Claims integration within the supplemental benefits world
As the insurance industry transitions to being more customer-centric, implementing claims integration will likely become a must-have feature.
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Rebecca Driskill: Hello and welcome to "Critical Point," a podcast brought to you by Milliman. My name is Rebecca Driskill, and I'll be your host. On our episode today, we're going to be talking about black lung disease. After the number of reported cases declined in the late 1990s, a recent CDC report indicates that trend has reversed and that cases of black lung in miners are the highest they've been since recordkeeping began in the early 1970s. Today we're going to be talking about what this means for companies and insurers looking to manage this risk for their employees. At Milliman, we have two of the foremost experts on black lung risk. I'm joined by Milliman principals Christine Fleming, good morning--
Christine Fleming: Hi. Good morning, Rebecca.
Rebecca Driskill: Hi. And Travis Grulkowski. Morning, Travis.
Travis Grulkowski: Good morning, Rebecca.
Rebecca Driskill: So first off, maybe you guys could just explain a little bit about black lung disease and what kinds of companies need to manage this risk.
Christine Fleming: Sure. So, black lung disease is also commonly referred to as CWP, which stands for coal workers' pneumoconiosis. It's a restrictive air or lung disease, that is, what we would call a signature disease – it’s brought on from the inhalation of coal dust, working in a coal mine. And that's the most common type of disease that you'll hear when people refer to black lung disease, they mean CWP. The other type of disease that we see very, very rarely is a more serious disease, it's a different disease. It's called progressive massive fibrosis, and that is also a disease that can be brought on by coal dust inhalation or other types of inhalation, and it's signified by a different type of showing on an x-ray. So those are basically the two conditions we're talking about.
Rebecca Driskill: Great. So the companies that typically have to manage this risk are coal companies, insurers?
Christine Fleming: Right. Right. So, the coal mines, the coal companies, any sort of company that owns a mine, any insurance company that's insuring that sort of a coal company or another company that owns the mine. Assigned risk pools or any sorts of insurance mechanisms of last resort in a state or in the federal system would also have to be knowledgeable about these kinds of liabilities and these diseases and how they're playing out. Rebecca Driskill: What about governments? Are they interested in understanding the risk as well? Do you see it on the state side?
Christine Fleming: Yeah, so you'll see it on the state side when you've got an insurer of last resort. So for example, if the voluntary insurance market is not writing these types of liabilities anymore, the state would need a mechanism to pay out the benefits, the state benefits, and each state is going to vary; and then you'll see it on a federal government level as well for a couple of reasons. There was an act that also set up a trust fund to pay for federal black lung benefits when there was no responsible operator to take care of those benefits. For example, if a coal mine had gone out of business and wasn't insured, it would go to a trust fund, and that's all managed and administered by the Department of Labor. So yes, the government has quite an interest in this as well.
Travis Grulkowski: That's a good point Christine. Since 1973, there hasn't really been a large insurance market for federal black lung liabilities – it generally falls to the state fund or the assigned risk pool, and so many operators still self-insure these liabilities.
Rebecca Driskill: From what I understand, the coal industry is shrinking, but with the Centers for Disease Control and Prevention (CDC) numbers we saw that there seems to be a resurgence in black lung cases. We can't talk about why that might be-- we're not medical professionals, but I'm curious what you guys are seeing on the claim side and if you're seeing an increase in claims and what some of the reasons for that could be.
Christine Fleming: Yeah, I mean, we are. I think it's an important distinction to make whether the disease itself is on the increase versus the claims are on the increase. And you're absolutely right, we're not medical professionals and that's not what this podcast is meant to address, but we've definitely seen ebbs and flows in the number of black lung claims being filed, and in the number of black lung claims being entitled, and that's going to happen when there's going to be a change in regulation or a change in legislation or a change in the interpretation of regulations that would allow more black lung claimants to get paid and approved and entitled for benefits. So we do see sort of resurgences of claim activity even in a shrinking coal industry. And in fact, interestingly, a shrinking coal industry, you might even see more claim activity, and the reason is -- if a coal mine, for example, decides to stop operating and has a point-in-time sort of massive layoff within one year, then you might see a lot of coal mine workers file claims within that particular year or a short period of time thereafter. So that kind of activity can actually increase claim counts as well. Wouldn't you think, Travis?
Travis Grulkowski: Exactly. And I think the reason we're seeing a lot of this shrinking industry is we're talking a lot about climate change-- you're hearing that a lot today in the news. And really, the insurance industry is starting to back off coalmining operations, and so I think the latest numbers I heard were 17 of the largest insurance companies and reinsurance companies in the world are no longer insuring coal, and so that is putting an additional stress on the mining industry, and we're seeing a lot of these workers leave the workforce and start to file federal black lung claims. And so, since 2010, now with the Byrd Amendment, the 15-year presumption has been restored, so that puts the onus back on the operator to prove that the miner does not have a disabling lung disease, and so that's allowing workers to file once, file twice, and file continuously until they get an entitled claim. So I think that's another reason we're seeing this resurgence of entitled claims in the industry. Rebecca Driskill: Can you guys just explain real quick, what's the difference between an entitled claim and not entitled claim?
Christine Fleming: Sure. So there are basically six different ways that a black lung claim can be adjudicated throughout the process, and one of those ways would be it's denied, for example. We don't see evidence of CWP and your claim is denied. Another way is that you're entitled. That means we do see evidence of CWP and we're going to go ahead and approve this and entitle you to get benefits. So when we say entitled claims, we mean that the result of an adjudication process, that entitles the black lung claimant to get benefits. Just backing up a little bit on this regulation, the Byrd Amendment that Travis was referring to, do you think it would be helpful to get a little bit of regulatory history?
Rebecca Driskill: Yeah. Mm-hmm. Yeah, yeah.
Christine Fleming: Okay. So basically we're going back to 1968 with the first regulation, the first legislation that entitled coal workers to get these benefits, and it was the Federal Coal Mine Health and Safety Act-- I'm just going to call it the Coal Mine Act-- and that was the first time we entitled people to get benefits, and the entitlement rates at that point were very high, probably around 60% or so-- very, very high indeed compared to today. Throughout time, various interpretations and regulations and legislation that was passed sort of-- kind of pulled back on those entitlements depending on how hard it was to bring a claim and how hard it was to prove that you were injured or had this disease as a result of work. So we've hit some lows in the entitlement rate based on legislation. I think in the mid-nineties it got as low as 5%, dropping from 60%.
Come to present day and what Travis was referring to before, in 2001 actually, there was a regulation that, for lack of a better word, I guess decreed or settled that CWP would be considered a progressive disease, and that's very, very important, because "progressive" means even if the coalminer leaves employment, if years later he develops this, he can go ahead and file a claim, because it's considered progressive. Well, when coalminers who had already left employment heard about this 2001 change, again, rushed to the courthouse to file that claim. So because it was considered progressive because of that regulation, we got a rush to the courthouse then, and then fast-forward to 2010-2011 with the Byrd Amendment, what Travis was saying before-- again, I'll just repeat-- was the Byrd Amendment shifted the burden of proof from the claimant to the coal mine employer.
So whereas before the claimant had to prove that his condition was caused by his work, after the Byrd Amendment, now the employer has to prove that the claimant's condition is not caused from his work, and that made it-- that shift in presumption was actually very critical and it really brought into question a lot of things, like, "Well, what about smoking? How does smoking play into this?" Because it used to be that you could rebut the presumption by saying, "Well, he smoked, and his lungs are-- he's not getting respiratory flow through his lungs because of the smoking." With that presumption shift, you can't really say that anymore, and again, we saw a big sort of resurgence of claims being filed and claims being entitled. That's why that entitlement rate has gone back up. So we do see, like I said in the beginning, just sort of ebbs and flows.
Travis Grulkowski: Correct. I think it's approaching now 30% in a lot of the jurisdictions.
Christine Fleming: I think that's right. I think that's right. I think the last DOL tables that were published on entitlement rates-- and it varies, for a lot of different reasons, so these are generalities-- but was in the 22% to 30% range, just depending.
Rebecca Driskill: What does that mean for businesses trying to manage their risk? What's your guys' best expert advice on that?
Travis Grulkowski: I mean, I think it becomes imperative that they try to estimate the liabilities, and to do so takes a lot of-- it takes an actuarial expert, really, to understand what the tail of these liabilities are. These claims can be-- they're a lot like latent claims, similar to asbestos, but at the end of the day they are more like a work comp claim because the benefits are defined. So, I think it's understanding how these approvals are going to affect the final claim count. So an actuary trained to do that can come up with the methodology to produce an estimate that's reasonable and then they can have a better understanding of what the risk truly is.
Christine Fleming: I completely agree, and I echo what Travis is saying, that they really need to get a handle on what the liabilities are going to be, because that's the only way they're going to be able to make informed decisions about how to manage those liabilities. The liabilities are there and hiding your head in the sand and not estimating them is not going to make them go away. And it's tricky stuff from an actuarial perspective. It is like comp, as Travis was pointing out, in that the benefits are defined, but it's very different from comp too, because in comp you have a point-in-time injury, you file your claim, you're either denied or not denied, and most of the time you sort of settle on a number in between. You're not maybe totally disabled, but you're not not disabled at all. You're partially disabled and you settle on some sort of an amount, and then your claim is done with finality. But it's not the case with black lung. First of all, you can't settle black lung claims, but even that aside, it's never, never done with finality, unless you're finally entitled and in pay status. But until you get there, even if you're denied, you can refile. You can present new medical evidence and you can refile and you can do that as many times as you want. In preparation for this podcast I took a look at some of our data and I found a claimant that had refiled 18 times, until he finally got entitled. So it's different than workers' comp because of that lack of finality, and because it's considered progressive, at least for now-- and again, people will debate that-- but because for now it's considered progressive by the Department of Labor, it also means that you can file a claim long after you've stopped working, and so the actuarial estimation process around-- because of those two phenomenon-- it's very complicated.
Rebecca Driskill: So it sounds like there's a lot of uncertainty with black lung claims on the part of the businesses trying to get a handle on those costs. Can you guys talk a little bit about what is it about black lung that makes it-- that creates this risk or uncertainty in terms of costs?
Christine Fleming: So I think one of the big areas of uncertainty is the fact-- we mentioned before that in black lung claims, you can't settle a claim. There is actually nothing in act-- just kind of interesting factoid that there's nothing in the act that prohibits settlement. However, the Department of Labor has not acknowledged that settlement is a possibility, and in practice these claims just cannot be settled. So without the opportunity to settle a claim, you do not have a chance to resolve a claim with finality, with any sort of certainty. It will be paid for the life of the claimant and their surviving dependents, once you know you're paying for the life of somebody, that's when mortality enters the picture, and that's a big area of uncertainty. Coupled with the fact that the benefits do increase with a cost of living adjustment every year. So because of those two factors, the uncertainty with regard to the amount of time you're going to be paying the claim, because you can't settle it, and the Cost of Living Adjustment (COLA) adjustment for the indemnity portion of the claim, added to the ongoing medical – and medical costs are highly uncertain because it depends on the technologies used to treat these types of illnesses going forward– that uncertainty just really increases. I would say that settlement is a big one that differentiates it from comp.
Travis Grulkowski: I would agree, Christine, especially when you bring mortality factors into the equation. That's when it becomes a high-exercise for the actuary. One, you have to figure out this length of time where not only do you not know how many future claims are going to come in, but then once you know a claim will be entitled, there's a lot of uncertainty with regards to how long that claim is going to remain in pay status, and that's where mortality, morbidity, all these other factors enter the equation for the actuary to consider. Christine Fleming: Yeah.
Rebecca Driskill: And it sounds like with climate change and the changing industry, if there are fewer insurers involved, then this is really-- this risk is on the companies to manage. Is that correct?
Travis Grulkowski: Correct. The shrinking industry puts more stress on the solvent operators. In the past I believe some of the benefits were paid for through an excise tax system where the solvent companies were paying into the fund for future benefits. Well, as that pool is shrinking (of solvent companies) the benefit pool is obviously shrinking. So the idea that Christine mentioned about settlement becomes another important factor. If we can settle these claims, maybe we can do something to help not only the operable mining companies, but then the beneficiaries of the benefits so we know there's going to be money at the end of the day to pay these claimants.
Rebecca Driskill: So basically if there were a way to figure out settling the claims that seems like it would be both beneficial for the miners themselves and the companies who would be able to get a better handle on the cost on their books-- is that--?
Christine Fleming: I think that's fair to say. I mean, I think that's a possibility. There are two different perspectives on that, but the idea of being able to settle a claim I think is going to go a long way to bring more certainty to the actuarial analysis and finality-- obviously finality to the claims as well, and it's going to cut back on the adjudication process because once you entertain a chance to settle, you can do that presumably at every step of the way. So we won't see the number of refilings that we're seeing today because at any point in time before entitlement we could resolve the claim.
Rebecca Driskill: Do we have a sense of what the costs are that companies face from the black lung exposures?
Christine Fleming: We do, and there have been various studies put out on aggregate costs, but in general, the-- it is similar to workers' comp in the sense that you pay for medical and indemnity. There's a small expense piece but it's negligible, it's probably not really worth mentioning here. But the indemnity piece is a defined benefit that increases with a cost of living adjustment, and it's paid-- it's almost the equivalent of a permanent total disability in workers' comp. It's paid for the life of the claimant and the surviving dependents, up to four of them, and the defined benefit is interesting-- this is where we vary from workers' comp. It's not based on the wage of the coalminer, it's not based on anything personal to the coalminer. Every black lung claimant gets the exact same amount depending on how many dependents that he has, and right now I think it varies from $675 a month to maybe $1300 or $1400 a month. The medical piece is the second piece that's paid out, and that's just going to be dependent upon the status of the coalminer himself and what type of treatment and testing that he's undergoing.
Travis Grulkowski: Christine, that's correct, and in fact, when we're talking about total black lung liabilities, the number to date-- I think the last number I heard as of year-end 2018 was north of $40 billion, and the industry ultimate could be two to three times higher than that. So we're talking of an industry ultimate north of $100 billion. By comparison, the current industry estimate for asbestos liabilities is $100 billion. This is a real latent claim issue for the insurance industry right now.
Rebecca Driskill: Obviously there are a lot of complexities to take into account. So how do you estimate the cost of the risk, or what are the options for offloading this liability, if that's something that a company is interested in doing?
Travis Grulkowski: Yeah, there are a couple of options. I mean, obviously estimating the liability is the number one priority, and I think that that is paramount to understanding what the total risk is for any individual operator or self-insured coalmining company, and I think getting a better understanding of the number of claims that could be entitled in the future is the key. And so using kind of the Department of Labor's patterns along with the company's own patterns, and then understanding how the legal environment or the regulatory environment has impacted this phenomena of the refiling process and how future claims are not just going to go away because a miner can file multiple times-- so understanding how that impacts the actuarial estimate is going to be key. And then once the company has an estimate, there are a couple of options. If they have the assets to pay these liabilities, they can maybe set up a self-insured liability to pay those claims out; or they may have to look at other options, like commutations or an LPT transaction, and I think that's where, if a company is allowed to settle claims, it could be interesting for the runoff market. It could be an opportunity for players out there that transact similar to something like a runoff workers' compensation book, where they know they can pay these claims and settle them. There could be an opportunity to do the same with the black-- federal black lung liabilities.
Rebecca Driskill: We talked about the latent costs of these liabilities and how high they are. Where do you guys see this headed in the next five to ten years?
Travis Grulkowski: Honestly, with climate change, the insurance industry is going to continue to put pressure on companies like-- that operate coal mines, and understanding those liabilities is going to be critical. I think the liabilities are going to continue to mount; federal black lung claims are going to continue to be entitled; and while we can help estimate those liabilities, I think there needs to be a creative solution to offload those liabilities, because I don't think the coalmining companies are going to be able to handle those liabilities. They're just not going to be solvent anymore. So my thought-- and this is my opinion-- that if settlements are allowed, those creative solutions can take place, and other avenues for offloading these liabilities can take place.
Christine Fleming: Yeah, I agree, and I-- in five years where we're going to be, in ten years, it's very interesting, because if you look back since 1968, we have interpreted the regulations and the legislation very differently in a way that's very impactful to black lung claim benefit payments. So for example, with this latest big change in 2010-2011 with the Byrd Amendment, with that change in presumption that I was talking about before, we saw a big uptick in filings and entitlements. That's starting to come down in recent years, and maybe even flatten out-- it's a little bit too soon to tell. If I had to guess, and this is just a guess, I would say that we've seen that lump in the snake and now it's sort of flattening out-- maybe at a higher level than pre-Byrd Amendment, but nonetheless sort of a flattening, and it could stay that way, until there's a new regulation or new legislation. And a number of factors can drive that, and one of the things that goes through my mind when we talk about climate risk and climate change and coal mines being pressured to close down, stop operating or constrained, one of the things that comes to mind is we can shut down every coal mine in the country, but the liabilities are not going to go away. Those claims are going to continue to come in.
Those funds-- remember I was talking about the insurer of last resort in states, and the Federal Black Lung Trust Fund that's basically a fund for when the responsible coal operator is out of business and can't pay the claims-- those funds are not operating at heavy profit margins. In fact, the Black Lung Trust Fund is operating at a deficit and has been for quite some time, not surprisingly. I'm wondering if we don't have to, in the next 5, 10, X years, sort of rethink how we're thinking about this disease, because right now we're saying that simple CWP is a permanent total disability. It's being paid that way, okay? The science may argue against that. There's very little indication that simple CWP on its own is disabling. You might have some reduced respiratory lung function, but in very few documented cases would that be completely, permanently, and totally disabling. Moreover, in many of the cases where there is some reduced lung function, it could very well be as a result of smoking and COPD, which is very different than what we're talking about with CWP.
I'm wondering if, given the climate change risk environment that we're in right now, given the fact that we're about ten years out of the Byrd Amendment, and maybe we're right around the time when we're going to be rethinking regulations and legislation, the financial condition, the fact that coal companies really can't self-insure, it's very expensive to get collateral and backing, the fact that the voluntary insurance market, as Travis was saying before, is shrinking and it's all going to these assigned risk pools and these involuntary insurers of last resort, do we need to rethink, as a society, how we're going to pay benefits to the men and women who need it without bankrupting ourselves so that we have nothing left for the people who really need it? So I can see sort of a discussion about that over the next five to ten years.
Rebecca Driskill: Christine, Travis, thank you guys so much for joining me today.
Christine Fleming: Thank you, Rebecca.
Travis Grulkowski: Thank you.
Rebecca Driskill: You've been listening "Critical Point" presented by Milliman. To listen to other episodes of the podcast, visit us at Milliman.com or you can find us on iTunes, Google Play, Spotify or Stitcher. We'll see you next time.
Critical Point Episode 23: Managing the costs and risks of black lung disease
Black lung disease presents a significant, long-term liability exposure for coal companies, risk pools, and governments, as Milliman consultants Christine Fleming and Travis Grulkowski discuss in this episode of Critical Point.