The Biggert-Waters Act: What Does It Do, and What Next?

December 19th, 2013

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?

Medicare Cost Plus: Yes or No?

August 28th, 2013

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.

Should The PPACA Employer Mandate Be Delayed?

July 24th, 2013

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.

CMS Health Care Innovation Awards

July 17th, 2013

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.

The Future of Insurance Pricing

June 26th, 2013

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.

What About Louisiana Senate Bill 19?

May 7th, 2013

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?

Understanding the PPACA Employer Mandate and Associated Penalties

May 2nd, 2013

The US Department of Health & Human Services has recently clarified the employer requirements with respect to offering group medical coverage in 2014.  While a $2,000 per employee penalty (all employees less 30) still applies for employers with at least 50 FTE’s who do not offer any type of group medical coverage, employers have some potential to avoid the full impact of this penalty as long as they offer some type of group medical coverage…even if the plan offered has an actuarial value less than 60%.

In the event an employer offers a group medical plan with an actuarial value that is less than 60%, the applicable penalty is the lesser of:

  • $3,000 for every employee who receives subsidized insurance coverage at a state exchange.
  • $2,000 for every employee (less 30). 

In some cases the “$3,000 per subsidized employee” will actually be the lower penalty.  This will tend to be the case for employer groups with lower earning employees who may choose to not purchase coverage in 2014.  See the helpful employer mandate chart published by CIGNA for more information.

Fortunately, there are a variety of modeling tools available to help employers assess the impact of PPACA.  Tell us about your business.  Will you offer group medical coverage?  Do you understand the impact PPACA will have on your organization?  Have you used a PPACA modeling tool?  Let us know.

Florida SB836 and HB821 – What Do They Do?

May 2nd, 2013

The Florida House and Senate will soon consider bills to enact portions of the NAIC Model Holding Company Act: Senate Bill 836 (SB836) and House Bill 821 (HB821).  Both bills contain almost identical language and provide the Office of Insurance Regulation (OIR) with new tools in monitoring the solvency of insurers and performing financial examinations of these entities.  

One of the main tools being added is that the OIR would be able to examine any insurer and its affiliates to ascertain the financial condition of the insurer.  This authority also allows the OIR to examine the enterprise risk of a group of affiliated companies or an insurance holding company and how that risk might affect the financial condition of the insurer.

The bills also include additional calculations and tests, for both property & casualty and life & health, to determine a company action level event, as well as revisions to the provisions for companies at the mandatory control level. They also change annual statement requirements by necessitating the actuarial opinion summary (AOS) be included in the annual statement (624.424(1)(a)2, F.S.).

Some specifics relevant to the P&C industry are:

  • Establishes a new additional trigger for a company action level event, as follows: (Three times the Authorized Control Level Risk-Based Capital) > (Total Adjusted Capital) >= (Company Action Level Risk-Based Capital) AND The “Trend Test” is triggered.
  • After the mandatory control level is passed, the OIR now can forego taking action if the company MAY (not “will”) eliminate the control event within 90 days.
  • The AOS must be completed in accordance with the NAIC P&C annual statement instructions.
  • Every insurer must file an enterprise-risk report by April 1st.  Exceptions may be granted by the OIR for domestic subsidiary insurers of compliant insurers or domestic insurers writing only in Florida with less than $300 million premium that can demonstrate that there’s no substantial regulatory or consumer benefit. Note that a waiver is valid for two years.
  • Supervisory colleges may now be formed to assess a company under ss. 608.801 and 624.316.  The OIR can decide its powers and the company is billed for its expenses.

HB821 bill is set to take effect 10/1/2013 if it passes and SB836 is set to take effect on 1/15/2015.  The text of HB821 can be found here and the text of SB836 can be found here.

What effects would these law changes have on your insurance company and its interactions with the OIR?  What would be your most pressing questions for regulators if these changes are made?  What are the hurdles you might face if these changes are effective by the end of the year?  Let us know.

Should Insurers Care About Statistical Reporting?

April 26th, 2013

Compliance to regulatory bureau statistical reporting demands is often done as an afterthought or not addressed until the insurer is forced to do so in response to fines or assessments for timeliness or data quality issues from the Bureau or, worse yet, from the regulator.  There are a lot of good reasons why insurers have problems complying with stat reporting requirements in a timely or effective manner.  Here are four of them: 

  • “It does nothing to drive new business.”
  •  “We are saddled with a variety of legacy systems and different platforms making it difficult to capture and retain data in a format that can be reported accurately.” 
  • “Our technology budgets are under pressure to keep up with changing products and maintaining ‘front end’ systems.” 
  • “Statistical reporting is largely invisible and few of our personnel are aware of what it is and why it is required.” 

However, all insurers must collect data to issue policies and handle claims, as well as comply with regulatory requirements.  Insurers with the ability to quickly comply with bureau statistical reporting regulations have a competitive advantage.  These insurers tend to be compliant by design, and they proactively utilize their data to identify changing trends and business opportunities.  Careful design of front-end systems enables the efficient collection of the “right” data which reduces operational costs while enhancing the customer and agency experience.  It also builds-in the ability to quickly meet new demands created by ever changing business and regulatory environments. 

If you want to conquer the statistical reporting challenge, here are five things you should consider:

  • Don’t limit your thinking to only bureau or regulatory requirements.  The same tools used to produce required statistical reporting can also produce vital strategic reports for use internally.
  • Be mindful of statistical reporting requirements as existing data/claims systems are enhanced or new systems are implemented. 
  • Consider all aspects of how data is to be utilized as “front end” administrative and claim systems are being developed or implemented to ensure “back end” requirements such as financial and statutory reporting requirements are addressed. 
  • Develop data warehouses to consolidate experience from legacy systems regardless of their platform or formats to build a central repository for reporting needs.
  • Work to ensure the data is accurately flowing through all systems and is mapped correctly to enable accurate reporting.

Florida Senate Bill 7132: Peter and Paul

March 27th, 2013

On March 25th, Florida State Senator Joe Negron filed SB 7132 dealing with motor vehicle registration fees and the elimination of a long-standing tax credit provided to insurance companies. The Appropriations Committee is currently scheduled to discuss the bill on March 28th.  Under the bill, revenue lost from a reduction in vehicle registration fees would be offset by the elimination of tax credit.  Sen. Negron estimated the elimination of the tax credit could generate $220 million of additional revenue that could then be used to offset the revenue lost by reducing vehicle registration fees. 

The bill seeks lower vehicle registration fees that were just increased in 2009. Specifically, the bill looks to, among other things, lower the fee for issuance of an original licenses plate from $5 to $2.50, lower the service charge for issuance of license plate validation sticker from $3 to $1, and lower the surcharge of license tax from $4 to $2.  To give some context to the amount of savings for individuals, the estimated savings of $220 million would be spread out over the roughly 18 million registered vehicles in Florida1, amounting to around $12 per vehicle.

On the other hand, the bill looks to remove the allowance for an insurer to take credit against their premium tax for up to 15% of the salaries of non-licensed employees located in the state of Florida. This tax credit has been in place since 1987, and it acts as an incentive for the state to attract more jobs in the insurance sector. It also provides for carriers who employ more Floridians to enjoy a cost advantage over those who employ fewer.

While lowering front end fees on all individuals who operate a licensed vehicle, the bill puts additional hindrances on the domestic insurance market. These domestic carriers have made significant financial commitments to Florida, and have dedicated management teams, operations, and facilities in the state that employ Floridians. If this tax credit is removed, these carriers will be faced with increased costs that will hamper their competitive positions against carriers who do not employee Floridians.

Any insurance carrier operating in the state who employees Floridians will be affected. The domestic carriers, who tend to have a large percentage of their employees within the state, will be most affected. These include domestic carriers who write automobile, commercial insurance, workers compensation, medical malpractice, etc.  Ultimately, these costs will be passed back down to Floridians in the form of higher insurance rates. What may not be understood by some is how many Floridians are dependent on insurance from domestic carriers. To provide some insight, around 40% of households in Florida receive property insurance from a domestic private insurance company. When all lines of business are considered, this percentage is sure to grow and the pool of people receiving benefits becomes more and more aligned with those paying the costs. Is this proposal just robbing Peter to pay Paul?

What are your thoughts on this bill? How would this proposal affect your business and tax burdens?