Tag Archives: 90-day rule

Flo Won't Handle Your File: Claims in the Social Media Age

Viral phenomena on the Internet more frequently concern “Cats that Look like Hitler” or racy photos of Prince Harry cavorting in Las Vegas.

Insurance claims rarely go viral on social media, but that changed recently with a controversial underinsured motorist claim involving Progressive Insurance Company. You can find background on the case here.

The sad facts here are straightforward. Progressive Insurance Company policyholder Katie Fisher died in a 2010 automobile crash in Maryland. Allegedly, the other driver ran a red light, though there was a dispute as to who had the green light and the right-of-way. The driver that struck Katie’s vehicle was under-insured. The good news: Katie had bought underinsured motorist coverage (UIM).

The bad news: to collect, Katie’s family had to sue the other driver for negligence to force Progressive to pay. However, when the family sued the other driver, Progressive’s attorneys associated with the other driver’s attorneys to defend the liability claim. As a result, the deceased’s brother went viral in social media rounds, complaining that Progressive used premium dollars to defend his sister’s killer in court. That makes for an arresting headline.

This claim illustrates the importance of an insurance company being attuned to social media and having a social media policy. Of course, here Progressive did not stick its head in the sand. It did not ignore the social media buzz surrounding its handling of the case. Apparently, it responded but responded in a way perceived as tone-deaf.

Progressive In A Lose-Lose Situation?
Maybe Progressive Insurance Company was in a no-win situation. If it ignored the social media banter about its stance, consumers would accuse it of insensitivity. It entered the dialogue to justify its actions. In so doing, people accused it of being tone-deaf to consumer sensitivities. I don’t know what response Progressive could have launched on social media that would have satisfied its critics.

This vignette underscores how little people understand what they buy when purchasing underinsured motorist coverage. Buying underinsured motorist coverage essentially risks putting you at odds with your own insurance company. In such a claim, your own insurance company is incentivized to show that you in fact were at fault for the accident and/or that your injuries were not the result of the negligence of an underinsured driver. People assume that the insurance company to whom they paid their premiums will always be on their side. Typically, this is the case. Typically, this is the alignment of interests.

In underinsured motorist coverage and claims, however, “typical” doesn’t necessarily apply. Here, interests are aligned differently. Just because you pay your insurance company for the coverage doesn’t mean that — in a claim involving an underinsured adverse driver — your insurance company is going to act all soft and fuzzy.

Of course, insurance companies would not effectively market and sell underinsured motorist coverage if they made this reality explicit and spotlighted it in the sales process. People don’t think it through. Nobody really believes deep down they will be hurt due to the fault of an underinsured driver. If they pay for the coverage, perhaps they pay for it begrudgingly at best.

Policyholder Ignorance About Underinsured Motorist Coverage
So, those who say “Shame on Progressive” for its stance adverse to its own policyholder could add, “Shame on the policyholder” for not realizing the dynamics in underinsured motorist claims. Of course, it sounds callous to be lecturing a family on the dynamics of claims-handling when they have lost their daughter in a fatal car accident.

Further, there was a reasonable question of fact as to who had the right-of-way. Should Progressive and its adjusters have ignored evidence that the deceased may have been at fault in order to pay the claim? It’s difficult to fault Progressive’s adjusters here, as tempting as it may be to do so. There was a legitimate dispute as to who had the right-of-way and who ran the red light. Was Progressive wrong for exercising its legal right to seek a judicial determination of liability?

Personally, I don’t think so.

Nevertheless, insurance companies now face not just bad faith risks over how their claim department handles or mishandles an automobile loss. They also face reputational risks if disgruntled consumers take to Twitter, Facebook, blogs, Tumblr, etc. to air their gripes.

Internet Megaphones
The Internet and social media provides a bully pulpit and cyberspace megaphone for anyone who has a beef, whether that complaint is justified or specious. On the other hand, since everyone now has an electronic megaphone via the Internet, World Wide Web and social media, the cacophony of complaints can create a “white noise” effect that makes any one complaint difficult to stand out. This complaint did stand out, though, and got widespread media play.

While it is tempting to say “No comment” or “We won’t try our case in the media,” insurance companies — like other businesses — cannot take an ostrich approach and stick their heads in the proverbial sand.

The takeaways and lessons from this go beyond Progressive Insurance Company. Katie Fisher’s case illustrates that in the 21st century:

  • insurance companies must have social media policies,
  • they must monitor social media, and
  • they must be able to articulate a concise yet compelling message to an often skeptical audience.

It’s not enough to handle the claim conscientiously.

It’s not enough to handle it in accord with the policy conditions.

It’s not enough to comply with state insurance department regulations.

It’s not enough to believe that you acted in good faith.

If you have an under-insured motorist claim, you must realize that your adjuster will not be perky Flo from the TV commercials.

Insurers Need Social Media Strategy
This case study also spotlights the need for insurance companies to have a refined social media strategy. That goes beyond grappling with questions like, “Should we be on Facebook or Twitter?” or, “Should we have a blog?”

Sorry — those questions are so 2010. That no longer cuts it as a coherent social media strategy.

It’s no longer enough to have a digital footprint in the social media world. The content of what companies put out on social media is vital, scrutinized, and should promote their brand. Content is king.

Moreover, insurance companies must have institutionalized disciplines to monitor what is being said about them on social media so they can respond quickly and persuasively. The consumer conversation about your service and policies is going on — with you or without you. It is best that it goes on with you. It’s best that you have an opportunity to be aware of customer service firestorms brewing so that you have the opportunity to squelch them, address them and nip them in the bud.

You may have to justify your steps in the court of public opinion through social media or suffer the consequences of a public relations black eye if you hunker down and go incommunicado.

As this case study shows, adjusters are sometimes damned if they do and damned if they don’t.

Pay the claim in the face of conflicting evidence, and be second-guessed for poor decision-making by higher-ups. Contest the claim and align yourself with the other driver’s insurance company, and you get criticized in the court of public opinion for callousness.

No one promised adjusters a rose garden and they certainly don’t get to operate in one in the age of viral posts and social media!

Addressing Objections to a Second Look at a Reinsurance Recovery

Most ceding companies avail themselves of catastrophe reinsurance, a product that pays anywhere from 90 to 100% of aggregated event loss after the ceding company’s retention up to the limits obtained. Generally the retention is determined as some fraction of the company’s surplus and the exposure profile of the company from any one catastrophe. The ceding company wants that retention high enough to not merely be swapping dollars with the reinsurer for frequency events, but low enough that the “shock” of the sudden demand for cash to pay claims does not impair the company.When a broker tells a ceding company what the rate-on-line is for a catastrophe treaty … (the rate for a limit of coverage) or the inverse of a payback period, that number is not assuming any reinstatement of limits occurring. The reinsurers have now worked it that the reinstatement premium will in effect accelerate the payback period and increase the actual rate-on-line by requiring 100% as to time in reinstatement calculations. This was not always the case — at one time the reinsurer only charged for the reinstatement limits at a pro rated factor of the time remaining on the treaty.

Catastrophe reinsurance is somewhat unique in that its limits must be reinstated, but reinstating those limits now generally comes at a price higher than the original limits costs. This is so because the reinstated limits are only good for the remainder of the treaty period, not for the entire annual contract period as were the original limits. For example, suppose a Texas ceding company had a catastrophe treaty for the period from Jan 1, 2012 to December 31, 2012 and a hurricane came through Houston on October 1, 2012, exhausting the cedant’s treaty limit. The cost to reinstate that entire limit is the same dollars as it was to initially secure the original limit, but the second limit is good only from October 1, 2012 to December 31, 2012. Thus, the limits costs are the same for a three-month period reinstatement as they were for a twelve-month original limit of the same amount.

Reinsurers may tell ceding companies at renewal time that they are renewing at the expiring rate, but what the ceding company must be aware of is that a reinsurer’s practice is not unlike the federal government saying it will not raise tax rates, but then taking away some deductions so that the net effect is to increase the tax owed. At renewal, the ceding company may find that because of some change in the treaty definitions initiated by the reinsurer, it will have to pay more for the treaty even thought the “rate” stayed the same. The net effect may be that while the rate did not change, the measurement against that rate did change, making the actual treaty costs increase or coverage decrease.

Consider also that if the ceding company had been carrying its original limits equal to the one in one hundred year storm, and such limits were appropriate, the reinstatement limit is now being carried for a second one in one hundred year event occurring in the same year, but happening again in the next three months, a highly unlikely scenario. The reinsurer is actually making the ceding company reinstate the catastrophe limit at a higher cost for an event that is even less likely to occur … but never fear, the reinsurer will offer to sell the ceding company yet another product that will cover the reinstatement costs … a treaty now for a charge slightly below the reinstatement costs that will pay the reinstatement premiums for the catastrophe treaty so that the ceding company will have reinstatement limits available in the event a second one in one hundred year catastrophe strikes within the next three months. (A pre loss, pre pay option treaty so to speak, where the ceding company can prepay the reinstatements now at a discounted rate!)

One of the primary attributes making for sound-rating analysis is the law of large numbers. That is, enough units are insured providing that sufficient losses are experienced in order to provide predictability to an event. By its very nature, catastrophes are generally unusual events as far as the individual ceding company is concerned. Regional ceding companies may experience an event that exceeds its retention only once every several years. Reinsurers thus, by in large, do not price catastrophe treaties for ceding companies on the individual cedant’s catastrophe experience.

Rates for catastrophe insurance are based on “cat models.” Cat models are used against the ceding company’s risk locations and dollars of exposure at those locations. That is, all other things being equal, having 5 billion dollars of insurance exposure along the coast where the models predict a hurricane will strike will cost the ceding company more to reinsure than 5 billion dollars of inland exposure, where the models show the effects of a hurricane are less intense.

During any catastrophe, claims are filed in multiples of what the ceding company may be used to dealing with on a normal basis, and the ceding company may be required to utilize the services of independent adjusters to augment their own claims personnel services. The combination of high volume, tyranny of the urgent, and utilization of temporary staff provides ample opportunity for mistakes in coding, reinsurance reinstatement premium calculations, and event identification.

Event identification is simply the realization that the loss may not be correctly identified to the named event covered. Not all policyholders may immediately turn in a claim, and a claim that is turned in months after the event may be miscoded and missed in reinsurance recovery. Additionally, not all reinsurance recovery is utilized because the cedant did not realize that certain subsequent events are covered.

For example, suppose a claim is paid and closed, and a recovery is made from the reinsurer for the event. Two years later the ceding company receives a suit alleging bad faith and deceptive practices and other allegations that the claim was mishandled. Many insurance companies will put its Errors and Omissions carrier on notice of the allegation being made. However, not all will notify the reinsurer of possible additional development under the treaty for the catastrophe under the ECO/XPL* portion of the cat treaty, which treaty has already been tapped. The ceding company will likely have a per claim retention under its Errors and Omissions policy, plus it is responsible for the stated limits of the policy it issued to the insured before its Errors and Omissions coverage kicks in. Whereas the cat treaty retention has already been met, meaning the ECO/XPL coverage of the cat contract will essentially provide Errors and Omissions coverage sooner to the cedant.

Additionally, depending on the definition of net retained loss under the treaty, it is possible under given circumstances that the ceding company could collect twice for the same Errors and Omissions loss, once under the treaty’s ECO/XPL and if large enough, additionally under its Errors and Omissions policy. An argument by the reinsurer that a collection under the Errors and Omissions policy inures to the treaty should be challenged with a claim that then the premium of the Errors and Omissions policy must similarly reduce the measure (earned premium) against the rate the reinsurer is charging. In other words the reinsurer does not get the inuring benefit of the Errors and Omissions without a corresponding allowance for its costs to the cedant. However, the cedant may be better off arguing the definition of retained loss under the treaty than to argue for the inuring costs.

During the turmoil of a catastrophic event, it is entirely likely that other reinsurance treaties will be overlooked or receive lesser attention. Most per risk treaties have a single occurrence limit, so that the per risk treaty is not used for catastrophic events. However, in many instances the per risk treaty inures to the cat treaty, so that the costs of the per risk treaty reduces the measure against which the cat rate is multiplied. In other words the costs of the per risk treaty reduces the costs of the cat treaty, because technically, the per risk treaty is supposed to be used up to the measure of its occurrence limit before the cat treaty is utilized; the recovery paid by the per risk treaty reduces the catastrophe loss.

As well, premiums may be missed or double paid, inuring contracts overlooked, or checks directed to the wrong reinsurer. I have seen the case during a catastrophe where a premium payment check was directed to the wrong Lloyds Syndicate, and such Syndicate was either so disorganized or so unethical, that it did not return the misdirected funds until after a formal request was made by the ceding company for the return over a year later. You can’t tell me the Syndicate thought that it was entitled to the money or did not realize it was not in the ceding company’s program.

The reinsurers are not your “friends.” They are not in the business to watch out for the interests of the ceding company — reinsurers are in business to make money, just as ceding companies are in business to make money. In 2010, just the top five reinsurers wrote over 98 billion dollars in premiums.

In a brokered market, the intermediaries do not only work for the interests of the ceding companies — they are in many cases dual agents. The word “intermediary” means go between, and for purposes of finances, intermediaries are the agent of the reinsurer, as provided in a standard intermediary clause ever since the federal case of 673 F.2d 1301; The Matter of Pritchard & Baird, Inc., which held that for purposes of money transfer, the broker is the agent of the reinsurer. Money received by the intermediary from the ceding company is considered money to the reinsurer, but money received by the intermediary from the reinsurer is not considered money to the ceding company.

Even all these years after Pritchard and Baird, I have recently witnessed where an unscrupulous reinsurer told the ceding company that it must collect from the intermediary the refund funds portion representing the intermediary brokerage fees. I have also witnessed where this same ceding company signed and agreed to placement slip terms but some 9 months later when the contract wording was finally provided, change the minimum premiums to equal the deposit premiums within the contract, successfully slipping this change by the cancer chemo patient general manager of the small ceding company and then arguing that it had no record of any change. Such behavior is inexcusable and would never have been caught without an independent reinsurance recovery review.

If reinsurers did things right, then the National Association of Insurance Commissioners would not have needed to adopt a rule requiring that final contract wordings must be signed within 9 months of the contract’s effective date to allow for accounting treatment as prospective, as opposed to retroactive, reinsurance.

It’s absurd to think that this type of rule should be necessary in the first place. The 9-month rule, which really comes out of Part 23 of SSAP 62, requires that the reinsurance contract be finalized — reduced to written form and signed within 9 months after commencement of the policy period. In effect the reinsurers being remiss in generating a timely reinsurance contract punishes the ceding company. The National Association of Insurance Commissioners also found it necessary to adopt the so-called 90-day rule. This rule requires the US ceding companies to take a penalty to surplus in an amount equal to 20% of reinsurance recoverables on paid losses 90 days past due. The rule also requires a 20% penalty to surplus for all recoverables due from so-called “slow payers.”

In effect reinsurers have been so remiss in generating timely contracts and paying bills in a timely manner that the National Association of Insurance Commissioners had to create rules to prod them into doing the right thing by punishing the ceding company if they don’t.

It also never ceases to amaze me the attitude of ceding companies in their thrill of receiving a 25% ceding commission from the reinsurer in a proportional treaty for business that costs the ceding company 33% to generate. Or how the reinsurer now “did them a favor” by allowing a 27% ceding commission in the renewal. Or how that so called quota share treaty that the reinsurer is supposedly a “partner” in has a catastrophe cap included for the benefit of the reinsurer. If this represents what it is like to partner and be the “friend” of ceding companies, then the plaintiff’s bar should certainly also be considered a friend of ceding companies.

Reinsurance intermediaries are required to be licensed in most states. Penalties are imposed on unlicensed intermediaries. In some states, led by New York through its Rule & Regulation 98, reinsurance intermediaries must have written authorization from a reinsured before procuring reinsurance for the reinsured. The reinsurance intermediary must provide the reinsured with written proof that a reinsurer has agreed to assume the risk. The reinsurance intermediary also must inquire into the financial condition of the reinsurer and disclose its findings to the reinsured and disclose every material fact that is known regarding the reinsured to the reinsurer.

Record keeping requirements also exist, mandating that the reinsurance intermediary keep a complete record of the reinsurance transaction for at least 10 years after the expiration of the reinsurance contract. Reinsurance intermediaries under these regulations are now responsible as fiduciaries for funds received as reinsurance intermediaries. Funds on reinsurance contracts must be kept in separate, identifiable accounts and may not be comingled with the reinsurance intermediaries’ own funds.

Most of the time the intermediary’s sales pitch to the ceding company emphasizes how it has a great relationship with the reinsurers, the inference being that such a relationship will ultimately provide for a better price for the ceding company in the negotiation process, as if the reinsurer will do a “favor” for the intermediary which will directly benefit the ceding company. Such fairy tale thinking is best left to children’s books and not in the board rooms of ceding companies. The truth is the intermediary is more dependent for its success on the relationship it has with the reinsurer than it is on the ceding company, and the intermediary is not about to alienate the reinsurer for the sake of a ceding company.

In the brokered market, the ceding company typically has no say in the treaty terms. What most small to medium ceding companies fail to realize is that just as an insurance policy that it issues is subject to being a contract of adhesion by virtue of the legal maxim of contra proferentem, so too is the reinsurance treaty to the reinsurer.

The Latin phrase “contra proferentem” is a standard in contract law, which provides that if a clause in a contract appears to be ambiguous, it should be interpreted against the interests of the person who insisted that the clause be included. In other words, if you speak ambiguously in a contract, your words can literally be used against you. This is designed to discourage people from including ambiguous or vague wording in contracts because it would run against their interests. This is a decisive advantage for many ceding companies in what are often ambiguously defined treaties produced by reinsurers.

All too often the ceding company simply falls in line with what the reinsurer says is the proper interpretation of the treaty language. Whether such complicity is reflective of the incorrect notion that the reinsurer is their “friend” and operates in its best interests or just ignorance, the fact is that ceding companies are often not fully utilizing the product for which they have dearly paid.

The services offered by such entities as Boomerang Recoveries, LLC provide for the ceding company a second look at the treaties it purchased and how it structured its recoveries from its various treaties. Every “touch point” along the recovery process provides for possible missed opportunity. An expressed reluctance by a ceding company to have its recoveries reviewed by an independent reinsurance professional represents misplaced loyalties. The loyalty of a ceding company is to its policyholders or its stockholders, not to its reinsurers.

Good faith and fair dealing owed by a ceding company to the reinsurer does not include foregoing rightful reinsurance recoveries or agreeing with every position of the reinsurer. In this day of increased litigation for Errors and Omissions and Directors and Officers issues, ceding companies should be more concerned with demonstrating their due diligence and exhibiting fiduciary responsiveness by trying to recover every dollar that they are entitled to receive under the treaty contracts, than in worrying about what reinsurers may think about an independent review of its reinsurance recovery process.

Think of it this way, if the ceding company obtained some tax advice on a return it had filed which showed that by refiling, it would be refunded $1,000,000 on the taxes it paid to Uncle Sam, will the officers of that company argue that filing an 1120X (Corporate Amended Tax Return) is a bad idea because it might look like an admission that the company had not taken every deduction entitled to it when it was originally filed or that the IRS might think poorly of the company? That would be absurd, but so too are the arguments that recasting and review of past reinsurance recoveries is a bad idea.

As we have seen:

  1. Every touch point in the recovery process is a potential to miss recovery … its just human nature to make more mistakes at the time of crisis than otherwise.
  2. Catastrophe treaties are not priced for individual company experience, but by models, so that additional recoveries will not directly impact the future rate charged the ceding company.
  3. Reinsurers are not in business to be your friend. Ceding companies pay sufficient premiums to collect all that they are entitled to collect under the treaty.
  4. Reinsurers will not tell ceding companies when a mistake is made or that it owes a ceding company more money.
  5. Intermediaries do not make a commission and are not paid to assure that the ceding company appropriately and fully utilizes the treaties that are placed.
  6. Reinsurance treaties are esoteric and a ceding company cannot rely on an intermediary to watch out for its best interests or interpret contracts in its favor.
  7. Increasing Directors and Officers exposures demand that officers and managers demonstrate their due diligence and the full filling of fiduciary duties. Even if no additional funds are shown as recoverable after a review, the effort is demonstrative of duties fulfilled.
  8. Intermediaries are dual agents and primarily “sell” their services to ceding companies by emphasizing the great relationship they have with reinsurers. Ceding companies need to understand that great reinsurer relationships do not mean better terms for ceding companies or that the intermediary is willing to sacrifice that relationship for the sake of the ceding company. Indeed, intermediary relationships with reinsurers are an extension of and built upon their loyalty to those reinsurers, not the ceding companies.
  9. Reinsurance treaties follow the legal maxim that ambiguities are construed against the drafter of the contract. Ceding companies need a truly independent expert that is not tied to the reinsurer, as is the intermediary, to argue for them and review recoveries on their behalf.

Cronyism has no place in today’s economy. Insurance managers are not reinsurance recovery experts, and utilizing the services of independent reinsurance recovery experts should be thought of as no different than utilizing the services of legal or tax experts to maximize the financial position of the ceding company. The deference ordinarily given to a reinsurer by a ceding company is substantially more than it would ever give to say, an insurer that carried its fleet auto coverage or its Directors and Officers coverage. Ceding companies should stop thinking of reinsurance as some sort of friendship pact and start considering it as they would any other insurance protection it purchased for its financial stability.

* Excess of policy limits, extra contractual obligations