The "Ins and Outs" and "Ups and Downs" of Worker's Compensation Commutations: Motivations, Pricing and DisputesBy Michael Goldstein, Mound Cotton Wollan & Greengrass
Matthew Moore, Senior Solutions Specialist, Inpoint (an Aon business), moderated this panel of commutation veterans who promised to delve into the many facets of worker’s compensation commutations. The panel consisted of Holly Drake, AVP, Head of Asset Management North America – Group Reinsurance, Zurich North America; Gregg Frederick, Executive Vice-President – Reinsurance, Legion Insurance Company (in Liquidation); Ben Gonson, Partner, Nicoletti Gonson Spinner LLP; James Kleinberg, Senior Solutions Specialist, Inpoint; Michael H. Goldstein, Partner, Mound Cotton Wollan & Greengrass LLP; and Andrew Rapoport, Managing Director, Aon Benfield Analytics. Mr. Moore introduced the panel of distinguished reinsurance practitioners and Holly Drake and Gregg Frederick kicked things off by providing an insightful overview of the commutation issues at play. These presenters focused their discussion on the relevant parties’ motivations to commute and broke them down into the following categories:
Aon’s Andrew Rapoport and James Kleinberg then presented their in-depth “Tabular Claimant Model,” which applies discounts based upon a mortality or morbidity table. This is to be differentiated from non-tabular discounts, which are determined from aggregate payment patterns rather than mortality tables. The presenters then walked the group through the relevant specific and global assumptions and factors and presented an illuminating “base case” valuation. The Aon presentation concluded with its “key takeaways,” which were presented as follows:
Ben Gonson made the next presentation and provided additional insights into the significance of commutation clause wording and stressed that not all commutation clauses are created equal. Mr. Gonson walked the audience through several examples of commutation clauses that he has come across over the years and broke down what can set them apart as follows:
Mr. Gonson then explained the role of “Sunset Clauses,” provided some typical examples of them, and explained their interplay with the commutation clause itself. His presentation concluded with the results from a March 2011 AIRROC actuarial survey regarding discounting for commutation in which 77% of the thirty respondents answered that they compute projected costs in the layer and then discount the layer (in the P&C context). Michael Goldstein rounded out the morning’s presentations and provided a comprehensive cross-section of recent arbitration panel and U.S. District Court opinions to examine commutation and sunset clauses in the worker’s compensation context. The three court cases that began in arbitration illustrate some of the problems and pitfalls of arbitration. For example, in Underwriters at Lloyd’s v. PARG, the U.S. District Court for the District of New Jersey examined the underlying panel award, which had spelled out what it considered to be examples of mandatory commutation provisions and required the parties to calculate the claims under the applicable treaties accordingly. Because of perceived ambiguities in the Award, the parties landed in court. The District Court remanded the dispute to the arbitrators in order to answer the following questions:
The same District Court closely analyzed sunset/notice of loss clauses in the worker’s compensation context. Mr. Goldstein concluded the panel by discussing several other recent holdings involving commutation disputes arising from sunset clauses and valuation, as well as tensions between standard arbitration clauses and valuation by neutral actuaries. |