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