistle blower are so rich. Compounding this risk exposure is the requirement that a public company must disclose it is being investigated or has received a subpoena. Increasingly, these announcements are triggering hungry plaintiffs’ lawyers to file shareholder derivative lawsuits. Settlements in these cases are becoming larger and larger, resulting in unpredictable drops in a company’s stock price, which can unleash securities class action suits.

There’s no avoiding such risks, as directors and officers cannot diminish the complexity of the business, legal and regulatory environment in which they operate. A company’s ability to attract good, ethical corporate leaders is only complicated by the threat of unfounded legal action. Solutions do exist, as a great deal can be done to protect the personal assets of directors and officers through a combination of strong corporate governance, broad corporate indemnification and a risk transfer program that includes a customized D&O liability insurance program.

What should companies do going forward?

The days of a ‘see no evil; hear no evil; speak no evil’ approach to compliance are over, because what you don’t know can hurt you. As organizations move from a mentality of erratic compliance validation to one that uncovers and addresses risks head-on, several benefits can be realized: improved planning, cost savings from elimination of redundant programs, increased morale and the attraction of top talent.

Best of all, a culture of compliance allows an organization to invest greater quantities of managerial time and resources on business-critical functions, which can only improve bottom line performance.

Edward X. McNamara is a senior vice president at Aon Risk Solutions, a leading risk management and insurance brokerage firm. Reach him at edward.mcnamara@aon.com or (216) 623-4146.

Published in Cleveland
Saturday, 30 April 2011 20:01

How to insure entities in the public sector

The public sector provides a broad range of services, and insuring their risks can be challenging. Within a single entity, such as a state, city or county, there are prisons, airports, police, etc., and entities that provide zoning ordinances, maintain bridges, run golf courses, and oversee water and sewer utilities.

“Public entities have a very broad range of risks that need to be analyzed,” says William F. Becker, Executive Vice President and National Practice Leader — Public Sector, Aon Risk Solutions. “Many of these risks are unique, and trying to find a set of carriers who understand that and will still take on those risks can be challenging.”

Smart Business spoke with Becker, Steven P. Kahn, Managing Director of Aon Global Risk Consulting, and Scott Saunders, Vice President of Aon Risk Solutions, about insuring the public sector.

What is included in the public sector?

The traditional definition is any governmental entity, encompassing cities, states, counties, towns and special districts, along with authorities, commissions, school systems, utilities, transits and airports. Aon’s practice group also supports nonprofits, political organizations, Indian Country and higher education institutions, both public and private.

How are insurance needs different for public sector entities?

Public entities see some of the same issues as private entities, but there are certain risks in the public sector that are not seen in private organizations because they provide services that other organizations do not, such as prisons, fire and police, zoning and bridge maintenance. Pursuant to sovereign immunity laws, the public sector may have caps on the amounts for which they can be held liable, or immunity from suits. Also, there are some coverages required by statute. For instance, private companies need D&O insurance to cover their directors and officers, but a public entity covers their public officials instead of directors and officers. While their basic exposures and risk factors  are quite similar, the public entity-specific policies are worded specifically to insure these exposures.

How do caps and/or immunity from suits work for public entities?

In some states, there are caps on the amount of a claim against a governmental entity, capping its liability and reducing its costs. Many states have a per-claimant and per-occurrence cap. The cap differs by state and some states, such as California, have no caps. The caps would not apply to a claim in federal court if an entity is sued for discrimination, for example, and the caps do not apply to claims in other states.

Other states may have full immunity from certain suits, e.g., Michigan municipalities are immune from suits subject to certain exceptions, such as losses arising out of highways and sidewalks, motor vehicles and building maintenance, etc.

What issues may arise if public entities are not insured properly?

Government entities have a very limited ability to obtain funds from other sources. A large award could cause them to cut programs, impose a special tax assessment, or, in some cases, to declare bankruptcy, if allowed. This recently occurred in Boise County, Idaho, due to a zoning claim the county lost in court.  The county issued a permit but wouldn’t let the developer move forward. The developer took the county to court and it lost a $4 million judgment. The county was not insured and it declared bankruptcy.

How can organizations best understand their risks and ensure they have the proper insurance?

A thorough and creative process is necessary to identify and measure exposure to risks of accidental loss. This is done by inspections, interviews, analysis of budgets and financial reports, analysis of past claims data, review of major contracts and knowledge of operations. The organization needs a knowledgeable partner to help it place the best available coverage at reasonable terms.

How can these entities determine exposures?

To complete a thorough analysis of their exposures, public entities should set up inspections, conduct interviews with department heads, walk through the facilities, look at budgets, financial reports, past claims data and contracts to understand what operations are being performed that fall under different units of local government.

Employees working in the governmental entity know the operations but are often unaware of the risk or insurance implications.

Why do public entities need professional help?

Risk professionals can look at insurance policy agreements and exclusions to make sure that nothing is left uninsured — or if something is left uninsured by design, the professional can ensure that everyone understands that the entity will retain the risk.

Some claims, like auto accidents, are straightforward, but other types can be subtle. For example, if the public entity denies a zoning permit to someone and is sued as a result, will it be covered? Will employment practices claims be covered if employees are terminated  inappropriately?

In another example, if an airport, overseen by the city council, purchases coverage for bodily injury or property damage from the aviation insurance market, it should carry errors and omissions insurance for its oversight of the airport. The public entity may purchase E&O insurance from the carrier that is providing its general liability, but that carrier may not cover anything at the airport. Only someone well versed in insurance policies would recognize the gap between policies. If the airport policy doesn’t cover E&O and the general liability policy covers E&O but excludes the airport, there is uninsured exposure.

These more subtle exposures are the ones for which the public entity will need help from a knowledgeable partner.

William F. Becker is Executive Vice President, National Practice Leader – Public Sector, Aon Risk Solutions. Reach him at bill.becker@aon.com. STEVEN P. KAHN, CPCU, ARM, is Managing Director of Aon Global Risk Consulting. Reach him at (949) 608-6418 or steven.kahn@aon.com. Scott Saunders is a Vice President with Aon Risk Solutions. Reach him at (412) 594-7583 or scott.n.saunders@aon.com.

Aon will be a sponsor and exhibitor at PRIMA 2011 June 5-8 in Portland, Ore. For more information visit Primacentral.org.

Published in Pittsburgh
Saturday, 30 April 2011 20:01

How to insure public entities

The public sector provides a broad range of services, and insuring their risks can be challenging. Within a single entity, such as a state, city or county, there are prisons, airports, police, etc., and entities that provide zoning ordinances, maintain bridges, run golf courses, and oversee water and sewer utilities.

“Public entities have a very broad range of risks that need to be analyzed,” says William F. Becker, executive vice president and national practice leader — public sector, Aon Risk Solutions. “Many of these risks are unique, and trying to find a set of carriers who understand that and will still take on those risks can be challenging.”

Smart Business spoke with Becker, Steven P. Kahn, managing director of Aon Global Risk Consulting, and Joseph J. Perry, vice president of Aon Risk Solutions, about insuring the public sector.

What is included in the public sector?

The traditional definition is any governmental entity, encompassing cities, states, counties, towns and special districts, along with authorities, commissions, school systems, utilities, transits and airports. Aon’s practice group also supports nonprofits, political organizations, Indian Country and higher education institutions, both public and private.

How are insurance needs different for public sector entities?

Public entities see some of the same issues as private entities, but there are certain risks in the public sector that are not seen in private organizations because they provide services that other organizations do not, such as prisons, fire and police, zoning and bridge maintenance. Pursuant to sovereign immunity laws, the public sector may have caps on the amounts for which they can be held liable, or immunity from suits. Also, there are some coverages required by statute. For instance, private companies need D&O insurance to cover their directors and officers, but a public entity covers their public officials instead of directors and officers. While their basic exposures and risk factors  are quite similar, the public entity-specific policies are worded specifically to insure these exposures.

How do caps and/or immunity from suits work for public entities?

In some states, there are caps on the amount of a claim against a governmental entity, capping its liability and reducing its costs. Many states have a per-claimant and per-occurrence cap. The cap differs by state and some states, such as California, have no caps. The caps would not apply to a claim in federal court if an entity is sued for discrimination, for example, and the caps do not apply to claims in other states.

Other states may have full immunity from certain suits, e.g., Michigan municipalities are immune from suits subject to certain exceptions, such as losses arising out of highways and sidewalks, motor vehicles and building maintenance, etc.

What issues may arise if public entities are not insured properly?

Government entities have a very limited ability to obtain funds from other sources. A large award could cause them to cut programs, impose a special tax assessment, or, in some cases, to declare bankruptcy, if allowed. This recently occurred in Boise County, Idaho, due to a zoning claim the county lost in court.  The county issued a permit but wouldn’t let the developer move forward. The developer took the county to court and it lost a $4 million judgment. The county was not insured and it declared bankruptcy.

How can organizations best understand their risks and ensure they have the proper insurance?

A thorough and creative process is necessary to identify and measure exposure to risks of accidental loss. This is done by inspections, interviews, analysis of budgets and financial reports, analysis of past claims data, review of major contracts and knowledge of operations. The organization needs a knowledgeable partner to help it place the best available coverage at reasonable terms.

How can these entities determine exposures?

To complete a thorough analysis of their exposures, public entities should set up inspections, conduct interviews with department heads, walk through the facilities, look at budgets, financial reports, past claims data and contracts to understand what operations are being performed that fall under different units of local government.

Employees working in the governmental entity know the operations but are often unaware of the risk or insurance implications.

Why do public entities need professional help?

Risk professionals can look at insurance policy agreements and exclusions to make sure that nothing is left uninsured — or if something is left uninsured by design, the professional can ensure that everyone understands that the entity will retain the risk.

Some claims, like auto accidents, are straightforward, but other types can be subtle. For example, if the public entity denies a zoning permit to someone and is sued as a result, will it be covered? Will employment practices claims be covered if employees are terminated  inappropriately?

In another example, if an airport, overseen by the city council, purchases coverage for bodily injury or property damage from the aviation insurance market, it should carry errors and omissions insurance for its oversight of the airport. The public entity may purchase E&O insurance from the carrier that is providing its general liability, but that carrier may not cover anything at the airport. Only someone well versed in insurance policies would recognize the gap between policies. If the airport policy doesn’t cover E&O and the general liability policy covers E&O but excludes the airport, there is uninsured exposure.

These more subtle exposures are the ones for which the public entity will need help from a knowledgeable partner.

Published in Detroit
Saturday, 30 April 2011 20:01

How to insure entities in the public sector

The public sector provides a broad range of services, and insuring their risks can be challenging. Within a single entity, such as a state, city or county, there are prisons, airports, police, etc., and entities that provide zoning ordinances, maintain bridges, run golf courses, and oversee water and sewer utilities.

“Public entities have a broad range of risks that need to be analyzed,” says William F. Becker, executive vice president and national practice leader – public sector, Aon Risk Solutions. “Many of these risks are unique, and trying to find carriers who understand that and will take on those risks can be challenging.”

Smart Business spoke with Becker, Steven P. Kahn, managing director of Aon Global Risk Consulting, and Mark Blassie, who works in business development at Aon Risk Solutions, about insuring the public sector.

What is included in the public sector?

The traditional definition is any governmental entity, encompassing cities, states, counties, towns and special districts, along with authorities, commissions, school systems, utilities, transits and airports. Aon’s practice group also supports nonprofits, political organizations, Indian Country and higher education institutions, both public and private.

How are insurance needs different for public sector entities?

Public entities see some of the same issues as private entities, but there are certain risks in the public sector that are not seen in private organizations because they provide services that other organizations do not, such as prisons, fire and police, zoning and bridge maintenance. Pursuant to sovereign immunity laws, the public sector may have caps on the amounts for which they can be held liable, or immunity from suits. Also, there are some coverages required by statute. For instance, private companies need D&O insurance to cover their directors and officers, but a public entity covers their public officials instead of directors and officers. While their basic exposures and risk factors are quite similar, the public entity-specific policies are worded specifically to insure these exposures.

How do caps and/or immunity from suits work for public entities?

In some states, there are caps on the amount of a claim against a governmental entity, capping its liability and reducing its costs. Many states have a per-claimant and per-occurrence cap. The cap differs by state and some states, such as California, have no caps. The caps would not apply to a claim in federal court if an entity is sued for discrimination, for example, and the caps do not apply to claims in other states.

Other states may have full immunity from certain suits, e.g., Michigan municipalities are immune from suits subject to certain exceptions, such as losses arising out of highways and sidewalks, motor vehicles and building maintenance, etc.

What issues may arise if public entities are not insured properly?

Government entities have a very limited ability to obtain funds from other sources. A large award could cause them to cut programs, impose a special tax assessment, or, in some cases, to declare bankruptcy, if allowed. This recently occurred in Boise County, Idaho, due to a zoning claim the county lost in court. The county issued a permit but wouldn’t let the developer move forward. The developer took the county to court and it lost a $4 million judgment. The county was not insured and it declared bankruptcy.

How can organizations best understand their risks and ensure they have the proper insurance?

A thorough and creative process is necessary to identify and measure exposure to risks of accidental loss. This is done by inspections, interviews, analysis of budgets and financial reports, analysis of past claims data, review of major contracts and knowledge of operations.

The organization needs a knowledgeable partner to help it place the best available coverage at reasonable terms.

How can these entities determine exposures?

To complete a thorough analysis of their exposures, public entities should set up inspections, conduct interviews with department heads, walk through the facilities, look at budgets, financial reports, past claims data, and contracts to understand what operations are being performed that fall under different units of local government.

Employees working in the governmental entity know the operations but are often unaware of the risk or insurance implications.

Why do public entities need professional help?

Risk professionals can look at insurance policy agreements and exclusions to make sure that nothing is left uninsured — or if something is left uninsured by design, the professional can ensure that everyone understands that the entity will retain the risk.

Some claims, like auto accidents, are straightforward, but other types can be subtle. For example, if the public entity denies a zoning permit to someone and is sued as a result, will it be covered? Will employment practices claims be covered if employees are terminated  inappropriately?

In another example, if an airport, overseen by the city council, purchases coverage for bodily injury or property damage from the aviation insurance market, it should carry errors and omissions insurance for its oversight of the airport. The public entity may purchase E&O insurance from the carrier that is providing its general liability, but that carrier may not cover anything at the airport. Only someone well versed in insurance policies would recognize the gap between policies. If the airport policy doesn’t cover E&O and the general liability policy covers E&O but excludes the airport, there is uninsured exposure.

These more subtle exposures are the ones for which the public entity will need help from a knowledgeable partner.

William F. Becker is executive vice president, national practice leader - public sector, Aon Risk Solutions. Reach him at bill.becker@aon.com. Steven P. Kahn, CPCU, ARM, is managing director of Aon Global Risk Consulting. Reach him at (949) 608-6418 or steven.kahn@aon.com. Mark Blassie works in business development at Aon Risk Solutions. Reach him at (314) 719-3865 or mark.blassie@aon.com.

Aon will be a sponsor and exhibitor at PRIMA 2011 June 5-8 in Portland, Ore.  For more information visit Primacentral.org.

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 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

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