Severance Insurance

I'm still trying to track down more concrete information on whether the Callen patent is in active use. I've had no success to date, but I'll keep trying.

In my last blog I kind of drew the conclusion that the obvious source would be the brokers. In thinking that through some more, if severance insurance is geared towards large corporations, then I would think the large brokers would be the likely suspects. I'm talking about the Marsh's and AON's of the world. They are the one's with the existing client relationships among the Fortune 200.

So...keep the faith. I'll keep looking. I'm getting more convinced that there is a move afoot, albeit quiet, to introduce severance insurance. I'm just curious enough (and unemployed enough) to have the interest and time to stay on this.

willy

Severance Insurance

Well, I think it's pretty clear. If corporate America or the world of private equity are going to hear about Severance Insurance, the trail is going to have to begin with a broker. The major brokers have the sophistication, credibility and relationships that are going to get Severance Insurance to become the new paradigm. It's a win/win/win situation. The broker benefits reputationally and financially by presenting a new and cutting edge cover. The insured ends up saving (theoretically) a bucket full of money. The displaced worker gets a guaranteed severance benefit.

I am becoming convinced that there is something going on out there in this space. I'm not so sure what's taking so long, but where there's smoke, there's fire...and I believe there is plenty of smoke out there.

I'm going to turn my research towards trying to sleuth out what is going on. Back to the Callen patent as a starting point.

I'll be back...hopefully with some concrete information.

willy

Severance Insurance

The quick and easy answer is that nobody does. Otherwise there would be a severance insurance/severeance replacement product out there. But maybe that's a little harsh. In my blogs I've discussed the obvious potential reactionaries:

• Outplacement firms...they like the system just the way it is, because large corporations turn to them to provide post-employment support. Why mess with what works (for them)?
• Academics...believe the current system is broken but beyond that diagnosis they have not come up with any concrete ideas for a new system/method
• Insurance companies...other than the AIG www.aig.com rumor, nothing else has turned up that would confirm any insurance company (good or bad) has a severance insurance product. They seem to be mired in the "adverse selection" bog.
• Insurance brokers...My sense is that the Marsh's of the world www.marsh.com are always looking for new product. But that doesn't mean they are capable or interested in developing one.
• Insurance consultants...Is it their job to diagnose problems (kind of like the academics), to solve problems (kind of like investment bankers) or both? My sense is they are diagnosticians not problem solvers. See www.hewitt.com or www.mercer.com
• Politicians...With all the talk about the middle class being left behind, about mortgage foreclosures, etc. I'm kind of surprised that both sides of the aisel haven't focused on this issue. Not one of the serious candidates has anything remotely close to restructuring job loss benefits on their radar screens/web sites.
• Job Boards...The Monsters www.monster.com of the world are too focused on their own business model to meddle in another arena.
• Investment Bankers...You'd think that the folks responsible for creating financial solutions and effecting all of the major merger and acquisition activity would have quantified the amount of money allocated to workforce restructuring in these deals and at least inquired/explored as to whether there were any alternative strategies available. I guess they rely on the brokers to give them a heads up.
• Private Equity...If there was ever a natural fit, I guess this would be it. They are focused on returns on invested equity and the timeline to effect their exit strategy. Severance Insurance could play a significant roll here. Again, I guess they rely on the brokers to give them a heads up.
• Corporate Executives...They rely on their risk managers (who rely on their brokers) and their human resource executives (who seem to always prefer not rocking the boat). If those executives aren't feeding senior management the right information, then nothing is going to change.

So, who cares (other than me)? I don't think anyone...EXCEPT THE POOR SOULS WHO HAVE BEEN FIRED!! And they don't carry any weight. Maybe they should organize? I've suggested that before.

willy

Severance Insurance

I believe I've developed a fairly strong case for the assumption that there is a reasonable consensus that the idea of severance insurance isn't so far-fetched. Then why has the outplacement world been so quiet? Are they worried about upsetting their apple cart? Do they prefer to fly under the radar? I don't think so. Just about every time an outplacement firm is quoted in a major publication, it's someone from Challenger Gray & Christmas...see http://www.challengergray.com/ or maybe it's the guys from Drake Beam Morin...see http://www.dbmcareerservices.com/.

Their lack of attention to the issue is probably driven by the same reason that mine was...it simply wasn't on their radar screen. A little bit surprising since their client bases have displaced tens of thousands of employees over the last eight to ten years. But their business model had nothing to do with funding benefits, so I guess it's not so surprising. As I understand it, they position themselves between the displacing corporation and displaced employee to provide the employee with what their industry deems as post-employment support, i.e., developing job search skills.

If that's the case, their business certainly doesn't focus on the mechanisms of funding severance nor does it focus on actually being accountable for finding displaced workers new jobs.

So they certainly can't be accused of ignoring severance. It's just not on their bandwidth. It just comes along with the displaced workers who cycle through their systems.

I'm beginning to come to the conclusion that if there is someone out there in the severance insurance space, they don't have a lot of company.

willy

Severance Insurance

I thought that maybe I was getting a little carried away with the whole concept of severance insurance (either financial or service) and decided to take a few days and poke around in academia to see if any smart academic type was out there thinking along the same lines. Guess what? There are.

As a matter of fact, the relevant literature goes back to 1996 when a guy named George E. Rejda (V.J. Skutt Distinguished Professor of Insurance at the University of Nebraska) wrote a paper, UNEMPLOYMENT COMPENSATION: A PROPOSAL FOR AN OPTIONAL SYSTEM OF SELF-INSURANCE. I quote from the abstract, "The author believes state unemployment compensation programs are inefficient public monopolies that are not subject to competition."
Now admittedly George was coming from a slightly different direction, but his premise was identical to mine. I quote further from his Abstarct, "As a result (of providing an alternative), the cost of providing benefits to unemployed workers may be reduced for many employers..."

There is another paper written in 2005 by Donald O. Parsons from Department of Economics at George Washington University entitled, BENEFIT GENEROSITY IN VOLUNTARY SEVERANCE PLANS: THE U.S. EXPERIENCE. What is interesting about this paper is that it cites studies done by Right and Lee Hecht Harrison that basically confirm the formulaic approach to severance plan benefits. The paper further posits (at least as I read it) that voluntary programs would (i) end up costing more, "induce firing costs" and (ii) be less generous, "benefit generosity is likely to be limited". Well, give the guy some credit, at least he's got his fingers on the right places to look, if you're a corporation trying to save money. But his conclusion is weighed down by what I would call the typical excuses for why severance funding can't be done (i) differently, (ii) fairly and (iii) more economically. He is basically saying that a different kind of severance would cost more and provide lower benefits. How creative!

Severance Insurance can be real. What I now know is that there are people out there working on an alternative, e.g., the Callen patent. What I don't know is who are they (other than Callen)?

I know I'm not alone. I've just got to find the players and bring their ideas to the surface.

willy

Severance Insurance

There is a good list of the benefits of a captive in Jay Adkisson's "The Asset Protection Book". He lists the following benefits:

• Stabalize Insurance Budgets
• Reduce Insurance Admin Costs
• Negotiation Tool
• Utilize Own Experience
• Premium Flexibility
• Policy Terms
• Increased Claims Control
• Recapture Underwriting Profits
• Accept Greater Deductibles
• Access to Reinsurance Markets
• Customized Coverage
• Underwrite Exposed Risks
• Enhance Loss Prevention
• Profit Center

After looking at this list, the conclusion is pretty obvious. Severance Insurance fits the "captive model" about as well (if not better than) any other cover currently offered by captives.

I'm beginning to get pretty convinced that if that Callen patent really does what I think it's trying to do, then whether it's an independent insurer or a captive insurer, severance insurance may, in fact, really be a reality out there. Unknown. Flying beneath the radar. But a reality. I'll continue to dig.

willy

Severance Insurance

Why would corporations lay off duration risk/reward, if it had a captive insurance company? They probably shouldn't, if it is a risk they can get their arms around. In the post SOX era aren't corporations looking for real transfer of risk opportunities to better justify the existence of their captives? And wouldn't a natural be a risk that they could control...like severance insurance?

There are plenty of companies out there with self-insuring cultures who have captives. Why wouldn't they want to end-run the traditional insurance channels, insure through their captive and reinsure that portion of the risk they wanted to cede? I suspect they would.

willy

Severance Insurance

I suppose the answer here is obvious. If they do a good job underwriting, an insurance company could:

• Make money
• Benefit shareholders
• Establish itself on the cutting edge of a new kind of "socially responsible" insurance
• Improve reputation

willy

Severance Insurance

How could severance insurance benefit the state unemployment insurance trusts?

• Reduce UI claims by reducing unemployment duration, i.e. getting people back to work more quickly

Interesting to note here that service severance has potential quantifiable value not only to displaced workers and their former employers but also to the state UI trusts, which in turn should realize savings through the reduction in benefits paid and, as a result, be able to lower premiums and benefit the corporations that are paying those premiums; a rather circular set of relationships.

Interesting.

willy

Severance Insurance

How could severance insurance benefit the employer?

• Could provide less expensive funding alternative for the costs associated with severance
• Savings could fund a variety of initiatives from R&D to retained workforce benefi
• Could provide the ability to smooth the costs associated with severance over a period of years
• Could position the company as one with a social conscience, assuming they included service severance in their plan
• Could position the company as a better place to work...for prospective employees
• Could level the playing field for all employees...a known benefit plan with equal treatment for all

willy

Severance Insurance

How could severance insurance benefit the displaced worker?

• It could guarantee the severance benefit to the displaced worker
• It could provide a stronger guarantee than the company could provide
• It could smooth out the severance benefit, i.e., no lump sum payment but payments made on a pay period basis
• It could extend the benefit period
• It could provide a tax advantage to the benefits
• It could help access "working fringe benefits"
• It could provide ancillary benefits, e.g., "service severance"

Others?

willy

Severance Insurance

Literally, severance insurance would mean a guarantee to the beneficiary that s/he would receive severance. But when you really think about it, it's a whole lot more than that. It benefits the displaced worker (possibly in a variety of ways); it benefits the employer (possibly in a variety of ways); it benefits the state unemployment insurance trusts (possibly in a variety of ways); it even benefits the insurance industry (while not harming any other party). In my opinion the only possible downside to severance insurance is to the insurance company that poorly underwrites the risk (if, in fact, there really is a method out there that allows an insurer to underwrite the risk).

This is pretty interesting. I'll take a look at them one by one.

willy

Severance Insurance

Human resource folks aren't all that bad, in spite of my cynicism. They just need to be able to justify a change in strategy from their perspective. My experience is that HR talks one way to displaced employees and another way to retained employees. Fundamentally, I think they are intimidated by the potential power that a displaced employee has, so they tend to acquiesce to virtually any threat. On the other hand, their response to a disenfranchised retained worker might be along the lines of, "Just be happy you have a job." Many benefit vendors/consultants report that their overview of HR personnel is that they act as the self-appointed guardians of displaced employees and all the benefits that inure to them and struggle to see any positives in changes to those benefits.

So, if their perspective is one of guardian, then severance insurance needs to bring more to the table than "just" an alternative funding strategy that happens to have the potential to save substantial sums of money. Enter what I have called in earlier blogs "service severance".
If service severance, as I see it, can be justified to HR folks as a far superior and constructive approach than outplacement, then maybe they begin to grab onto the idea that there might be a better mousetrap in the world of severance. What am I saying here? I am saying that corporations need to go the extra mile and add service severance to financial severance, if for no other reason than to get the buy-in of their own HR executives.

I'm going to spend some time to better flesh out my ideas for service severance in future blogs.

willy

Severance Insurance

If you go to the Bureau of Labor Statistics data, it is really easy to demonstrate that the duration of unemployment is directly related to industry. That's no big whoop, because we all know that there are cycles in every business. Take, for instance, the mortgage universe. Five years ago there weren't enough workers on the face of the earth to satisfy the industry's appetites for workers. Today, they're a dime a dozen. Another good example drills down one layer deeper...from industry to actual skill set; how about being a cobalt programmer pre 12/31/99 vs. post 12/31/99. Boom to bust. But often they're not that obvious. You need to drill sideways. Look at categories of jobs, and you will always find certain job descriptions that are like the kiss of death (in terms of how long it takes) when it comes time to finding a new job. An example would be a human resources middle management type. There are a lot of them out there in a market where there are fewer jobs available that match their skill set. Whoaa... "human resources" and "skill set" in the same sentence. Now that's a bit oxymoronic!! Sorry, my cynicism runneth over. I'm not disguising what I've been through very well, am I?

My point here is that there seems to be significant data available to an underwriter to understand the myriad of individual risks inherent in underwriting severance insurance. The challenge is automating its retrieval and layering it on a real workforce/employee base.

willy

Severance Insurance

It's nice to have data that shows pretty significant predictability over a long period of time, but the problem is that when all the data is dumped into a bucket and the averages/medians are determined, they are just that...averages and medians. Just because a certain set of variables for one discrete group of workers matches another doesn't mean that there aren't huge anomalies. For instance, if I took the following variables (age, ethnicity, geographic location, number of dependents, academic achievement, work skill) and was able to show that the displacement characteristics were similar, I'll bet you the minute I then sorted by sex the similarity would erode.

What does all of this mean to an insurance underwriter? I really don't know, but I suspect that s/he would conclude that an underwriting would have to be done on an individual by individual basis. That's pretty cumbersome stuff and could be enough of a hurdle for the insurance companies to back away from even trying to offer severance insurance.

But where there's smoke, there's usually fire, and there is clearly buzz out there that some insurance company is writing severance insurance or at least some form of it. I still haven't found it, and I don't know whether it is for corporations or employees. I'll keep looking.

willy

Severance Insurance

One interesting fact that the Bureau of Labor Statistics data demonstrates that sort of offsets some of the adverse selection concern is that when you study the displacement history of the American workforce (age 25 through 54, both sexes, all ethnicities, in white collar/administrative/professional jobs across all industries, with three years or more of job tenure) over a long period of time (50 years), you'll see that the displacement rate as a percentage of the total workforce is amazingly flat...like close to a flat line around 1.67%. Even as the economy has seen wild swings in good times and bad, the departure from this average is not all that substantial. If you're interested, take a look at www.bls.gov and drill into the size of the workforce at any given point in time and then drill into the number of people displaced. Do that for as many years as you want, and you'll see what I mean.

I've got to think that the insurance industry hasn't missed this, if they are really considering putting a product on the market (or they already have). Their actuaries are certainly looking for predictability and fifty years of this data certainly would show them that. However, don't think the adverse selection proiblem is solved. There's a lot more drilling to do.

willy

Severance Insurance

Why would an insurance company want to offer severance insurance? And to balance out the discussion, why wouldn't an insurance company want to offer severance insurance? The answer to the first question is probably pretty simple...but also pretty naive. An insurance company would want to offer it, because it would be a new line of insurance, a new opportunity to improve returns on invested capital to benefit its shareholders, a new oportunity to differentiate itself from its competitors, a new opportunity to add a "short tail" product.

But for every one of these answers (and there are plenty more, I'm sure), I suspect the insurers would say there is an offsetting risk. And I'm sure they will hang their hats on the "adverse selection/moral hazard" argument, that those who would buy the coverage would be those who controlled the risk. For instance, a corporation would only buy the coverage, if they knew they were going to need it, or an individual would only buy a retail version of severance insurance if s/he thought they were at risk for getting fired.

No question, if there really is an insurance product out there, it has to deal successfully with this issue. The question is how could that happen. The answer...I don't know.

I'll keep digging.

willy

Severance Insurance

It would be pretty interesting to know how the average worker rated financial severance insurance vs. service severance insurance. My sense is that those who have gone through the drill and think that service severance is like outplacement would rate service severance pretty low. I'm not real objective on this subject because the outplacement "assistance" that I was given as a displaced senior executive was absolutely WORTHLESS. And to think my employer actually paid for it...scary! The fact that HR executives think it has value...even scarier!!

My vision of service severance is very different. First, it's actually accountable to its client(s). If they don't help you find a new job, they don't get paid. Second, they actually become an advocate for the displaced worker. Third, they have the ability to reach deep into the world of available jobs and match up opportunities that actually fit...your age, your skills, your experience, your location, etc..

I really think there's a void in this space, and without a whole lot of imagination I think we are beginning to see that there is a lot of "loose" money kicking around in the world of severance that could be better applied to not only provide a financial bridge during unemployment but also provide active advocacy with a clear goal...finding a new job.

Let me know what you think.

willy

Severance Insurance

Just a thought...If we are beginning to prove that there is an underlying economic validity to the idea of an insurance company offering severance insurance (financial severance), then couldn't some of the underlying economics possibly be directed towards what I call service severance?

Why not take some of the financial leverage and use it to help workers get back to work? It would benfit the worker, the insurer and the displacing corporation.

Pretty simple, eh? You'd think so. But I'm still blown away by the fact that corporate America isn't pursuing this idea.

Anybody got any thoughts on why?

willy

Severance Insurance

SUB Plans have been around since the mid 1950's. They are primarily used by heavily unionized industries with the auto industry leading the pack. There seems to be a consensus that the Ford plan is the gold standard. They find their origin the Tax Code under Section 501 (c)(17). There are over 100 private letter/revenuerulings supporting various aspects of SUB plans, including the fact that benefits paid out under this plan are not deemed "wages" for the purposes of FICA, FUTA, SUI and Medicare employment taxes.


That would seem to confirm that there are at least two ways for a company/insurer to save money on severance. I've got to think there are more.

What blows my mind is why severance insurance (if, in fact, it does exist) isn't on corporate America's radar screen.

willy

Severance Insurance

I can't find any other employee benefit that gets the same kind of preferential treatment that long term disability does. But I did find that Ford Motor Co. has a thing called a SUB Plan which allows the benefits paid out under this program to not be subject to FICA taxes. It looks like that holds true for both the employee and the employer. Interesting!

I'll do some more hom,ework and circle back.

willy