Tag Archives: california department of insurance

Insurers Are Turning to Dubious Securities

The latest California Department of Insurance market share report said that workers’ compensation carriers combined to write $11.43 billion in premium in 2014, up 11% from 2013, the fourth consecutive double-digit increase. Premium growth lately is more a reflection of increasing payrolls rather than rates, as those have held rather steady in the last few years. But there is another, more insidious reason for premium growth lately: low interest rates. Chief financial officers are able to lock in only pathetic returns using traditionally safe investments because of the moribund interest rate environment.

So they are looking to alternative investment vehicles — and history doesn’t look kindly to that kind of activity involving dubious securities. The last time “interesting” financial assistance came into the California (and subsequently national) market was in the mid-1990s, when the Unicover/Craigwood reinsurance scheme was being pitched to minimize carrier risk … and dozens of carriers folded.

Now we have a new investment vehicle that is picking up steam, and I think it portends trouble if not kept in check. It’s called ILS.

In aviation, ILS is Instrument Landing System – a way for aircraft to find the runway under a layer of clouds and fog. In insurance, ILS is insurance-linked securities.

The most common ILS, and what brought this alternative to note, are CAT bonds. Catastrophe bonds are risk-linked securities that transfer a specified set of risks to investors. They were first used in the mid-1990s in the aftermath of Hurricane Andrew and the Northridge earthquake.

Wikipedia has a good explanation: “An insurance company issues bonds through an investment bank, which are then sold to investors. These bonds are inherently risky … and usually have maturities less than three years. If no catastrophe occurred, the insurance company would pay a coupon to the investors, who made a healthy return. On the contrary, if a catastrophe did occur, then the principal would be forgiven, and the insurance company would use this money to pay their claim-holders. Investors include hedge funds, catastrophe-oriented funds and asset managers.”

At least one insurance investment observer indicates alarm at the “convergence” of the insurance and capital markets. Michael Moody, MBA, ARM, in the April edition of Rough Notes magazine writes about “Capital Market Convergence” and describes how the money behind the capital structure of the insurance industry is increasingly being collateralized and sold off to investors with the single intent of increasing yield on capital invested: “With interest rates continuing at historically low levels, most institutional investors are looking for better yields. Currently, many of the ILS products are producing results that are 5% to 6% higher than traditional investments.”

Here’s the issue: There will be many investment people who know nothing about the insurance product providing the capital. Financial instruments such as credit default swaps (CDS) and collateral debt obligations (CDOs) and others created by Wall Street will move capital out of the insurance industry to the detriment of the insured public, and this includes workers’ compensation.

Moody understatedly writes: “Agents and brokers who have accounts that utilize significant amounts of reinsurance need to be aware of the advancements that are being made in the ILS market. The old days of competing on price are disappearing. Capital market professionals believe it is only a matter of time before reinsurance and ILS will be used in the same manner that reinsurance is purchased in layers today. It will not be uncommon to find excess limit programs that are made up of a combination of reinsurance and ILS. The genie is out of the bottle, and the capital markets appear to be willing to embrace the convergence with the insurance/reinsurance concept. As a result, agents and brokers who are interested in a long-term view of the insurance industry would be well advised to monitor this situation closely, as it will remain extremely fluid for some time.”

Certainly, departments of insurance will protect us from dubious securities, right? After all it is their job to regulate the insurance market and ensure a safe, healthy industry.

Well, that didn’t happen when Unicover/Craigwood came around, and there’s no reason to believe that any regulating agency is going to be proactive; traditionally, regulators are reactive. By the time they are alerted and take action, it’s too late – carriers disappear, guarantee associations are swamped and state funds take up the slack (as in 2000, when the State Fund covered 50% of the California market).

California, and the nation’s work comp market, is one bad ILS away from disaster. Carriers won’t be looking for the runway under the clouds – rather, they’ll be looking for insolvency relief.

Looming Problems for Insurance in California

The dust is settling on the first round of Obamacare, but the radical changes to our insurance markets and healthcare are far from over. In the years ahead, the California insurance market runs the risk of having less competition, with fewer products and higher prices that shortchange consumers, unless we change direction soon.

For a foreshadowing, look no further than Covered California, the health insurance exchange set up by the state to administer Affordable Care Act (ACA) plans.

Covered California celebrated the news that 1.4 million Californians signed up for new health insurance plans through the exchange, but this number is likely vastly inflated, considering what will certainly be duplication in signups and customers who will default on their premiums. Covered California conveniently left out the fact that it canceled nearly a million plans even though the president himself – the Obama in Obamacare – told states they didn’t need to cancel plans to be in compliance. The exchange’s decision left helpless consumers scrambling to find plans in the wake of the unnecessary and harmful decision.

Nine million Californians might lose their plans next year when the ACA mandates affect employer-sponsored insurance. That number might even be higher.

I won’t see Covered California trample on these millions of families like it did with the million individual-market consumers. That’s why I sued the exchange, to stop it from overstepping its authority and pulling the health insurance rug out from underneath a quarter of the state.

My suit also takes dead aim at the reckless spending and waste at Covered California. The exchange infamously squandered nearly $1.4 million on a video of ’80s fitness sideshow Richard Simmons prancing around on a stage with a contortionist in an attempt to reach out to millennials. I wish I was making this up, but I’m not. That $1.4 million is more than many Californians will make in a lifetime of work.

The exchange, only four years old, already projects a $78 million deficit in 2015/16 and more than $30 million the next year. Politicians can’t sit back and watch this happen. Without intervention, Covered California could come to the state’s general fund to bail it out or raise the monthly surcharge on health insurance plans so high that it will discourage people from buying insurance in the first place.

Obamacare has valuable components, such as the coverage for pre-existing conditions, but under the costly and ineffective administration of Covered California it veers toward disaster.

Meanwhile, attempts to amend California’s Medical Injury Compensation Reform Act, passed in 1975, could raise the liability limits for doctors. This would drive up insurance costs above even the inflated ACA-compliant plan costs and choke off the supply of medical care in the state, as doctors leave or limit the scope of their practices to manage their higher exposure.

Even worse, a proposition on the ballot in California this fall would give the Department of Insurance (DOI) authority over increases in health insurance plan rates. This may sound good for consumers, but it’s just the opposite.  As with any other product, it’s competition – not government control – that drives down prices.

Under this insurance commissioner, the DOI has hardly been the consumer’s friend. The DOI already pressured Anthem Blue Cross, one of the state’s largest health insurance providers, out of one critical state insurance market, leaving families with fewer choices to meet their healthcare needs. DOI is also slow to approve rate decreases that would benefit consumers. Rate decrease applications take between four and 12 months, leaving ratepayers hung out to dry while the bureaucratic process grinds on. Approvals of new products are slow to non-existent, meaning that Californians are robbed of advances that people in every other state use to protect themselves, their families and businesses, all while saving money. Putting this DOI in charge of health insurance would be a death blow to innovation and competition, leading to higher costs for everyone.

This is a wild time in insurance in California, and Californians need an advocate fighting for them, now and in the future. With the right ideas and right leadership, California can enjoy a future every bit as great as its past.

‘Sharing Economy’ Has Tricky Insurance Issues

Imagine the unimaginable – you accidentally injure a passenger or pedestrian with your car. How much insurance do you carry to protect them or yourself? Like many, you may carry only $15,000 per individual injury (the minimum, unchanged since 1967, required by California). If your income is low enough to qualify, you may carry a Low Cost Auto policy with only a $10,000 limit. Such minimum limits are a compromise. Insurance is expensive, and states try to balance the utility of car use against insurance costs that, if too high, would reduce that utility. You may, of course, carry higher limits. Or, perhaps, you are like approximately one in seven California drivers, and you illegally drive with no insurance.

Now assume that you are among the many auto owners who have joined the “sharing economy.” You use a smartphone app to match yourself and your car with others willing to pay you for a lift. Uber, Lyft, Sidecar and others (“Transportation Network Companies,” or TNCs) offer these apps, share the fees with you and make this popular service available to thousands.

Again, imagine the unimaginable – a collision injuring your passenger or a pedestrian. Keeping in mind that any insurance cost is ultimately passed on to the passenger, how much insurance should be required for a TNC driver?  $10,000? $15,000? $50,000 (the maximum required for private autos in any state and the minimum required in California if you allow others to rent your auto)? Or perhaps $106,841 (the value in 2014 dollars of $15,000 in 1967)? $750,000 (the minimum required of limousine companies)? Some other figure?

Put another way, the question about how much insurance to carry is asking: How much should those who benefit from the sharing economy share the burden when the activity damages them or others?

Unlike most driving for personal reasons, TNC driving generates cash flow. To many, it seems only fair that some of that be used to extend additional protection to those injured by the activity. What should trigger the additional protection – when one turns on the TNC’s app to seek a fare, when a “match” is made or when a passenger enters the vehicle? Also, who should carry the insurance – the TNC, the TNC driver or some combination?

Currently, these questions are debated among legislators, regulators (such as the California Public Utilities Commission, or CPUC), TNC operators and others. Requiring lots of insurance by setting a high limit may chill innovation; setting the limit too low unnecessarily burdens injured parties or others (e.g., taxpayers, who support Medi-Cal or Medicaid and may end up paying for expenses not covered by private insurance) and may unfairly create a disadvantage for competing sources of transportation that may be subject to higher insurance limits.

Raise the price of insurance, and the price of a ride goes up. (This issue is hardly unique to TNCs. Congress is also debating whether to raise the federally mandated $750,000  truckers’ minimum insurance limit.) Not only might an increase in insurance costs for TNCs stifle a popular and convenient form of transportation, but it may lead some less safe drivers back into their vehicles (e.g., teenagers, intoxicated drivers, impaired drivers, poorly insured drivers, uninsured drivers or drivers with unsafe driving records). This, in turn, may lead to the unintended result of even more unnecessary injuries and deaths.

Much of the debate about TNCs is colored by a New Year’s Eve accident in San Francisco that occurred when a TNC driver with his app on (there is some evidence he may have been looking at it) struck and killed a pedestrian and injured several others. This is a tragic accident, but it also gives the debate an emotional overtone that may make it difficult to strike the correct balance. This accident could also have happened while a non-TNC driver was texting or talking, and there may have been minimal or no insurance available in that case.

In this author’s view, comprehensive legislation or regulation shaping the future of TNCs is premature. These fast-moving innovations are new enough that insurers, legislatures and regulators have been caught on the back foot. At the same time that policy makers are moving forward with regulations, insurers and TNCs are developing new products and strategies to address these issues.

While there is no shortage of those eager to express their opinions (perhaps this author included), there is little credible data on which to base sound policy decisions. Here are some of the many open questions:

–On average, how much would different limits add to the cost of a 10-mile ride? Ten cents? Ten dollars?

–How much will new insurance products cost?

–As the use of TNCs expands, will overall accident rates rise, or will they fall?

–If you drive to a ballgame with your daughter and a fare, will your daughter’s injuries be covered if you have an accident? (Your liability would not be covered under most personal auto policies – surprise!). Put another way, what terms and conditions will appear in any new insurance products or endorsements?

–Does the display of a TNC’s trade dress (essentially, its visual appearance) create ostensible or apparent authority should a passenger suffer injury? Would liability extend to an injured passenger who hailed a car displaying the TNC’s trade dress, even though the driver did not engage the TNC’s app so he could keep the entire fare? If the TNC is liable, could it seek reimbursement by claiming indemnity against the driver?

–If you drive 12,000 miles a year, but 2,000 of those miles are driven as a TNC driver and are insured by some form of TNC policy, should your personal auto insurer base your rate on 12,000 miles or on 10,000 miles? If the latter, how are the different miles to be confirmed?

–If you carry higher limits on your personal auto policy (e.g., $300,000 plus a $1 million umbrella), will the protection for you and anyone you injure drop to a lower TNC policy limit when you act as a TNC driver?

–One current bill in California (AB 2293 — Bonilla) provides that the TNC must assume ALL of the driver’s liability, without limit. By contrast, the CPUC’s proposed rules do not provide for unlimited liability. When is it appropriate to impose liability on the provider of an app as if users of apps were employees or agents of the app provider? Would the operator of an app that matches homes with those who want accommodation (e.g., Airbnb) be liable should a guest trip on an unsafe carpet or step? Would the operator of an app that matches car sellers and buyers be liable for an accident during a test drive? Would an app marketing tickets be liable if the bleachers collapse or the cruise line runs aground?

–Should liability turn on whether the app provider is more than passive? If so, what more is required? A profit motive? This would sweep up many apps. What if the app provider imposes rules on its users (e.g., vetting drivers for their safety record, adopting a zero-tolerance alcohol policy and reviewing ratings by customers)? If so, then forcing app providers to assume unlimited liability may discourage them from taking measures that could enhance safety. For these reasons, this liability provision in AB 2293 could have enormous implications and should be carefully considered.

–If, under AB 2293, the operator of the app is liable without limit, what purpose is served by mandating policy limits? If the operator of the app has sufficient net worth, it would be liable regardless of any policy limits that might be imposed.

–How, if at all, should one weigh the evolving existence of near-universal healthcare under the Affordable Care Act (Obamacare)? Covered parties who suffer injuries will at least have access to healthcare without limit and regardless of fault. Depending on any number of factors, the bulk of these health costs may fall on health insurers, liability insurers, the public or some combination.

Who knows answers to any of these questions? Without answers to these and related questions, it is likely that regulating in a partial vacuum will strike the wrong balance. Like emergency physicians, legislators and regulators should stabilize the patient but “Do No Harm.”

In the meantime, the public deserves protection. There should be no gaps in coverage (whatever trigger or limits are chosen). To keep rates reasonable and predictable, insurers also need clarity with respect to which insurers are responsible.

Prudence, however, suggests that any current legislation or regulation should have a firm sunset date. Otherwise, like barnacles, awkward legislation sticks and impedes progress.

During this initial period, the legislature should require (not just request) that the Public Utilities Commission and the Department of Insurance gather appropriate data and report back to the legislature before the legislation or regulation reaches its sunset. Regulators and legislators may, then, make informed, data-driven decisions that strike the most appropriate balance among all of the legitimate interests.