Archive for the ‘Insurance companies’ Category

Proposed Reinsurance Tax

Tuesday, July 6th, 2010
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Massachusetts Congressman Richard Neal would like to impose taxes on foreign reinsurance companies and that means scarcer and more expensive risk capital for small businesses. Reinsurance companies are the ultimate providers of risk capital as they back-stop the risks of primary insurance companies. Consider what happens when a hurricane strikes Florida, for example, causing $10 billion in insured losses. The insurance company likely has reinsurance protection in place to spread the risk, thereby increasing capacity and lowering costs. If the insurer had to bear the losses itself, it would have less risk capital to underwrite policies. Imposing a special tax on reinsurance raises its cost, making insurance less affordable to small businesses. Any reduction in reinsurance capacity increases the vulnerability of communities particularly prone to catastrophic risks, such as coastal communities and large cities. Foreign reinsurance providers are of particular concern to the small business community as they provide two-thirds of the reinsurance coverage purchased by U.S. property-casualty insurance companies. We rely on foreign capital to make our economy hum. Imposing a discriminatory tax on reinsurers is counterproductive for the U.S. economy and its small businesses.

Good News and Bad News from the Insurance Industry

Saturday, June 26th, 2010
Better Numbers, But...

Better Numbers, But...

This week the property-casualty industry reported some good news and some bad news. According to the ISO and the Property Casualty Insurers Association of America, the industry returned to profitability, reporting a 6.7% return on policyholder surplus for the first quarter this year, a marked improvement from the 1.2% loss from the first quarter of 2009. The industry-wide results would have been even better, but for steep losses reported by mortgage and financial guaranty insurers.

“This is further proof that home, auto, and business insurers are fiscally sound, that we have been strong and stable throughout the economic downturn of the last two years, and that we are able to pay claims to policyholders during their times of need,” said David Sampson, PCI’s president and CEO. “With experts forecasting an active hurricane season, the $102.9 billion increase in policyholders’ surplus from $437.8 billion at the end of first-quarter 2009 to $540.7 billion at the end of first-quarter 2010 provides us all with an extra measure of confidence that insurers will be able to fulfill their obligations to policyholders when the wind blows. Nonetheless, it only takes one storm like Hurricane Ike in 2008, Hurricane Katrina in 2005, or Hurricane Andrew in 1992 to disrupt millions of lives and cause tens of billions of dollars in property damage. And this means now is the time for all of us — insurers, businesses, public safety officials, elected leaders, and the general public — to prepare for hurricane season to minimize the human hardship and economic loss in the event of a natural catastrophe this year.”

But the news isn’t all good, either for the industry or the businesses they insure. The property-casualty insurance industry returned to profitability, despite continuing declines in premium volume. Premium volumes have declined for twelve consecutive quarters.

“The 1.3 percent decline in net written premiums in first-quarter 2010 reflects the ongoing consequences of a once-in-a-generation economic storm. In first-quarter 2010, seasonally adjusted total private-sector employment fell 2.7 percent compared with its level a year earlier, private-sector wages and salaries dropped 1.4 percent, and the average unemployment rate rose to 9.7 percent from 8.2 percent in first-quarter 2009,” said Sampson. “This challenging economic environment reduces demand for insurance. Nonetheless, our industry remains stable and is financially well positioned.”

I am concerned about declining premium volumes. Understandably, businesses and consumers are looking for ways to reduce expenses in this difficult economy. But foregoing insurance coverage may be shortsighted. I have met homeowners in Rhode Island who stopped their flood insurance once their mortgages were paid off, only to suffer major financial losses when the record floods struck the state earlier this year. If you are buying insurance only to satisfy a lender’s requirements, you need to seriously reconsider your risk management strategy. An uninsured loss will only increase financial stress and it will be too late to go back and reinstate insurance coverage retroactively.

The Value of Mutuality

Thursday, June 17th, 2010

Mutual insurance companies are owned by their policyholders and, as such, are limited in their ability to raise capital. Unlike stock companies, mutual insurers cannot raise equity by selling additional shares. This constraint prompted the demutualization trend in the U.S. and in the U.K. in the 1990’s as mutual insurance companies, such as the Metropolitan Life Insurance Company, launched initial public offerings of stock. Demutualization was believed to raise capital for expansion, increase efficiency and motivate management by offering stock-based incentives for performance. But what of the policyholders? I have observed that small business commercial policyholders of mutual insurance companies are generally more satisfied with their coverage than policyholders of stock companies. In particular, the process of adjusting and paying claims appears to be more transparent and fair to the mutual policyholders. Now, the Association of Cooperative Mutual European Insurers has published a study “Valuing Our Mutuality” that examines the performance of mutual insurers. The researchers looked at premium income and growth, claims payments, expenses and financial performance. The study substantiates what I had observed anecdotally: mutual insurers generally have higher claims ratios than publicly traded insurers, such that more money goes back to the policyholders per paid premium. What was even more striking was the finding that mutuals are more efficient in their expense management: the five-year average expense ratio for life mutual insurers was 13.2% vs. 14.8% for their publicly traded peers. (The expense ratio represents the insurance companies’ expenses divided by its net premiums earned. A lower ratio represents better cost control measures.) The researchers limited their review to European life-health and property-casualty insurance companies; it would be interesting to learn if we have a similar result in the U.S. insurance industry. In Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (Wiley, second edition paperback, 2010) I urged small business owners to carefully consider the claims paying record of an insurance company when choosing coverage. Make sure to obtain quotes from mutual insurers as part of your selection process. The research shows you may be happier with the results.

Lloyds of London Fears the Perfect Storm

Friday, May 21st, 2010
Spiraling Upward

Spiraling Upward

The chief executive of the Lloyds of London insurance market believes that the industry faces the “perfect storm” this year. In his speech to the Insurance Day London Summit, Lloyds CEO Richard Ward stated that the insurance industry is already under pressure even before the U.S. hurricane season begins June 1. The Deepwater Horizon oil spill is likely to cost the insurance industry $3.5 billion, making it the largest insured loss in the energy sector since the 1988 explosion of the Piper Alpha rig in the North Sea. The implications of the precedent are likely of serious concern to the Lloyds market, given that Piper Alpha precipitated the spiral of reinsurance losses that brought Lloyds to the brink of insolvency in 1992. Swiss Re estimates its share of the oil spill loss to be $200 million; Lloyds will issue its own estimate by month-end. As reinsurers will absorb most of the losses related to the oil spill, they will increase premiums assessed to direct insurers that will, in turn, raise insurance premiums on personal and commercial policyholders. What drives the rate hikes is not just the absolute magnitude of losses, but their occurrence in combination with low investment returns. Insurers collect premiums to cover risks and invest those premiums to generate returns from which claims will be paid. For the insurance industry, the combination of high underwriting losses (such as the oil spill, the Chilean earthquake and other disasters of 2010) with low interest rates can be fatal. This is what the Lloyds CEO meant when he referenced the “perfect storm”. Of course, what is particularly worrisome is that the insurance industry is under pressure in 2010 even before the start of the U.S. hurricane season. What does this mean for small businesses? If you can renew your coverage sooner rather than later, you might avoid rate hikes almost certain to follow later in the year.

California Considers Auto Insurance Rates

Monday, May 17th, 2010
The Politics of Auto Insurance

The Politics of Auto Insurance

While the banking sector dominates the national news headlines, the insurance industry is capturing attention at the local level. Yesterday, I blogged about Arizona’s decision to privatize its workers compensation fund. Today, let’s turn our attention to California where residents are debating the merits of Proposition 17, a measure designed to lower auto insurance rates and increase competition. Opponents of the measure, which appears on the June 8 ballot, say it will do just the opposite. The existing law in California allows drivers with good safety records and continuous insurance coverage to benefit from premiums discounts. Proposition 17 allows drivers to carry those discounts over to new insurance providers. The measure is backed by major insurance players, which may see an opportunity to capture market share. I see no reason why an insurance company cannot match a discount for a driver with a good safety record to win the business, without putting the measure to a public referendum. Market practice, not political fiat, should govern rates.

A Bitter Pill for Small Business

Wednesday, April 28th, 2010

The following is an op-ed I had written last year about the Senate’s health insurance reform bill, which favors the interests of large health insurance companies at the expense of expanding access to affordable health care for the small business sector. Congressman Ron Paul wrote a column on his website about corporatism, the advancement of big business interests to the detriment of our personal liberties and economic freedoms. He said it better than I did, but we are essentially on the same page on this one:

A Bitter Pill for Small Business

Proposed Health Insurance Reform Sacrifices Economic Recovery

As a small business owner for ten years, I paid the high price of limited choice. If allowed the freedom to do so, I would have chosen health plans available to the Fortune-500, options the Senate Finance Committee and the health-care lobby would deny.

But this uneven playing field could be corrected Thursday when the U.S. Senate Committee on Small Business and Entrepreneurship will hold hearings to consider the impact of the insurance reforms recommended by the Senate Finance Committee.

The genesis of this game-changing opportunity was Monday’s public break-up of the alliance between the insurance industry and Congress, an alliance that had promoted reform measures harmful to the nation’s 29.6 million small businesses.

Having spent roughly $100 million in advertising to promote the reforms, America’s Health Insurance Plans, an industry lobby group, on Monday published an analysis demonstrating that the proposed reforms would accelerate increases in medical insurance premiums.

Stung by this apparent betrayal, Senate Finance Committee spokesman Scott Mulhauser attacked the report as a “health insurance company hatchet job, plain and simple.”

The health-care industry’s initial support of the proposed reforms and even its eventual about-face on the matter simply reflect its self-interest. The industry’s support of the Senate Finance Committee’s plan was the result of government’s promised mandate that millions of uninsured Americans must obtain coverage, many with government subsidies, or face serious penalties. The insurance industry presumably calculated that these financial benefits warranted sacrificing sound underwriting practices to contain costs, as such costs could be passed on to policyholders anyway. When the Finance Committee didn’t deliver the desired mandates, the deal was no longer attractive to insurers.

But the deal was always disastrous for small businesses, so insurers likely want political cover to escape blame for rising premiums that they will have to pass on to policyholders.

Consider that costs of regulatory compliance are a significant burden hindering small business employment. The Office of Advocacy of the U.S. Small Business Administration reports that on a per-employee basis, small businesses pay 45% more to comply with government regulations than large corporations. The proposed excise tax on certain health plans represents a new administrative burden for requiring businesses to report the costs of their employee benefit packages provided by each of their vendors. Considering the 2009 Small Business Health Care Reform Survey of the National Small Business Association found that 30% of small businesses use three or more vendors, and some as many as 12 different vendors, this requirement is onerous.

Even worse is the suggestion that such excise taxes defray the costs of expanding coverage. The Senate Finance Committee would broaden eligibility for Medicaid without providing a viable plan to pay for it or contain its spiraling costs, which are increasingly borne by smaller businesses. Currently Medicaid is funded by taxpayers at 65% of costs and Medicare at 85% with the balance paid in the form of what are, in effect, hidden taxes in the form of higher premiums on private plans.

Large corporations, (defined as those with at least 50 employees) are able to escape such assessments because they benefit from self-insured health plans. The Kaiser Foundation estimates that self-insured companies covered 75 million out of 137 million workers in 2008. Self-insurance allows the flexibility of plan design to manage costs and utilization as well as significant cash flow and tax benefits.

But most importantly, self-insured plans are not subject to conflicting state mandates, as they are regulated under federal law (ERISA, the Employee Retirement Income Security Act). The plans are also not subject to state health insurance premium taxes, which typically cost 2% – 3% of premiums and they avoid insurance charges for fluctuations in claims, which typically range from 3% – 10% of premiums.

These are significant cost savings, but they are not available to smaller employers which cannot absorb any volatility in self-insured claims. Nor would the insurance lobby have any interest in expanding access for small business, as insurers earn less when they limit their role to administrators of self-insured plans.

The federal and state governments also benefit by holding small businesses hostage to limited choices as, according to the AHIP, the private sector pays 135% – 140% of the cost to subsidize the continued underfunding of Medicare and Medicaid. The federal government’s reimbursement formula incents politicians to spend more for their constituents to capture more federal dollars from Washington. Politicians postpone the day of fiscal reckoning for Medicaid, in part, by holding small businesses hostage to costly mandates.

To be sure, supporters of the Senate bill will say that small businesses priced out of the market can access coverage on the insurance exchanges. But that violates the President’s promise that those who are satisfied with their insurance may keep their plans. In any event, the insurance exchange is not financially sustainable, requiring over $800 billion in subsidies over the next decade. Comparable efforts to establish insurance exchanges in Texas, Florida, North Carolina and California all failed, in part for the inability to design plans to manage risks, which plan design restrictions are enshrined in the Senate’s proposed reform.

There is a proven model for self-funded plans that could be adapted to broaden access to affordable health insurance. Prior to starting my small business, I was a senior executive of the world’s largest reinsurer of health risks, where captive insurance programs were commonly structured to manage other insurance costs. This model can be applied to health insurance plans and, with enabling legislation, structured for small business access.

Outside the reinsurance industry, captives are not well understood. They are thought to insure a single corporate parent. In fact, captives are often structured for ownership by multiple companies, agencies or an association. Because larger groups have more predictable medical claims, captive associations are even better mechanisms for containing health insurance costs than allowing small businesses to negotiate their individual purchases across state lines.

What hinders the implementation of this solution is that it is impossible to design a single offering that complies with the mandates of all 50 states. And if such a plan were to exist, it would not offer any cost savings as the policyholders would have to be rated and priced as individual small groups within their states of domicile.

It is time to change this status quo.

The insurance lobby is correct to state that the Senate’s reform measures will raise the cost of coverage. The President is correct to state that small businesses need affordable health insurance to expand job creation. On Thursday, ranking Senate Small Business Committee Senators Mary Landrieu (D-LA) and Olympia Snowe (R-ME) should resolve this apparent conflict by calling for enabling legislation for health care entrepreneurs to design ERISA-qualified captive health benefit plans for small business associations. That would be a win for everyone’s stated goals.

Failing Grades in Insurance

Tuesday, April 13th, 2010
Taking the Test

Taking the Test

The Kansas City office of the National Association of Insurance Commissioners conducted an “Insurance IQ” test on 1,000 Americans with discouraging results: only 45% of those tested feel capable of making good insurance choices. Are you feeling more confident than the average American? The following three questions were answered incorrectly by 60% of the people tested in this study:

1. Does automobile insurance cover personal belongings stolen from your vehicle? The answer is no.

2. Can your credit score affect your car insurance premium? The correct answer is yes.

3. At what age do most Americans become eligible for Medicare? The correct answer is 65 years old.

The “Insurance IQ” test consisted of ten questions and was conducted last month. Respondents, on average, correctly answered only four out of ten questions.

Another troubling finding was that 86% of Americans do not completely understand insurance terms frequently used in recent discussions on health care reform. For example, 55% of participants in the study did not understand the term “pre-existing condition”. It refers to a medical condition that existed prior to applying for an insurance policy or becoming a member of a new health plan. The consequences of this lack of understanding of basic terminology not only limit the ability of Americans to fully participate in the public debate over insurance reform and to make informed coverage decisions as consumers, but also expose them to scams. The Kansas State Insurance Department recently issued an alert to consumers about con artists targeting elderly Kansans to whom they attempted to sell phony “ObamaCare” health insurance policies for the federal government.

Now imagine if a comparable test were performed to assess our level of knowledge about commercial insurance coverage. If the results of the consumer test were this dismal, the small business owners, which deal with more complex issues of commercial coverage, would likely do much worse. Clearly we have to do more to improve our national level of financial literacy, particularly with regard to insurance.

Stress in the Florida Insurance Market

Sunday, January 3rd, 2010
Calm Before the Storm

Calm Before the Storm

State Farm Florida has entered into a consent order with its state insurance regulator that will help the company to stabilize its financial condition by reducing its exposure to catastrophes and raising premiums. The Florida property insurance market is under enormous pressure; 102 of the 210 private property insurers operating in the state are losing money. Three went out of business in the last year.  The consent order allows State Farm to non-renew no more than 125,000 of its 810,416 residential property insurance policies in Florida. Those policyholders designated for non-renewal will have at least six months’ notice and will be offered other insurance options. The new rates will go into effect as the remaining policies are renewed. State Farm Florida will remain the largest private insurer of property in the state and was granted a 14.8% rate increase on all homeowners’ policies. Policyholders need not take action at this time, but those of us who have looked at the declining property market in Florida need to take into consideration the rising costs of homeownership there.

It Adds Up

Tuesday, December 29th, 2009


At a recent small business event, I had the pleasure of being seated next to a chapter director of the National Hispanic Chamber of Commerce. Over lunch she shared with me her own insurance disaster, which illustrates the importance of good record-keeping – a costly way of learning a lesson! She collects Lladro figurines. Over 30 years of marriage, her husband would give her gifts from Lladro for commemorating special events: their wedding anniversary, Valentine’s Day, her birthday and Christmas. Lladro figurines are handcrafted in Spain and cost several hundred dollars each. Some of the figurines she has collected are irreplaceable as they are models that are no longer in production. And of course, their sentimental value is incalculable as they represent precious memories with her husband, who passed away. She had the figurines prominently displayed in a glass curio cabinet in her living room. She lost her collection when her home was burglarized. Unfortunately, she did not calculate the value of her collection in her coverage limits for her homeowner’s insurance. Nor did she endorse the collection or document the assets with videotape or photography, for example, or sales receipts. Over 30 years, that collection had become quite valuable, so in addition to the emotional distress associated with its loss, there is a significant financial loss as well. It is an all too common mistake to neglect to update asset values or to underestimate the value of non-traditional assets. I chided Stefan, our IT guru, for this very oversight. He had purchased a state-of-the art stereo system at a retailer’s bankruptcy sale for a ridiculous price. But in the event of fire, theft or other loss, he would never be able to replace that asset for what he had paid for it. It is not covered in his insurance policy, yet he insures his automobile, which is worth far less. I use the New Year as an occasion to update my business and home records to ensure that my insurance records are up to date. Please do the same – it will give you peace of mind.

U.S. Senate Works Christmas Eve

Sunday, December 27th, 2009
Coal In Your Stocking This Year?

Coal In Your Stocking from Our Santas in the Senate

The Senate worked late into the night to socialize one-sixth of the U.S. economy: the entire healthcare sector. No matter how you look at it, it is a no-win for small businesses. If you are satisfied with your current medical insurance, but the government deems your benefits “generous”, you will be hit with punitive taxes. If you are over age 65 and are covered by Medicare, your benefits may be adjusted by the government to rationalize the system.

And all of us will be paying for the cost-shifting into enlarged state Medicaid programs and pork-barrel politics played to buy the votes of senators reluctant to support this bill. Even worse, our political leaders had the moxie to demonize the insurance industry, even as this “reform” enriches the industry by delivering captive policyholders to them with no offsetting pressure on cost containment. We are still left with a patchwork of 50 state insurance systems and no national economies of scale. Small businesses will still be overpaying for insurance, while large corporations can escape the most onerous burdens with self-insurance or other captive schemes. Let’s see if the House shows any political courage after the New Year, but the signs are ominous.