Connecticut”™s attorney general advised the state to pursue unspecified sanctions against a Westport consulting firm for what he called a botched insurance-privatization proposal.
In 2001, the Westport-based risk-management advisor MRM Consulting Inc. advised the Connecticut Department of Administrative Services (DAS) to shed up to $150 million in liability for up to 700 of the state”™s oldest and most expensive worker”™s compensation claims.
MRM deduced the loss-portfolio arrangement would cost the state an $80 million lump payment ”“ “a hell of a number,” in MRM”™s president”™s reported words, but too high according to Attorney General Richard Blumenthal.
“The state should consider whether and how MRM can be held accountable for its highly troubling performance,” the attorney general wrote in a 50-page report. “By following their faulty reserve numbers and premium pricing, the state proceeded with a project of highly suspect and challengeable value.”
ACE Financial Solutions L.L.C., a division of Bermuda-based ACE Ltd., assumed the portfolio, in a deal brokered by Marsh & McLennan Companies Inc., where MRM President Adrien Theriault once worked. Other companies bidding on the portfolio included American International Group Inc. and Hartford Financial Services Group Inc.
Blumenthal charged that MRM made an array of mistakes, including hiring college-age acquaintances of Theriault”™s son to gather information relied on for the ultimate $80 million valuation; and mistakenly including hundreds of worker”™s compensation claims that were already closed, forcing DAS to add several hundred more claims at the last moment without proper analysis.
Theriault could not be reached for comment at deadline.
MRM bills itself as an expert in owner-controlled insurance programs (OCIP); its clients have included the states of Connecticut, Rhode Island, New Jersey, Florida and Texas; as well as the city of Bridgeport and the Houston Rockets NBA franchise.
Blumenthal said MRM”™s experience did not qualify it for the DAS deliberations, as such “wrap ups” typically do not typically involve the sale of worker”™s compensation liability to a third party.
Late last decade, the workers”™ compensation caseload for six state agencies was managed by Berkley Administrators of Connecticut Inc., a unit of Greenwich-based W.R. Berkley Corp.
For states and cities, loss portfolio arrangements allow them to limit their liability and redeploy personnel and reserve funds. For insurers, it represents an upfront cash payment that can be reinvested, as well as an opportunity to reach settlements for an overall profit on the principal. Berkley Administrators generally settled cases with injured workers for 50 cents on the dollar, though settlements could range from 35 percent to 65 percent.
Expecting 2,500 cases in the DAS contract, Berkley Administrators was swamped with 4,000 claims. Each case adjuster had a double workload, Theriault testified to Blumenthal”™s investigators, and he said Berkley was paying claims which were in unopened boxes that were never examined by Berkley.
“The LPA was designed to include only certain claimant groups such as widows which were very attractive to insurance companies because the only risk on that group was life expectancy,” Blumenthal stated in his report. “He included claimant groups that would be considered attractive to an insurance company rather than push for inclusion of the most serious cases.”
After receiving $80 million in state payments raised through bonds, ACE has paid out $57 million to settle claims, according to Blumenthal, while 100 cases remain open.
While the $57 million figure does not include costs for administration and personnel, nor does the $80 million lump sum payment include ACE gains from any investments the past seven years.
“We do not know what the remaining 100 cases will cost over the life of the deal, so we cannot say with absolute certainty that it was a bad deal,” Blumenthal concluded. “By following (MRM”™s) faulty reserve numbers and premium pricing, the state ”¦ appears to have overpaid.”
Blumenthal wants the state to create an in-house settlement fund for future case portfolios.
