1 Collateral/Security A Regulators Perspective Wednesday, February 8,2012 John Schrock, Administrator –State of Michigan Workers’ Compensation Agency Self-Insured Programs Division

2 Perspective Why is security required ?  Risks are approved based upon their demonstration of a reasonable position of solvency and ability to pay claims.  There is no profit motive.  Generally there are no business retention consideration. Programs are by approval and optional for the employer. Security required is therefore part of an approval process. The employer can choose to accept the approval terms or move to cover their liability through another program.  Actions and requirements are governed by statutes and administrative rules.

3 Purpose of Security  Serves as one of the components of the approval process.  Provides for the payment of claims if the risk is unable to meet their financial obligation.  Is used to mitigate losses to other similarly situated employers if a guaranty fund exists that is funded by program participants.

4 Considerations Factors considered in establishing security amounts.  Risks financial position and how it is reported. Audited, Reviewed, Compiled or Internal Statements. Financial Ratios (current ratio, debt to equity, equity to retentions, etc.).  Historical operating results / years in operation.  Nature of industry / number of employees.  Historical loss experience on a paid and incurred basis and consideration of historical reserve balances.  Service provider / TPA and their history.

5 Considerations - Continued Factors considered in establishing security amounts.  Management History of the risk. Stability, etc.  Banking relationships and status. Is the risk in compliance with terms of financing agreements?  Legal structure.  Pending litigation.  Position in industry (reputation).  Policy language and Terms of stop loss insurance in place.  Ability to secure corporate guaranties.  Risks openness to communicate and provide additional information or to answer questions related to operations.

6 Conclusion  Our office does not use a formula approach; each risk is evaluated without direct consideration of others based upon the information provided. Failure to provide information may negatively influence decisions made.  Risks always have the option to remain in or return to the commercial market place to provide for their exposure.  Regulators are open to discussion and additional information that may not have been provided previously for consideration.  Although many of the same elements are considered in the evaluation, because of the differing purposes and perspectives, differing conclusions may occur.