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THURSDAY, APRIL 1, 2010
Big “I” National News
On the Hill
Health Care Reform: An Agent Overview
How will the health care overhaul affect your agency’s health insurance sales?
In the wake of Congress passing and President Barack Obama signing into law the largest health care reform legislation since the 1960’s, the Big “I” is working overtime to analyze its impact on agencies that sell health insurance. Unfortunately, many of the specifics affecting agents’ ability to sell health insurance will be somewhat of a question mark as the law’s implementation occurs over the next four years. Many of the details of how coverage will be placed will be determined by regulations issued by the Department of Health and Human Services (HHS) and individual states in the years to come. More detailed analysis will be ongoing, but at this time, the Big “I” can provide some generalities about what the bill may mean for insurance agents that are selling health insurance policies. This article discusses the bill from the insurance salesman perspective and not that of a small business owner, which of course is another important vantage point of Big “I” members. Next week’s article will review the legislation from this small business perspective.
One of the most important provisions of the new law that will impact agents is the creation of state “Health Insurance Exchanges” for individuals and small groups. The law requires each state to create exchanges by 2014 that individuals and employers can go to for insurance that is provided by participating private insurers. The exchanges will include four tiers of private plans, co-op plans and at least two multi-state qualified health plans contracted out to private carriers by the Office of Personnel Management (OPM). The legislation leaves much of the details of the operation of these exchanges to each state. While agents will be able to place coverage for clients through the exchanges, the marketing or commission regulations are not yet clear. Additionally, consumers will be able to go directly to the exchanges without the assistance of an agent, and some consumers may end up choosing to do so.
Companies, meanwhile, will have to abide by new “medical loss ratios” (MLR) where the insurance plans must spend a certain percentage of premiums on health care delivery costs only. The MLR will be 80% for individual policies and small group plans while for large group plans (>100 individuals), it will be 85%. This means that, starting in 2011, companies will only be able to spend 20% of individual/small group plan premiums and 15% of large group premiums on things such as marketing, administrative costs and agent commissions. Companies would be required to provide rebates to consumers if they fail to comply with the MLRs.
Additionally, insurance companies will be required to abide by new federal requirements such as not discriminating against preexisting conditions, eliminating lifetime benefits caps, restrictions on annual caps and abiding by new individual and small group rating bands. Finally, the law also imposes a direct $2 billion annual tax on health insurance companies. The tax will increase each year until reaching $14.3 billion in 2018. For subsequent years, the fee will increase based on the previous year’s premium growth. These taxes are expected to strain insurance company profitability and their available capital for marketing-type activities.
The law is also estimated to bring approximately 32 million new Americans on to the health insurance rolls. About half of these would be the result of expanded government entitlement programs such as Medicaid and SCHIP. Nonetheless, that still means an estimated 16 million new consumers will be accessing the private insurance market. Although this means agents may potentially lose some customers because of direct competition from the Exchanges and insurance companies may face significant downward pressure on their bottom line that could translate to similar downward pressure on agent profitability, there is at least the opportunity for new customers.
Finally, the Big “I” anticipates that, for the next few years, many customers (especially small businesses) will find this new, complicated law and the resulting regulations very challenging. As a result, they will need an experienced agent to guide them through the process of obtaining health insurance more than ever. The Big “I” is committed to providing its members with the necessary tools to serve as that trusted health insurance advisor.
Click here for a short chart summary of the health care reform law.
Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.
L-H Trends
Health Care Reform Includes Long-Term Care Angle
Market for LTCi coverage might change with start of new government program through voluntary payroll deduction.
Long-term care insurance: it’s one topic that hasn’t received the attention it deserves in the fallout from the health care overhaul. The CLASS provision of the law is a voluntary federal program for long-term care insurance (LTCi) that will be financed by voluntary payroll deductions. A person 18 years or older would be qualified to receive benefits after five years of contributions to the program. Under the measure, all working adults would be automatically enrolled in the program, unless they choose to opt out.
While that sounds simple, The Centers for Medicare and Medicaid Services (CMS) prepared a pessimistic analysis of the CLASS program which appears beginning on page 10 of its report of Nov. 13, 2009, on H.R. 3962. CMS predicts that the CLASS program will fail because people who expect to become disabled are more likely to enroll in the program, and as a consequence, premiums will have to be set so high that few other people will enroll. CMS expects that only 2.8 million people would enroll by the program's third year of operation, and that the average premium would be $180 per month. (Interestingly, the Congressional Budget Office estimates average monthly premiums of $123 a month). During the first five years, the program would accumulate a large surplus as premiums are received by the program but no benefits are paid out. However, CMS predicts that beginning in the year 2025, expenses would exceed revenues, and that at some date thereafter when the accumulated surplus is used up, the program would become a drain on the federal budget.
Aside from the fact that the CLASS provision is a public health insurance plan for LTCi, the question is this: Will Americans sign up (or not-opt out) for this coverage? At certain ages, private plans may be more competitively priced, although the current reality is that most younger people don’t purchase (or even consider purchasing) LTCi insurance. A second question will be if CMS’ analysis is correct, will the program remain voluntary, or if participation isn’t high enough will Congress revisit the voluntary aspect and instead require mandatory participation?
The daily per diem amounts (i.e. $75) that the CLASS will pay in the event that the person needs LTCi are well below the cost of average daily rates for nursing home care or even home-based care. People that sign up for the coverage may find themselves still with significant financial exposure. Lastly, private insurance carriers are required to have adequate actuarially based reserves to meet future liabilities, especially for “long-tailed” products like LTCi. If Social Security and Medicare are the guidepost, the CLASS LTCi program will be a pay as you go program with positive cash flow in the first few years generated by participant contributions, but will only create larger unfunded liabilities for Americans.
Continue to monitor the actual application of the rules to be equipped to make prudent strategic decisions regarding the mix of products and services your agency should offer.
Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.
On the Hill
NFIP and COBRA Subsidy Extensions Expire
What do the expirations mean for agents?
The Senate left town for the Easter recess without voting on extending either the National Flood Insurance Program (NFIP) or the Consolidated Omnibus Budget Reconciliation Act (COBRA) enhanced benefit subsidies. Both programs expired on March 28.
Recently the House approved, by unanimous consent, a $9 billion measure containing one-month extensions of several programs including unemployment insurance, COBRA health benefits and flood insurance. Senate leaders of both parties hoped to have their chamber approve the same bill before the Easter break, but Sens. Tom Coburn (R-Okla.) and Jim Bunning (R-Ky.) objected to the House bill saying it was not funded. A similar scenario occurred in early March, when Bunning brought the programs to a halt for five days over another extension that wasn't offset. Unfortunately, just like last month, the flood insurance and COBRA provisions have been caught up in a larger policy and political disagreement.
Just before the recess, the Senate reportedly agreed to a compromise of a one- or two- week extension of the bill that Coburn and Bunning signed off on, but House Speaker Nancy Pelosi (D-Calif.) indicated that the House would not agree to such a short term bill and that the chamber had finished its work. Consequently, she sent the House home for the Easter recess.
The Senate is not scheduled to return to Washington, D.C. until April 12 and the Big “I” is hopeful it will act immediately on an extension and that it will be retroactive to March 28.
In the case of flood insurance, the expiration means that there can be no new policies, policy changes or renewals until an extension is passed. In fact, renewal notices will not be sent during the hiatus. However companies have been directed to continue to pay all claims for policies in force. Additionally, federal banking regulators have directed lenders that they will not need to require the purchase of flood insurance for new loan closings on properties in special flood hazard zones. The lenders do have the option of requiring the lender to sign a flood insurance application and make a payment for coverage, and these applications will be processed as soon as the program is extended. The lenders instead will also have to set up systems by which they will prove the purchase of flood insurance coverage as soon as the program is extended.
Should the Senate pass the extension upon its return as expected, the NFIP will return to normal operations. If the extension is also retroactive, then any new policy applications or renewals that were signed and submitted during the hiatus will be effective from the date of application (or in the case of waiting periods, the waiting period will start from the date of application).
For COBRA benefits, the expiration means that the 15-month, 65% federal government subsidy of COBRA benefits for laid off and unemployed workers has ceased until at least April 12. The subsidy came as part of the American Recovery and Reinvestment Act of 2009, also known as the “stimulus package.”
The following links provide addition information from FEMA on the expiration period of the NFIP.
Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.
P-C Trends
Bring on the Bulls
Will p-c coverage demand follow increase in personal consumer expenditures?
It will be a bright year for the bulls. 2009 was a good year for stocks and the bullish period for equities will continue in 2010: that is the analysis of the economy recently released by money management firm Fisher Investments.
Part of the firm’s analysis noted that consumer spending has a steadying affect on the economy. For independent agents, that could be good news because as consumer spending on goods and services increases, premium bases should increase. A review of the numbers on personal consumer cxpenditures (PCE) sheds some light on potential for property-casualty insurance premiums.
Kenneth Fisher and his namesake money management firm, Fisher Investments, are frequent writers and prognosticators on stock market trends and economics in Forbes magazine and other venues. In the analysis, Fisher looks at favorable indications from the three “Pillars of Economic Expansion”—emerging market economies, rebounding business investment, and lean corporate cost structures—and reviews a smattering of other insights into the U.S. economy ending. The firm predicts growth based in part on strong consumer spending.
The graph below shows the data Fisher used to make the predictions. An obvious conclusion from the data is that consumer spending has grown as a percentage of the U.S. economy, based on measures kept by the Bureau of Economic Analysis in gross domestic product (GDP) and personal consumer expenditures (PCE). Graphed as GDP divided by PCE from 1953 to 2009, consumer spending is a consistently increasing portion of GDP. Digging deeper, the Fisher Investments Market Outlook points out that increases in proportionate consumer spending in ’73-‘74, ’80-’81, ’91 and ’00-’01 all occurred during notable recessions which were then followed by periods of general economic expansion. The U.S. has experienced such a period of expansions in proportionate consumer spending during contracting GDP in 2008 and 2009.
However, don’t read too much into the overall upward trend in consumer spending as a proportion of GDP from this graph. The reality is more complicated and most of the long-term trend in PCE as percent of GDP can be attributed to health care spending, as that has increased from 3.3% of GDP in 1953 to 16.1% in 2009.
But insurance agents should take note of Fisher’s point of expansion following periods of increasing consumer spending as a portion of GDP. As consumer spending increases (or at least stays relatively steady) if expansion follows, premium bases for commercial and personal lines should correlate. That is, workers’ compensation premiums correlate to payrolls, general liability with gross receipts, homeowners with home/content’s values and so on. Whether that will be true for 2010 and beyond remains to be seen, but it could be a preview of what’s to come in terms of demand for insurance coverage.
Paul Buse (paul.buse@iiaba.net) is president of Big I Advantage® and a licensed p-c agent.
To read the full report from Fisher Investments, go to www.fi.com.
Forms and Substance
Coinsurance, Explained
Find out why some customers are good candidates for coinsurance.
One of the toughest tasks facing insurance agents involves how to explain coinsurance - why it exists, its purpose and how it works. Although most commercial property policies provide examples of how coinsurance works, the reason for such a clause is a mystery to most insureds and to many agents.
The coinsurance condition was introduced as a standard clause by the Louisville Board of Fire Underwriters in 1885 for pork and tobacco risks and was expanded to other property in 1890. However, individual insurer use of this condition dates back to at least 1877 by the Continental Insurance Company, if not earlier.
Coinsurance is a contractual requirement that the insured carry agreed upon insurance-to-value, as specified by a percentage (usually 80%, 90% or 100%) entry on the declarations page. If, at the time of loss, the limit of insurance is less than the value of the property times the coinsurance percentage, the insured will become a "co-insurer," along with the insurance company, when a loss occurs.
The purpose of coinsurance is not to punish an insured for carrying inadequate insurance-to-value, but rather to provide a financial incentive that encourages them to carry adequate limits in the event of major losses and rewards them (in many instances) with a significant premium reduction for doing so.
Why do insureds need an incentive to carry limits of insurance approaching the value of their property? Because, in the aggregate, most losses are partial and don't result in a total, or even a substantial, loss. Without a financial incentive, insureds who are not risk aversive might be inclined to purchase relatively small limits of insurance. Since that inclination depends, in part, on the structure and occupancy of the building, the amount of the incentive is largely determined by those factors.
According to one estimate, less than 2% of fire losses are total and 86% of fire losses result in damages of 20% or less of the building value. That is, if a building is worth $500,000 and a fire occurs (which isn't that likely to begin with), there is an 86% chance that the damage will be $100,000 or less. So, if the insured is a risk taker, why not insure the building for $100,000 or less? Of course, the statistics above are just for the peril of fire; the numbers may change for windstorm and other potentially catastrophic perils.
The above numbers are averages. Statistically, a reinforced concrete office building is much less likely to experience a major loss than a wood frame woodworking shop. So, the owner of the office building could be less inclined to carry full insurance to value because the probability of a serious loss is virtually zero. On the other hand, the owner of the woodworking shop is much more likely to insure to value because it is easy to conceive that a major loss could occur.
Coinsurance provides an incentive for adequate insurance-to-value by providing a rate credit for carrying relatively high limits to value. The credit is much larger for a fire-resistive office building because the owner needs a larger incentive and the rate credit reflects the lower probability of loss. In contrast, the credit is much smaller for a woodworker in a wood frame building because the owner is better able to visualize a complete loss. Thus, coinsurance provides an incentive to purchase higher insurance to value than some insureds would be inclined to do otherwise. In doing so, insureds can save significant amounts and they have the assurance that, in the unlikely event that they do have a major loss, they're covered. Click here for some premium examples and a deposition excerpt from an agent who was unable to explain coinsurance. Bill Wilson (bill.wilson@iiaba.net) is director of the Big “I” Virtual University.
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