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.

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.

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.

Who Gets the Credit?

March 21st, 2013

Credit insurance is not as well-known or well-understood as Auto or Homeowners insurance, even though the typical consumer will be bombarded with credit insurance offers every time they purchase a car, open a new credit card, purchase a home, or participate in many other financial transactions.  Unlike Auto property or Homeowners property, these coverages do not pay to repair the property.  Instead, they are related more to the amount you owe rather than the value of the property.

Guaranteed Auto/Asset Protection (GAP) Insurance — GAP insurance covers the “gap” between what your regular insurance will pay and what you actually owe on a vehicle.  As an extreme example, you go to the Ferrari dealer and finance the purchase of a brand new 458 Italia Coupe for about $240,000.  You call your insurance agent after the purchase and get a standard auto policy for this vehicle.  A month later you total the vehicle.  Because the 458 is only actually worth about $210,000 (because of depreciation) you are out $30,000.  Even though the vehicle is no longer operable, you still owe the bank the $30,000.  If you have GAP coverage on this vehicle, the GAP insurance pays the $30,000 to the bank and you are in the clear to purchase a new Ferrari!

Involuntary Unemployment Insurance (IUI) – Every time I call my credit card company, regardless of the reason, I have to hear them pitch the purchase of insurance that will pay my bills if I lose my job.  In light of the recent recession, this coverage made more sense as the national unemployment rates increased and maintained higher than normal levels.  There are a wide variety of coverages and many options available for IUI – some that provide coverage in the event of a strike or lockout, some make payments for only a couple of months and some make payments for up to a year.   Upon experiencing an involuntary unemployment event, IUI will make your minimum payments to your lender and by doing so can help protect your credit rating and alleviate some of the burden of being without a job.

Mortgage Credit Insurance (MCI) – MCI should not be confused with Mortgage Insurance (PMI), which is intended to make payments to the lender in the event of a borrower default.  Unlike GAP or IUI, MCI is considered a credit life type of insurance.  This is because the coverage is intended to provide a benefit should you experience a serious disability, injury, or death.  In the event of a triggering event, the benefit makes payments to the lender on behalf of the insured.

There are many other types of credit insurance products that provide coverage for many types of loans, life events, and collateral.  In common among the majority of credit-related insurances is that the lender (not insurer), is typically the direct marketer of the insurance product.  In addition, in most instances, the purchase of these policies cannot be a determining factor in whether or not the bank will give you a loan.  It is important that the consumer understand the coverages that they will be presented with and possibly purchase.  In some instances, such as when the consumer has an amount of savings sufficient to cover the losses that the credit coverage is intended to provide, it may not make sense to purchase the credit coverage.  In other instances, there may be insurance alternatives that make more sense to purchase.