Merlinos consultants Matt Merlino and Ashley Pistole will be attending the National Association of Insurance Commissioners (NAIC) Summer 2014 National Meeting, August 16-19 in Louisville. If you are going to be in Louisville let us know — we would love to say hello. If you would like meet to discuss your specific needs with Matt and Ashley, please contact us.
Florida’s SB 542 was signed into law on Friday, June 13th, 2014. SB 542 is a bill establishing the rules for the sale and regulation of flood insurance outside of the National Flood Insurance Program. As we covered in prior blogs, this bill establishes what flood coverage can be offered by private insurers, what the approval process will be, and lays the groundwork for what flood models and methods will be approvable.
Given that there is a window of time before some of the new rules set in, how will your company take advantage of the new possibilities afforded by the flood market?
Last week we discussed reactions to Biggert-Waters (BW-12), most specifically the effects of the federal Homeowner Flood Insurance Affordability Act (HFIAA), which was passed in March. This week we’re taking a look at how Florida reacted to BW-12, and what HFIAA might mean for them.
After BW-12 came into effect and Floridians started getting massive increases in their flood insurance premiums, the Florida government started moving to allow the sale of flood insurance by the private market. After all, if NFIP were going to be offering actuarially sound rates, then there was the opportunity for competition from the private sector. So, the Florida Office of Insurance Regulation (OIR) issued bulletin OIR-13-03M so that companies could begin to move into the flood market. According to the bulletin:
- Flood Insurance can be offered as either:
- A stand-alone, allied lines policy
- An endorsement on an existing property policy, or
- It can be incorporated into an existing policy as a covered peril
- Requirements for a company wishing to issue flood insurance policies under this bulletin are a plan of operations, the relevant Certificate of Authority, the appropriate forms, and rates made from one of three approvable methods. Those methods are:
- Use NFIP experience from 1978-2012 to derive rates
- Use competitive analysis, or
- Use surplus lines data or flood models
The flood insurance program produced by the bulletin’s process need only be filed with the OIR for informational purposes. The company does have to keep support for the program and its rates on hand for two years, though, in case of an exam.
Meanwhile, lawmakers were piecing together Senate Bill 542 (SB 542), a bill devoted to establishing a private flood insurance market in Florida. Details of the bill are:
- The OIR is established as reviewing projected flood losses, but only on personal residential properties.
- Unlike the rule for hurricane models, the projected flood losses may be a straight average of model results or output ranges. Like the hurricane model rule, all models must be reviewed by the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM), separately from any associated hurricane models.
- “Flood” is defined as an overflow, flash flood, mudflow, or land collapse/sinking along a shore.
- “Flood Insurance” is defined as insurance covering any structure or contents in personal lines, not commercial lines.
- There are four kinds of flood insurance allowed:
- Standard insurance is a policy whose coverages are equivalent to those offered under NFIP
- Preferred insurance covers everything under an NFIP policy, plus other water intrusions from outside the structure, additional living expenses, and replacement cost on contents
- Customized insurance is loosely defined as “broader than…standard”
- Supplemental insurance cannot be excess coverage, but otherwise supplements a standard or preferred policy for things like valuables, deductibles, or additional living expenses.
- Notably, the bill specifically disallows Florida’s Citizens Property Insurance Corporation from providing flood coverage.
- It also disallows the Florida Hurricane Catastrophe Fund from providing reimbursement for flood losses, even those caused by flood during a hurricane.
- The bill also sets up some deadlines and effective dates. Upon getting signed into law, the bill will take effect, except for the FCHLPM’s new rules on models (i.e., the methods, models, principles, standards, and output ranges). Those will need to be adopted by the FCHLPM by 7/1/2017.
This creates a gap, though, because companies won’t have anything with which to comply when making filings before 7/1/2017. Therefore, until 10/1/2019, flood filings will essentially be informational filings.
Right now the bill has passed both houses, but is stalled out on the Governor’s desk, awaiting his signature to become law. However, with HFIAA having taken effect during this bill’s lifetime, the need for SB 542 has waned and the public outcry that fueled its progress through the legislative process has fizzled. Without the public push, one has to wonder if there is any reason at all for Governor Scott to sign it into law, especially since it mandates more work for OIR. What odds do you give this former wonder-bill?
Six months ago we wrote about the 2012 Biggert-Waters Act (BW-12) and people’s reactions to it at that time. In the intervening six months, a lot of reacting has happened. Most importantly, the Homeowner Flood Insurance Affordability Act (HFIAA) was passed.
After Biggert-Waters was passed, there was a public outcry. It was so universal across the political spectrum that Republican governors from three flood-exposed states — Mississippi, Florida, and Alabama — banded together to file a suit against FEMA. Among their charges were that BW-12 was implemented in an arbitrary and capricious manner, without regard to affordability for the insureds and with a failure to utilize accepted actuarial principles and consider actual risk. Specifically, these governors cited that the individual risk characteristics of a property were not fully considered. This lawsuit was withdrawn after the passage of HFIAA, and if we look at the components of HFIAA, it’s clear that it was withdrawn because HFIAA addressed many of the states’ concerns.
- HFIAA provides refunds for new policies in high-risk areas (anything written after 7/6/12) or renewals written after HFIAA whose premium increased more than 18%.
- The new cap on rate increases for primary residences is 18%. The cap under BW-12 was a 25% increase. This old 25% cap still applies to businesses, non-primary residences, Severe Repetitive Loss Properties, and what I call “risky” Pre-FIRM properties.
- Essentially, can now carry-forward the prior policy’s rates on your property. That is, if you sell your property, you can transfer the flood policy to the new owner at the subsidized rate. Additionally, if you dropped your policy because of the huge rate increase from BW-12, then you can buy it again at the subsidized rates.
- In order to offset all this subsidizing, NFIP will now be trying to recoup some of the lost revenue by charging all properties an additional fee. For primary residences this is just $25, but for all other properties it will be $250. These fees will disappear only when subsidization ends.
- Grandfathering will continue. It will also be expanded to include increases due to re-mapping. That means that the first year rate for properties newly classified as Special Flood Hazard properties will match those outside of the Special Flood Hazard Area. After the first year they will increase at the capped rate.
- Some other changes from HFIAA include: the appointment of a Flood Insurance Advocate, whose job will be to take consumer complaints and educate the public; allowances for flood mitigation, like residential basement flood-proofing; the establishment of installment plans, higher deductibles, and a broader affordability framework to address consumer affordability issues; the reporting to Congress of premiums greater than 1% of the coverage provided.
- The rest of HFIAA deals with the mapping issue, and takes a lot of cues from the Mississippi lawsuit: FEMA is charged with evaluating and improving data and mapping approaches used to make the flood maps and rates; accounting for improvements to a property that mitigate flood risk; considering non-structural features that will mitigate flood-risk; removing the $250,000 cap on reimbursements for map appeals, and coordinating first with communities during the re-mapping process and then reporting maps to Congress before implementing the new maps.
That is certainly a lot of targeted changes to BW-12. Next week we’ll look at how Florida has reacted so far to BW-12, and what it means for the state after the passage of HFIAA.
Drafted in the wake of the 2004/2005 hurricane season and Superstorm Sandy, the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12, or Biggert-Waters) makes a number of changes to the National Flood Insurance Program (NFIP). The changes are primarily rate increases or re-mappings to “reflect true flood risk.” Essentially, BW-12 eliminates, or gradually eliminates, subsidies for properties that do not meet current construction and elevation standards. Those that do meet the standards will continue to be subsidized.
BW-12 has two main sections: 205 and 207. Section 205 eliminates the grandfathered status for buildings that do not meet current standards and were not re-mapped, and section 207 deals with those properties that were re-mapped. Though FEMA is currently undertaking a study of the affordability of BW-12, articles have quoted FEMA saying that only 87% of FEMA’s Floridian insureds will be affected by BW-12. This makes Florida an NFIP “donor” state, where more premium comes into NFIP than is paid out by the program.
In response to the coming advent of BW-12, federal regulatory agencies have started preparing new rules for financial institutions, including the force-placement of flood insurance. Private insurers have begun expressing interest in selling flood insurance not backed by NFIP. Notably, NFIP was originally passed to meet a flood insurance need that private insurers were not meeting due to unprofitability. The Florida Office of Insurance Regulation has responded to this renewed interest with an informational memo to assist private insurers in making filings, and Homeowner’s Choice, as well as the Underwriters at Lloyd’s, are now writing flood insurance.
It’s no surprise that this change in the flood insurance system will increase costs for communities built in high-hazard areas, or newly high-hazard areas. The public outcry against the rising costs of flood insurance resulted in the proposal of October’s Homeowner Flood Insurance Affordability Act of 2013, whose purpose is to delay BW-12 until two years after FEMA concludes its affordability study of BW-12. Unfortunately for coastal homeowners, Congress adjourned on Thursday without passing the Act, meaning that flood rates will spike when BW-12 takes effect in two weeks.
Others are trying to find alternative solutions to BW-12. One Congressional-hopeful in Florida has floated the idea of a National Disaster Insurance Program, aiming to lower the costs to those affected by BW-12 by pooling flood risk with the risk associated with natural disasters in other parts of the U.S., like fire or earthquakes. In October, the Florida Senate Banking and Insurance Committee explored what it would take to opt Florida out of NFIP and handle flood insurance on its own.
With implementation of BW-12 unopposed, how does the act affect your future? Does Biggert-Waters affect your homeowners policy? Have you looked into private insurance, or are you an insurer who is thinking of offering flood insurance? How is your state handling the changes?
Self-insured group medical plans are very prevalent and have served plan sponsors well in many respects. However, plan sponsors have experienced increases in per capita medical costs that greatly exceed the Consumer Price Index for all urban consumers (CPI-U) for many years. The vast majority of self-insured group medical plans in-force in 2013 utilize a network of hospitals and physicians where the providers have contracted to provide services at some effective discount off their standard fee schedule known as “allowed charges.” These allowed charges are often determined in conjunction with a Preferred Provider Organization (PPO).
Another reimbursement approach that is getting attention is known as Medicare Cost Plus (MCP). With this method, the plan does not utilize a PPO network to determine the allowed charges covered, but rather the allowed charges are set to be equal to some multiple of the Medicare allowed charges in a given market. Plans commonly will reimburse at 120% of the Medicare allowed charges, but the multiple can vary upward or downward.
The Medicare Cost Plus approach can result in significant plan savings that accrue to the sponsor of the self-insured plan because 120% of Medicare reimbursement is typically less than what is allowed by the commercial PPO networks. The differences are larger for facility (inpatient and outpatient) claims than professional claims. Administrative costs under a MCP reimbursement should be lower due to the lack of network access fees. In addition, medical stop loss premium rates should be lower under a MCP plan because the lower level of allowed charges reduces the level of the insurance carrier.
Employer plan sponsors retain all the traditional advantages of self-insured group medical plans including the ability to not comply with state insurance mandates, avoidance of state premium taxes, and the ability to offer identical plan designs to employees who reside in different states.
The savings that the MCP method offers could be partially or fully offset by additional costs incurred for member advocacy in a MCP plan. The primary issue that employers will encounter with a MCP reimbursement approach is that without pre-negotiated provider reimbursement rates and/or discounts, some providers will not accept the plan reimbursement as payment in full for their services rendered. This can result in members being balance billed by providers after a claim is adjudicated. It could also result in the member not being welcomed by some physicians or facilities in the provider community.
Employers must prepare for these claim adjudication issues and develop a strategy to help plan members deal with providers who contest reimbursements and “balance bill.” Plan sponsors must also engage a qualified ERISA attorney to draft a new plan document and develop compliance procedures associated with the MCP reimbursement strategy.
We think the Medicare Cost Plus reimbursement approach will provide significant savings for some self-insured group medical plans. What do you think? Is MCP a good alternative to the traditional way of determining allowed charges? Will your group explore MCP as an option? Let us know.
A bill was recently introduced in the U.S. Senate that would give employer until 2016 to comply with a health care reform law provision requiring them to offer coverage to full-time employees or pay a fine. The measure, S. 1330, which was proposed by Senator Mark Begich, D-Alaska, follows a one-year delay announced earlier this month by the U.S. Treasury Department. Federal regulators has decided to hold off until 2015 the enforcement of provisions of the health care reform law requiring most employers to provide qualified, affordable health coverage to their employees.
The House of Representatives also has approved bills delaying until 2015 both the employer mandate and the requirement that individuals enroll in a qualified plan or pay a fine. However, before the votes, the Obama administration said the president would veto both bills, even if approved by the Senate, because the legislation on the employer mandate is “unnecessary” and the bill seeking to delay the individual coverage mandate would lead to higher insurance premiums and a greater pool of uninsured U.S. residents, the administration said in a statement. “Enacting this legislation would undermine key elements of the health law, facilitating further efforts to repeal a law that is already helping millions of Americans stay on their parents’ plans until age 26, millions more who are getting free preventive care that catches illness early on, and thousands of children with pre-existing conditions who are now covered,” the administration said in the statement.
However, after the House votes, U.S. Rep. Tim Griffin, R-Ark., said the Obama administration erred in the way it granted employers the one-year reprieve from the law’s coverage and reporting requirements, as well as its refusal to extend the same relief to individuals. “The White House may believe it can unilaterally delay implementation of Obamacare’s employer mandate, but only Congress can change the law,” Rep. Griffin, the primary sponsor of the House bill to delay the employer mandate, said in a statement. “Unlike the president, we know it’s not fair to give businesses and labor unions relief from Obamacare’s job-crushing provisions and leave families to deal with the disastrous consequences.”
So do you think that the delay for the employer mandate should be granted? What impacts will be on your organization if this mandate was not delayed? Let us know.
The Centers for Medicare & Medicaid Services (CMS) has released a Funding Opportunity Announcement for round two of the Health Care Innovation Awards. Under this announcement, CMS will spend up to $1 billion for awards and evaluation of projects from across the country that test new payment and service delivery models that will deliver better care and lower costs for Medicare, Medicaid, and Children’s Health Insurance Program (CHIP) enrollees. Applicants who are requesting more than $10,000,000 in funding are required to submit an external actuarial certification with their application. The application deadline for “round 2” of the grant program is August 15, 2013.
Merlinos & Associates is working with multiple applicants to provide certifications in support of their applications for Health Care Innovation Award funding. If you need assistance, please let us know.
Within the last 15 years there have been significant innovations in the pricing of personal and commercial insurance. Three quick examples come to mind:
- The use of more powerful pricing models, often based on Generalized Linear Models (GLMs)
- The use of personal and business credit histories
- The advent of Usage Based Insurance (UBI)
These innovations allow for more sophisticated pricing, based on the premise that they can be used to more accurately predict an insured’s risk.
Such innovation is welcome, but it does come with a price. Ten to fifteen years ago, one could easily pick up an insurance company’s rating manual and, with good old fashioned pencil and paper, figure out what rate you would be charged. Fast-forward to today, and that situation has changed. Many insurance companies have invested significant time and resources to develop complex underwriting and pricing models that almost always incorporate “credit scores” or “insurance scores” generated by third party vendors. The results of these models and their underlying classifications are often filed with insurance departments under the auspices of being a “Trade Secret.” As such, a portion of the rating manual is not made public. The new rating process has the outward appearance of a “black box,” as an insured’s rate cannot be calculated from the publicly available manual. This is complicated by the fact that there is seemingly only one accurate source for a given insurance company’s actual rates…the insurance company itself.
Enter UBI. Now your auto insurance premium can be determined based on information transmitted electronically from a “black box” in your vehicle. As new types and massive quantities of information become available from insureds, insurers will surely protect this data and any modeled results based on it under the auspices of being a “Trade Secret.” Even now, some insurers are offering discounts to their insureds so they can begin collecting telemetric vehicle data. Ultimately data generated from a “black box” may be modeled through another “black box” before determining your insurance premium. UBI also represents another departure from traditional personal insurance pricing in that your insurance premium may not even be known in advance, which presents a whole new set of questions.
How comforting is all this? Are we ready for pricing innovations like UBI now or is it the wave of the more distant future? Tell us what you think.
According to Louisiana Senate Bill 19, Louisiana Citizens Property Insurance Corporation would be required to get approval from the state House and Senate committees before rate increases of more than 25% could go into effect. The bill, sponsored by Sen. Bret Allain, was introduced in the Senate due to large rate increases many Citizens policyholders saw in certain territories last year. The bill would allow lawmakers the opportunity to analyze and consult experts on the necessity of rate increases proposed by Citizens before any large rate increases were implemented.
Currently, Citizens is required by law to have rates that exceed by at least 10% the higher of:
- The market rate in each parish.
- The actuarially justified rate in each parish.
Citizens performs a rate study annually that analyzes the current market rates in each parish and analyzes the actuarially indicated rates in each territory. Rate increases proposed and approved are based on either the market rate or the actuarial indicated rate. The result in the past has left some policyholders with large rate increases that they feel they cannot handle. If LA SB 19 is passed, lawmakers would be given the opportunity to approve any rate increases greater than 25% and possibly implement the rate increases over a period of two to five years.
The Bill has passed in the Senate with 36 yeas and 0 nays, and has moved to the House for consideration.
What do you think the effect of this bill would be on Citizens rates? Would it result in lower rate increases year over year and provide relief to policyholders? Could it hurt Citizens’ goal of being the “Insurer of Last Resort” if it results in blocking rate increases that keep Citizens rates higher than the market? Is it a good idea to put approval of large rate increases in the hands of lawmakers rather than continuing with the current laws governing Citizens’ rating?