The News You Need for Sept. 13

We're not superstitious, but we are lucky because we get the lowdown on financials and captive insurance, find out what happened when a Massachusetts worker got run over by a coworker, dig into the comp-AI connection, and learn some Utah compliance.

Captives 101: Understanding the Financials of a Captive Insurance Program?

Dr. Claire C. Muselman

The previous article discussed the regulatory and legal considerations of creating and operating a captive insurance program. We now turn our attention to the financial aspects of managing a captive. Financial management is one of the most important elements of a successful captive insurance program. Understanding financial statements, managing reserves, ensuring capital adequacy, and meeting auditing and reporting requirements are essential to a captive's long-term viability. In this article, we will discuss these financial elements in detail.?

Understanding Captive Insurance Financial Statements?

Like any other business, captive insurance companies must keep accurate and detailed financial records. Three key financial statements—the balance sheet, the income statement, and the cash flow statement—are essential to understanding a captive's financial health.?

The balance sheet provides an overview of the captive's financial position at a given time. It details the captive's assets, liabilities, and equity, giving information about the company's creditworthiness and ability to meet its obligations.?

The income statement shows the captive's profitability over a certain period, usually a quarter or a year. It details income from premiums, investment income, other sources, and expenses such as claims payments, administrative costs, and taxes. Understanding the income statement helps captive managers assess whether the business generates enough revenue to cover its costs and generate a profit.?

The cash flow statement tracks the cash movements in and out of the captive. This table is especially important for captives, as it helps ensure they have enough liquidity to meet their obligations, such as settling claims and covering operating expenses.?

By regularly reviewing these financial statements, captive managers, regulators, and stakeholders can assess the captive's financial health and make informed decisions about its future.?

Key Financial Indicators and Their Importance?

In addition to understanding financial statements, captives must monitor several key financial indicators to ensure long-term success. Among the most important indicators are:?

? Claim ratio: This ratio compares the claims paid to the premiums collected. A low claim ratio indicates that the captive effectively manages its risks. In contrast, a high claim ratio may indicate a need for better risk management practices.?

? Expense ratio: This metric measures the captive's administrative costs as a percentage of premiums collected. Maintaining a low expense ratio is essential for profitability, as high administrative costs can affect the captive's revenue.?

? Combined ratio: The combined ratio is the sum of the loss and expense ratios. A combined ratio below 100% indicates that the captive is operating profitably. A ratio above 100% indicates that the captive may need to adjust its pricing, risk management, or cost controls.?

Tracking these indicators allows captive managers to identify potential financial issues and take corrective action before they become significant problems.?

Reserves and Capital Adequacy Management?

One of the captive's most important responsibilities is maintaining adequate reserves to cover potential losses. Reserves are funds set aside to pay future claims, and they must be calculated carefully to ensure that the captive can meet its obligations.?

Calculating reserves typically involves working with actuaries who use statistical models to estimate how much the captive will need to set aside for future claims. Captives must strike a balance between maintaining sufficient reserves to cover potential losses and ensuring that they do not build up excessive reserves, which can tie up capital that could be used for other purposes. In addition to managing reserves, captives must maintain sufficient capital. Capital adequacy refers to the capital the captive must have to remain solvent and meet regulatory requirements. Captives must maintain sufficient capital to absorb unexpected losses while operating efficiently. Failure to maintain sufficient capital can result in regulatory penalties and, in extreme cases, dissolution of the captive.?

Investment Strategies for Captives?

Captives often have significant funds available for investment, particularly in the form of reserves. Developing an effective investment strategy is essential to achieving maximum returns from these funds while managing risk. Captives should consider their risk appetite and financial objectives when formulating an investment strategy. A captive with a conservative risk appetite may invest in low-risk assets such as government bonds or blue-chip stocks. In contrast, a more aggressive captive may choose to invest in higher-risk investments and investments with higher yields. However, captives must always ensure their investment strategy matches their liquidity and solvency requirements. Successful captives often adopt a conservative investment approach, prioritizing capital preservation over aggressive growth. This approach ensures they have sufficient funds to pay claims and meet regulatory obligations.?

Audit and Financial Reporting Requirements?

Regular audits and accurate financial reporting are essential to maintain transparency and compliance with regulatory requirements. Captives must submit regular financial reports to their regulators, including audited financial statements that independently assess the captive's financial health. The role of external auditors is to ensure that the captive's financial statements are accurate and comply with regulatory standards. Auditors review the captive's financial records, evaluate its internal controls, and offer an opinion on whether the financial statements present an accurate and fair view of the company's financial position. In addition to auditing, captives must meet ongoing financial reporting requirements set by their regulatory authorities. These reports help regulators monitor the captive's creditworthiness and ensure it meets its obligations to policyholders.?

Understanding the financial aspects of a captive insurance program is essential to its long-term success. From managing reserves and capital adequacy to monitoring key financial indicators and developing effective investment strategies, financial management plays a key role in ensuring the sustainability and profitability of the captive. Regular audits and accurate financial reporting help maintain transparency and compliance, building trust with regulators and stakeholders.?

In the following article, we will explore the role of captive managers and service providers in successfully operating a captive insurance program. These independent experts support the captive's day-to-day operations and ensure it meets its regulatory and financial obligations. Stay tuned to learn more about the world of captive insurance.?

Exclusive Remedy Knocks Out Mass. Worker’s Claims

Frank Ferreri

Case File

A Massachusetts worker had punched out and was heading to his car to leave for the day when a coworker plowed into him in an employer-owned vehicle. The exclusive remedy provisions of Massachusetts law kept him from bringing a negligence claim even though he was off the clock. Simply Research subscribers have access to the full text of the court's decision.

Case

Meehan v. Lazer Spot, Inc., No. 23-P-180 (Mass. App. Ct. 09/11/24).

What Happened

A worker brought a negligence claim against his employer and a coworker alleging that the coworker struck him while operating a vehicle owned by the employer. According to the worker, after his shift ended one day and while he was walking to his car, the coworker struck him the company truck. The impact threw the worker in the air and caused him "a variety of injuries."

The trial court granted the employer's motion for summary judgment, and the worker appealed to the Massachusetts Appeals Court.

Rule of Law

Massachusetts's Workers' Compensation Act provides the exclusive remedy for claims brought by an injured employee against an employer. Unless an employee expressly preserves his common law rights of action, a claim alleging negligence of an employer or of a coemployee foreclosed by the exclusivity provisions.

Massachusetts courts have extended compensability to injuries arising while an employee was arriving to or departing from work on a passage to which the employer had a right of use, such as a stairwell, elevator, parking lot, or outdoor passageway.

Workers' Comp 101: In Mannering's Case, 195 N.E. 757 (Mass. 1935), the Massachusetts Supreme Court held that an employee is within the scope of her employment while making her exit from the employer's premises after the end of her period of work, "either on land of the employer or by stairs over which [s]he has a right of passage."

What the Court Said

Because the worker received a personal injury arising out of and in the course of his employment, the exclusivity provisions of Massachusetts's workers' compensation law foreclosed the worker's negligence action, and thus the appeals court affirmed the trial court's decision.

The court rejected the worker's argument that he was not injured in the course of his employment because, at the time of the accident, he had concluded his employment activity and thus was not acting in furtherance of the employer's business.

The court found "little difficulty" in concluding that the worker's injuries arose in the course of his employment because:

(1) He had just "punched out," proceed to walk toward his car in the employee parking lot to go home.

(2) He was departing from work on a passage to which the employer had a right of use.

(3) There was a causal relation between his employment and the injuries he suffered.

(4) The risk of injury was a hazard to which his employment exposed him.

(5) His act of walking across the premises to his designated parking area was incidental to his employment.

The Takeaway

Just because a worker is no longer on the clock doesn't mean he's not at work for purposes of determining whether an injury arose out of employment.

Part II: AI Patent Challenges in the Insurance and Workers’ Compensation Industry?

Avery Steffen & John Alchemy, MD, AAFP, QME

The U.S. Patent and Trademark Office (USPTO) released a guidance update on patent subject matter eligibility, especially focused on the consideration of AI. The update, effective from July 17 through?Sept. 16 allows public comments to assist in the shaping of patent examiners’ considerations and applicants’ understanding of how to assess AI-related inventions under U.S. patent law or how it may be considered in the future. It builds on previous guidance, offering better clarity and consistency for evaluating how AI inventions may qualify as patentable concepts.?

The USPTO provided this update to offer clearer guidance on evaluating the patent eligibility of inventions, particularly in emerging fields like artificial intelligence (AI), under U.S. patent law (35 U.S.C. § 101). As AI technology advances, determining what qualifies for patent protection has become more complex and confusing, especially when abstract ideas or algorithms are involved, as discussed in Part I of this article series. This signals the broader USPTO initiative to promote guidance on AI development and appropriate incorporation into the inventive process, ensuring that inventors and attorneys have clear and consistent guidelines to follow while still encouraging innovation in critical technological areas.?

A Rapid Transition to New AI Insight and Applications?

The growing application of AI in the insurance and workers' compensation industries is unavoidable, if not already present in practice. AI provides the ability to perform complex data analysis and massive process automation while creating new permutations of understanding by data synthesis (generative AI). The insurance and workers’ compensation industries now face new opportunities to streamline operations and offer new innovative solutions. With the employment of high-accuracy databases (HADs) and validated data sets, the ability to generate higher quality outputs and more accurate data models is now possible. This explosion of computing power coupled with trainable learning will likely unfold the next “technological hook,” bringing the insurance and workers’ compensation industries to a new chapter. The coupling of these two powerful components will lead to many inventions in data text understanding, leading us into areas never before imagined, such as injury impact, secondary data signaling, and ultimately the new frontier of emotional analysis and contextual understanding, which may serve to adjust and advise claim decisions and resources.??

Affective Text Data Analysis Applications? ? One example of this innovation is the “affective analysis” of report text, where AI algorithms assess the tone, emotional content, and context of reports related to workers' compensation claims. This type of analysis may help insurers more accurately assess the severity of an injury or the impact of a disease, potentially leading to more precise impairment ratings, and better supportive decision-making throughout the claims process.?

In addition to affective analysis (sentiment analysis, emotional recognition, affective computing), AI-powered textual analysis using large, trained datasets will enhance the insurance industry’s ability to predict outcomes and standardize processes across multiple areas of practice. By utilizing large-language models, AI can recognize patterns in claims and medical reports, allowing stakeholders to understand complex concepts, such as injury severity and clinical disease expression, more effectively and quickly. This advanced understanding offers new possibilities for insurance and medical professionals to make more accurate comparisons between cases. Claim aggregations and data cohort organization now usher in a new level of standardization and objectivity in workers' compensation claims.?

Vector Data Analysis Applications?

One of the exciting developments in AI is its capacity to interpret vector values, a key element in natural language processing for understanding signal strength. By analyzing these values, AI can cite subtle nuances of injury descriptions and impact vis-à-vis activities of daily living, indirect pain levels, social impact, and disease progression expression. This capability represents a new resource tool in the insurance and workers' compensation industries, where understanding the degree of injury impact or disease manifestation can significantly influence the outcome of claims, financial reserves, resource utilization, and settlement negotiations.?

AI Patentability Challenges?

However, while AI presents numerous opportunities for innovation, the process of securing patents for AI-driven technologies is fraught with challenges. One major issue is determining whether AI innovations meet the criteria for patentability, including novelty, non-obviousness, and utility. For example, if an AI algorithm improves the accuracy of impairment ratings or automates complex claims processing tasks, it may be eligible for patent protection. However, the novelty requirement means that the invention must differ significantly from existing technologies, and determining this difference in the case of AI can be complicated. Is it acting as a simple computer software model, or is it doing something more??

AI Non-Obviousness?

“Non-obviousness,” as discussed in Part I, is another critical standard that AI-related inventions must meet to qualify for patents. AI innovations cannot be obvious extensions of current technologies; they must introduce new approaches or algorithms that would not be apparent to experts in the field and carry out a defined action or deliverable. In the case of workers' compensation, for instance, an AI system that automates claims processing might seem like an obvious application of existing technology. But if it uses a unique method, such as employing a novel machine learning model that interprets medical data more accurately than traditional methods, and solves a problem using a novel approach, it could pass the non-obviousness test.?

AI Utility?

The third major criterion for patentability is “utility,” meaning the AI innovation must provide a clear and practical benefit to the industry. In the insurance and workers’ compensation sector, AI can improve decision-making in claims management, predict medical outcomes more accurately, and even assist in pricing and policy adjustments based on real-time data or anticipated data. An AI powered tool that predicts when a workers' compensation claimant will reach Maximum Medical Improvement (MMI) is one such valuable example, offering utility by helping doctors, adjusters, and nurse case managers not only streamline their work but anticipate next steps to ensure claims are processed in a timely and efficient manner. This type of practical innovation aligns well with the utility requirement for patent claims and protection.?

AI and the Alice Decision?

Despite these opportunities, AI patents will likely face significant legal challenges, particularly in relation to overcoming the general concept of being an abstract idea. The U.S. Supreme Court’s decision in the 2014 case Alice Corp. v. CLS Bank International established that abstract ideas, such as “algorithms” or “basic economic principles,” are not patentable unless applied in a novel and specific way. This ruling has major implications for AI in the insurance and workers’ compensation industry, where many innovations involve mathematical algorithms or process automation that may be considered abstract ideas. For an AI algorithm to be patentable, it must solve a specific technical problem in a new way rather than merely automating a known process.?

For example, if an AI tool automates a common task like claims processing, it may be rejected as an abstract idea. However, if the AI tool incorporates a unique algorithm that analyzes claims data in a new way, it may qualify for patent protection. For example, an algorithm might be designed to predict injury severity or disease progression based on real-time data and multiple variables. It might be coupled with specific diagnostic recommendations and treatment interventions with recovery loop analysis, with specific output limits and data ranges of the intervention by way of hardware components comprising a register and a microprocessor. Add in a plurality of synaptic circuits, and together all of these components form an AI invention.??

The AI tool described passes Step 2A of the USPTO subject matter eligibility test under 35 U.S.C. § 101 because it integrates a novel algorithm into an actual practical application. While algorithms can be considered abstract ideas, this invention applies the algorithm to real-time data analysis, specifically predicting injury severity and disease progression, and providing diagnostic recommendations and treatment interventions. Additionally, the inclusion of hardware components, such as a microprocessor, register, and synaptic type circuits, links the abstract idea to a tangible and specific technological solution, making it more than a mere abstract concept. This integration into a concrete system demonstrates that the invention is directed to a practical application, moving beyond a judicial exception.?

This distinction between abstract ideas and patentable inventions is particularly important for AI innovations in the insurance and workers' compensation fields, where many processes involve data interpretation and decision-making. The defining line of the Alice decision challenge remains one of the major litmus tests of patentability.?

AI and Algorithms?

Another major issue that is still being settled is around the patentability of algorithms. While algorithms are central to AI technologies, courts have generally ruled that mathematical algorithms themselves are not patentable unless applied to solve a specific, real-world problem. For instance, an algorithm that simply calculates impairment ratings based on workers' compensation data may not be patentable. But if that algorithm applies novel methods, such as incorporating data from multiple sources to provide a more accurate rating or integrating AI-based predictive analytics to streamline the process while running simultaneous multiple streams of administrative and legal data gates, a process known as “variable thread analytic computation” (VTAC), it could meet the standards for patentability.?

AI and Attorneys?

Given these legal complexities, companies looking to innovate with AI in the insurance and workers' compensation industries must carefully consider their patent strategies earlier than ever. It is essential to ensure that any AI-driven innovation is not only novel and useful but also applied in a way that goes beyond simply automating existing processes. Working with experienced patent attorneys who are well familiar and specialize in AI and intellectual property law is critical to navigating these challenges and securing patents that offer true protection and a solid competitive advantage.?

Innovation Through Patent Law Navigation?

In conclusion, the integration of AI into the insurance and workers' compensation sectors offers vast potential for innovation, but also presents significant challenges and complications in terms of its description of context and patentability. As AI continues to evolve and play a more prominent role in areas such as insurance, workers’ compensation, impairment rating claims processing, and injury outcome prediction, it is crucial for administrative and medical professionals in these fields to understand the legal landscape and limitations surrounding AI patents. By carefully considering the novelty, non-obviousness, and utility of AI innovations, and working with specialized legal professionals, companies can secure valuable patent protections and maintain a competitive edge as innovators and leaders in the rapidly changing world of insurance and workers' compensation.?

The path to obtaining AI patents may not be straightforward, but with a basic understanding of the strategic approach, stakeholders can navigate these complexities and successfully protect inventions and intellectual property. In the future, as AI becomes even more deeply integrated into the processes of the insurance and workers' compensation industries, the importance of robust patent strategies will only grow in value. Understanding the intersection of AI, intellectual property law, practical and specific applications of data analysis, and the unique challenges of patenting in these industries is critical for staying ahead in this innovative future.?

About the Authors?

John Alchemy, M.D., QME, DABFP, has 30 years of clinical and legal experience in California Workers' Compensation. He is the founder of Impairment Ratings Specialists, A Medical Corporation, and Alchemy Logic Systems, operating as RateFast, an industry-leading software and data analytics platform for workers' compensation. Dr. Alchemy holds eight USPTO patents in the fields of insurance, impairment rating, and database validation and design, with additional patents pending.?

Avery Steffen, J.D., graduated from UCLA Law School in 2023 and is actively practicing in Sacramento, Calif. He has experience in the California workers' compensation administrative system. Mr. Steffen has authored educational articles for the California Medical Unit's continuing education program with the retired judge Hon. Steve Siemers, focusing on impairment rating for qualified medical evaluators.?

NCCI Court Case Update: Utah

NCCI

On August 22, 2024, the Utah Court of Appeals, in?Ackley v. Labor Commission, clarified that injuries resulting from idiopathic falls to level ground floors can be compensable if the employee can show that the hardness of the floor made the resulting injury worse.

In this case, an employee suffered multiple injuries after falling to a level ground floor at work. The fall was prompted by a ruptured hand cyst, which caused extreme pain and loss of consciousness. The court of appeals, in its initial review of the case, determined that the employee's fall was idiopathic as it originated from the employee's "internal or personal weakness or condition" and remanded the case to the Utah Labor Commission to consider whether the work conditions contributed to the hazards of the fall and increased the risk of injury to render the injury compensable. On remand, the commission denied benefits, reasoning that the evidence did not support the conclusion that the employment placed the employee in a position that increased the dangerous effects of the idiopathic fall.

The commission's decision was again appealed, and the court of appeals clarified that in an analysis of compensability for an idiopathic fall, an "increased risk" alone is not enough. Instead, the risk must?actually result?in increased or aggravated injuries. Thus, the court concluded, idiopathic falls to level ground floors may be compensable, but only if the employee can show that the work conditions—in this case the hardness of the floor—made the resulting injuries worse.

For more information on other cases monitored by NCCI's Legal Division, visit previous Court Case Updates and?Court Case Insights?under the?Legal section?of?INSIGHTS?on?ncci.com.