Tuesday, July 31, 2007

Severance Insurance

With long term disability if you get W-2'd the premium (which basically means that you pay the pemium), any benefit you receive is not deemed "wages" for the purpose of federal income tax. It's not taxable! Wow!

I've got to research whether there is anything like that for any other benefit. Do you suppose it (or anything like it) is translatable to any other kind of job loss benefit?

willy

Monday, July 30, 2007

Severance Insurance

It's been established (not yet quantified) that there are durational savings. Where else could there be savings? A number of blogs ago I asked the question, "If insurance companies can write disability insurance, why can't they write severance insurance?" Both illness/injury and getting fired result in the same thing...loss of income, and both happen involuntarily.

Well, that got me to researching long term disability insurance and better understanding what makes it tick. I now better understand how it is structured, but in doing the research I found that long term disability benefits are offset by any Social Security or Workmens Compensation benefits received. "Offset" ??? If that's the precedent, then why couldn't/shouldn't severance be offset by state unemployment benefits? Possibly more savings for an insurer? Any legal issues?

So how big a deal would that be. In looking up state unemployment insurance benefits, I found that the range of weekly benefits is from $133 in Puerto Rico to $575 in Massachusetts. And these amounts can grow considerably based on marital status, dependents, etc. So say someone is getting 10 weeks of severan ce. The potential savings with an offset would be $1,330 to $5,750 per person. That's real money.

Now I'm understanding why insurance companies are sniffing around this. The savings are really there, so it would seem.

willy

Sunday, July 29, 2007

Severance Insurance

Ok, here's a little bit of insight as to how big an arbitrage (the difference between how long a severance benefit a displaced worker gets and when that displaced worker gets a new job) could exist.

There was a 2005 paper written by Donald O. Parsons from George Washington University's Department of Economics that seems to have done a pretty good job researching the minimums and maximums of corporate generosity when it comes to severance. He found:

1. Exempt workers severance benefits ranged from 4 to 28 weeks.
2. Executive workers severance benefits ranged from 9 to 33 weeks.
3. Senior executive workers severance benefits ranged from 12 to 37 weeks.
4. Officers severance benefits ranged from 13 to 39 weeks.

So, it's pretty clear that there does exist a duration arbitrage that an insurance company could absorb a portion of the risk on.

willy

Severance Insurance

Days or weeks? The classic answer is probably, "It depends." But depends on what? My guess is that since severance benefits are typically determined by the length of tenure an employee has, average employee tenure is probably one of the biggest factors. I'd expect that an old line company like P&G or IBM or ATT probably has pretty long average employee tenures, so their displaced employees probably receive a severance benefit that provides a big spread (arbitrage) between benefit duration and how long it takes their displaced employee to find a new job.

As an example the Bureau of Labor Statistics data for the month of June states that the median weeks unemployed for US workers over the age of 16 is 6.2 weeks. So, if the average benefit formula provides one week of benefit for every year of tenure, then there exists a positive potential arbitrage for every worker who has been employed by the same company for over 6.2 years. This leads to the question of what is the average tenure of the American workforce?

willy

Severance Insurance

If there is money to be saved, because the formula used to calculate severance benefit duration generates a benefit duration that significantly exceeds average/median unemployment durations, who gets to save it? The corporation? No question here unless there really is insurance, in which case it's these savings that incent the insurance company to write the coverage in the first place.

So, it's possible that the insurance companies see a natural arbitrage here and are willing to bite off a piece of it in the form of duration risk?

How big do you think that arbitrage is...days? weeks?

willy

Monday, July 23, 2007

Severance Insurance

Almost all of the severance programs that I have looked at work on the basis of a displaced worker receiving a certain number of days or weeks of severance for each year that they have worked for the company. For instance, if a company gives one week of severance for each year of tenure, the arithmetic is pretty easy...6 years of tenure gets 6 weeks of severance, where each week of severance equates to one week of pre-displacement salary.

The question is, are there any potential savings here? I went to the Bureau of Labor Statistics website and researched what the average duration of unemployment was. Interestingly, they not only keep average data monthly (and have since 1948) but they also keep median data monthly.

So, my conclusion is pretty clear here; if the severance duration awarded an individual displaced worker exceeds the national unemployment duration average or median, there just might be suuficiently significant savings on which an insurance company might build a risk absorbtion model. But that's too simple, because I'll bet when you drill down in the data, you'll find significant variables like age, sex, ethnicity, academic achievement, job description, job tenure, salary range, etc.

Does severance insurance really take into account all of this and still allow an insurance company to quantify the duration risk, such that they can make an informed decision as to whether or not they should offer coverage to a company? There's another issue. What's a company but a group of workers (I've refrred to them quite often as currency). Could an underwriter really accurately underwrite a company on an individual by individual basis and come up with a premium that accurately reflected the sum of the individual risks?

This whole discussion brings up another hurdle. In order to capture potential duration savings, the severance benefit would have to be paid on a pay period basis and stop (like disability) when the diplaced worker went back to work. How would that change cut it with the human resources crowd?



willy

Wednesday, July 18, 2007

Severance Insurance

I've talked a bit about Severance Insurance being a transfer-of-risk product for large corporations, say the Fortune 500. Clearly, it benefits the buyer (the corporation) by apparently saving them significant amounts of money. A couple of blogs ago I asked "at whose expense?".

So I figured I better do a little more research and inquire of a number of human resource specialists about their feelings towards such a change of approach in funding severance. Virtually unanimously, they were more focused on this approach "not taking anything away from" displaced employees. Almost all of them were concerned that a change would require them to do more work. Hey guys, who's this about, you or the displaced worker?!! But back to the real question...at whose expense?? Clearly, these HR folks are asking that question.

Until I sleuth out the real structure of the insurance coverage, I really can't definitively answer that question. Probably the best way to get a handle on it in the absence of that information would be to analyze the current structure of all post employment compensation; severance, accumulated vacation time, accumulated sick time and state unemployment insurance benefits. By better understanding how much theses benefits can deliver, we can probably put our finger on the likely sources of savings that the insurance companies are incorporating in their coverages.

So, the next blog will begin to model/quantify/discuss those sources of post employment compensation with a view to trying to identify the likely sources of savings.

willy

Severance Insurance

I'm not particularly brilliant at understanding how patent language is constructed and after taking a look at the two patents for "Providing Termination Benefits for Employees" aka severance insurance, I'm not any more enlightened on how this insurance product is really structured. No great surprise there!

It appears that the software uses a three dimensional risk isolation approach and limits the coverage in any given cell (specific group of employees as determined by wage, tenure and job description) to a calculated number of employees (as a percentage of the total number of employees in that cell). This would appear to be the controlling strategy for dealing with adverse selection. Under the approach used in the two patents, it would appear that a corporation couldn't elect to fire just those employees who would be the most expensive to provide severance to, because they would only be covered for a certain number/percentage of employees who fit that description, e.g., those who earned over $150,000.

willy

Tuesday, July 17, 2007

Severance Insurance...What is it?

As I said in last night's blog, there is an insurance product out there for corporations called Severance Insurance. Clearly, it is a new and innovative way of funding the costs associated with severance. But why would a corporation buy it? Is the corporate market the only market? What about private equity funds? What about its use in the merger and acquistion spectrum? What about for activist investors? Not yet knowing all the details of how the coverage is designed, I would expect that there are only two credible pitches for this coverage: (i) it can save significant money and (ii) it can smooth demand on cash flow! The question is, how much can it save and at what cost to whom? Being the cynic that I am, I could assume it takes from the worker in order to give to the employer, but maybe that's an unfair position. Until I find out more I'll withhold my cynical tendencies.

I'm hoping that my poking around will turn up the actual structure of this new product, and then we can discuss its specific merits (or lack thereof). In the meantime the patents I mentioned do give some sense of how the insurance policy is structured, so maybe we can start there.

More on what the patents disclose later.

willy

Monday, July 16, 2007

Severance Insurance/Salary Protection Insurance

I am getting somewhere with all of this. It turns out that there do exist transfer-of-risk solutions for severance. Here's what I've learned.

Severance Insurance is an alternative way for large companies to fund the costs associated with severance.

Salary Protection Insurance is the same thing but with the interests of the displaced employees as its priority.

willy

Sunday, July 15, 2007

Severance Insurance

If insurance companies can write short and long term disability insurance, then why can't they write severance insurance? Their immediate response will be that they can't deal with something called adverse selection. What's that? It is the fact that if a corporation is the insured, they will only buy the insurance if they know they are going to need it. If the worker is the insured, he or she will only buy it, if they think they're going to get fired.

Interestingly enough there is a patented underwriting method for something called salary protection insurance that claims to deal successfully with the adverse selection issue. Go look up Patent Nos. 6,332,125 B1 and 6,944,597 B2.

So if the concern for adverse selection is removed, why isn't salary protection insurance available? Geeez, it would be just like disability insurance...someone loses their job through no fault of their own...they get sick...they get injured...or they get fired/displaced/let go/replaced/outsourced for no cause and their income is maintained net of Workman's Compensation, Social Security or in the case of Salary Protection Insurance, net of state unemployment insurance benefits. Why shouldn't every worker in the United States have this coverage...as a benefit? The company pays for it (or some major chunk of it), just like they do disability insurance. Then, if a worker gets fired, it's an insurance policy that takes over and maintains the worker's income for some period of time. But maybe it should be exactly like disability insurance. If the worker pays the premium and gets fired, the benefit payments are tax free. That would be excellent!

I've heard AIG has been looking at this coverage. Don't know for sure, but they are a company that has always been on the cutting edge of new transfer-of-risk solutions, so it wouldn't surprise me.

willy

Friday, July 13, 2007

Severance Insurance

The traditional funding protocol for severance is pretty simple. The company writes the displaced employee a check in exchange for receiving a signed general release and waiver.
Now there is an insurance policy that corporations can buy to cover their expenses related to severance and the word is that it not only smooths demand on free cash flow but also saves the corporation big bucks.

So if that's the case, there must be enough financial leverage inside the policy to pay a return to the insurance company, its broker, deliver savings to the corporation and also pay the corporation's severance obligations. Why couldn't that financial horsepower be shared and advantage both the displaced employee and the corporation?

This whole idea of severance insurance is a whole lot like short and long term disability. All provide salary protection because of an involuntary loss of income; non-causal loss of job v. an accident, injury or illness.

The only question is why has it taken so long for severance insurance to be offered?


willy

An Alternative Funding Strategy for Severance

The standard funding protocol for severance is that a corporation writes a check to the displaced employee. Evidently, there is now an insurance policy that

Tuesday, July 10, 2007

Salary Protection Insurance

Seriously, who's it for?

willy

Salary Protection Insurance

Word from a number of insurance markets is that there is such a beast. Who's the broker? How do I get it? Is it for me or for my employer (former)?

willy

Salary Protection Insurance

Do you think there could be such a thing? There is!

willy

Tuesday, July 3, 2007

Independence?

It's nice to celebrate our nation's independence, but when you think about it, what does that get us? A warm and fuzzy feeling? Niiiiice. But for those of us who have put in an entire career for some company only to be fired because we no longer fit, it doesn't mean jack! WE sure aren't independent. Independence needs to mean that we, the workers, have some control of our destiny. That doesn't mean letting some union represent us. It means standing up, being counted and representing ourselves. Until corporate America can be made to believe that the workers they seek are "collectively independent", we are captive to their whims and whimsies. Time to stand up folks. Organize ourselves. Don't rely on anyone to do it for us. Seek independence. SERVICE SEVERANCE MUST HAPPEN. There is a way!

willy