While finance chiefs are likely to have occasional conversations with their risk and employee-benefits managers, the relationship tends to be arm’s length. Once they confirm that their organizations are well protected against physical damage and financial ruin, many CFOs send corporate insurance specialists on their way. But that’s not the case when it comes to the interaction between Richard Hinds, CFO of the $8.2 billion Miami-Dade County, Florida, public school system, and Scott Clark, the entity’s risk and benefits officer.
Clark, who is also the incoming president of the Risk and Insurance Management Society, has reported to Hinds on and off for the past 20 years. Frequently, the CFO accompanies the risk manager to negotiate insurance coverage with underwriters in London, Munich, and elsewhere. Indeed, Hinds’s support of Clark’s work at RIMS, the major professional organization for risk management, was a primary reason why Clark took on the top slot at the society. And when he formally becomes president at a reception in New York on January 13, Hinds plans to be there.
The relationship has helped Clark assume a strategic role in the fortunes of the school system, which is facing both a severe cut in revenues and a steep rise in health-insurance costs. Last month Clark discussed those challenges with CFO, along with the role of finance chiefs in risk management. The following is an edited version of that discussion.
What should CFOs be thinking about in terms of risk management in 2011?
They should be thinking about the premiums for their strategic insurance programs. We’re benefiting industrywide from a relatively soft market on the casualty side and in some areas of the property side as well. Even though there have not been any hurricanes for the past five years in certain parts of the country, we still have some pockets of very, very difficult markets, such as California for earthquake insurance and Florida for property insurance.
As the new president, I want us to start having conversations within RIMS as to what we can do to support CFOs in terms of their employee-benefits programs. Benefits continue to be a significant cost driver in all companies’ bottom lines. Everybody’s wondering how the new federal health-care law will affect the structure of benefits programs.
What benefits challenges does the Miami-Dade County system in particular face?
It’s a delicate dance to provide a quality benefits program to recruit and retain excellent employees and teachers for the 340,000 kids that we educate while keeping in mind that the ever-increasing cost of employee benefits goes to the bottom line. I have to support the current benefits program at a time when my revenue is going down and the cost structure of benefits continues to go up, in line with the increased cost of benefits across the United States.
Also, fraud is a huge issue in employee-benefits programs. South Florida is a fraud leader in the benefits area. So an important part of my job is working with the third-party administrator that handles my self-insured health-care program to identify any fraud as early as possible.
Why is fraud detection so important to you?
Because fraudulent claims by our employee base, if in fact they are involved, amount to stealing money from the taxpayers. On a federal level, Medicare or Medicaid fraud ends up as a significant pass-through cost to us as the largest employer in Miami-Dade County. What happens is that when health-care providers don’t get enough money from Medicare and Medicaid because of fraud, they shift that cost to the self-insured employers, like the public schools.
What role do you play in terms of the system’s financial strategy?
As a public employer in Miami, we’re seeing a significant reduction in the revenues for public education. Part of the problem is that the federal government’s stimulus funds that have been backfilled into our education budget for the past two years will go away after this current school year, which is fiscal year 2011.
Come July 1, there will be a significant amount of dollars across the state that will no longer be available for public education. I have to be engaged in the issues of how to fill that empty pot. I’m having conversations with both my CFO and the schools superintendent [Alberto Carvalho] about how to support the maintenance and operations of our facilities, which are our largest asset.
We also have a huge exposure to hurricanes. Because of the deterioration of dollars in the state, I have to cut about 10% of my property-insurance budget. So I’m having a conversation with my CFO about how to achieve that cost reduction. Is my leverage in the insurance marketplace enough? Or will we have to cut the premium through a combination of taking on additional risk and having a larger windstorm deductible? That would leave the district with significant risk to its bottom line if in fact the wind blows in South Florida.
If I take on a larger deductible and save, say, $4 million, there is always a risk that I may not be eligible for Federal Emergency Management Administration funding, because I have assumed too much risk. A lack of FEMA funding could physically shut this district down in the event of a huge hurricane. So a $4 million decision involves a strategic risk.
What does Richard Hinds bring to the table when you negotiate insurance programs?
After all these years of traveling with me to London, he really understands the volatility of the catastrophe and windstorm insurance marketplace. What he does when he travels with me is to bring additional credibility to our negotiations with property-casualty underwriters. It shows that we are fully engaged, up to the very top of this organization, in creating and maintaining a global property-insurance program. And I think that says volumes when the insurance company is looking to put out its capacity in a windstorm market.