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Data Driven

For Stephen V. Festa, metrics matter for better claims management.
By: | September 15, 2013 • 11 min read

Change is coming in workers’ compensation claims management and Stephen V. Festa is urging his customers to take action.

Festa is the executive vice president and chief operating officer for Employers Holdings Inc., the Reno, Nev.-based carrier that operates in 31 states.

The majority of EMPLOYERS’ customers are small businesses. The carrier once functioned as the State Fund of Nevada, but has grown steadily to the point where it is publicly traded.

In his role, Festa monitors the factors that are shaping claims outcomes in workers’ compensation.  Some companies may know what he knows, but those who don’t would be well advised to listen closely to what he has to say.

The first such factor, although not necessarily the most important, is the economy. The Dow Jones Industrial Average and the S&P 500 were at new highs this summer, but Festa sees lingering claims management concerns due to unemployment or underemployment on the part of many workers.

“The economy is mending but it is still not back to where it was,” Festa said, during an interview with Risk & Insurance® in July, when he was a senior vice president and chief claims officer at EMPLOYERS. His promotion to EVP and COO was announced in August.

“There is clearly an impact that we are seeing at EMPLOYERS and if others aren’t seeing it, they need to be looking for it because it is definitely out there,” he said.

Due to the mediocre job market, EMPLOYERS is seeing a significant uptick in post-termination claims, he said.

“A lot of those claims turn out to be cumulative trauma claims,” Festa said. “A perfect example of what I am referencing is that we will see claims that are reported, six, seven, eight months after the alleged date of injury.”

Some claims have a date of injury that is as much as 18 months earlier. Festa said what the claimants in these cases share is that they were let go from their positions when the economy faltered, and they have not been able to find a job since.

Another identifier in these claims is that many of the claimants that were let go by one company are represented by the same attorney.

“We clearly can link the proliferation of those claims to the economy turning south and we are not done [with this trend],” Festa said.

To counter the trend, Festa advised business owners to be well-versed on termination best practices and to document that they have given their employees written instructions on how to file a timely claim and had the employee sign a copy of those instructions.

“I am optimistic that once the economy is back on its feet, we will see a reduction. But there will be a lag effect,” Festa said.

Another economic factor impacting claims outcomes, he said, is the inability of many smaller companies to focus on return to work, given the sometimes harsh constraints of the new economy.

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“The companies are vested in their own survival, so their ability to accommodate return to work options starts to dissipate, which in many cases clearly is going to prolong the case life of the claim,” he said.

Festa said his team is working proactively with companies and their TPAs to structure effective return to work programs, and to educate small business owners on the fact that their bottom lines will be adversely impacted by the longer tail claims.

“I understand the shift in focus,” Festa said of small business owners whose main goals are to keep their businesses afloat in this new economy.

“But at the end of the day, this does lead to more costly claims,” he said.

Discipline in Data

What Festa draws on in offering his insights into economic trends and their impact on workers’ compensation claims is data, and lots of it, said those in the industry who know him well and have spent some time working with him.

“He is very metrics driven without sounding obsessive about it,” said Marty Welch, CEO of the Hawaii Employers’ Mutual Insurance Co., a workers’ compensation insurer based in Honolulu.

“He just understood that this business of insurance is always some combination of the analytical and the intuitive, if you will,” he said.

“Some will say that claims reserving is an art. But I think it is probably more in line with 30 percent art and 70 percent or so analytics,” said Welch, who served with Festa at EMPLOYERS some years back, as chief underwriting officer and then chief operating officer for the company.

Welch, Festa and a number of other executives were brought on by EMPLOYERS’ CEO Douglas Dirks in 2004, with the goal of turning what was then a mutual into a much larger company.

EMPLOYERS celebrated its 100th anniversary this past July.

“He is relentless in measuring things,” EMPLOYERS’ CEO Douglas Dirks said of Festa.

“Metrics are a very big piece of his operation. He is very good at setting goals and measuring performance and then adjusting the goals, if necessary,” he said.

That metrics driven approach, he said, applies not only to claims management, but to the function of Festa’s department in general.

“Everyone in his organization knows what the goals are. They measure everything. They feel like they actually participate in defining and setting goals, and it creates a very powerful organization,” Dirks said.

Another trait that Dirks said he values highly in Festa is his affinity for collaboration.

“One of the core values for our company is collaboration and obviously Steve is a great team player,” he said.

“While Steve is opinionated, he is always willing to listen,” said Mike Saladino, senior vice president at Aon Risk Services, who worked with Festa when both were at Crawford & Co.

When Dirks and others talk of Festa as a collaborator, they do not mean a person who automatically nods his head “yes” to the statements of other team members.

“Sometimes collaboration is misunderstood as groupthink. Collaboration isn’t groupthink. It is quite the opposite. It is the ability to bring diversity to views, air those views and then come to an agreement about what course of action should be followed,” Dirks said.

It’s Festa’s analytical approach that makes him so valuable in group discussions, according to Wayne Wilson, the executive director of the California Insurance Guarantee Association (CIGA), a fund that pays off the claims of defunct insurers.

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Festa serves as chairman of the board of governors of CIGA.

“He is not a shoot-from-the-hip type of person, but then again he is not a guy that gets bogged down and has problems making a decision,” Wilson said.

Festa does his analysis, he said, and then comes to a conclusion, a trait that Wilson described as a “blessing” sometimes in board discussions.

Perspective on TPAS 

Before Festa came to EMPLOYERS, he gained national experience by serving as an executive vice president at Crawford and Co., from 1998 to 2003. While there, Festa led the company’s TPA division.

As an executive working with a carrier that uses TPA services in some states, and having run a TPA with national operations, Festa offered some pointers on ways to best manage the TPA relationship.

For one, as with many services in the insurance industry, Festa advised that TPAs can have strong operations in one geographic area, and not-so-strong operations in another.

“If I were a buyer in the Southwestern part of the country as opposed to a national buyer, I wouldn’t want to be swayed by the fact that a TPA has a good reputation nationally,” Festa said.

“I would never apply a broad-brush approach to the selection of a TPA. I would be more specific if my needs were more specific,” he said.

Nor would Festa apply a broad-brush approach to auditing a TPA’s performance.

“If we have a concern regarding the Oregon operation, then we focus on that operation,” Festa said.

The TPA referral process is also something risk managers need to pay close attention to, he said.

“The referral process for services is another area that generates revenue for the TPA and is an area that is ripe for conflict of interest,” Festa said.

Strict parameters around what fees should be charged and conducting audits to make sure those parameters are being followed, he said, are key to maintaining a productive relationship with a TPA.

“There may be a referral on an underlying indemnity claim where the adjustor refers that to a field case manager ahead of time,” Festa said. “But the referral itself needs to be an appropriate referral.

“I know there exists, having seen it from both ends, what I will call referrals that are less than appropriate, and not necessary. And being a buyer of TPA services, that is an area that we will look very closely at,” he said.

EMPLOYERS handles the majority of claims in house, but in those states where the volume of claims isn’t large enough to justify a bricks and mortar presence, the company does use TPA services, he said.

Festa worked as an adjuster back at the beginning of his career. He knows how heavy the workload can be.

“If an adjuster can pass off some work to another party and alleviate their workload, human nature being what it is, they may do that and you have to watch out for that. Ultimately, it will be costly,” Festa said.

The Affordable Care Act

The economy and its impact on workers’ compensation is one key factor in workers’ compensation insurance. The federal government and its attempts to mandate health insurance for millions of uncovered citizens is another.

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When fully implemented, estimates are that the Affordable Care Act will add 30 million more people to the health insurance system.  Long-term, there could be some benefits to workers’ compensation carriers and self-insureds in the form of generally healthier populations and reduced co-morbidities.

But in the short term, Festa sees some problems.

One big problem is that wait times to see specialists and other health care providers will increase, he said.  In treating injured workers, it is a given that the sooner the patient can see a doctor, the better the outcome.

“Already today, there are certain geographic areas that it takes longer than it should to get in to see a medical provider and the wait time is certainly going to lengthen,” he said.

“There is a lot of statistical evidence that supports the fact that delaying the appropriate medical treatment has an exponential effect on the overall cost of the claim,” Festa said.

Festa said there is no way the number of new doctors is going to grow fast enough to alleviate the situation.

Again, he’ll be checking the data.

“We will be watching that. We measure case life to see how long claims are staying open,” he said.

Festa also said that as providers are pinched for profits under health care reform, they will shift costs to workers’ compensation payers. Those payers lack leverage, comprising as they do, only 2 percent of overall medical spend.

“I look for the medical provider community to be recovering some of their profit from the comp community as well as other payers, and I expect cost shifting will occur,” Festa said.

The Evolution of a Claims Leader

Festa said he has been blessed to have been a part of the evolution of EMPLOYERS, which took such bold steps to grow from a state fund to a publicly traded company in 2007.

When Festa joined EMPLOYERS in 2004, it was a mutual doing business in a handful of western states. Through acquisitions and organic growth, it now operates in 31 states.

“What attracted me to the job was that the CEO had a vision of taking us to a national footprint,” Festa said.

Dirks said he sought executives who had traits that were reflective of the organization.

He pointed to Festa’s commitment to excellence and accountability.

“Steve has a real drive to do things well and to bring his team along to do the same thing,” Dirks said.

From Festa’s perspective, that means having to make tough decisions sometimes.

“I think it is very critical that you can’t let yourself get complacent,” Festa said.

“I don’t want maintenance managers in our organization,” he said. “I want leaders that are consistently focused on raising the bar and sometimes that is taxing on your thought process.”

Sometimes that focus means letting people go or demoting them.

“You have to make those calls in an objective way to benefit the organization, but the day that they become easy for me is the day that I need to step down. True leaders take these responsibilities very seriously,” Festa said.

Festa’s integrity, drive and devotion to analytics set him apart from the pack.

“I have told other people this,” Welch said. “He is the best claims executive that I have known in a 30-year career.”

“We brought in Steve to run the claims operation,” Dirks said.

“He is successful not just because he is an outstanding claims professional, but because he is an outstanding businessman.”

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]